Private equity funds have become an increasingly popular investment vehicle in Hungary since the late 2010s, currently, the register of the National Bank of Hungary shows more than 165 private equity funds registered in Hungary. Although the availability of specific statistics is limited, based on the partial data, it can be estimated that the total assets of Hungarian private equity funds are roughly around HUF 3 trillion, i.e., close to 4% of the nominal GDP of Hungary.
A well-known key feature of this type of investment entity is that the investors enjoy a relatively high level of privacy, deriving from the long-debated concept of secrecy of investments. The level of such secrecy was traditionally higher in some jurisdictions while very limited in others. The exact level of privacy in Hungary, especially regarding the main investment unit holders, was initially in the grey zone of legislation.
During the years of the sudden proliferation of private equity funds, this ambiguity caused headaches for many bank officers responsible for anti-money laundering (AML), customer due diligence, and sanctions screening. The concerns were aggravated by the suspicion that in a large part of private equity funds, the fund manager’s role appeared to be formal, suggesting that the investor who apparently controlled the investment decisions – based on the investment policy or on informal grounds – selected this type of investment tool essentially because of the increased privacy level comparing to those applicable in the case of ordinary company shareholdings.
The practices of banks, who are primarily responsible for sending their clients’ ultimate beneficial owner (UBO) data to the central UBO register, were very divergent in 2021-2022. So much so that, after the launch of the Hungarian central UBO register in 2022, in the case of some private equity funds the register contained the unit holders possessing at least 25% of all investment units, while in the case of others, it indicated the senior manager of the fund manager as the UBO, or contained no information on the UBO at all, keeping the majority investors undisclosed toward the UBO database.
Following some position letters and statements of the affected ministries, it was the tax authority operating the UBO register that ultimately put an end to this uncertainty in mid-2023 by deleting all UBO data from the central register in connection with all private equity funds. It claimed that such entities do not fall under the scope of the act that created the central UBO register. The opponents kept arguing that the unit holders of private equity funds reaching 25% do fall within the beneficial owner definition of the effective EU money laundering directive (AMLD-5).
Now, this situation has substantially changed again from January 1, 2025, when new provisions entered into force inserted in the Hungarian AML Act and in the UBO Register Act. Following this amendment, the referenced acts will explicitly list private investment funds (meaning venture capital funds and private equity funds) for those entities to which UBO-reporting obligations will apply. The new amendment clearly defines those who qualify as beneficial owners of private equity funds: they are primarily those natural persons who directly or indirectly hold together with their close family members at least 25% of the fund’s investment units. Notably, the definition is open to including other types of control and influence as well.
It is however important that, for existing private equity funds (i.e., those registered by January 1, 2025), the obligation to upload UBO data will first apply only in July 2026. This corresponds to the date when the transposition deadline specified by the new AML Regulation adopted by the Council on May 31, 2024, will expire.
It has to be mentioned that, following the judgment of the Court of Justice of the EU passed in a milestone case in late 2022 (joined cases C-37/20 and C-601/20 – WM and Sovim SA v Luxembourg Business Registers), the Hungarian legislator (similarly to several other EU member states) cut off the unconditional publicity of the central UBO-register in 2023. As a result, UBO data of private equity funds uploaded starting from 2025 (or mid-2026) will only be available to the competent authorities and obliged entities. There will also be a possibility for third parties to access this data if they can verify with relevant documentation that they have a legitimate interest in the UBO data for the purposes of anti-money laundering or combatting the financing of terrorism.
By Gyorgy Kiszely, Partner, Nagy & Trocsanyi
This article was originally published in Issue 11.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
