Identification forms, UBO register, UBO index
Obligations of service providers and clients when concluding an accounting, auditing, payroll accounting or tax consultancy contract
In this post, we would like to provide our clients with guidance on the often complex system of Anti-Money Laundering Act (Act LIII of 2017 on the Prevention and Combating of Money Laundering and Terrorist Financing).
When and for whom is it compulsory?
Generally speaking, the service provider is obliged to carry out client due diligence at the time of establishing a business relationship, i.e. at the time of concluding a contract.
The existence of original identification forms, completed and signed by the client (see in more detail in paragraph 4) is a condition for the provision of the service, without which the service provider cannot start providing the service to the client.
In addition, the act lists other special cases (e.g. in the case of transactions amounting to or exceeding HUF 4,500,000).
What is the purpose of the act?
To screen the client, locate and identify the ultimate beneficial owner of the company and if any data, facts or circumstances indicating suspicious activities (money laundering, terrorism, other criminal activities) are found, report them to the Hungarian tax authority.
Who is an actual beneficial owner?
This is the most difficult part of the identification process.
Under the Anti-Money Laundering Act, the aim is always to identify the natural person who ultimately owns or manages a company. The natural person that the service provider needs to identify is often at the very end of a complex (international) business network.
Therefore, the identification forms must always primarily indicate the natural person who owns at least 25% of the company wishing to contract with the service provider, either directly or indirectly (through another company or organization), or, failing this, who has a dominant influence in the company (paragraphs a-c of Subsection 38 of Section 3 of the Anti-Money Laundering Act).
The act specifically mentions foundations and fiduciary asset managements; the ownership of these two types of organizations must be defined slightly differently. (paragraphs d-e of Subsection 38 of Section 3 of the Anti-Money Laundering Act).
In the case of direct ownership: the natural person(s) who directly has/have at least 25% of the voting rights or shares in the organization.
In case of indirect ownership: the natural person(s) who indirectly (according to Subsection (4) of Section 8:2 of the Civil Code) has/have at least 25% of the voting rights or shares in the organization. In this case, it is often not easy to calculate the indirect shares, because not only the Anti-Money Laundering Act, but also the Civil Code must be taken into account. (This means that if a company has more than 50% influence in the intermediate company, this influence should be counted as 100%.)
To determine the above, however, it is necessary to know the organizational structure of the client, its ownership structure with the exact shares, and to unravel the ownership chain down to the last private owner.
If there is no direct or indirect owner, who owns more than 25% of the shares, the executive officer of the organization is considered to be the owner. (paragraph f of Subsection 38 of Section 3 of the Anti-Money Laundering Act.)
How does it look like in practice?
The service provider must identify the client (his/her authorized representative / representative acting on behalf of the client) and carry out identity verification.
To do this, we use an identification form (in the form of a Word document or a form), which must include the following:
a. details of the contracting company,
b. details of the contractual transaction,
c. details of the representative(s) of the company – person(s) having powers to sign for the company: the same person(s) who signed the contract,
d. details of the natural person ultimate beneficial owner(s),
e. if there is no natural person owner as defined by law, a declaration to that effect,
f. for publicly exposed persons: a publicly exposed person’s declaration.
The presentation of the documents required for identity verification is mandatory for the representative of the company and optional, not mandatory, for the ultimate beneficial owner. The service provider must make a copay of the documents presented.
Required documents: identity card / passport, address card (if you live in Hungary).
The annex containing the above information (a-f) need to be signed only by the representative(s) of the company, who also declare(s) the ultimate beneficial owner(s).
In the event of any change in the personal data, the client is obliged to notify the service provider of the change within 5 working days, in which case the client must be identified again, i.e. a new identification form must be filled in with the new, changed data.
As a service provider, we are obliged by the Anti-Money Laundering Act and our internal rules to review the identification register and the data stored at least once a year.
The service provider classifies clients into 3 categories: low (e.g. budgetary authorities, municipalities), high (e.g. high risk, third country clients, owners considered to be publicly exposed persons), and average (e.g. ‘normal’ legal entities / business entities without legal personality).
Clients in category ‘high’ are subject to enhanced due diligence by the service provider (one element of which is, for example, the request for an asset declaration).
If a client has already been screened in a previous transaction within 1 year, the service provider only needs to fill in a so-called identification declaration stating that the identification has already been carried out (indicating the exact date of the identification).
If data, facts or circumstances indicating money laundering / terrorism emerge at any time during the conclusion of the contract or the performance of the service, the service provider must report it to the Hungarian tax authority.
The service provider must keep the signed originals of the forms, the documents attached thereto, and must keep them for 8 years after the business relationship has ended.
UBO register, the database of the Hungarian tax authority and the UBO index
From February 1, 2022, the service provider has been obliged to compare the data received from the clients on the identification forms with the data stored in the UBO register of the Hungarian tax authority (ultimate beneficial owners’ register) (Subsection 3 of Section 8 of the Act on the Establishment and Operation of the Background of Data Provision in Connection with the Identification Duty of Financial and Other Service Providers, ‘UBO’ Act.). The Hungarian tax authority records data based on the previous reporting of clients to their financial institutions: in previous years, the same identification process had to be carried out account-holding banks.
If the service provider notices a discrepancy in the data, it has an obligation to report it to the Hungarian tax authority to ensure that the tax authority’s database is up to date.
In the UBO register, UBO index is an indicator assigned to data of the ultimate beneficial owner of a firm/company providing the data, with a value between 1 and 10, indicating its level of reliability.
The Hungarian tax authority assigns a national registration number to the firm/company providing the data when it receives the first uploads of data from the banks. On the first data upload, the UBO index is 10. (Subsections (1)-(2) and (4) of Section 7 of the UBO Act).
If it is reported to the Hungarian tax authority that there is a discrepancy between the data in the UBO register and the data reported to the service provider, the UBO index is reduced by 2 or 1 point, depending on the type of entity that reported the discrepancy.
If the UBO index falls below 8 points, the data of the ultimate beneficial owner of the firm/company providing the data is qualified ‘uncertain’; if it falls below 6 points and remains so for 60 days of the receipt of the notification by the respective film/company on such status, the data of the ultimate beneficial owner of the firm/company providing the data is rated ‘unreliable’.
In the notification, the Hungarian tax authority does not disclose the identity of the sender reporting the discrepancy to the firm/company providing the data.
If the firm/company providing the data confirms or changes its UBO data, the Hungarian tax authority will adjust its UBO index to 10 (Section 12 of the UBO Act).
The legal consequences of the UBO index being qualified as ‘uncertain’ and ‘unreliable’ and the possible legal remedies are detailed in Sections 13-16 of the UBO Act.
Written by Anita Kasza
Legislation referred to:
Act LIII of 2017 on the Prevention and Combating of Money Laundering and Terrorist Financing (Anti-Money Laundering Act.)
Act XLIII of 2021 on the Establishment and Operation of the Background of Data Provision in Connection with the Identification Duty of Financial and Other Service Providers (‘UBO’ Act)
Act V of 2013 on the Civil Code (Civil Code)