Government draft of the Anti-Money Laundering Transparency Register and Financial Information Act published

• Notification presumption abolished
• Privileged treatment of listed companies abolished
• Reporting obligations of foreign companies in share deals extended
• Graduated transition periods

On 10 February 2021, Germany’s federal government adopted a draft of an Act to Amend the Anti-Money Laundering Act (Anti-Money Laundering Transparency Register and Financial Information Act – “Draft TraFinG Gw”). The reason for the planned amendments is the intended interconnection of the EU Member States’ beneficial owner registers. The federal government is adhering to its concept of a full transparency register already laid down in the ministerial draft, despite considerable resistance in the consultation process. As a consequence, all German companies will be required to report their beneficial owners to the Transparency Register, including those previously excluded from or privileged with regard to the reporting of their beneficial owners to the Transparency Register. The Draft TraFinG Gw therefore concerns in particular companies which to date have made use of the legal presumption of notification under section 20(2) Anti-Money Laundering Act (Geldwäschegesetz – GwG). There will also be changes for companies listed on an organised market and their subsidiaries, for which, to date, the obligation to report their beneficial owners to the Transparency Register was always (in the case of subsidiaries, usually) deemed to have been met. The explanatory memorandum to the Draft TraFinG Gw mentions around 2.3 million affected companies. The legislator also expects a considerable rise in administrative offences proceedings as a result of the statutory reform.

Collection register becomes a full register

To date, the German Transparency Register has been designed as a collection register. Reporting the beneficial owner to the Transparency Register has not previously been necessary if all necessary information about the beneficial owner was already available from certain publicly consultable registers such as, in particular, the commercial, partnership, cooperative or association registers. The registers in question transmit the necessary index data to the Transparency Register, and so the relevant entries in these register have hitherto been accessible via the Transparency Register website.

By contrast, in future every German company without exception and certain foreign companies which acquire land in Germany directly or indirectly will be required to report their beneficial owners to the Transparency Register.

This also eliminates the privileged treatment of listed companies. To date, the beneficial owners were only to be determined or reported for legal persons (except for foundations with legal capacity) and other companies not listed on an organised market under section 2(11) of the Securities Trading Act (Wertpapierhandelsgesetz – WpHG) and are not subject to any transparency requirements under Community law with regard to voting shares or comparable international standards. This provision in section 3(2) 1st sentence GwG is to be deleted without replacement. This will not only have an impact on notifications of beneficial owners of these companies and their subsidiaries, but will also mean that obligated parties under anti-money laundering law will, in future, when establishing a business relationship with listed companies, also have to identify the beneficial owners of those companies.

Interconnection of European beneficial owner registers

The planned changeover to a full register takes place against the backdrop of the originally planned interconnection of all European beneficial owner registers by the end of March 2021. To this end, a European platform will be set up through which all the data contained in the national beneficial owner registers will be available. This U-turn in the design of the German Transparency Register is particularly surprising in view of the fact that the German legislator deliberately designed the Transparency Register as a collection register when it was introduced in 2017, despite the foreseeable future interconnection of the European beneficial owner registers. The German legislator was convinced that collection registers were compatible with the European platform. In particular, the legislator preferred a collection register to avoid excessive red tape and due to the “high-quality information on investment transparency, arising especially from the commercial, partnership, cooperative and association registers” (Bundestag printed matter 18/11555 p. 125) rather than a full register or a supplementation of existing registers.

The abolition of the legal presumption of notification is also unexpected, in light of a ministerial draft of a law on the standardisation of foundation law published only on 28 September 2020. This draft provided for an expansion of the legal presumption of notification to foundations provided they were registered in a foundation register to be created. This is now void due to the Draft TraFinG Gw. Consequently, in the government draft that has been published in the meantime, the expansion of the legal presumption of notification to foundations was stricken.

New information on the beneficial owner in the Transparency Register

The Draft TraFinG Gw provides that in future all nationalities of the beneficial owner are to be reported to the transparency register; to date, it was sufficient merely to disclose one of several. However, there is no obligation under the Draft TraFinG Gw to actively make a subsequent notification of any additional nationalities of the beneficial owner. Instead, a subsequent notification is to be made if the reportable associations “update the information on the beneficial owner [in the Transparency Register] on a regular basis”. This wording was criticised in the consultation procedure in light of the fact that under German law, unlike in some other countries, no regular confirmation notification must be made to the Transparency Register, but such an obligation could hereby be indirectly created. Further developments in this respect remain to be seen. Practical experience in other countries show that such a regular confirmation notification causes considerable additional effort, especially for companies with multinational group structures. Moreover, given the existing obligation to immediately update the Transparency Register when there are changes in beneficial ownership, the additional benefits of a regular confirmation obligation for combating money laundering are doubtful.

While the ministerial draft of the TraFinG Gw stipulated that in addition to the information on the beneficial owner to be reported to the Transparency Register (first and last name, date of birth, place of residence and nationality) also the owner’s place of birth was to be reported, that is no longer the case under the Draft TraFin Gw.

In cases where no natural person can be determined as an actual beneficial owner, the Federal Office of Administration (Bundesverwaltungsamt – BVA) has so far held the view in its questions and answers on the Transparency Register as of 19 August 2020, contrary to the express wording of section 3(2) 5th sentence of the Anti-Money Laundering Act (Geldwäschegesetz – GwG), that all legal representatives have to be reported to the Transparency Register as presumed beneficial owners. By contrast, the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) has to date considered it sufficient, at least in general, to record only one person when performing checks on obligated parties under anti-money laundering laws. While the ministerial draft of TraFinG Gw provided for an amendment of section 3(2) 5th sentence GwG, which stated that all legal representatives of a company were to be seen as presumed beneficial owners, that provision was deleted without replacement in the government draft. The hope is that the Federal Office of Administration revises its opinion in light of this and that in future it will be sufficient to report to the Transparency Register one of several legal representatives, regardless of the powers of representation.

Reporting obligations for share deals of foreign companies

In the current legal situation, foreign companies are already required to report their beneficial owners to the Transparency Register if they undertake to acquire ownership of a property located in Germany and they are not registered in a transparency register of another EU Member State (section 20(1), 2nd and 3rd sentences, GwG). This provision already leads to considerable effort in practice because in certain EU Member States there is still no functioning beneficial owner register (especially in Italy), entries are only made with considerable delay due to technical problems with the register or the coronavirus pandemic (e.g. in Belgium and Romania), or states are not covered by privileged treatment (e.g. Switzerland, and also the UK since 1 February 2021).

The current provision only covers cases in which a foreign company directly acquires ownership of land in Germany. The Draft TraFinG Gw now provides for an expansion of reporting obligations by foreign companies to the German Transparency Register. According to this, foreign companies are to be required to report their beneficial owner to the German Transparency Register if shares in a company holding property in Germany are transferred to it within the meaning of section 1(3) of the Land Transfer Tax Act (Grunderwerbssteuergesetz – GrEStG) (known as a share deal). These conditions are met if, for example, a foreign company acquires at least 95% of shares in a German limited company (GmbH) which is the direct owner of land in Germany. However, in this case, too, the foreign company is to be exempt from notifying the German Transparency Register if it has already reported its beneficial owner to a transparency register in another EU Member State.

In addition, the notarisation prohibition of section 10(9) 4th sentence GwG is to be extended to share deals. Under this provision, the German notary may only perform a notarisation involving a foreign company which is required to report its beneficial owner to the Transparency Register if it has fulfilled its reporting obligations.

The new provision is likely to lead to considerable additional effort in property deals involving foreign companies. It also remains unclear under the new provision what will apply in the case of foreign companies which are exempt under foreign law from registering with the foreign transparency register, for example because they are listed on an organised market.

Compilation of summaries of the ownership and control structure of reportable associations

Another new feature of the Draft TraFinG Gw is the express authorisation of the German Federal Gazette (Bundesanzeiger) to compile summaries of the ownership and control structure of reportable associations (section 20(3a) of the draft GwG). The summaries are to be produced especially based on information acquired when resolving discrepancy notifications. Criticism was expressed in the consultation procedure, especially regarding the disclosure of summaries to reporters of discrepancy notifications and to certain authorities as provided for in the ministerial draft. The explanatory memorandum of the draft law also suggested that a future disclosure of the surveys to obligated parties under anti-money laundering was also envisaged. Publishing the summaries in the Transparency Register, as is done in other EU Member States, would then only be one step further. The ministerial draft ensures clarity in this respect and limits the option for disclosing the summaries of the ownership and control structure due to concerns under data protection law. Thus there is now to be no disclosure to the reporter of a discrepancy notification or to obligated parties under anti-money laundering law. Finally, the summaries are to be deleted by the Federal Gazette two years after the completion of the audit of the discrepancy notification.

Simplifications in checking details of the beneficial owner

Under the Draft TraFinG Gw, simplifications are planned regarding the checking of information about the beneficial owner:

Under section 11(5) 4th sentence GwG, an obligated party under anti-money laundering law must currently ensure with risk-appropriate measures that the information it has collected about the beneficial owner of a contracting partner is accurate. It must not rely solely on the information in the Transparency Register, but must instead perform its own investigations, the scope of which depends on the risk of money laundering in the specific individual case. In practice, this leads to considerable effort in checking customers. While in future the obligated party must still collect information about the beneficial owner from the contracting partner, it usually does not have to take any measures beyond inspecting the Transparency Register to check the details of the beneficial owner (section 12(3) 2nd sentence of the Draft GwG). Exceptions are to be made where the details collected about the beneficial owner differ from those in the Transparency Register or there are other indications casting doubt on the position, identity or collected information about the beneficial owners or pointing to an increased risk of money laundering.

Notifying the Transparency Register of the relocation of a registered office of entities not entered in a register

Currently, under section 20(1a) GwG, entities not registered in the commercial, partnership, cooperative or association registers must notify the Transparency Register of changes to their firm name, mergers, changes of form and their dissolution. According to the Draft TraFinG Gw, such a notification will also be required for a relocation of the registered office. This provision especially concerns foundations with legal capacity, but also applies to foreign companies registered in the Transparency Register.

Graduated transition periods for the subsequent registration of beneficial owners, administrative offences and discrepancy notifications

While the generous transition periods for implementing the first notifications to the Transparency Register required by the TraFinG Gw can be assessed positively, they are actually called for in view of the serious impacts of the abolition of the notification presumption under section 20(2) GwG.

For subsequently registering beneficial owners of companies subject to notification for the first time under the planned regulations, the Draft TraFinG Gw provides for a phased transitional regime. According to this, the following companies must meet their reporting obligation

• in the case of a company with the legal form of an AG, SE or KGaA, by 31 March 2022;
• in the case of a GmbH, cooperative, European cooperative or partnership, by 30 June 2022; and
• in all other cases, by 31 December 2022.

In addition, the corresponding fine provisions for breaches of the duty of first notification of the beneficial owner will be temporarily suspended as a result of the new provisions, specifically

• in the case of a company with the legal form of an AG, SE or KGaA, until 31 March 2023;
• in the case of a GmbH, cooperative, European cooperative or partnership, by 30 June 2023; and
• in all other cases, until 31 December 2023.

Due to the lack of an entry under section 20 GwG, discrepancy notifications, too, will not have to be submitted until 1 April 2023, provided that the company in question was able to invoke the notification presumption under section 20(2) GwG before the entry into force of the TraFinG Gw.

Identification obligations when cryptovalues are transferred

Since, following the revision of the GwG, which entered into force on 1 January 2020, service providers in the area of “cryptovalues” have been classified as obligated parties under money laundering law (see our News article on the government draft to implement the 5th EU Anti-Money Laundering Directive), the Draft E-TraFinG Gw now provides that the duties of care under section 10 onwards of the GwG are also to apply to the transfer of cryptovalues outside a business relationship. However, this will apply only if the cryptovalues have a countervalue of €1,000 or more at the time of the transfer. This achieves synchronisation with the threshold of money transfers outside a business relationship (see section 10(3) no. 2(a) GwG). The term “cryptovalues” is not defined in the government draft; instead reference is made to the definition in section 1(11) 1st sentence no. 10 of the Banking Act (Kreditwesengesetz – KWG). The transfer of cryptovalues is defined in the Draft TraFinG Gw as any transfer of cryptovalues between natural or legal persons in the context of the provision of financial services or the operation of banking transactions, which does not exclusively represent the custody of accounts within the meaning of section 1(1a) 2nd sentence no. 6 KWG.

Changes to the German Banking Act

In addition to adjustments of the provisions on the automated retrieval of account information in section 24c KWG, the Draft TraFinG Gw provides for a further amendment of the KWG. Financial holding companies within the meaning of section 2f KWG, recently introduced by the Risk Mitigation Act, shall, if they have their registered office in Germany and possess a licence under section 2f(1) KWG, be deemed obligated parties under section 2(1) no. 1 GwG and be subject to oversight by BaFin. This is a consistent approach, because it would be very hard to explain why a financial holding company with the appropriate permission of BaFin should be subject to another supervisory authority under money laundering law.

If you have any questions about the Draft TraFinG Gw or on any potential need for action, in particular with regard to adapting compliance structures to identify contractual partners and beneficial owners, or regarding notifications, corrections, requests to restrict inspection of the Transparency Register or related fines or legal proceedings, please contact us. We continuously monitor current developments and are in constant contact with the competent authorities.