Abstract
The EU beneficial ownership register regime forces among other companies, trusts, and foundations to make publicly available their beneficial owners, even though, the definition of beneficial owner is alien in many continental jurisdictions due to the Roman Law heritage in the civil law. This article discusses the working mechanism of the Beneficial Ownership Register (BOR) in Hungary with a special focus on the asset management foundation (AMF), the trust and the hybrid trust. It also analyzes the impact of BOR and AML law on the privacy of the participants in an AMF, trust, or hybrid trust.
Introduction
EU Member States were required to implement the new rules of the Beneficial Ownership Register (BOR) provided by the 5th amendment of the Anti-Money Laundering (AML) Directive[1], into national legislation by 10 January 2020. Many of the Member States, including Hungary did not consider the justification[2] behind the Directive so important to rush the implementation[3]. Ultimately, the Hungarian Parliament has implemented the 5th AML Directive enacting Act XLIII. of 2021 (BOR Act).[4] The BOR Act in compliance with the AML Directive created a legal base which, once the BOR becomes fully operative[5], it makes the beneficial ownership (BO) information of the companies and foundations publicly available. Although, the BOR Act does not directly list the asset management foundation (AMF) in the application scope of the act, it does mention the foundation.[6] The author’s conservative interpretation is that AMF is a special type of foundations; therefore, the AMF falls into the application scope of the BOR Act and the beneficial owners (BOs) of the AMF shall be publicly available, same way as the companies’ BOs.
In the case of trusts or trust like legal arrangement[7], the BOs’ information is not publicly available, as first the applicant shall prove and document the purpose of use in accordance of the BOR Act and the existence of a legitimate interest. It means, the beneficiaries may enjoy certain level of privacy in the case of a trust, even to a limited extend. The authorized authorities have full access to the BOs’ information of the trusts, without requiring these from the trustee or the National Bank of Hungary, respectively, as they had to do it before the implementation of the BOR. Full transparency of beneficial ownership was provided to the authorities before the BOR from the very first day of the implementation of the trust to the Hungarian legal system. The new rules just provide quicker access to the information.
The hybrid trust[8] shares the AML classification and BOR treatment of the foundation as the trust assets, in this case, are part of the AMF’s assets and the sole beneficiary of the hybrid trust must be the very same AMF which acts as trustee.[9] Therefore, the BOs’ information of the hybrid trust is publicly available with the extend and classification which are required by the AML Act[10] and the BOR Act.
The general aim and application scope of the BOR Act
The BOR Act’s aims are, in accordance with the AML Directive, creating data service background of BOR, ownership transparency of economic and social actors, combat against money laundering and terrorism financing.
The BOR Act splits the personal application scope of the law into two parts, the data-providers and the service-providers fall into it. Entities falling into any of the above categories shall comply with the BOR Act; however, the responsibility of the compliance is installed on the data-providers and the service providers’ role is far more technical in connection with the provision of data into the BOR.
The category of the data-provides covers among others all type of companies available in Hungary, including Societas Europaea (SE), cooperatives, associations, foundations and trustees of trust or trust like relationships, if the trustee provides its services in Hungary, or the trustee establishes business relationship in Hungary or acquires real estate in Hungary. Although, the BOR Act tries to focus on the trust relationships and their BOs, at the end it classifies the trustee as data-provider. This classification may cause confusion in the BO data when the financial institutions transmit the BO data to the tax authority. This issue will be explained later in the explanation of working mechanism of BOR. Notwithstanding, the list of entities covered by the personal application scope of BOR Act[11] is extensive, the BOR Act does not cover the investment funds including the private equity funds established in Hungary.
The investment funds are regulated in Hungary in accordance with the two main pillars of EU legislation in this area, which are the Directive on Undertakings for Collective Investment in Transferable Securities (UCITS)[12] and the Alternative Investment Fund Managers Directive (AIFMD)[13]. The Act CXCIII of 2011 about the investment fund managers and collective investment vehicles (IMF Act)[14] and the Act XVI. of 2014 about the collective investment vehicles and their managers[15] regulate the undertakings for collective investment in transferable securities (UCITS) and the alternative investment funds (AIF) and their managers. According to the legislation, the collective investment fund and the alternative investment fund, including the private equity fund are legal persons.[16] Due to historical reasons, the investment funds are not created in a form of a company, these do not issue shares or quotas, are not registered in the company registry and most importantly regulated completely differently than the companies. In most of the EU Member States the investment funds are certain type of companies; therefore, these automatically fall under the BOR rules. In contrast to the vast majority of the EU Member States, the different investment funds do not exist in a form of companies in Hungary and are not under the personal application scope of the BOR Act. The outcome is very unique, whilst the investment funds are under the local BOR regulation in the vast majority of the EU Member States as these are regulated as companies, do not fall under the BOR regulation in Hungary as these are not companies and the BOR Act does not cover them in the personal application scope. This results in that investment funds, including real estate funds, venture capital funds and most importantly private equity funds maintain the privacy of their beneficial owners, as their data is not publicly available in Hungary.
The BOR Act defines the service-provider with a reference to the AML Act[17] which provides an extensive list of those provides who deal with assets of clients. The list includes among others the financial institution, financial service provides, pension fund providers, post-payment service providers, casinos, accountants, auditors, tax advisors, attorneys, trustees, real estate agents, auction houses, traders of precious metals, escrow service providers, virtual currency service providers and company address providers. Among the above service-provides, the BOR Acts install obligation and task to the financial institutions as they have the obligation to collect the BO data from the data-providers in connection with their payment accounts and transmit the information into the BOR. The other service-providers shall use BOR for their extended KYC and compliance procedure as it is explained later in this paper.
Who are the BOs of companies, asset management foundations, trusts, hybrid trusts and investment funds?
To understand the the working mechanism and extension of the BOR, first the definition of the BO must be clear. The BO’s definition is a very technical one, created purely from AML perspective and does not cover absolutely the definition of the civil law owner. Therefore, for example a trustee is absolute owner of the asset from civil law perspective, but there are other BOs of the very same asset owned by the trustee from AML perspective. A ten percent owner of a company participation is absolute owner from civil law perspective but not BO from AML perspective. Twenty five percent owner of a company participation is a civil law owner and a BO of the participation but not a BO if the company is listed on a recognized stock exchange.
The BOR Act itself does not provide a definition of the BO of the data-provider, it refers back to the AML Act.[18] Therefore, the BO of the data-provider must be determined in accordance with the AML Act.[19]
First, it must be highlighted that an investment fund, as it is not classified as a data-provider, does not fall under the definition of the BO provided by the BOR Act, as the act narrows the BO’s definition to the data-providers. Therefore, the BO definition of the AML Act is irrelevant with regard to the investment fund; consequently, the BOR does not include the BOs’ data of the investment funds. The fact that a private equity fund can be established even for an individual provides vast opportunity for privacy protection. .
The AML Act defines the beneficial owners of a legal person, a foundation including the AMF as well as of a trust as follows:
“beneficial owner’ shall mean:
a) any natural person who owns or controls at least twenty-five per cent of the shares or voting rights in a legal person or an unincorporated organization directly or – by way of the means defined in Subsection (4) of Section 8:2 of Act V of 2013 on the Civil Code (hereinafter referred to as “Civil Code”) – indirectly, or who is able to exercise effective control over the legal person or unincorporated organization via other means, if that legal person or unincorporated organization is not listed on a regulated market and is subject to disclosure requirements consistent with Community legislation or subject to equivalent international standards,
b) any natural person who has a dominant influence in a legal person or unincorporated business association as defined in Subsection (2) of Section 8:2 of the Civil Code,
d) in the case of foundations:
da) where the future beneficiaries have already been deter mined, (the beneficial owner is) the natural person who is the beneficiary of twenty-five per cent or more of the property of the foundation,
db) where the individuals that benefit from the foundation have yet to be determined, (the beneficial owner is) the natural person in whose main interest the foundation is set up or operates, or
dc) (the beneficial owner is) the natural person who exercises control over the management of the foundation or exercises control over at least twenty-five per cent of the property of a foundation, and/or who is authorized to represent the foundation,
e) in the case of fiduciary asset management contracts15: (the beneficial owner is)
ea) the principal, and the beneficial owner referred to in Paragraph a) or b),
eb) the fiduciary, and the beneficial owner referred to in Paragraph a) or b),
ec) the beneficiaries or class of beneficiaries, and the beneficial owner referred to in Paragraph a) or b), furthermore
ed) any natural person exercising effective control over the trust fund via other means, and furthermore
ef) in the absence of the natural person referred to in Paragraphs a) and b), (the beneficial owner is) the executive officer of the legal person or unincorporated business association;”
As companies are legal persons these BOs shall be determined according to point a) above; therefore, if the direct or indirect ownership, voting rights or control of a private individual achieve twenty five percent that person shall be considered as BO. The ultimate rule to determine the BO is, if there is no private individual person having at least twenty five percent direct or indirect ownership, voting rights or control in the company, the manager(s) shall be classified as BO of the company.
With regard to provision d) above, it is obvious that the AMF falls under the AML Act just as any other foundation. Consequently, if any determined beneficiary holds a property interest of at least 25% in the AMF, or if there is an individual holding powers in whose main interest the foundation was set up or operates, or who exercises control over the management or the board of the AMF, this person is considered the beneficial owner of the AMF. The same applies, if a person exercises control over a property interest of at least 25% in the AMF.
Yet, an AMF may even provide enhanced privacy for the beneficiaries if the board of the AMF has discretionary power to appoint the future beneficiaries and if at the same time there is no individual who is in fact appointed for an interest of at least 25% in the property of the AMF. In addition, there must not be any individual, for example a protector, who exercises control over the management of the foundation. If such conditions are met, it is the AMF’s board that is regarded as the BO of the AMF.
The determination of the BO of trust relationships are quite straightforward; the settlor, the trustee, the beneficiary and the protector if it exercises control over the trust assets shall be considered as beneficial owners of a trust. However, in the case of hybrid structures when an AMF acts as trustee of a trust relationship, the classification deviates from these general rules as will be explained in the following part.
Beneficial ownership in the case of hybrid trust (trust relationship provided by an AMF)[20]
The ownership structure in a foundation, although its aims are very similar to that of a trust relationship, differs from a trust. Consequently, a different ownership structure affects the determination of the beneficial ownership of such structure. It is for this very reason that the AMF Act uses a different terminology than the Trustees Act[21] and the trust section of the Civil Code[22].
According to the AMF Act, there is no settlor in the case of a trust relationship managed by an AMF, as Article 2(4) of the AMF Act provides: “the founder may transfer assets into fiduciary asset management by unilateral declaration made in the deed of foundation”. Moreover, article 5 (1) of the AMF Act provides, “the founder of an asset management foundation may entitle (. . .) the foundation board to exercise the founder’s rights”. These provisions allow the founder to transfer the founder’s rights to the foundation board. If such a transfer is made, it at the same time results in the annulation of the founder’s position. The AMF, as a legal person, only comes into existence by court order, con- sequently a trust relationship managed by the AMF cannot be established earlier than the AMF itself. Therefore, if the founder transfers his founder’s rights to the board of the AMF in the foundation deed, the board at the time of the creation of the trust relationship becomes the founder of the trust relationship. Once the founder has transferred his rights to the foundation board, the board members qualify as beneficial owners of the trust relationship instead of the economic founder who transfers assets into the trust.
Moreover, the AMF Act contains a legal presumption in connection with the beneficiary. According to Article 2(3)(a) of the AMF Act “in respect of the assets taken into fiduciary asset management by the asset management foundation (. . .) the asset management foundation shall be regarded as the exclusive beneficiary” of the trust relationship. This means that the beneficiary of the trust managed by an AMF is the AMF itself. However, the beneficiary of the AMF itself may be any person appointed by the founder or co-founder. If no beneficiary holds an interest of at least 25% in the AMF’s property or no person exercises effective control over the AMF’s property, the board members remain the beneficial owners of the AMF.
Working mechanism of BOR
The working mechanism of the BOR is as follows. The data-provider who fall under the personal application scope of the BOR Act, shall maintain an accurate, up-to-date information about its BOs and transmit the required BO information to the financial institutions where the data-provider maintains its payment accounts. In the case of any change in the BO information the data-provider shall receive the new information about the change in 15 days from the BO; however, the fulfillment of this obligation falls into the responsibility of the data-provider. This places significant responsibility on the management of the data-provides. Obviously, the data-providers shall determine the BOs in accordance with the AML Act. The financial institution in accordance with their KYC and compliance obligations based on the AML Act shall collect, maintain accurate and up-to-date BO information about those data-providers with whom they maintain business relationship and transmit the BO data into the BOR until the 5th day in every month. The National Tax and Custom Office (tax authority) is responsible to maintain and manage the BOR; therefore, the financial institutions, using a closed electronic transmitting channel among them and the tax authority, shall transmit the information into BOR. The tax authority creates an individual national registration number (BOR number) to each data-providers as well as provides ten BO index point to each of them.
As it was mentioned earlier, the trustees and not the trust relationships are classified as data-providers and the data-providers obligation is to maintain an accurate, up-to-date information about their BOs. A technical, literal interpretation of these rules would result in that the trustees shall provide their own BO information, instead of the trust relationships’ BO information. This is obviously the opposite of the general aim of the AML Directive and the BOR Act. Based on the general aims of these legislations, the trustees shall provide BO information about the trust relationships. The wrong classification however triggers an additional technical issue during the implementation. The financial institutions are not able to separately transmit the BO information of those trust relationships which belong to the same trustee. The trustee is the data-provider and according to the correct interpretation of the BOR Act, the trustee shall maintain an accurate, up-to-date BO information about the trust relationships. Even if the trustee provides the BO information of the trust relationships separately to the financial institution, the latter is not able to transmit these trust by trust but only connected to the trustee, as it is the data-provider. Moreover, the tax authority, creates a national registration number to each data-provider. The same technical issue arises again, the trustee is the data-provider; therefore, under one national registration number there are even several thousand of BO and their information mixed and not separated trust by trust. The system works if the trustee manages only one trust but fails if the trustee manages several trusts.
Any authority, prosecution office and court may inform the tax authority if they experience any deviation among the BO data in BOR and the known facts. The service providers shall monitor the BO data during their compliance activities and if they experience any deviation among the facts and the BO data registered in the BOR they shall report deviations to the tax authority. The tax authority shall deduct 2 points from the BO index of the data-provider if the deviation was reported by a state body and 1 point from the BO index of the data-provider if the deviation was reported by a service provider. The tax authority shall correct the BO data of the data-provider in BOR according to the above reports, at the same time of changing the BO index of the data-provider.
Ten-to-eight-point BO index means “excellent” compliance, under 8 BO index point equal to “uncertain” compliance and under 6 BO index point results in “unreliable” compliance of the data-provider. The “unreliable” classifications of a data-provider will be immediately online available at the website of the tax authority, whilst if a data-provider’s classification remains “uncertain” for more then 180 days, the tax authority publishes it at its website after the above grace period. The service providers shall use this information in the extended KYC and compliance process before they establish business relationship with a data-provider. Although, the data-providers have the chance the correct the BO information upon the call of the tax authority and gain back the original BO index number; the consequences of the failed compliance of those data-provides who were classified “uncertain” or unreliable are “predictable”. According to the AML Act. first the service providers shall make an extended due diligent as well as deny the fulfillment of any transaction above HUF 4.500.000[23]. In the case of continuous non-compliance status, the service provider shall terminate the business relationship with the data-provider.
Content of BOR
The BOR contains the following data of data-providers:
- national registration, company registration and tax numbers, name, address, EU individual identification number, if any,
- Regarding the BO of the data-provider: full name, full birth name, citizenship, place and date of birth, address, type and share of interest in the data-provider
- BO index of the BO information
Access to BO data
The access to BO information, depending on the status of the applicant, shall be available as follows.
Any authority, prosecutor office, and court during the performance of their duties shall have free, immediate and online access to BO information, without informing the data-provider about the information request.
Any authority, prosecutor office, and court, during the performance of their duties may transmit the BO information to any authority, prosecutor office or court of an EU Member State or to a third Country, if in the latter case the third country’s data-handling meets the conditions of the regulation of transmitting data to a third country.
The service providers during the performance of their compliance duties may have free access in a way as determined by the tax authority to BO information except the BO index and the deviation reports provided by the authorities, prosecutor office, court, or other service providers.
The data-provider and the BO are allowed to request free, individual data service about their BO information and the deviation reports provided by the authorities, prosecutor office, court, or service providers from the tax authority.
Third person is allowed to request individual data service for consideration about the BO information of any data-provider excluding the trust relationships if the third person provides the name of the data-provider. The information which is provided to the third person exclude the deviation reports provided by the authorities, prosecutor office, court, or service providers.
Third person is allowed to request individual data service for consideration about the BO information of a trust relationships if the third person provides and documents the purpose of the data’ use and the legitimate interest in obtaining the data. Legitimate interests are combat against money laundering or terrorists financing or if the third person obtaining the data and any BO of the trust relationship are family members according to the definition of the Civil Code[24] or the third person obtaining the data and any BO of the trust relationship are both BO of a same legal person or the above persons are in close business relationship, or they are in property lawsuit. Additionally, if the trust assets contain assets hold in a legal person or other entity registered in a third country out of the EU and the assets qualify for majority influence in the above entity, third person may request data about the BO of the trust relationship in writing. The third person shall acquire the prior permission of the competent minister before submitting the data request to the tax authority. During the preliminary licensing process, the third person shall provide and document the purpose of the data use and the legitimate interest in obtaining the data or the qualifying majority influence in a third country entity. The BO information which may be provided to the third person in the above cases exclude the deviation reports provided by the authorities, prosecutor office, court or service providers.
Summary
Another piece of privacy has been lost forever with the implementation of BOR. Nevertheless, the special BO classification rules of the hybrid trust and the investment funds, especially the private equity fund which are not under the BOR regime provide extra shelters for those who seek privacy. The trust relationships enjoy special treatment and only those may have access to the BO information who really can justify and document the narrow defined legal interest. The two-stage data requirement process of the trust’s BO information probably will efficiently filter the data fishing expeditions and the privacy of the trust beneficiaries remains intact.
[1] DIRECTIVE (EU) 2018/843 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU.
[2] The justification behind the Directive, among others, is to combat money laundering and to ensure fair taxation of every type of income.
[3] 17 Member States missed the deadline
[4] The act currently is not available in English. The original Hungarian language version is available here: https://net.jogtar.hu/jogszabaly?docid=A2100043.TV Last visited: 23. January 2022.
[5] The BOR system becomes operative in several stages until the 1st of July 2022.
[6] Article 1, paragraph 1, sub-paragraph 27 of the BOR Act.
[7] There were disputes whether the Hungarian fiduciary asset management (FAM) contract is a trust or not. See in details: Ákos Menyhei, Development of the estate planning industry through the introduction of the trust in Hungary, Oxford Journals, Trusts & Trustees, Vol. 22, No. 6, July 2016, pp. 659–664, CE Rounds, Jr and IIlés, István, A Hungarian Trust a Clone of the Anglo-American Trust, or Just a Type of Contract?: Parsing the Asset-management Provisions of the New Hungarian Civil Code’ 6 (2) Journal of International Commercial Law 153 2015 5http://www.georgemasonjicl.org/wp-content/uploads/2015/08/6_ Geo_Mason_J_Intl_Com_L_153_2015-3.pdf#page1⁄454 accessed 3 February 2016.
I believe, the practice has stepped this theoretical debate over and recognized the FAM contract as a trust. Therefore, I use the “trust” for the FAM contract.
[8] See in details: Ákos Menyhei and János Zsoldos, Privacy protection in Hungary, Oxford Journals, Trusts & Trustees, Vol. 26, No. 6, July 2020, pp. 542–549.
[9] See in details: Ákos Menyhei, The new Hungarian asset management foundation, Oxford Journals, Trusts & Trustees, Vol. 25, No. 6, July 2019, pp. 599–610 599
[10] Act LIII of 2017 on the Prevention and Combating of Money Laundering and Terrorist Financing, available in English:
https://net.jogtar.hu/jogszabaly?docid=a1700053.tv&dbnum=62&getdoc=1 Last visited 23. January 2022.
See in a detailed analysis about the classification of the BOs of the AMF and the hybrid trust: Ákos Menyhei and János Zsoldos, Privacy protection in Hungary, Oxford Journals, Trusts & Trustees, Vol. 26, No. 6, July 2020, pp. 542–549.
[11] BOR Act. Article 1., Paragraph 1., Sub-paragraph 1-29
[12] DIRECTIVE 2009/65/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS)
[13] Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers.
[14] https://mkogy.jogtar.hu/jogszabaly?docid=a1100193.TV, last visited 23. January 2022.
[15] https://net.jogtar.hu/jogszabaly?docid=a1400016.tv, last visited 23. January 2022.
[16] Article 65. Paragraph 1 of Act XVI. of 2014. about the collective investment vehicles and their managers.
[17] Article 3. Sub-Paragraph 12 of the BOR Act.
[18] Article 3. Sub-Paragraph 13 of the BOR Act.
[19] Article 3. Sub-paragraph 38, a and b and d-f points of the AML Act.
[20] This paragraph is based on the article of Ákos Menyhei and János Zsoldos, Privacy protection in Hungary, Oxford Journals, Trusts & Trustees, Vol. 26, No. 6, July 2020, pp. 542–549. Please see the full argument in the publication.
[21] Act XV. of 2014 about the trustees and their activities
[22] Act V. of 2013 about the Civil Code
[23] It is approximately €12,000
[24] Article 8:1 paragraph 1 sub-paragraph 2 of the Act V of 2013 about the Civil Code
