Increased Transparency on the Ultimate Beneficial Owners of Private Equity Funds

On 25 August, it was announced that the Hungarian government intends to tighten and clarify the rules regarding the identification of the beneficial owners of venture capital funds and private equity funds. The reason for this measure is that these structures may be used to conceal the ultimate beneficial owners; at the same time, there is a public interest in disclosing to the public the identity of the owners of funds that hold significant assets.

Both private equity funds and venture capital funds are classified as closed-end investment funds. This means an entity established by multiple investors for the purpose of making joint investments, which invests capital in accordance with an investment policy agreed upon by the investors and issues investment units representing the investors’ interests for a predetermined period, in a predetermined quantity, and with a predetermined term. The main difference between the two structures is the investment target: while a private equity fund can invest its capital in any company, a venture capital fund must invest at least 70% of its capital in the development of companies in the early stages of growth.

The government has not yet announced exactly what the stricter and more transparent rules governing the funds will exactly be. Under current anti-money laundering regulations, service providers (e.g. financial service providers, entities engaged in real estate transactions, accountants, auditors, attorneys, tax experts and notaries, gambling service providers, precious metal and commodity traders, fiduciaries, art and antique dealers and registered office service providers) are required to identify and keep registers of individuals who own at least 25 per cent of a fund’s investment units, and compliance with this requirement is continuously monitored by the supervisory authorities overseeing these service providers; therefore, no significant tightening of regulations is likely in this area. Since, according to the announcement, the measure aims to make ownership chains more transparent, it is conceivable that the planned regulations will require service providers to investigate and document the ownership structure of funds in greater detail and will ensure greater transparency regarding these ownership structures. In previous years, there have already been several EU and domestic initiatives aimed at establishing an ultimate beneficial ownership registry that is accessible to everyone and provides an accurate and truthful picture of the identities of the actual owners of not only traditional organizations and companies, but also foundations, trusts, as well as venture capital funds and private equity funds.

It was also announced that the government intends to make public procurement more transparent; as part of this effort, it will tighten transparency rules and increase the transparency of bidders’ ownership structures. In addition, the government would expand the scope of organizations and data required to be disclosed in the central public data registry – which has already served to ensure transparency in the use of public funds –, and the registry would be restructured in order to ensure that data regarding the use of public funds is available in an online, searchable, downloadable, and comparable format.