New Rules Against Money Laundering: A New Transparency Register - Who Is Affected?

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New Rules Against Money Laundering: A New Transparency Register - Who Is Affected?

By Tatjana Schroeder*

Introduction

In particular as a reaction to the Panama papers and increasing international terrorism, new requirements from Brussels regarding the combatting of money laundering and terrorism financing have become stricter. Germany had transposed Brussels’ Fourth EU Anti-Money Laundering Directive into national law by June 26, 2017.

At the same time, a new ordinance on the transferring of funds came into force and a new transparency register was implemented. This register has to be filled in at the latest by October 1, 2017 by management of all German corporations being obliged entities. The new register can be reviewed for the first time on December 27, 2017. Entities obliged to fill in the new register are all limited liability companies such as AG, GmbH and eG, all registered partnerships such as KGs and OHGs and also all trusts.

The reform significantly extends the scope of the Anti-Money Laundering Act. In the future, 55 paragraphs (the prior total was 17) will regulate how profits from serious crime are to be tracked down. The list of offenses leading to a fine has also significantly increased – with the fines to be imposed also becoming substantially higher.

Those obligated to follow the Anti-Money Laundering Act include not only banks and financial institutions, but also other professional groups, who in the view of the legislator could possibly be used for activities in connection with money laundering. For example, they include lawyers, notaries, and real estate brokers, but also distributors of goods handling large amounts of cash, for example jewelers, car dealers, art and antiques dealers.

In addition to the above a new obligation was implemented for management of all corporations being defined as obliged entities1 such as AG, GmbH, eG, KG, OHG and also trusts, in order to identify and make visible the corporation´s shareholders with “economic authority”2.

The time to meet these obligations is more than tight, ending on October 1, 2017. Thus, especially all individuals having management functions in German corporations being obliged entities should become familiar with at least the basic principles of the new regulations in order to be able to manage their reporting obligations to the new register correctly and to avoid potential fines for being in breach.

New Transparency Register – More Open Issues than Clear Answers

In order to prevent the misuse of private companies and trusts for the purposes of money laundering, tax evasion, and terrorism financing, in the future it should be possible to identify the shareholder with “economic authority”3 more easily. The key to this for the legislator was seen in the introduction of a central transparency register, which should hold information on the shareholders with “economic authority”. But even though the transparency register in the meantime has been set up, it brings more open issues than it answers on the questions which corporation has to report to it and with what facts. The reason for this is as follows:

In general all corporations being defined as obliged entities have to file shareholders with “economic authority”. A corporation is only exempted from reporting to the new register in case of the following:

(1)          it is stock-listed with a similar reporting obligation to the capital market; or

(2)         documents from the other German publicly accessible electronic registers as explicitly listed in the Anti-Money Laundering Act - such as the Commercial Register and the Partnerships Register - may also be accessed and show the corporation´s shareholders having “economic authority”.


Unfortunately, these registers very often do not show the shareholders with “economic authority”.


The Anti-Money Laundering Act rules that only a natural person can be a shareholder with “economic authority”, which directly or indirectly has the “economic authority” by holding 25% or more of the share capital or voting rights, be it directly or in a voting pool or similar structure. So, if the German register of the corporation only shows legal entities as shareholders with 25% or more and/or the line crosses the German border by showing a foreign legal entity as shareholder with 25% or more, it currently looks as if management will be obliged to check in its group of companies where the line goes to until there is the relevant natural person.


In this respect the Act is also contradictory. While the legislator stated in the bill reasoning4 that there shall be no obligation for the “starting management” in the German corporation reporting to the register to do any detective work, the wording of the bill as such does not include this. This in the end could result in high fines for management who trusted in the bill reasoning and did not report. This could be seen as being in breach. Today it is absolutely speculative to foresee how this will be handled by authorities. Thus, management should speed up implementation of a strict compliance structure, starting today with a review of the existing registers in which the corporation is listed in order to find out whether there is a realistic chance to claim one of the exemptions.


Access to the New Register


Initially, authorities – such as the finance authority - and persons who are obligated to obtain information in accordance with the Anti-Money Laundering Actwill be allowed to access the transparency register. This access is only foreseen to start December 27, 2017 so the interim period between the starting date of the transparency register October 1 and December 27, 2017, is not covered by any such access right.


Others, such as non-profit organizations and journalists, will also be allowed access, however, only if they are able to prove that they have a justified interest in doing so. As of now, it is unclear when a justified interest of this kind will be acknowledged.


Lower Thresholds for Cash Transactions


Previously, cash transactions exceeding EUR 15,000 had to be specially checked; now, the limit has decreased to EUR 10,000. In the future, all retailers who receive EUR 10,000 or more in cash must both identify their business partner and meet the legal requirements for risk management, that is generally ensure that they take internal measures in order to detect any money laundering.


Special Features in case of Transactions in Third Countries


In the future, transactions with third countries must be monitored more carefully, especially taking into account the combatting of terrorism financing. The EU Commission issued a negative list of countries for this purpose for which a higher level of risk is to be assumed. On top of the list is North Korea, but Iran, Afghanistan, Bosnia and Herzegovina, and Uganda are also included. Countries that are traditionally considered tax havens, such as the Cayman Islands and Panama, are not on the list even though they were part of the reason to establish the transparency register. This is due to the fact that the laws in question in those countries are in line with international standards. Their practical implementation may be something different.


Increased Sanctions


Breaches of the new money laundering requirements will be prosecuted more strictly in the future. The fines for severe, repeated, and systematic breaches are therefore increasing noticeably from a previous maximum of EUR 100,000 to up to EUR 1 million. Anyone who is fined will also be subject to public shaming: In future, supervisory authorities will be able to publish incontestable fine decisions on their websites. 


Bureaucratic Expenses


The government expressly states that it has tried to keep the expenses of bureaucracy as low as possible for the obligated parties, by referring to information that is available on participants from existing registers such as the commercial register. That this is a practical mistake has been explained in short above.


Thus, expenses are set to increase simply not only because of the reduction in the threshold above which notification has to be provided on cash transactions, but also because a higher level of care being required in identifying transactions involving risk. In addition – and this is the main issue for corporations being obliged entities - the regulations show that above all a greater number of breaches of the notification obligations are to be prosecuted. The legislator in the bill reasoning estimates the number of fines at approximately 1,500 per year. This might be realistic but it is not likely that drug cartels and terror organizations will end up in court any more frequently than previously; they will try to ensure that they do not turn up in the transparency register.


Conclusion


Not only “notification exempts”. Also “failure to notify means a fine” applies. Above all, all of those addressed in management by the new Anti-Money Laundering Act should very quickly prepare themselves.

 


German Term: Vereinigungen im Sinne der §§ 20 und 21 GWG

2 German Term: wirtschaftlich Berechtigter

3 German Term: wirtschaftlich Berechtigter

4 German Term: Gesetzesbegründung


*Tatjana Schroeder is a partner in the Corporate/M&A as well as in the Banking and Finance Practice Group in the Frankfurt office of SKW Schwarz Rechtsanwälte Steuerberater Wirtschaftsprüfer Partnerschaft mbB. She has worked for over 15 years as in-house counsel for large international groups (Siemens AG) as well as family offices (DELTON AG, held by Stefan Quandt) and joined SKW Schwarz in 2003. Tatjana Schroeder can be contacted at t.schroeder@skwschwarz.de.  


SKW Schwarz Rechtsanwälte Steuerberater Wirtschaftsprüfer Partnerschaft mbB is an independent German law firm. With more than 120 lawyers and offices in Berlin, Düsseldorf, Frankfurt am Main, Hamburg and Munich the firm is present in the major German business hubs.

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Frankfurt,
Monday, September 25, 2017
Professional Responsibility / Ethics, Business Organizations