Improvement of Beneficial Ownership Data Quality (SK0143)

What is the public problem that the commitment will address? Act no. 52/2018 Coll., amending Act no. 297/2008 Coll. on protection against the legalization of income from criminal activity and on protection against the financing of terrorism and on the amendment and supplementing of certain laws as amended and amending certain laws, transposed the Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on preventing the use of the financial system for the purposes of money laundering or terrorist financing, which amends Regulation of the European Parliament and the Council (EU) no. 648/2012 and repeals European Parliament and Council Directive 2005/60/EC and Commission Directive 2006/70/EC. In this context, a general obligation to register beneficial owners was introduced, especially in relation to business entities. However, this regulation does not contain effective mechanisms for ex ante and ex post verification of data on end users of benefits. This legal and factual situation leads to the fact that it is not possible to fully rely on the existing beneficial ownership records. Proper beneficial ownership recordkeeping, especially with regard to the timeliness and completeness of data, is a necessary prerequisite for increasing the transparency of contractual and ownership relationships, improving and making the business environment and economic competition more transparent, and creating an effective obstacle that significantly complicates the abuse of business companies for illegal purposes (money laundering, committing criminal activity, circumventing regulations on conflict of interests or proving the origin of assets, illegal cartel agreements, tax fraud, etc.). Last but not least, it is a prerequisite for public control of the possible abuse of commercial companies for illegal purposes by providing free and online up-to-date, structured and complete data about beneficial ownership to the public, investigative journalists, the third sector and state authorities, from Slovakia as well as from abroad.

What is the commitment? The commitment "scales" the proven principles of verification (ex ante), publication and subsequent control (ex post) of the correctness and completeness of the data on the beneficial owners. Slovakia was one of the first countries in the world, which through its law no. 315/2016 Coll. on the register of public sector partners introduced mandatory registration and verification of beneficial ownership data for persons from the private sector who have public resources or public property at their disposal. This unique system, built on the pillars of (i) public and free online access to data on beneficial ownership, (ii) verification of data on beneficial ownership by the responsible parties who take joint responsibility for the correctness of the data and (iii) reversed burden of proof in case of subsequent judicial review, they also currently represent the highest world standard (the current wording of AML directives 4 and 5 as well as FATF recommendations no. 24 and 25). The planned activity would lead to an appropriate extension of proven principles from persons doing business with the state to all persons registered in the business register (i.e. from approximately 30 thousand entities to approximately 300 thousand entities). The reform of the business register and related IT infrastructure will ensure that all registered entities undergo screening - automated control of recorded data (automated comparison of data with public and private databases) and subsequently entities that show increased risk according to the list of indicators of increased risk (red flags) the so-called "slow track" were subject to additional verification of data on the beneficial ownership by a third party. On the contrary, entities that do not show an increased risk would continue in the registration process on the so-called "fast track" without unnecessary administrative obstacles (two-track system of ex ante control). In the case of a qualified initiative from the public, the registry court would then examine the correctness of the entry (ex post control), while the principle of transferring the burden of proof to the audited company would be applied. This reform activity will ensure an increase in the transparency of contractual and ownership relations, improvement and transparency of the business environment and economic competition, and will create an effective obstacle that significantly complicates the abuse of business companies for illegal purposes (money laundering, committing criminal activity, circumventing regulations on conflict of interests or proving the origin of assets, illegal cartel agreements, tax fraud, etc.). Last but not least, it will improve public scrutiny of the possible abuse of commercial companies for illegal purposes by providing free and online up-to-date, structured and complete data about beneficial ownership to the public, investigative journalists, the third sector and state authorities, from Slovakia as well as from abroad.

How will the commitment contribute to solving the public problem? Implementation of the commitment takes place in phases: Phase I: Analysis of the possibilities of the new operation of the business register with regard to the introduction of multi-level verification of data on the beneficial ownership The activity examines how it is possible to achieve that all entities registered in the business register undergo a screening based on automated data control, and subsequently entities that show an increased risk according to the list of indicators of increased risk ("red flags") would be on the so-called "slow track", subject to additional verification of data on the beneficial ownership by a third party. Phase II: Elaboration of a proposal for legislation taking into account the conclusions of the analysis In this phase, the Ministry of Justice will ensure the preparation of legal regulation, which will take into account the results of the analytical phase, in a participatory manner. The draft law will then be submitted to the regular legislative process. Phase III: Implementation of the legislative solution In this phase, the Ministry of Justice will ensure the implementation of the legal solution within the relevant information systems, as well as from an organizational point of view at the level of registry courts (e.g. training).

Why is this commitment relevant to OGP values? The commitment supports the development of all open governance principles

Additional information Relevance to the strategic and partial objectives of the OGP National Action Plan 2022-2024: 1.2.: Motivate institutions to reevaluate their own practice and learn through mechanisms supporting accountability to different audiences. 2.1.: Identify examples of Slovak and foreign good practice and ensure their exchange. 3.1.: Build the capacities of civil society and the general public to participate in open governance. 3.4.: Strengthen the capacities of active use of data for setting strategic objectives and evaluating their fulfillment. Relevance to programs/projects of the Slovak government and international documents: a) Program statement of the government 2020–2024 (new business register) b) Recovery and Resilience Plan of the Slovak Republic (new business register) c) Act no. 530/2003 Coll. on the business register and on the amendment of certain laws, as amended

Milestone Activity with a verifiable deliverable Start Date: End Date: For the Ministry of Justice of the Slovak Republic Analysis of the possibilities of the new operation of the business register with regard to the introduction of multilevel verification of data on the beneficial ownership 1 July 2022 31 March 2023 Preparation of a draft legislation taking into account the results of the analysis and its submission to the government 1 April 2023 31 December 2023

Action Plan Review

Commitment 7. Improvement of beneficial ownership data

● Verifiable: Yes

● Does it have an open government lens? Yes

● Potential for results: Substantial

Improvement of beneficial ownership data quality in the commercial register

WPO, Ministry of Justice

For a complete description of the commitment, see Commitment 7 in the Slovak Republic’s action plan: https://www.opengovpartnership.org/documents/slovak-republic-action-plan-2022-2024/.

Context and objectives:

Commitment 7 aims to enhance quality of beneficial ownership data in the Slovak Republic. Specifically, it seeks to widen the scope and application of data control already in place when registering beneficial owners of companies in the RPSP to also encompass all companies in the entire Business Register. Such a reform would extend stricter rules of data control from the current 30,000 businesses supervised to approximately 300,000 entities inscribed in the Business Register. As such, the commitment is relevant to the OGP value of transparency.

The Slovak Republic was one of the first countries to implement a publicly available beneficial ownership register. [19] This commitment builds upon previous anti-corruption reforms. Companies receiving public funds are registered in the RPSP and need to pass a higher threshold of control when disclosing their beneficial owners than those in the wider Business Register. [20] Every application for registration in the RPSP is checked by the Žilina District Court (ex ante control). There is a robust sanction mechanism if inaccurate information is revealed after the registration (ex post control). The RPSP has been used widely by investigative journalists and civil society. [21] These safeguards are missing when businesses (not trading with the state) declare their beneficial owners in the wider Business Register. Since November 1, 2018, all registered businesses are required to disclose data on beneficial ownership. [22] However, the registration of these data is only declaratory, and no ex ante or ex post control takes place. As a result, data on beneficial ownership in the Business Register are not always reliable.

The Ministry of Justice added this commitment to the action plan after the draft plan was published in the interdepartmental consultation procedure in May 2022. As a result, it was not discussed within the MSF. The commitment reflects a part of the planned reform of the Business Register and the Ministry of Justice’s priorities to increase transparency of the business environment and fight the use of shell businesses for illicit activities.

Potential for results: Substantial

Adoption of a robust scrutiny to the Business Register has potential to substantially increase quality and reliability of data on beneficial ownership of all registered businesses in the country. If fully implemented, the commitment will provide a tenfold significant increase in the number of businesses in the Businesses Register covered under the data control mechanism and have their beneficial ownership information revealed, from approximately 30,000 to 300,000.

Currently, high-quality data on beneficial owners are limited to businesses trading with the state, while other businesses can easily evade public control. Improving the quality data on beneficial owners for more companies can contribute to the fight against shell companies, money laundering, tax avoidance, and corruption. Data from the RPSP have already been instrumental in documenting true beneficiaries of companies who were known for winning government bids under dubious circumstances. Notably, Transparency International Czech Republic used data from the Slovak register to uncover that Czech Prime Minister Andrej Babiš held a conflict of interest as the beneficial owner of Agrofert (an agro-food conglomerate), the controlling company of the Agrofert Group. [23] More reliable data on beneficial ownership can further support the work of watchdog organizations and investigative journalists to reveal potential corruption and illicit activities of businesses.

Opportunities, challenges, and recommendations during implementation

This commitment contains an ambitious reform in transparency and reliability of beneficial ownership data. Its success depends on a number of variables. Increased control of data for over 300,000 businesses poses a considerable challenge in capacity and data management. Key political decisions need to be made, notably in the extent of scrutiny and the institution(s) preforming the data control. The reform requires strong and sustained political will to ensure adoption of necessary legislative and budgetary changes, as well as procurement of the new IT system for the Business Register (as of 1 October 2020, all applications with the Business Register are done electronically). [24] The question of supervisions of the quality of data is also open. Currently the Business Register is kept by eight district courts (registry courts) [25] and administered technically by the Ministry of Justice. In the reform planned, the Ministry of Justice proposes to assign the agenda of the Business Register to one single court, the Žilina District Court, which also leads the RPSP. [26]

The recent ruling from the Court of Justice of the European Union could present a major challenge to the full implementation of this commitment. [27] On November 22, 2022 the CJEU invalidated a provision of the fifth EU Anti-Money Laundering Directive that guaranteed public access to information on companies’ beneficial ownership citing not sufficient justification of infringement of privacy solely for the purpose of fighting financial crime. While it is too soon to understand the full practical impact from the ruling, it presents a setback, however, for achieving fully open and accessible beneficial ownership information in the spirit of this commitment and the general global shift toward openness on this topic. An immediate response from Open Ownership on the ruling stated that to deal with this setback, beneficial ownership transparency reforms would need to focus not only on the money-laundering benefit of public access to beneficial ownership registers but also on the broader public interest in having this information available (as is the case in the United Kingdom). [28]

The experience of the RPSP offers leverage that can serve as a good example for the proposed reform. Responsible actors can build on the recommendations from a recent analysis of the RPSP. [29] The experts recommended an automated comparison of end-user benefits recorded in individual registers to reveal false data, find greater interconnection of registers at the European Union (EU) level, enforce sanctions, improve court staffing, and register close persons of public officials.

Lastly, practical impact can increase if the reform is connected with enhancing the technical functions of the Business Register and making its data interconnected to other national registers, namely the RPSP and the Register of Legal Persons. Ideally, it would also be interconnected to the European Business Registers. Such interconnectivity of beneficial ownership data would significantly expand the possibilities of watchdogs and investigative journalists to track data and compare them with registers in other EU countries.

To ensure successful implementation of the commitment, IRM recommends:

• The government needs to secure financial resources for the newly established control mechanism. With the reform in place, the government needs to make sufficient resources available to ensure effective and efficient supervision by the courts of beneficial ownership data. Without proper resourcing, the reform may not have the same positive results seen from the valuable experience of registering, checking, and publishing beneficial ownership information in the RPSP.
• The Ministry of Justice could connect this reform to the new information technology for the Business Register, which would ensure better data management and interconnectivity with other registers, such as the Register of Legal Persons and Register of Public Sector Partners.
• The Ministry of Justice needs to work with civil society and experts to address the recent CJEU ruling to ensure that the widest possible transparency can continue to be offered. Any study should also look to future-proofing proposed changes to expansion of disclosure of beneficial ownership information in the Business Register to protect such progress from external setbacks.
• The Ministry of Justice needs to ensure it is easy for companies of all sizes in the Business Register to provide accurate beneficial ownership data. Open Ownership uses Slovak Republic’s current process, which places the burden of proof on those registering the information, as a good practice example. [30] To facilitate the provision of accurate information, the Ministry of Justice should provide effective guidance to help business owners understand what data is required, why this is necessary, and the potential sanctions if accurate beneficial ownership data is not properly submitted. This could help to preempt any perception that the level of scrutiny and the burden placed on the registered business to provide data on beneficial ownership is unnecessary.