How to prepare for administrative proceedings at the CNB: Legal and documentation minimum

Facing an inquiry from the Czech National Bank (CNB) can be a daunting prospect for any foreign company operating in the Czech financial market. This article provides clear answers and a practical guide to understanding and preparing for CNB administrative proceedings. As a leading Czech law firm with extensive experience helping international clients, ARROWS, a law firm based in Prague, European Union, has the expertise to guide you through this complex process. 

The Czech National Bank: Understanding the Financial Watchdog's Role

For foreign businesses, the first step is to understand the unique and powerful position of the Czech National Bank. Unlike in some jurisdictions where regulatory duties are split among several agencies, the CNB is the single, integrated supervisory authority for the entire Czech financial market. This authority is established by the Act on the Czech National Bank (Act No. 6/1993 Coll.).

The CNB's Mandate

The CNB's primary objective is to maintain financial stability, which it achieves through systematic regulation, supervision, and, when necessary, enforcement. Its integrated structure means it oversees a vast range of sectors, giving it a comprehensive view of the market. This structure is different from systems like the one in the United Kingdom, which separates prudential and conduct regulation between two bodies, the PRA and the FCA.

The CNB's holistic oversight allows it to connect activities across different sectors. A compliance issue identified in one area of your business, such as consumer credit, could easily trigger deeper scrutiny into your anti-money laundering (AML) framework or capital market activities. A failure in one department can therefore create a systemic risk for your entire licensed operation in the Czech Republic, making robust, firm-wide compliance not just a best practice, but a critical defensive strategy.

Who is Regulated?

The CNB's supervisory reach is extensive. If your business operates in the Czech Republic, it likely falls under CNB oversight if it is a:

• Bank, foreign bank branch, or credit union.
• Insurance or reinsurance company.
• Investment firm, securities dealer, or investment fund.
• Payment institution or electronic money provider.
• Consumer credit provider.
• Bureau de change.

What Triggers a CNB Investigation? Common Pitfalls for Foreign Companies

CNB administrative proceedings do not begin without cause. They are typically triggered by findings from the CNB's supervisory activities or by external complaints. The CNB employs both off-site surveillance (reviewing submitted reports) and on-site inspections to monitor compliance.

Often, the first formal step an entity receives is a request for explanation (výzva k podání vysvětlení). This is a critical juncture. Your response must be timely, accurate, and strategically sound, as it can determine whether the matter is closed or escalates into a full administrative proceeding. The deadlines for these requests are often short, typically around 10 working days.

Common Violations

Our experience shows that foreign companies most often face CNB scrutiny for issues related to:

• Information and Reporting Failures: This includes failing to provide required information during a public offering of securities or neglecting to notify the CNB of a change in a qualifying participation (a significant ownership stake).
• AML/CFT Deficiencies: Inadequate internal controls, poor customer due diligence (CDD) procedures, or failures in reporting suspicious transactions are major areas of focus for the CNB, mirroring the priorities of global financial regulators.
• Consumer Protection Breaches: For entities providing credit, a common trigger is the failure to properly assess a consumer's creditworthiness before granting a loan.
• Non-Cooperation with Inspectors: It is crucial to understand that failing to provide assistance during a CNB inspection is, in itself, a punishable offense that can trigger formal sanction proceedings.

FAQ – Legal tips about CNB inspections

1. What is the first thing we should do if we receive a request for explanation from the CNB?
Immediately engage a specialized Czech law firm. The deadlines are short, and your initial response is critical in shaping the entire process. Do not hesitate to contact our firm – office@arws.cz.

1. Can our employees speak English during an on-site inspection?
While some CNB staff may speak English, the official language of the proceedings is Czech. Relying on informal translation is risky; professional legal representation ensures nothing is lost in translation. For expert representation, email us at office@arws.cz.

The Administrative Proceeding Unpacked: A Step-by-Step Guide

If an initial inquiry escalates, the CNB will launch a formal administrative proceeding. The entire process is governed by the Administrative Procedure Code (Act No. 500/2004 Coll.), known in Czech as the správní řád, along with specific financial market laws.

The Procedural Stages

1. Initiation: The proceeding is formally launched when the CNB issues an order initiating the proceedings, which details the suspected violation.

2. First Instance: This stage is conducted by the relevant department within the CNB’s Financial Market Supervision Section. Your company will have the right to submit evidence, present arguments, and respond to the CNB's findings.

3. The Internal Appeal (Rozklad): If the first-instance decision is unfavorable, the next step is not a court. Instead, you must file an internal appeal, known as a rozklad, with the CNB Bank Board. This is a critical and often misunderstood feature of the Czech system.

4. The Appeals Committee: The Bank Board is advised by an Appeals Committee composed of external legal and financial law experts. While its recommendation is not legally binding, in practice, the Bank Board follows its opinion in the vast majority of cases.

5. Judicial Review: Only after the Bank Board has issued a final decision on the rozklad can your company challenge the outcome in the administrative courts, typically the Municipal Court in Prague.

A critical distinction in the Czech system is the internal nature of this primary appeal mechanism. You are, in effect, appealing to the senior leadership of the same institution that found your company at fault. This dynamic requires a fundamentally different strategic approach compared to jurisdictions where an appeal immediately goes before an independent court or tribunal. 

Arguments must be tailored not for a judge, but for the regulator’s governing body, potentially focusing more on policy, remedial actions, and regulatory intent. This structural nuance makes experienced local counsel, who understands the Bank Board’s perspective, indispensable.

Your Legal & Documentation Minimum: How to Prepare Your Defence

A successful defense in a CNB proceeding is built on a foundation of meticulous documentation. The CNB makes evidence-based decisions, so your ability to produce clear, compliant, and correctly formatted documents is paramount.

Key Documentation Requirements

• The Document Trail: Be prepared to provide a comprehensive set of documents. This includes all relevant internal policies (AML, risk management, data protection), minutes from board meetings, records of client communications, transaction histories, and any other evidence related to the matter under investigation.
• Language is Non-Negotiable: The official language of all proceedings is Czech. Any document you submit that is in a foreign language (e.g., English) must be accompanied by an officially certified translation into Czech, prepared by a translator appointed by a Czech court.
• Authentication of Foreign Documents: Czech authorities will not accept foreign public documents (such as corporate registry extracts or a Power of Attorney signed abroad) at face value. They require a higher form of verification:

• Apostille: For documents from countries that are signatories to the 1961 Hague Convention, an Apostille certificate is required.
• Superlegalization: For documents from all other countries, a more complex and time-consuming process called superlegalization is necessary.

• Power of Attorney (PoA): To have a Czech law firm represent your company, you must grant a formal Power of Attorney. This document must clearly define the scope of representation. If signed outside the Czech Republic, the signature will need to be authenticated with an Apostille or superlegalization and then officially translated into Czech.

These procedural requirements for foreign documents are more than just administrative formalities. The CNB can impose strict deadlines for submissions. The process of obtaining an Apostille and then securing a certified translation takes time. 

A foreign company that is unprepared for these steps may find itself unable to submit crucial exculpatory evidence from its home jurisdiction before the deadline expires. This allows the regulator to make a decision based on an incomplete record, effectively turning a paperwork requirement into a significant strategic disadvantage. Proactive preparation of this documentation is therefore a core part of any effective defense strategy.

FAQ – Legal tips on documentation

1. What is an "Apostille" and why do I need it?
An Apostille is an international certificate that authenticates a public document (like a PoA or corporate extract) for use in another country. Without it, Czech authorities will not accept your foreign documents as valid. 

2. Can we use our regular translation service?
No. For official proceedings, you must use a translator officially certified and registered by a Czech court. Using a non-certified translation will result in the document being rejected. Our lawyers are ready to assist you – email us at office@arws.cz.

A Foreigner's Guide to Czech Procedure: Key Jurisdictional Differences

Understanding how Czech administrative law differs from the legal systems in your home country is vital. As an international law firm operating from Prague, European Union, ARROWS specializes in bridging these legal and cultural gaps. Our ARROWS International network, built over 10 years, provides us with a unique perspective on these critical differences.

• Czech Republic vs. Common Law (US/UK): The Czech administrative system is inquisitorial, meaning the CNB actively investigates facts and builds the case. This contrasts with the adversarial systems common in the US and UK, where the regulator often acts more like a prosecutor presenting a case before a neutral decision-maker.
• Comparison with the US SEC: A fundamental difference is the right to a jury trial. In the US, the Supreme Court's recent decision in SEC v. Jarkesy affirmed the right to a jury in certain SEC enforcement actions seeking civil penalties. In the Czech Republic, CNB proceedings are purely administrative; there is no jury, and a court review is only possible after the internal administrative process is fully completed.
• Comparison with the UK FCA: The UK's Financial Conduct Authority (FCA) has a more segmented and arguably more transparent enforcement process, involving distinct stages like a Preliminary Investigation Report, a Warning Notice, and a Decision Notice. The decision-making is handled by a Regulatory Decisions Committee (RDC), which operates with a degree of separation from the investigation team, and there is a direct path to appeal to an independent Upper Tribunal. This contrasts with the CNB's
  rozklad process, which is handled internally by the Bank Board itself.

Potential Outcomes and Sanctions: What Is at Stake?

The consequences of an adverse finding by the CNB can be severe, ranging from financial penalties to the complete termination of your business activities. It is essential to understand the full scope of what is at stake.

Range of Sanctions

The CNB has a variety of enforcement tools at its disposal, applied based on the severity of the violation:

1. Warning/Admonition (Napomenutí): The mildest sanction, issued for minor breaches, serving as a formal notice of wrongdoing.

2. Remedial Measures: An order requiring the firm to take specific steps to correct identified deficiencies and bring its operations into compliance.

3. Fines (Pokuty): The most frequent sanction. Fines can be substantial, often reaching millions of Czech Koruna (CZK). In 2023 alone, the CNB imposed total fines of CZK 78.6 million across the financial sector. High-profile cases include a CZK 6 million fine against UniCredit Bank for incorrect currency exchange rates.

4. License Restriction or Revocation: In the most serious cases, the CNB can restrict the scope of a company's license or revoke it entirely. This is the ultimate sanction, effectively ending the firm's ability to conduct regulated business in the Czech Republic.

Final decisions on penalties are often published on the CNB's website, creating a public record of non-compliance that can cause significant reputational damage.

Your Next Step: Partnering with ARROWS for a Robust Defence

Navigating the Czech regulatory environment presents unique challenges for foreign companies, from the CNB’s internal procedures and strict documentation rules to the fundamental differences in administrative law. Proactive and expert legal guidance is not a luxury—it is a necessity.

ARROWS is a leading Czech law firm in Prague, EU, known for its speed, quality, and deep understanding of the financial sector. We support over 150 joint-stock companies and 250 limited liability companies, providing them with the legal foundation to operate with confidence. Our team can provide comprehensive support, including:

• Legal consultations to prevent inspections or penalties.
• Preparation and review of internal company policies.
• Drafting all necessary documentation to prevent fines.
• Full representation in proceedings before the CNB and in administrative courts.
• Professional, certified training for your employees and management.

Facing a CNB inquiry or want to ensure your business is fully compliant? The first step is to seek expert advice. Contact our team of experienced lawyers today for a confidential consultation by writing to office@arws.cz.

FAQ – Most common legal questions about CNB administrative proceedings

1. How long do administrative proceedings with the CNB typically last?
The duration varies greatly depending on complexity. While the Administrative Procedure Code sets general deadlines, these can be extended in complex cases. A straightforward matter might take a few months, but a case involving a full
rozklad appeal and subsequent judicial review can take much longer. 

2. What are the likely costs involved in a CNB proceeding?
Costs include potential fines, which can be substantial, and the legal fees for representation. Investing in expert legal counsel early can often reduce overall costs by preventing procedural errors, strengthening your defense, and achieving a faster, more favorable resolution. To discuss a tailored fee structure, email our lawyers at office@arws.cz.

3. Is it possible to settle a case with the CNB before a final decision?
The Czech system does not have a formal, public settlement procedure like those seen in the US or UK. However, the manner in which a company cooperates, demonstrates that it has implemented remedial actions, and communicates with the regulator can significantly influence the final outcome and the severity of any sanction. Our lawyers can advise on the best strategic approach for your specific case. Get tailored legal solutions by writing to office@arws.cz.

4. Do we absolutely need a Czech lawyer to represent us?
While not legally mandatory in all initial stages, attempting to navigate CNB proceedings without a Czech lawyer is extremely risky for a foreign company. The proceedings are conducted in Czech, are governed by complex local law (správní řád), and require an intimate understanding of the CNB's specific practices and expectations. Expert local representation is essential for a credible defense. Need legal help? Contact us at office@arws.cz.

5. Our parent company is in another EU country. Does that simplify the process?
While your company benefits from EU principles of business, the CNB's enforcement actions are governed strictly by Czech national administrative law. The procedural rules, official language, and documentation requirements are all local. Our firm, ARROWS, specializes in bridging this gap for our EU-based clients. For immediate assistance, write to us at office@arws.cz.

6. What happens if we disagree with the final decision of the CNB Bank Board?
After exhausting the internal appeal (rozklad), your final recourse is to file an action with the Czech administrative courts.7 This initiates a formal judicial review of the CNB's decision. This is a complex legal process that requires expert representation by lawyers experienced in Czech administrative litigation. Do not hesitate to contact our firm – office@arws.cz.