German act to implement the 5th EU money laundering directive

By Carsten Beisheim, Juliane Dopychai, Johannes Wirtz LL.M.

12-2019

To implement RL (EU) 2018/843 (so-called 5th EU Money Laundering Directive) the German Federal Government published – subsequent to the draft bill of the Federal Ministry of Finance – a draft legislation on 31.07.2019. The Finance Committee of the German Federal Parliament submitted its resolution recommendation (BT-Drs. 19/15163), which contained some changes to the draft legislation, on 13.11.2019. On the following day, the draft legislation was passed by the German Federal Parliament in the version proposed by the Finance Committee (BT-Drs. 19/15196). Recently – on 29.11.2019 – also the German Federal Council approved the law passed by the German Federal Parliament (BR-Drs. 598/19). The future law will contain numerous modifications, in particular to the German Money Laundering Act (Geldwäschegesetz – GwG) and other laws affecting the financial sector, to improve the prevention and detection of money laundering and terrorist financing. It will come into force on 01.01.2020 and would thus comply with the implementation deadline of the EU Directive (10.01.2020).

The following article is intended to give a brief overview of the most important practical changes that the future law will entail.

BROADENING THE CIRCLE OF OBLIGATED PERSONS

Service providers in the field of virtual currencies

The future law regards virtual currencies (so-called crypto values) as financial instruments (section 1 para. 11 sentence 1 no. 10 German Banking Act (Kreditwesengesetz – KWG) new) and companies which perform so-called crypto custody business (custody, administration and security of crypto values or private crypto keys which serve to store crypto values or to transfer them for others) as financial service institutions (section 1 para. 1a sentence 2 no. 6 KWG new). Service providers from these areas will thus become obligated persons according to section 2 para. 1 no. 2 GwG. In addition, this modification subjects the crypto area under the control of the financial sector regulated and monitored by the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin). However, the future law provides a relief in comparison to the previous government draft: The former intended obligation to separate the crypto custody business from other financial services is no longer required (deletion of section 32 para. 1g KWG new). Moreover, certain rules for financial service institutions do not apply to service providers offering only crypto custody services (section 2 para. 7b KWG new).

Crypto values within the meaning of the KWG are digital representations of a value, that has not been issued or guaranteed by any central bank or public authority and does not have the legal status of a currency or money, but is accepted by natural or legal persons as a medium of exchange or payment by reason of an agreement or actual practice or serves investment purposes, and that can be transmitted, stored and traded electronically (legal definition of section 1 para. 11 sentence 3 KWG new).

Lawyers

Lawyers are still only required to identify their clients under money laundering law if they conduct certain catalogue business. In addition to the catalogue transactions already mentioned in section 2 para. 1 no. 10 GwG, lawyers will in future also become obligated persons under the GwG when advising on M&A or taxes (section 2 para. 1 no. 10 lit. c - e GwG new).

Real Estate agents

In the future, real estate agents will not only be obligated persons in the meaning of the GwG in the commercial brokerage of the purchase or sale of real estate or rights equivalent to real estate, but also in the commercial brokerage of rental and lease agreements as well as with regard to commercial premises and apartments (section 1 para. 11 GwG new). However, the implementation of effective risk management and the fulfilment of the general duty of care in the brokerage of rental and lease agreements should only be necessary in the case of a monthly rent or lease of EUR 10,000 or more – meant is probably the net cold rent or lease (section 4 para. 4, section 10 para. 6 GwG new). However, this is always necessary for the mediation of purchase contracts.

Art mediator and art storage holder

In addition to traders of goods, art brokers and art storage holder whose storage takes place in duty-free areas are also to become obligated persons within the meaning of the GwG (section 2 para. 1 no. 16 GwG new). However, they are only to be obliged to implement effective risk management and general due diligence requirements for transactions of EUR 10,000 or more – regardless of cash payment (section 4 para. 5 no. 2, section 10 para. 6a no. 2 GwG new).

Public auctions by public authorities

In the future, courts, authorities as well as corporations and institutions under public law will be obliged to fulfil identification and reporting obligations under money laundering law within the framework of public auctions for cash payments of EUR 10,000 or more per item auctioned and to cooperate with the Financial Intelligence Unit – FIU (section 2 para. 3, para. 4 GwG new).

LIMITATION OF THE CIRCLE OF OBLIGATED PERSONS

In the absence of a relevant money laundering risk, debt-collection service providers (section 2 para. 1 no. 11 GwG new) and "pure industrial holding companies", i.e. holding companies which exclusively hold participations in companies outside the credit, financial and insurance sectors and which are not involved in business activities beyond the tasks associated with the management of the participations (section 1 para. 24 sentence 2 GwG new), are no longer to be included in the group of obligated persons under the GwG in future.

BROADENING OF OBLIGATIONS TO PREVENT MONEY LAUNDERING

Risk management and general due diligence obligations

As already mentioned, rental or lease agents are only obliged to carry out effective risk management and fulfil their general duties of care from EUR 10,000 monthly net rent or lease (section 4 para. 4, section 10 para. 6 GwG new). The same applies to art mediators and art storage holders for transactions of EUR 10,000 or more – regardless of cash payment (section 4 para. 5 no. 2, section 10 para. 6a no. 2 GwG new).

Traders of goods have to observe some changes: In addition to the obligation to uphold effective risk management and to fulfil the general due diligence obligations for cash payments of EUR 10,000 or more (section 4 para. 4, section 10 para. 6 GwG), these obligations must in future also be observed for transactions involving art objects of a value of EUR 10,000 or more – regardless of cash payment – and for transactions involving high-value goods (in particular precious metals) for cash payments of EUR 2,000 or more (section 4 para. 5 no. 1, section 10 para. 6a no. 1 GwG new).

In future, real estate agents will have to identify the contracting parties or the persons acting on their behalf as well as the beneficial owners if their client expresses a serious interest in the execution of the real estate purchase agreement and the parties to the purchase agreement are sufficiently identified (section 11 para. 2 GwG new).

In future, for purchase procedures within the meaning of section 1 German Land Transfer Tax Act (Grunderwerbsteuergesetz – GrEStG) notaries will have to carry out a conclusiveness check on the identity of the beneficial owner on the basis of documents on the ownership and control structure to be submitted by him (section 11 para. 5a GwG new). They have to keep the documentation of the ownership and control structures (section 8 para. 1 sentence 2 GwG new).

Furthermore, when establishing a new business relationship with a private legal entity, a registered partnership or trust, obliged persons shall obtain proof of registration in the transparency register from the business partner or a corresponding extract from the transparency register (section 11 para. 5 sentence 2 GwG new).

Enhanced due diligence obligations

The future law extends the scope of the enhanced due diligence obligations for the participation of a third country for which the EU has identified an increased risk of money laundering (“high-risk country”) or a natural or legal person domiciled in that country (section 15 para. 3 no. 2 GwG new). The consequence of this broad wording is that it is already sufficient for participation, for example if only the assets of a transaction are located in such a high-risk country. In the case of the participation of a high-risk country, the obligated persons must comply with a catalogue of binding measures; they must in particular

  • obtain certain additional information (section 15 para. 5 no. 1 GwG new),
  • obtain the approval of a member of the management for the establishment or continuation of the business relationship (section 15 para. 5 no. 2 GwG new),
  •  boost the monitoring of the business relationship through more frequent and intensive controls and the selection of transaction patterns for further examination (section 15 para. 5 no. 3 GwG new),
  • observe additional measures ordered by the competent supervisory authorities (section 15 para. 5a GwG new).

Extension of the obligation to report for persons with professional confidentiality

The obligation to report suspicious cases to the FIU should in future contain a further release from the obligation of professional confidentiality for persons who are bound by professional confidentiality, in addition to positive knowledge regarding the use of the mandate relationship for the purposes of money laundering, terrorist financing or other criminal offences: In agreement with the Federal Ministry of Justice, the Federal Ministry of Finance shall be able to determine cases in connection with purchase procedures in accordance with section 1 GrEStG by statutory order, which must always be reported by persons bound by professional confidentiality (section 43 para. 2 in connection with para. 6 GwG new). This will affect in particular notaries and lawyers consulting in the field of real estate acquisition.

Group-wide compliance with the duties of the GwG

Parent companies that are obliged persons as per the GwG are already required to take group-wide measures to prevent money laundering and terrorist financing (section 9 GwG). If the parent company is not an obligated person within the meaning of the GwG, the subordinate "intermediate holding companies" obligated under the GwG – subsidiaries to which in turn other subsidiaries are subordinate – should in future perform the role of a parent company with regard to such preventive measures (section 9 para. 4 GwG new). This transfers the responsibility for group-wide measures to those subsidiaries below the actual parent company which are themselves obligated within the meaning of the GwG.

UPGRADING THE TRANSPARENCY REGISTER

The transparency register is to be upgraded by being accessible to all members of the public in future, even without a legitimate interest in inspection (section 23 para. 1 section 1 no. 3 GwG new). The persons who have inspected the transparency register should not be disclosed to legal entities, registered partnerships and trusts (section 23 para. 3 sentence 2 GwG new). On the other hand, the future law – in contrast to the previous government draft – gives the beneficial owner the possibility to request information from the register keeping authority (Federal Gazette Publisher – Bundesanzeiger Verlag) about inspections carried out by members of the public (section 23 para. 6 GwG new). However, information about natural persons who have inspected the transparency register shall be communicated only in an anonymised form (section 23 para. 6 sentence 3 no. 4 GwG new). The beneficial owners registered in the transparency register may still request a limitation of the possibility of inspection because of a legitimate interest (section 23 para. 2 GwG). In practice, such requests are rarely successful, as the register keeping authority interprets this exception very strictly.

The obligation to obtain an extract from the transparency register or corresponding proof of the business partner (section 11 para. 5 sentence 2 GwG new), which will in future be imposed in certain cases, will probably also lead to a more intensive use of the transparency register.

In addition, companies domiciled abroad who wish to acquire real estate in Germany will in future be subject to the penalty-imposed obligation to disclose information about their beneficial owners to the transparency register, unless this information has already been recorded in a transparency register of another EU Member State (section 20 para. 1 sentence 2 f. GwG new). The same applies to foreign trustees if they enter into a business relationship with a German contractual partner on behalf of the trust or wish to acquire real estate in Germany (section 21 para. 1 sentence 2 f. GwG new).

In order to improve the data quality of the transparency register, the obligated persons shall have in future the penalty-imposed obligation to report any discrepancies found between information in the transparency register and their own information on beneficial owners immediately to the register keeping authority (section 23a GwG new).

Tax-privileged associations (e.g. sports clubs) will be pleased that under the future law – in contrast to the previous government draft – they can be released from the annual fee for the transparency register on request (section 24 para. 1 sentence 2 GwG new).

RECOGNITION OF REPORTS OF SUSPICION AS SELF-DISCLOSURE

The future law provides that a suspicion report pursuant to section 43 para. 1 GwG may at the same time constitute a self-disclosure exempting from punishment within the meaning of section 261 para. 9 sentence 1 no. 1 of the German Criminal Code (Strafgesetzbuch – StGB) if the reported facts contain the information required for this purpose (section 43 para. 4 GwG new).

EXTENSION OF THE FINE CATALOGUE

The catalogue of fines in section 56 GwG is to be considerably extended – especially in the area of the transparency register. On the other hand, the current standard of liability (intent and recklessness) – contrary to the draft bill of the Federal Ministry of Finance – is to be kept in principle probably due to critical statements from the business industry. Only in the case of violations of selected essential basic obligations under money laundering law the future law punishes – in contrast to the previous government draft – a negligent breach of duty (section 56 para. 2 GwG new.). Due to this differentiation, in future the framework for fines will also be based on the respective level of culpability (section 56 para. 2 sentence 2, para. 3 GwG new).

ENHANCEMENT OF THE FINANCIAL INTELLIGENCE UNIT (FIU) POWERS

In addition to the current possibility for the FIU to automatically access the personal data stored in the police information system in order to fulfil their tasks (section 31 para. 4 GwG), in future it will also be possible to automatically access information and criminal offences stored in the Central Public Prosecutor’s Office Register of Procedures (section 31 para. 4a GwG new.). In addition, the FIU – as well as the StA – should have comprehensive, automated access to the data of the transparency register, which should include the search for legal entities, registered partnerships and trusts as well as their beneficial owners (section 26a GwG new).

In addition, obligated persons must register electronically at the FIU regardless of the submission of a suspicious activity report (section 45 para. 1 sentence 2 GwG new). On the one hand, this is intended to create a database of all obligated persons and, on the other hand, to lower the barrier to submitting a suspicious activity report.

CONCLUSION AND PROSPECTS

The (potentially) obligated parties under the GwG are advised to review and adapt their internal compliance structures and processes for the prevention and detection of money laundering and terrorist financing on the basis of the text of the law passed by the German Federal Parliament or to establish them if they do not exist yet. Insofar as suspicion reports are submitted to the FIU in the future, it should always be ensured that the information also meets the requirements of a self-disclosure within the meaning of section 261 para. 9 sentence 1 no. 1 StGB.

Since various recommendations of the German Federal Council from the first round were not taken up in the subsequent legislative procedure by the German Federal Parliament, the German Federal Council has called on the German Federal Government to make adjustments at the next opportunity. Therefore, the reform process in the area of money laundering should still be monitored closely.