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Increased risk for non-Slovak finance parties doing business with Slovak public entities

A new law in Slovakia which has been in force since 1 February 2017 poses the risk of transactions between foreign banks and Slovak state entities (and related companies) being unenforceable unless certain registration conditions are met. The law has a broad scope and catches many types of transactions in which foreign banks may be involved in the Slovak Republic.

On 1 February 2017, new Act No. 315/2016 Coll. on the register of public sector partners (the Public Sector Partners Act) came into force in the Slovak Republic. The Public Sector Partners Act’s main goal is to increase the level of transparency in B2G transactions between the state, or certain entities linked with the state, and private sector companies by disclosing the ultimate beneficial owner of the latter in a special publicly accessible register (the Register).

Broad definition of “public sector partner”

Private sector entities subject to registration under the Public Sector Partners Act are called “public sector partners”. The definition of a public sector partner is very broad and includes inter alia each individual or legal entity, other than a public administration body, which receives (under any legal title) funds or assets from any public entity (including central government, municipalities and any other public bodies) or any entity which is controlled or managed by any public entity (the Public Counterparties) or enters into a public procurement contract or concession agreement. The definition of the Public Counterparties is broad and includes state enterprises and large Slovak corporates managed or controlled by the state or under joint control of the state, which are active in various industry sectors, such as energy, utilities and transportation.

The obligation to register also extends to direct or indirect suppliers to public sector partners provided that they are or should be aware that the supplied goods or services or acquired assets or property rights relate to an agreement or other transaction with a Public Counterparty.

De minimis thresholds of EUR 100,000 for one-off payments and EUR 250,000 for total yearly performance apply to certain types of public sector partners.

An exemption applies to Slovak banks when entering into loan agreements with a Public Counterparty, however, but the exemption does not extend to foreign banks and other types of banking transactions and services.

Registration

All public sector partners have to register themselves in the Register prior to entering into any agreement or any other transaction with a Public Counterparty. “Other transaction” should be understood broadly as any legal act, including for example a purchase of bonds. For existing contractual relationships, public sector partners have to register on or before 31 July 2017.

The application for registration in the Register must be filed electronically by an authorised person (such as a Slovak bank, notary, attorney-at-law, auditor or a tax advisor, in each case having its registered seat or place of business in Slovakia) acting on behalf of the person seeking the registration. In the application the authorised person has to identify (i) the applicant’s ultimate beneficial owner or (ii) in the case of an issuer of securities traded on a regulated market in which no natural person holds an at least 25% share in its business proceeds or a company directly or indirectly controlled by such an issuer, details of the members of the top management of the company. The top management includes board members, general proxies and all B-1 managers. Data in the Register has to be kept up-to-date. Any changes regarding the ultimate beneficial owner or the top management must be registered within 60 days of their occurrence.

Each ultimate beneficial owner must inform a public sector partner and an authorised person of the fact that he/she became the ultimate beneficial owner of a public sector partner within 15 days.

Sanctions

If a public sector partner fails to register itself in the Register, the Public Counterparty does not have to fulfil its obligations under the agreement or transaction.

Sanctions for other breaches of the Public Sector Partners Act, such as registration of false data, failure to keep the registered data up-to-date or failure to present evidence as to the veracity of the registered data, include fines which may be imposed on (i) a public sector partner (in the amount of the economic benefit received by the public sector partner under the agreement with the Public Counterparty or, if the benefit cannot be ascertained, up to EUR 1,000,000), (ii) executives of the public sector partner (up to EUR 100,000), (iii) the ultimate beneficial owner of the public sector partner (up to EUR 10,000) and (iv) the authorised person (up to EUR 100,000).

For certain breaches directors of the public sector partners may be barred from holding executive or supervisory positions in Slovak companies.

Impact on insolvency

If an insolvent debtor is or in the past five years has been registered in the Register, all its creditors (other than public administration bodies) holding claims exceeding EUR 1,000,000 have to register themselves in the Register as well. Otherwise the creditors are deemed the debtor’s related parties for purposes of any insolvency proceedings, as a result of which their claims against the debtor are treated as subordinated claims and any security interests securing them are disregarded by operation of law.

A very quick amendment

Just two weeks after the Public Sector Partners Act came into force, it was amended through a fast-track legislation procedure. The amendment excludes from the remit of the Public Sector Partners Act contracts and other transactions with the Debt and Liquidity Management Agency of the Slovak Republic, in particular in connection with the issuing of government bonds and transactions with the National Bank of Slovakia. Moreover, foreign state bodies and international institutions founded under international public law have been exempted from the registration requirement. Trading on the Slovak stock exchange (but not on foreign stock exchanges and not OTC transactions with listed securities) have been exempted too.

Implications for foreign banks doing business in Slovakia

The Public Sector Partners Act addresses similar issues as the EU’s Fourth Anti-money Laundering Directive 2015/849 which imposes an obligation to maintain registers of beneficial owners and the UK Persons with Significant Control registration rules. However, the Public Sector Partners Act goes well beyond the baseline of the prevailing EU‑wide approach.

For foreign banks trading with Slovak counterparties, the new regime creates the following main issues:

  • Failure to register will affect the enforceability of a transaction with a Public Counterparty. For example, if a foreign bank lends or trades with a Public Counterparty, the Public Counterparty may lawfully refuse performance under the transaction as a matter of Slovak law. In addition, the court may impose sanctions including the surrender of the economic benefit of the transaction (eg for a loan, the amount of interest received by the bank from the Public Counterparty).
  • Although the banks are unlikely to have beneficial ownership issues, they still have to register. A bank whose securities are listed on a regulated market (or which is owned by another listed company) has to register its top management, which is defined as board members, general proxies and all B-1 managers. In practice, this may involve a large number of individuals in a major bank. Birth dates and home addresses have to be provided, and the registration should be kept up-to-date. This may pose a significant administrative burden.
  • The broad definition of “Public Counterparty” means that a bank needs to register not only if it trades with the state, but also with any company in which the state retains a majority or a right to appoint a majority of members of the board of directors or supervisory board. This includes major partially privatised companies, mainly in the utilities sector. In addition, the new law can be construed in such a way that it requires a bank to register even if it has no direct relationship with a Public Counterparty, but lends to or trades with public sector partners if the funding or trading is for a transaction between the public sector partner and a Public Counterparty. This may affect for example funding by foreign banks to concessionaires on PPP projects.

Finally, a foreign bank is also required to register if it has no business with a Public Counterparty whatsoever, but is a creditor of an insolvent company which is or was in the past five years registered in the Register. Such an insolvent company may be a Slovak bank trading with Public Counterparties and also with foreign banks. The foreign bank’s claim will be subordinated and any security will be non-enforceable in the event of the bankruptcy of that Slovak bank, unless and until the foreign bank also registers itself in the Register.

Further information

This case summary is part of the Allen & Overy Legal & Regulatory Risk Note, a quarterly publication.  For more information please contact Karen Birch – karen.birch@allenovery.com, or tel +44 20 3088 3710.

Legal and Regulatory Risk Note
Europe