On 26 June 2017, the new German anti-money laundering law (Geldwäschegesetz) entered into force. The law implements the 4th EU Anti-money laundering Directive (AMLD) that was adopted in June 2015. The development of the law was marked by various controversies, which will be discussed further below. At the same time the Geldwäschegesetz (GWG) 2017 does contain various new elements, which all companies obliged under the law must integrate into their compliance systems.
As a key innovation, the German AML law introduces a risk-based approach to the prevention of money laundering. Obliged entities must assess each business relationship and transaction individually with regards to the risks of money-laundering and terrorist financing and take appropriate security measures as part of an effective risk management approach. The risk assessment determines the appropriate level of due diligence, i.e. whether simplified or enhanced due diligence measures apply for a particular customer. Certain obliged firms are required to appoint a dedicated AML officer, including financial institutions and insurance companies, capital management firms and gambling service providers.
The Financial Intelligence Unit (FIU) responsible for enforcing the law and analysing suspicious transaction reports will move from the Federal Criminal Police (Bundeskriminalamt) to the Central Customs Authority (Generalzolldirektion) under the auspices of the Ministry of Finance. Although the new FIU authority will also have more resources, it remains to be seen if the prosecution of money laundering offences will be more effective in the future.
The risk-based approach to AML
The law lists a number of risk factors (see Annex) linked to either low or high possibilities of money laundering or terrorist financing. The list of factors refers to risks attached to a customer or business relationship, geographical risks with respect to the relevant countries and jurisdictions, and risks in relation to the relevant products, services, transactions or delivery channels.
Most notably, on 26 June 2017, the Joint Committee of the European Supervisory Authorities published the Risk Factor Guidelines (under the 4th EU AML Directive) on simplified and enhanced due diligence, which set out in more detail the factors that obliged entities should consider for their risk assessment of business relationships and occasional transactions. The guidelines consist of a general section, applicable to all firms, and a sector-specific section, which details factors that are of particular importance in relevant sectors. The guidelines, which were subject to consultation with stakeholders last year, will eventually apply as of 26 June 2018.
A priori high risk and therefore requiring enhanced due diligence are
- Politically exposed persons (PEP), their relatives and persons known to be close associates. The enumerative list of PEPs now includes domestic PEPs, officials of political parties, and senior officers of European or international organisations.
- Customers coming from countries which are defined as being high risk jurisdictions
- Large, unusual and conspicuous transactions
- International correspondent relationship with respondents from a third country
Enhanced due diligence requirements, which follow on from the discovery of the aforementioned high-risk factors and come on top of basic due diligence for verifying the identity of a customer, include:
- Establishment and continuation of a business relationship only with the approval of senior management
- Determination of the origins of wealth and funds, used in the business relationship or transactions
- Continuous monitoring of the business relationship
- With respect to respondents, determination of nature of business, reputation, anti-money laundering compliance etc.
The new anti-money laundering law also introduces a number of clarifications for obliged firms or persons. For example, with respect to gambling service providers, lotteries which are not organised on the internet and which were approved by German authorities are exempt from the obligations. Real estate agents are obliged to identify the contract parties if they demonstrate a serious interest to buy the relevant real estate property. Insurance companies and agents are obliged if they are involved in lending money. Persons trading in goods are obliged persons and must watch for indicators raising suspicions of money laundering and terrorism financing, and they are obliged to identify the counter-party and assess the risks if they are involved in a cash payment of EUR 10,000 or more.
A central register called “Transparenzregister”
The introduction of a so-called Transparenzregister (transparency register) – in the German law is based on the 4th EU AMLD’s requirement to establish a special central register, which includes information about the ultimate beneficial ownership of a company. Legal entities, registered partnerships, trusts and similar legal structures are required to complement information already available in the various German company registers and to keep the following beneficial owner information up-to-date:
- Name, date of birth, place of residence
- Nature and scope of ownership interests, including details of shareholders holding a 25 percent stake or more,
- Details of other forms of control, function of legal representative or managing partner
- Defined functions in case of legal foundations and trust-like legal organisations
The disclosure requirements focus on information which the companies already know or which their shareholders provide to them. Critical NGOs such as Transparency International or Tax Justice, pointed out that the obligation to identify and report the beneficial ownership of a company is limited to situations in which the German company or its shareholders are directly controlled by a beneficial owner. If there are more layers of legal entities, the German firm has no obligation to identify the beneficial owner. Instead, the obligation rests with the beneficial owners to disclose their identities and interests.
Obviously, the latter provision will be difficult to enforce and if the German law does not require the company to disclose who its ultimate beneficial owners actually are, it will be easy to hide the ultimate beneficial owner in a layered structure of companies.
That limitation in § 20 GWG apparently contradicts the 4th EU AMLD (Art. 39), which requires a company to identify its beneficial owners. There is also a curious inconsistency in the German law, as obliged companies, while performing customer due diligence, are in fact required to identify the beneficial owner. These obliged firms may therefore not always regard the so-called transparency register as a useful and reliable source.
Also from experience with integrity due diligence investigations, hidden beneficial ownership often gives cause for concern, in particular if it involves PEPs, their relatives or close associates. The law could be read as one that gives hints as to how a shareholding structure might be layered in order to render the disclosure of beneficial ownership ineffective. It could be said that, against the backdrop of the Panama Papers and how important it is to improve transparency of off-shore structures, the German AML Law’s lack of ambition with respect to ensuring the disclosure of beneficial ownership information is particularly surprising.
The ruling coalition of CDU and SPD, which enjoys a large majority in the German Bundestag, also agreed on another questionable provision, which can be found in § 3 GWG. It states that if no natural person can be designated as beneficial owner, or if doubts exist that the relevant person is in fact the beneficial owner, the legal representative or managing partner shall be designated as the beneficial owner.
Regarding the risk-based approach to AML, it should be clear that companies which make use of the so-called senior manager opt–out clause, or those companies that cannot or will not disclose the beneficial ownership structure might be regarded as high-risk.
However, this is not the end of the discussion. As amendments to the 4th EU AML Directive are currently being negotiated, the controversial parts of the German Geldwäschegesetz, may soon come under review again.