Why is an AML check performed during a real estate transaction?

Real Estate Transfers Are No Longer Just About Purchase Agreements, Escrow, and the Land Registry: Welcome to the World of AML

This is precisely why legislation has introduced the key role of the so-called "obliged person". In the context of your transaction, this is your attorney, notary, or real estate agent. These professionals are not only responsible for the flawless legal execution of the deal, but the law also directly requires them to vet their clients and the origin of their funds.

Many clients perceive this check as a sign of distrust. However, it is crucial to change this perspective. An AML check is not a personal investigation into you, but rather a necessary protective mechanism. It protects the integrity of the entire transaction and prevents any party—whether knowingly or unknowingly—from becoming part of a criminal scheme.

A professionally conducted AML check is therefore not a complication, but rather a seal of legitimacy and security for your transaction. It is a signal that the transaction has been expertly vetted, which can paradoxically prevent future delays and ensure a smooth and swift registration in the Land Registry. 

Who Must Verify the Origin of Your Money and Why? The Anti-Money Laundering Act in Practice

The entire system is based on a solid legal foundation, which is Act No. 253/2008 Coll., on Certain Measures against the Legalisation of Proceeds from Criminal Activity and the Financing of Terrorism, known as the AML Act. This regulation clearly defines who is an "obliged person" and what their duties are. In a real estate sale, this applies to virtually all key players who facilitate or legally secure the transaction for you.

Attorneys, notaries holding funds in escrow, and real estate agents are legally required to perform several key actions to meet their obligations. This is not at their discretion but is a strict legal mandate. For clarity, let's outline the basic concepts you will encounter in practice:

• Client Identification: The first and most basic step, where the obliged person verifies your identity using a valid ID card, and in the case of a company, its existence and the authorisation of the acting persons according to the extract from the Commercial Register.

• Client Due Diligence: This is not just a one-off verification. Due diligence means a deeper understanding of your business activities, the purpose of the transaction, and, above all, obtaining information about the origin of the money to be used for the purchase.

• Ultimate Beneficial Owner (UBO): A crucial concept that requires identifying the specific natural person (or persons) who ultimately owns or controls the company purchasing the property. It is not enough to know just the name of the executive director.

• Politically Exposed Person (PEP): A special category of individuals in prominent public functions (politicians, senior officials, etc.) and their family members, for whom the law requires enhanced due diligence due to a higher risk of corruption.

The lawyers at ARROWS are obliged persons under the law and deal with this issue on a daily basis. As a result, we know exactly what documents are needed and how to carry out the entire process quickly and in compliance with the law to protect your transaction.

How Does an AML Check Work Step by Step? From Identification to Risk Assessment

The AML check process may seem complicated at first glance, but it is actually a logical and systematic sequence of steps. The goal is to get a complete picture of the transaction and its participants. At ARROWS, we have standardised this process to be as least burdensome as possible for the client.

Client Identification and Due Diligence 

In this initial phase, we will need basic documents from you. For natural persons, this is a valid identity card. For legal entities, a current extract from the Commercial Register and the identity cards of all acting persons. We verify that the persons signing the contracts are actually authorised to do so.

Determining the Ultimate Beneficial Owner

 This is often the most challenging part, especially for companies with complex ownership structures. Our task is to penetrate the "paper" structure to get to the specific people who will ultimately benefit from the transaction. We use public and specialised databases for this purpose.

Determining the Origin of Funds and Assets

 Here, it is necessary to document where the money for the property purchase comes from. This is not out of curiosity, but a legal obligation. Acceptable documents include, for example, tax returns for recent years, contracts for the sale of a business share, inheritance decisions, gift agreements, bank statements showing gradual savings, or a loan agreement.

Assessing the Transaction's Risk Profile

Based on all the information gathered, we evaluate the overall risk profile of the transaction. Factors that increase the risk include, for example, the origin of money from a country with more lenient AML regulations, an opaque ownership structure involving shell companies, or an attempt to conduct the transaction in cash.

Reporting Obligation

If, based on the check performed, the obliged person suspects that it could be a case of legalising proceeds from criminal activity, they have a legal duty to file a suspicious transaction report (STR) with the Financial Analytical Unit (FAÚ).

What Are the Risks of Neglecting an AML Check? Fines in the Millions and Criminal Liability

Ignoring or formally conducting AML duties is not just a professional failure. It is a gamble with risks that can have unnecessary consequences for all parties involved, including the seller and the buyer. The sanctions stipulated by the AML Act are intentionally set to be deterrent and severe.

• Financial Penalties: The Financial Analytical Unit (FAÚ) is authorised to impose draconian fines for breaches of AML obligations. These can reach up to CZK 130,000,000 or, for some entities, up to 10% of their total annual turnover. Such a penalty can be ruinous for many companies.

• Criminal Liability: The danger does not end with fines. Neglecting duties can lead to criminal prosecution. This applies not only to the legal entity itself under corporate criminal liability, but also to specific individuals—executive directors, board members, or authorised signatories, who may be personally liable for negligently facilitating the legalisation of proceeds from criminal activity.

• Freezing of Funds and Assets: One of the FAÚ's most effective tools is the power to immediately secure the funds intended for the transaction. Money in an attorney's or notary's escrow can be blocked, as can the transfer of the property itself at the Land Registry. Such a step paralyses the entire transaction until the case is resolved.

• Reputational Damage: Even a mere association of your name with a money laundering investigation can have consequences. The loss of trust among business partners, banks, and investors is often irreversible and can harm you more than any financial penalty.

The preparation and revision of internal AML documentation and expert training for employees by ARROWS are the best prevention against these scenarios. The investment in prevention is a fraction of what dealing with the consequences could cost you.

Transactions with an International Element: When Do AML Obligations Become More Complicated?

If your real estate transaction crosses the borders of the Czech Republic, AML obligations become more complex and riskier. An international element automatically increases the demands on the depth of due diligence and requires specific know-how that goes beyond standard practice.

Complications typically arise in situations where:

• The buyer is a foreign company whose ownership structure is not easily traceable in public registers.

• The purchase is financed by a foreign bank or non-banking entity.

• The buyer's ownership structure includes companies based in offshore destinations, trusts, or other complex legal arrangements.

• The ultimate beneficial owner is a foreign national from a non-EU country.

In these cases, the standard procedure is insufficient. It is necessary not only to understand the Czech AML Act but also to be aware of the legal environment and the availability of information in the relevant foreign jurisdiction. Determining the ultimate beneficial owner of a company registered in the British Virgin Islands is incomparably more difficult than for a Czech limited liability company (s.r.o.).

Thanks to the ARROWS International network, built over ten years, we handle transactions with an international element almost daily and can effectively vet even complex foreign structures. Our partners abroad allow us to quickly and reliably verify information directly at the source, which is crucial for the security and speed of an international transaction.

Properly setting up AML processes is only one part of a successful transaction. Flawless contractual security is also key. You can find more about this service on our website in the Real Estate Law section.

How ARROWS Ensures a Smooth and Secure Transaction for You

Understanding AML legislation is one thing, but applying it flawlessly in practice is another. At ARROWS, we do not treat AML obligations as a formality, but as a fundamental pillar for protecting your investment and your personal and corporate integrity. Our services are designed to guide you through the entire process with minimal burden and maximum certainty.

For our clients, which include more than 150 joint-stock companies and 250 limited liability companies, we provide comprehensive AML services. To help you avoid the risks described above, our Prague-based legal team will prepare tailored internal AML directives and all the necessary documentation to protect you from fines and penalties.

We will provide expert training for your employees or management, including certification, so they know exactly how to proceed and what to watch out for. In the event of an inspection, we will professionally represent you before administrative authorities, including the Financial Analytical Unit, and defend your interests. Our experience from long-term client collaboration allows us to anticipate potential problems before they arise.

However, our services do not end with legal clauses. We pride ourselves on building long-term relationships and a deep understanding of our clients' businesses. We are happy to connect our clients if we see interesting business or investment synergies. We are also always open to hearing interesting business ideas that could lead to mutually beneficial cooperation.

Whether you are buying or selling a property, don't take risks. Contact us at consultation@arws.cz and get a tailor-made legal solution that will protect both your investment and you personally.