Introduction
In recent years, the Czech National Bank (“CNB”) has recorded an increase in cases of unauthorised taking of deposits from the public. This refers to situations where an individual or entity takes deposits from members of the public without holding a banking licence or other authorisation. Such deposits are very often taken on the basis of loan or credit agreements in which the unauthorised party acts as the borrower and members of the public act as the lenders.
Legislation classifies unauthorised taking of deposits from the public as an offence or as a criminal act.[1]
The CNB has already discussed the topic of taking of deposits from the public in its interpretative documents Regarding the unauthorised taking of deposits from the public (illegal banking)[2] and Regarding the term “public” in financial market regulations[3] (in Czech only).
In view of the latest findings from its enforcement activities and the frequently recurring objections of entities on which sanctions have been imposed, the CNB hereby recapitulates the fundamental conclusions from interpretative practice so far, adding procedural information regarding sanctions for unauthorised taking of deposits from the public.
Examples of the forms of taking deposits
Pursuant to Article 1(2)(a) of Act No. 21/1992 Coll., on Banks, as amended, a deposit means any funds entrusted to the bank that constitute an obligation of the bank to the depositor to repayment thereof.
As indicated in the interpretative document cited above,2 the CNB identifies deposits not on the basis of the formal designation of the obligation between the provider and recipient of the funds, but on the basis of its material content in the context of Article 1(2)(a) of the Act on Banks. Therefore, the key factor for assessing a deposit within the meaning of the legal definition is the actual content of the obligation based on which the funds were (temporarily) entrusted to the recipient.
The funds may thus be (temporarily) entrusted on the basis of, for example, a credit agreement, an account agreement, a one-off deposit agreement, a custody contract or an innominate contract containing such an obligation.
The term “deposit” therefore cannot be understood only as a deposit under a one-off deposit agreement governed by Article 2,680 of Act No. 89/2012 Coll., the Civil Code, as amended.
The situation most often encountered by the CNB in its supervisory and decision-making practice involves cases where unauthorised entities taking deposits enter into loan agreements pursuant to Article 2,390 of the Civil Code, or credit agreements pursuant to Article 2,395 of the Civil Code, with individual natural persons or legal entities.
These agreements can be characterised by the following features:
- the provision of funds by the lender to the borrower, or the obligation of the lender to provide funds to the borrower, and
- the obligation of the borrower to repay funds to the lender.
It follows from the above-mentioned defining characteristics that the acceptance of funds (by the borrower) on the basis of a loan agreement or a credit agreement represents the taking of a deposit pursuant to Article 1(2)(a) of the Act on Banks.
By such taking of deposits from the public, the borrower commits conduct consisting in the taking of deposits within the meaning of the Act on Banks, which requires the granting of a banking licence (exemptions may be stipulated in special legislative acts; for example, a credit union may take deposits from its members).
Imposing sanctions for unauthorised taking of deposits from the public and determining the upper limit of a fine
The Act on Banks considers unauthorised taking of deposits to be very serious unlawful conduct.
This is in line with the fact that obtaining money from the public is subject to strict regulation in the financial market, primarily to minimise the risk that money accepted from the public may not be returned. An important element of this protection of the public is deposit insurance, which in the Czech Republic is provided by the Deposit Insurance Fund (as part of the Financial Market Guarantee System) and is mandatory for all banks and credit unions. However, this regulation does not apply to unauthorised entities taking deposits from the public – their depositors are thus not covered by any protection.
The above-mentioned conduct is classified by the Act on Banks as an offence, the seriousness of which is reflected in the amount of the fines that may be imposed.
In the case of a natural person (whether carrying on business or not), a fine of up to twice the amount of the unlawful gain may be imposed. If it is not possible to determine the amount of the unlawful gain, the fine may be up to CZK 130 million.
In the case of a legal entity, too, a fine of up to twice the amount of the unlawful gain may be imposed. If the unlawful gain cannot be determined, the fine may be up to 10% of net annual turnover, or 10% of the net annual turnover of the controlling entity, as indicated by the consolidated financial statements of the controlling entity for the immediately preceding accounting period.
When imposing sanctions for these offences, the CNB determines the upper limit of the fine based on the amount of unlawful gain. The latter means the sum of the amounts of all unlawfully taken deposits. “Unlawful gain” therefore cannot be identified with the financial results of the offender unlawfully taking deposits (such as the profit/loss or the return on the deposits taken). Nor can it be identified with the amount by which the offender enriched themselves to the detriment of the depositors. This conclusion of the CNB has been repeatedly upheld by administrative courts, which have also explained the reasons for this approach in more detail.[4]
In practice, it is not possible to automatically or mechanically compare the amounts of fines imposed in individual cases for the commitment of these offences. This follows both from the different upper limits on the fines derived from the total amounts of deposits taken and from the fact that the CNB in each case also applies the general factors for determining the amount of the fine (Articles 37–40 of Act No. 250/2016 Coll., on Liability for Administrative Offences, as amended).
Other factors for determining the amount of the fine in individual cases include, for example, the duration of the unlawful conduct, the number of persons from whom deposits were taken, the offender’s financial results and financial situation, the offender’s sanction history, the nature and type of the activity of the offender (e.g. a legal entity or a self-employed individual holding authorisation for another activity on the financial market supervised by the CNB), the manner of handling the funds, and the offender’s payment discipline, where failure to fulfil the obligation to return the accepted funds clearly constitutes an aggravating circumstance (whereas proper fulfilment of such obligations does not constitute a mitigating circumstance).
Although the CNB has so far in practice imposed fines mostly close to the lower limit, the absolute amounts of these fines are among the higher ones, reaching millions or tens of millions of koruna. Given the increasing frequency of unauthorised taking of deposits from the public in various forms, it is evident that the fines imposed so far for these offences have not sufficiently fulfilled one of the primary functions of administrative penalties – general prevention. For this reason, the CNB deems it necessary to continue tightening its sanctioning policy in this area.
[1] If the intensity of unauthorised taking of deposits displays the features of a criminal act. The rest of this document focuses solely on offences dealt with by the Czech National Bank.
[2] https://www.cnb.cz/en/supervision-financial-market/legislation/cnb-opinions-on-financial-market-regulations/RS2022-04-EN/
[3] https://www.cnb.cz/cs/dohled-financni-trh/legislativni-zakladna/stanoviska-k-regulaci-financniho-trhu/RS2018-05/
[4] See especially the judgement of the Supreme Administrative Court of 24 April 2023, ref. no. 7 Afs 230/2022 – 78.