On 10 December 2009 the lower chamber of the Dutch Parliament passed a bill to amend Book 2 of the Civil Code, the Companies (Documentation) Act and certain other laws (Bill no. 31 948). The aim of the bill is to abolish the system of preventive governmental supervision of companies, under which it is necessary to obtain what is known as a "declaration of no objection" when incorporating a private limited liability company (BV), public limited liability company (NV) or European Company (SE) or amending its articles of association, or in the event of a conversion into one of these three corporate forms. This is to be replaced by a system of permanent scrutiny, under which the authorities will supervise a legal entity throughout the course of its life. The scope of the supervision will also be extended. The new system will cover not only BVs, NVs and SEs but also other legal entities and enterprises. If the upper chamber handles the bill speedily, the present system of preventive supervision and the related requirement of a declaration of no objection will be abolished with effect from 1 July 2010.

This memo briefly examines the present system of preventive supervision and then explains the new system of permanent supervision. Among the matters dealt with are the methods of scrutiny, the scope of the new supervision and the use that may be made of the requested data by the authorities for the purposes of supervision.

Preventive supervision / declaration of no objection

Under the present system of supervision, where a BV, NV or SE is to be incorporated or its articles of association are to be amended, or in the event of a conversion into one of these three forms, the relevant persons or directors are required to apply to the Ministry of Justice for what is termed a "declaration of no objection". Where a new company is being incorporated, this enables the authorities to check that the company in question will not be used for illicit purposes and that its operations will not prejudice creditors. In the event of a conversion, or the amendment of articles of association, the authorities check that the company will not be used for illicit purposes or have a prohibited character. If this test is not met, the applicant will not receive the declaration of no objection and the civil law notary is not permitted to proceed with the execution of the relevant notarial deed.

Under the bill, this system of scrutiny and the need for a declaration of objection will be entirely abolished. After the new rules enter into effect, notaries will be able to proceed with the execution of the deed of incorporation, conversion or amendment, as the case may be, without a declaration of no objection being required. This will reduce the bureaucracy involved in the formation of a BV, NV or SE (also in the event of a conversion) or the amendment of the articles of association of such a company in the Netherlands.

Permanent supervision

The new system of supervision is a form of scrutiny that applies throughout the life of a legal entity, the aim being to prevent and combat the misuse of such entities and their businesses. To this end, the authorities will draw up a number of risk profiles. If a legal entity fits one of these profiles, this means that there is a heightened risk of misuse for illicit purposes and is called a risk alert. The risk profiles will be based on data that make it possible to identify misuse of, for example, a financial nature.

The data to be compared with the risk profiles will be obtained by the authorities from both closed and public sources in the Netherlands. The main source will be the system of national registers such as the trade register and the municipal personal records database. In addition, the Ministry of Justice will obtain data for its checks from the tax authorities, the Judicial Information Service, the Central Insolvency Register and the National Police Services Agency. The scrutiny of a legal entity will start immediately after its incorporation is registered in the trade register.

The permanent scrutiny will be carried out by the Scrutiny, Integrity and Screening Agency of the Ministry of Justice. This is the agency that is responsible for implementing the current system of preventive supervision. A risk analysis computer program will be used to compare key data of legal entities with the risk profiles prepared by the Agency. The key data will include the names and addresses of directors of the entity and data from the Central Insolvency Register. The statutory basis for the registration and use of this data will be laid down in the Legal Entities (Scrutiny) Act, which will replace and extend the current Companies (Documentation) Act.

Whenever a legal entity undergoes a change in the course of its life – for example, a transfer of shares or a change of management – this will be recorded and the modified data will be compared with the risk profiles again in order to determine whether there is a heightened risk of misuse of or by the entity. If there is no such risk, the data obtained will be automatically removed from the system. Information on changes such as share transfers and management changes will be obtained by the authorities directly or indirectly from data which the legal entities and their directors are already obliged to supply to the trade registry or the tax authorities. Therefore, no extra administrative burden will be placed on legal entities as a result of the new legislation.

If the computer system reveals a heightened risk, the Scrutiny, Integrity and Screening Agency will carry out a more in-depth analysis of whether this risk does indeed exist. If the analysis confirms that there is a heightened risk, a risk alert will be sent to a group of law enforcement authorities. These include the Public Prosecution Service, the tax authorities, the Dutch Central Bank (DNB), the Authority for the Financial Markets and the police, as well as special agencies such as the Fiscal Intelligence and Investigation Service/Economic Investigation Service (FIOD/ECD) and the Social Security Information and Investigation Service (SIOD). A risk alert may also be issued at the request of any of these authorities. Whether follow-up action is necessary is decided by the authorities themselves after they receive the risk alert. They have two forms of intervention which they can take.

The first form of intervention involves action under the criminal law. One possibility is to ban particular individuals from acting as company directors. Such a measure can be used, for example, to prevent someone with a history of fraud from setting up a company in the future or becoming a board member of another company. The second form of intervention is of a preventive nature. If the risk alert shows that there is a possibility of misuse of or by a legal entity, the authorities can take preventive action, for example by intensifying the level of scrutiny and thereby identifying possible infringements at an earlier stage.

Scope

Besides BVs, NVs and SEs, other forms of entity that will become subject to the system of permanent supervision by the authorities are cooperatives, mutual insurance associations, associations having legal personality, foundations, European Cooperative Societies (SCEs) and European Economic Interest Groupings (EEIGs) which have their seat in the Netherlands under their articles of association. This supervision will also apply to enterprises that belong to a foreign legal entity which has a principal or subsidiary place of business in the Netherlands. An exception will be made for partnerships acting under a common name (openbare vennootschappen) with legal personality that are set up in future pursuant to Title 7.13 of the Civil Code (which is expected to enter into force in the course of 2010). As the partners in such partnerships will be jointly and severally liable, the relevant partnership will be exempted from supervision.

Use of data by the authorities

The information obtained from a risk alert may be used by the law enforcement authorities only to prevent and combat misuse of and by legal entities. Under the new Legal Entities (Scrutiny) Act, a risk alert may be used for prosecution purposes for a maximum of two years, which is also the period for which the data may be kept. The Scrutiny, Integrity and Screening Agency is responsible for the data and may supply them to law enforcement authorities only on condition of strict confidentiality. The Agency is not obliged to disclose whether it is processing a risk alert concerning a legal entity or an individual connected with that entity. Under the Personal Data Protection Act an interested party may apply for this information, but the application will almost always be refused in the interests of any ongoing investigation (criminal or otherwise).

When a legal entity is registered at the trade register, the entity's directors (or other office holders) are informed that their data will be screened. Under the Personal Data Protection Act, the Scrutiny, Integrity and Screening Agency – as the body responsible for the management and use of the data – is obliged to notify the relevant individuals that their private data are being used. In addition, the Agency will mount an information campaign to notify the public that the personal data of individuals, and of their family members, may be used for investigations into the misuse of legal entities.