Early impacts of public beneficial ownership registers: Slovakia
Case study: Agrofert Group
Transparency International Czech Republic also recently uncovered a conflict of interest in the Czech Republic using Slovakia’s public register.[11] Before entering politics in 2011 on an anti-corruption platform,[12] current Czech Prime Minister Andrej Babiš worked in the private sector and now has a net worth of USD3.60 billion,[13] making him the richest elected national leader in the world. Babiš gained much of his wealth through the Agrofert Group, a business he founded in 1993 that now has more than 250 subsidiaries, including two of the largest Czech newspapers, MF DNES and Lidové noviny, and the most visited Czech news server, iDnes, through the Mafra media group, a subsidiary company of Agrofert.[14]
Following the introduction of Czech conflict of interest legislation that prevents members of government and other public officials from having a controlling interest in news media, Babiš transferred his sole ownership of the Agrofert Group to two trust funds, AB private trust I, owning 565 shares (89.97%), and AB private trust II, owning 63 shares (10.03%).[15] Agrofert is currently active in 18 countries in 4 continents,[16]and as such is registered in both the Czech Republic as well as Slovakia, where it is a market leader in agriculture and food processing.[17]
The Czech Republic has a central register of beneficial owners, but it is not publicly accessible.[18] However, since adopting the Act on Register of Public Sector Partners (Act. No. 315/2016) as part of a wider set of anti-money laundering legislation in 2017,[19] Slovakia has required the public disclosure of beneficial ownership of all companies drawing public funds.
Following research on the Slovak register in 2018, Transparency International (TI) discovered that Agrofert Slovakia still identifies Babiš as one of five beneficial owners.[20] Agrofert has argued that TI purposefully misinterpreted the term final beneficiary’ in Slovak law, and claimed that ‘Mr. Babiš is not the controlling entity of the Slovak companies of the Agrofert Group.’[21] TI contests this by highlighting the need for a substantive interpretation of beneficial ownership rather than a formal one and drawing attention to the fact that Babiš is the only beneficial owner that has the power to remove all other beneficial owners of the company.[22] Additionally, he is listed as a beneficiary in the certified disclosure document; the trust funds are set up so that the shares will return to him when he terminates his public office.[23]
Figure 3. Agrofert beneficial ownership structure before 2017, which restores upon Babiš leaving office
Agrofert ownership structure showing the ownership and control relationship between Czech PM Andrej Babiš and Agrofert before 2017, as well as the future ownership and control relationship after he leaves public office. (Source: https://www.agrofert.cz/en/events-and-news/shareholder-informed-the-management-of-the-companies-agrofert-and-synbiol-on-the)
This diagram shows the current relationship of Czechia’s Prime Minister Andrej Babiš with Agrofert. Prior to 2017, Mr Babiš directly owned Agrofert. In order to comply with new conflict of interest regulations Mr Babiš put his company into two private trusts – AB private trust I and II – controlled by his wife and lawyer. Mr Babiš direct ownership over Agrofert will resume when he terminates public office.
Sources: This diagram has been compiled from the following public sources to illustrate the complexity in understanding ownership structures based on limited publicly available information: Slovak Republic Register of Public Sector Partners, Agrofert, a.s. verification document, 30 June 2017; Agrofert; Transparency International Slovakia; Euractiv; Mafra; Novinky; and Reuters.
Figure 4. Agrofert beneficial ownership structure in 2020
Agrofert ownership structure showing the current ownership and control relationship between Czech PM Andrej Babiš and Agrofert while he holds public office. Under Slovak law, joint control and coordinated action is assumed between family members, thereby making Babiš a beneficial owner under Slovak law. Agrofert denies that Babiš exercises any control over Agrofert. (Source: https://www.agrofert.cz/en/events-and-news/rebuttal-of-misinformation-from-transparency-international)
According to one of the most commonly accepted definitions of beneficial ownership by the Financial Action Task Force, an intergovernmental policy-making body focussed on combatting money-laundering and terrorism financing, beneficial owners ‘includes those persons who exercise ultimate effective control over a legal person or arrangement.’ As Babiš maintains the right to dismiss the trustees of the trusts that own and control Agrofert if they are ‘in breach of their duties’,[24] one could argue that he maintains ‘ultimate effective control’. This raises several important questions: firstly, whether Babiš is violating the Czech Conflict of Interest Act; and secondly, whether Babiš is violating EU laws regarding firms being owned by politicians not being eligible to receive EU funding,[25] being that Agrofert subsidiary companies received EU subsidies both before and after Babiš transferred his ownership to the two trusts in 2017. The Stork’s Nest, a hotel and conference centre indirectly owned by Agrofert, received €2 million in EU funding in 2008. This has been the subject of extensive news coverage[26] and a number of lawsuits in the Czech Republic (most recently reopened in late 2019) as the company has alleged to have concealed its ownership by Agrofert in order to become eligible for the funds, which was earmarked for SMEs.[27] The company voluntarily returned the subsidies it has received.[28] According to Transparency International, the company received funds through the Rural Development Programme, which has run from 2014-2020 and is financed by the European Agricultural Fund for Rural Development.[29] According to Czech media, Agrofert received subsidies worth €82 million in 2018.[30]
Additionally, even if Babiš doesn’t currently derive benefits from the company, the trust funds are set up so that the shares will return to him when he terminates his public office.[31] As such, he may derive benefits in the future, which could create a serious risk for corruption right now. This underlines the importance of having a substantive definition of beneficial ownership.
In late 2019, a leaked European Commission audit report confirmed Babiš is in conflict of interest and that Agrofert should not have received €17.6 million in EU subsidies, stating that ‘Andrej Babiš is still the owner of the Agrofert holding and, since February 2017, of two trust funds which he directly controls.’[32] The report has received criticism from the Prime Minister and led to protests calling for his resignation in the Czech Republic.[33]
A subsequent leaked report following a visit in February by MEPs to Prague concludes that there are ‘systemic weaknesses in the detection, prevention and abolition of conflict of interests in the Czech Republic’. Babiš and Agrofert have maintained a vigorous denial of any wrongdoing.[34] As part of the EU’s fifth anti-money laundering directive (AMLD5), the Czech Republic has to implement a public beneficial ownership register. However, critics say the Czech Republic has passed a bill including a weak definition of beneficial ownership, which would be easily circumvented, and does not regard Babiš as the beneficial owner of Agrofert.[35] According to the Slovakian definition of beneficial ownership, the Czech Prime Minister remains the beneficial owner of Agrofert.
Footnotes
[11] https://www.transparency.org/en/press/andrej-babish-is-our-controlling-person-czech-republic
[12] DW, “Czech prosecutors drop fraud probe into PM Andrej Babis”. 2 September 2019. Available at: https://www.dw.com/en/czech-prosecutors-drop-fraud-probe-into-pm-andrej-babis/a-50255477 [Accessed 24 June 2020].
[13] Forbes, “Not Just Trump and Bloomberg: Here Are The Billionaire Politicians Of The Decade”. 26 December 2019. Available at: https://www.forbes.com/sites/giacomotognini/2019/12/26/not-just-trump-and-bloomberg-here-are-the-billionaire-politicians-of-the-decade/#1b5e47ec6a06 [Accessed 24 June 2020].
[14] Agrofert, “About Agrofert”. Available at: https://www.agrofert.cz/en/about-agrofert [Accessed 24 June 2020]; Progetto Republica Ceca, “The new Czech media owners”. 28 July 2014. http://www.progetto.cz/i-nuovi-padroni-dei-media-cechi/?lang=en [Accessed 24 June 2020]; Lupa, “Zpravodajci na českém webu: přehled zpravodajských serverů”. 12 February 2008. Available at: https://www.lupa.cz/clanky/zpravodajci-na-ceskem-webu-prehled/ [Accessed 24 June 2020]; MAFRA. Available at: https://www.mafra.cz/english.aspx [Accessed 24 June 2020].
[15] Podnikatel, “Babiš převedl Agrofert do svěřenských fondů, firma se mu ale vrátí”. 2 February 2017. Available at: https://www.podnikatel.cz/clanky/babis-prevedl-agrofert-do-sverenskych-fondu-firma-se-mu-ale-vrati/ [Accessed 24 June 2020]; Agrofert, “Shareholder informed the management of the companies AGROFERT and SynBiol on the transfer of shares into Trusts”. 3 February 2017. Available at: https://www.agrofert.cz/en/events-and-news/shareholder-informed-the-management-of-the-companies-agrofert-and-synbiol-on-the [Accessed 24 June 2020].
[16] Agrofert, “About Agrofert”. Available at: https://www.agrofert.cz/en/about-agrofert [Accessed 24 June 2020
[17] Agrofert, “About Agrofert”. Available at: https://www.agrofert.cz/en/about-agrofert [Accessed 24 June 2020].
[18] ISSM Justice, “Informační systém skutečných majitelů”. Available at: https://issm.justice.cz/ [Accessed June 24 2020].
[19] The Slovak Spectator, “Register of Public Sector Partners – brief overview on duties for foreign recipients of public funds”. 26 November 2018. Available at: https://spectator.sme.sk/c/20967942/register-of-public-sector-partners-brief-overview-on-duties-for-foreign-recipients-of-public-funds.html [Accessed 24 June 2020].
[20] Transparency International, “Andrej Babiš is Our Controlling Person (Beneficial Owner), Says Agrofert”. 22 June 2018. Available at: https://www.transparency.org/en/press/andrej-babish-is-our-controlling-person-czech-republic [Accessed 24 June 2020]; Ministry of Justice of the Slovak Republic, “Register of public sector partners”. 1 February 2017. Available at: https://rpvs.gov.sk/rpvs/Partner/Partner/HistorickyDetail/7859 [Accessed 24 June 2020].
[21] Agrofert, “Rebuttal of misinformation from Transparency International”. 19 June 2018. Available at: https://www.agrofert.cz/en/events-and-news/rebuttal-of-misinformation-from-transparency-international [Accessed 24 June 2020].
[22] Transparency International, “Andrej Babiš is Our Controlling Person (Beneficial Owner), Says Agrofert”. 22 June 2018. Available at: https://www.transparency.org/en/press/andrej-babish-is-our-controlling-person-czech-republic [Accessed 24 June 2020].
[23] Podnikatel, “Babiš převedl Agrofert do svěřenských fondů, firma se mu ale vrátí”. 2 February 2017. Available at: https://www.podnikatel.cz/clanky/babis-prevedl-agrofert-do-sverenskych-fondu-firma-se-mu-ale-vrati/ [Accessed 24 June 2020].
[24] Euractiv, “MEPs put pressure on Commission to take position on Czech PM fraud case”. 14 September 2018. Available at: https://www.euractiv.com/section/justice-home-affairs/news/meps-put-pressure-on-commission-to-take-position-on-czech-pm-fraud-case/ [Accessed 24 June 2020].
[25] Specifically Article 57 of Regulation (EU, Euratom) No 966/2012 and Article 61 of Regulation (EU, Euratom) 2018/1046; European Parliament, “European Parliament resolution of 14 September 2017 on transparency, accountability and integrity in the EU institutions”. 14 September 2017. Available at: https://www.europarl.europa.eu/doceo/document/TA-8-2017-0358_EN.html [Accessed 24 June 2020.]
[26] See for instance: The Guardian, “EU antifraud office finds ‘irregularities’ in payments allegedly obtained by Czech PM”. 5 January 2018. Available at: https://www.theguardian.com/world/2018/jan/05/eu-antifraud-office-finds-irregularities-in-payments-allegedly-obtained-by-czech-pm [Accessed 24 June 2020]; Financial Times, “Czech prosecutor reopens Andrej Babis fraud probe”. 4 December 2019. Available at: https://www.ft.com/content/ffe1cfd0-16a3-11ea-9ee4-11f260415385 [Accessed 24 June 2020]; Reuters, “Czech attorneys drop fraud charges against billionaire PM Babis”. 13 September 2019. Available at: https://www.reuters.com/article/us-czech-babis/czech-attorneys-drop-fraud-charges-against-billionaire-pm-babis-idUSKCN1VY0U8 [Accessed 24 June 2020]; DW, “Czech prosecutors drop fraud probe into PM Andrej Babis”. 2 September 2019. Available at: https://www.dw.com/en/czech-prosecutors-drop-fraud-probe-into-pm-andrej-babis/a-50255477 [Accessed 24 June 2020]; Financial Times, “Czech police recommend charging prime minister with fraud”. 17 April 2019. Available at: https://www.ft.com/content/7f01e73c-611e-11e9-a27a-fdd51850994c [Accessed 24 June 2020]; Aljazeera, “Corruption cases pile pressure on Czech prime minister”. 6 December 2019. Available at: https://www.aljazeera.com/news/2019/12/corruption-cases-pile-pressure-czech-prime-minister-191206160318659.html [Accessed 24 June 2020].
[27] Czech prosecutors have dropped the case against Babiš, concluding that it was not illegal, but reopened the case against a former employee. (Politico, “Czech prosecutor reopens Babiš subsidy fraud case” 12 May 2019. Available at: https://www.politico.eu/article/czech-prosecutor-reopens-andrej-babis-subsidy-fraud-case/ [Accessed 24 June 2020].)
[28] Reuters, “Czech attorneys drop fraud charges against billionaire PM Babis”. 13 September 2019. Available at: https://www.reuters.com/article/us-czech-babis/czech-attorneys-drop-fraud-charges-against-billionaire-pm-babis-idUSKCN1VY0U8 [Accessed 24 June 2020].
[29] Transparency International, “Andrej Babiš’s potential conflict of interest”. 19 September 2018. https://transparency.eu/andrej-babiss-potential-conflict-of-interests/ [Accessed 24 June 2020].
[30] Politico, “Czech prosecutor reopens Babiš subsidy fraud case” 12 May 2019. Available at: https://www.politico.eu/article/czech-prosecutor-reopens-andrej-babis-subsidy-fraud-case/ [Accessed 24 June 2020].
[31] Agrofert, “Shareholder informed the management of the companies AGROFERT and SynBiol on the transfer of shares into Trusts”. 3 February 2017. Available at: https://www.agrofert.cz/en/events-and-news/shareholder-informed-the-management-of-the-companies-agrofert-and-synbiol-on-the [Accessed 24 June 2020].
[32] RFI, “Leaked EU audit shows Czech PM in conflict of interest: report”. 3 December 2019. Available at: http://www.rfi.fr/en/wires/20191203-leaked-eu-audit-shows-czech-pm-conflict-interest-report [Accessed 24 June 2020].
[33] DW, “EU dismisses Czech prime minister’s criticism of subsidy audit”. 5 June 2019. Available at: https://www.dw.com/en/eu-dismisses-czech-prime-ministers-criticism-of-subsidy-audit/a-49071113 [Accessed 24 June 2020].
[34] The Guardian, “Czech PM must resign if conflict of interest is confirmed, say MEPs”. 29 April 2020. Available at: https://www.theguardian.com/world/2020/apr/29/czech-pm-andrej-babis-must-resign-if-conflict-of-interest-say-meps [Accessed 24 June 2020].
[35] Radio Prague International, “Babiš denies bill on registration of beneficial owners would help him”. 6 February 2020. Available at: https://english.radio.cz/babis-denies-bill-registration-beneficial-owners-would-help-him-8682319 [Accessed 24 June 2020]; Linkedin, “Andrej Leontiev”. June 2020. https://www.linkedin.com/posts/andrejleontiev_babi%C5%A1-denies-bill-on-registration-of-beneficial-activity-6677618808997343232-Evm4 [Accessed 24 June 2020].