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10 November 2017

Croatia: Adoption of a new Money Laundering and Terrorism Financing Prevention Act

On 27 October 2017, the Croatian Parliament enacted a new Money Laundering and Terrorism Financing Prevention Act (Zakon o sprječavanju pranja novca i financiranja terorizma; the "AML Act"). The main reason behind it was the transposition of the 4th AML Directive (Directive (EU) 2015/849) into the Croatian legal system.The most notable change in relation to the current Money Laundering and Terrorism Financing Prevention Act in force is the establishment of the Beneficial Owner Register as the central electronic database on the beneficial owners of legal entities (the "Register"). Despite pressure from public organisations, the Register remained inaccessible to the public.

Information from the Register will be accessible to (i) authorised officials in the Anti-Money Laundering Office (the "AML Office"), (ii) authorised persons in state bodies (eg Ministry of Finance, Croatian National Bank, Croatian Financial Services Supervisory Agency, Ministry of the Interior, State Attorney's Office, courts, etc), and (iii) authorised persons in the entities which are obliged to undertake measures relating to the prevention and detection of money laundering and terrorism financing when conducting customer due diligence.
Limited information from the Register may also be provided to interested parties which submit a reasoned application to the AML Office and prove justified legal interest. Justified legal interest shall be considered proven only if the following conditions are simultaneously fulfilled:

  1. information about the beneficial owner is exclusively connected to the impact it has on the legal position of the applicant in court, administrative or other legal proceedings; and
  2. information is sought in connection with money laundering, connected predicate criminal acts and terrorism financing.

In exceptional circumstances, access to information about the beneficial owner may be limited if access to such information would expose the beneficial owner to the risk of fraud, kidnapping, extortion, violence or deterrence, or if the beneficial owner is a minor or is declared incapacitated. Granted limitation shall not apply to obliged entities which are credit or financial institutions and public notaries when conducting due diligence measures, nor shall they apply to the AML Office and authorised persons in state bodies.

The AML Act prescribes that legal entities established in Croatia, ie companies, subsidiaries of foreign companies, associations, foundations and institutions ("Entities") are obliged to have and keep corresponding, accurate and updated information about their:

  1. beneficial owner(s), comprising of: first name and surname, country of residence, date of birth, ID card information, citizenship and nature and scope of beneficial ownership; and
  2. ownership structure – which for companies also includes information on shares, stakes and other participation in ownership.

Entities (except companies whose financial instruments are traded on a stock exchange or regulated market) shall be obliged to provide the information indicated above in a way and within deadlines prescribed by the special regulation which will be rendered by the Minister of Finance within six months from the effective date of the AML Act.

The Register will be operationally led by the Financial Agency (FINA), which shall, amongst other things, directly acquire basic information about the Entities (ie company name, business seat address, OIB and legal form) from registers through which particular Entities were established. Measures regarding prevention and detection of money laundering and terrorism financing The AML Act prescribes that measures, actions and procedures for the purpose of prevention and detection of money laundering and terrorism financing ("Measures") shall be taken by the obliged entities and competent authorities. The obliged entities include, inter alia, credit institutions, payment service providers, investment funds, pension funds, factoring companies, electronic money institutions, legal and physical persons providing forfeiting services, etc. Key Measures to be taken include customer due diligence via KYC standard and notification of suspicious transactions to the AML Office.

The Measures should be conducted before and/or during every transaction, as well as during the conclusion of legal transactions by which assets are acquired or used as well as in connection with other forms of managing assets and/or rights which may be used for money laundering and terrorism financing. Supervision over the obliged entities is the responsibility of the Croatian National Bank, the Financial Inspectorate, the Croatian Financial Services Supervisory Agency and the Tax Administration.

Natural and legal persons engaged in trade activity are not obliged to conduct the Measures. However, they are not allowed to receive or make cash payments in the amount exceeding HRK 75,000 (approx EUR 10,000). Payment exceeding the threshold must be made via transaction account opened with a credit institution. Under the current law, the threshold for cash payments amounts to HRK 105,000 (approx EUR 14,000) or EUR 15,000 when dealing with non-residents. With such restrictions in cash payments, the legislator circumvented the obligation under Article 2 (1) (e) of Directive (EU) 2015/849, which envisaged that persons trading in goods should also conduct the Measures.

In so doing, the legislator wanted to save companies from additional burdensome obligations, which would most certainly happen if persons engaged in trade activity were determined as the obliged entities. The legislator provided a little over two months for the obliged entities, competent authorities and legal entities to comply with the provisions of the AML Act, as it is set to enter into force on 1 January 2018.