Anti Money Laundering Act

The abbreviation AML means Anti Money Laundering, and as the name suggests, the legal regulation in this area aims to combat the laundering of the proceeds of crime. CFT - Combating the Financing of Terrorism is also significantly related to this area and aims to restrict access to finance and financial services by terrorists or terrorist groups. In the spirit of international cooperation, the Financial Action Task Force (FAFT) was established in 1989 to exert global influence in the development of AML/CFT standards and recommendations worldwide. Although the scope of individual measures varies from state to state, there is a global effort to achieve certain standards in this area arising from the work of the FAFT. In the Czech Republic, this area is legally regulated by the already mentioned AML Act, which is not a new addition to the legal framework, as its first version was already introduced in 2008 (with effect from 2009) but has undergone a number of significant amendments in the course of its existence, through which, among other things, extended the obligations of the so-called obliged persons.

Who is an obliged person according to the AML Act?

The AML Act applies to entities that deal with their clients' assets or come into contact with information about them in the course of their business. These persons have statutory obligations through which they contribute to the protection of the economic space. The range of obliged persons is defined in Section 2 of the AML Act, e.g.:

•  banks;
•  real estate agents and real estate traders;
•  persons authorised to engage in foreign exchange activities;
•  entities providing accounting, tax or auditing services;
•  entities providing legal and notarial services;
•  company founders and registered office providers;
•  providers of payment services;
•  providers of virtual asset services;
•  gambling operators;
•  second-hand goods trade, including car dealers.

What are the obligations arising from the AML Act?

If you as an obliged person are subject to the material scope of the AML Act, there are a number of obligations to be fulfilled. The obligated person must adopt and implement internal control policies and procedures designed to mitigate and effectively manage risks in this area. Additional obligations fall on these persons when they conduct business with a client. The basic obligations include:

•  develop a system of internal policies in writing;
•  risk assessment;
•  designation of an AML contact person;
•  regular staff training;
•  client identification and customer due-diligence;
•  archiving of client data;
•  information obligation;
•  reporting suspicious trade;
•  notification of discrepancies in the Register of beneficial owners.

The most significant obligation falling on the clients of obliged persons is thus the identification and customer due-dilligence itself.

Client identification involves verifying and recording the client's basic identification data and determining whether the client is a politically exposed person or a person against whom the Czech Republic applies sanctions. The obliged person is obliged to carry out the identification whenever they intend to carry out a transaction with the client (a single transaction) exceeding EUR 1 000, in the case of a business relationship (a contractual relationship involving repeated transactions) or in the case of a suspicious transaction. During the identification process, data is collected and recorded in accordance with the requirements of Section 8 of the AML Act.

A customer due-dilligence involves identifying additional information about the transaction or business relationship, determining the ownership and management structure, and reviewing the source of funds involved in the transaction or business relationship. The audit itself is carried out during the business relationship or when the need for an audit is triggered by law, e.g. before a transaction with a politically exposed person or a transaction with a client from a high-risk country. The facts to be identified during an inspection are summarised in Section 9 of the AML Act.

Please note that if the client refuses to submit to identification or customer due-dilligence and does not provide the necessary cooperation, the obliged person is forced under the AML Act to refuse to conduct business, to enter into a business relationship or, if not excluded by other legislation, to terminate the business relationship.

Within the framework of the established obligations, we would also like to draw your attention to the notification obligation that arises in the event of irregularities under the law regulating the registration of beneficial owners. If the client fails to correct the irregularities found in the records, the obliged person is forced to report the irregularity to the competent court. We have already written about the significant changes in legislation in our previous article Amendment to the Act on registration of beneficial owners, in which you can find more information on this area.

What are the penalties for non-compliance?

The fulfillment of obligations by obliged persons is subject to supervision. The AML Act gives general authority for the exercise of administrative supervision to the Financial Analysis Office ("FAO"). In addition to the FAO, a supervisory authority, typically a professional chamber, is established for individual sectors to exercise supervision in the AML area over a defined range of obliged persons. An example is the supervision of the activities of tax advisors by the Chamber of Tax Advisors of the Czech Republic.

During successive amendments to the AML Act, the penalties have been tightened and their severity differentiated according to three criteria, namely whether they are committed seriously, repeatedly or systematically. An offense under the AML Act is:

•  failure to identify the client and carry out customer due-diligence;
•  failure to comply with information obligations;
•  failure to comply with the notification obligation;
•  failure to comply with the obligation to defer a client's order;
•  failure to comply with prevention obligations;
•  failure to comply with the group's obligations and breaches of obligations by credit and financial institutions.

Penalties for non-compliance reach extreme levels, with penalties of up to CZK 130,000,000 being the upper limit for the most serious offenses.

In conclusion, the scope of the obligations set out is indeed extensive and imposes a number of requirements on the obliged persons. It is therefore important for the persons concerned to be aware of this issue and to identify the right strategic approaches to ensure compliance with the regulation in this area, which is constantly evolving. Failure to do so exposes them to the risk of penalties which, given the size of the penalties, can be liquidated for smaller companies.

If you are currently dealing with this issue, do not hesitate to contact our experts who will be happy to help you.