Are your company’s German entities listed in Germany’s transparency register (Transparenzregister)? If you’re not sure, you can check the register here.
If they are not, it could already be – or soon become – mandatory to register them. This is because the German cabinet recently approved an amendment to Germany’s anti-money laundering (AML) law that increases fivefold the number of companies that must be entered in the transparency register. In addition, the government is setting an ambitious timetable by which German companies must register.
There is, however, an upside: the transparency register will significantly streamline customer due diligence procedures in Germany.
The German legislator is consistently reshaping the AML landscape, driven primarily by European directives. The hot topic at present is the enormous expansion of the scope of the criminal provisions on money laundering (section 261 of the German Criminal Code – for further details see our August and November 2020 blog posts).
However, the draft bill reforming Germany’s transparency register will, if it becomes law, be possibly more far-reaching as all companies with a legal entity in Germany (with only a few exceptions) will have to report data on their ultimate beneficial owner (UBO) to the register. The government expects the number of entities subject to this reporting obligation to rise from 400,000 to 1.9 million.
In principle, all companies are already required to report certain information about their UBOs to the register. UBOs are all natural persons who, directly or indirectly, hold more than 25 per cent of the capital stock, control more than 25 per cent of the voting rights or exercise control in a comparable manner. Companies must provide the UBO’s name, date of birth, place of residence and nationality, plus information on the nature and extent of the UBO’s economic interest.
However, the current law contains several exceptions. If the data required by law is available in other registers (eg the commercial or partnership register), companies are exempt from the reporting requirement. Further exemptions apply to corporations listed on an organised market such as the Frankfurt stock exchange.
Connecting and streamlining the registers
The fifth European Anti-Money Laundering Directive (EU Directive 2018/843 (5AMLD)) requires that, by 10 March 2021, national transparency registers are interconnected at the EU level (including structured data sets in a common file format), which will help cross-border co-operation and access to information.
As the data is distributed across several registers, to comply, the German register-keeping authorities would have to reprocess the data and set up the technical interfaces required for all registers concerned.
To avoid this financial and administrative burden, the German legislator has opted to abandon the above-mentioned exemptions and collect all data on UBOs in a comprehensive transparency register instead.
Therefore, if the draft bill becomes law, all corporate entities based in Germany and those intending to acquire real estate in Germany must submit information on their UBOs to the transparency register.
The scope of the revised reporting obligations
The renewed reporting obligation will primarily extend the transparency register’s scope to limited liability companies (GmbHs) and listed companies that are currently covered by the exemptions. If not already identified, companies must identify their UBOs based on shareholding and/or voting rights ratios or other control options.
The draft law provides for staggered transition periods:
- limited liability companies (GmbH) will have to file the report by 31 December 2021;
- for stock corporations (AG), SEs, partnerships limited by shares (KGaA), co-operatives (Genossenschaften), European co-operatives (SCEs) or partnerships, the intended deadline is 31 March 2022 and for registered partnerships 30 June 2022;
- in all other cases, the reports must be filed by 31 December 2022.
However, the obligation will not be limited to a one-time report. Companies will have to submit a report to the register each time the structure of their UBOs changes, for example following a merger or when shares are transferred. Companies will also have to report other relevant changes to the register, such as changes to the name of the company or the personal data of the UBOs (such as their address).
While an additional reporting obligation may not cause major difficulties for owner-managed companies and single entities, maintaining the transparency register will lead to significant compliance costs for groups, financial holding companies or PE funds (which typically have hundreds of UBOs in Germany).
Failure to report is subject to a fine of up to €1m to be imposed either on the German entity or its management. While the register-keeping authority, the Federal Office of Administration (Bundesverwaltungsamt), was quite lenient in the past, it has recently increased its enforcement action.
A single, comprehensive register will help anyone doing business in Germany meet their ‘know your customer’ obligations.
According to the draft bill, companies obliged under the Money Laundering Act (Geldwäschegesetz (GwG)) to identify the UBO of a contractual partner meet that obligation if the UBO’s data is collected from the customer (a process known as ‘identification’) and the collected data is checked against the register (‘identity verification’). Corporations will only have to conduct further due diligence if other facts indicate that the information in the register is inaccurate.
The draft law says that identification must be carried out – only checking the registry will not be sufficient.
What to do?
While the law will likely pass quickly, due to the pandemic, Germany may fail to meet the directive’s mandatory interconnection deadline (10 March 2021). Against the backdrop of the new law, companies should check the following:
- is the company aware of its UBOs?
- has the company established processes to ensure it becomes aware of any changes regarding UBOs?
- has the company established processes to report any relevant changes to the transparency register?
Also, on 1 January 2021, the previously implemented section 26a of GwG came into force. This allows the German Financial Intelligence Unit (which was raided by prosecutors last summer for its alleged failure to process suspicious activity reports) and law enforcement authorities to search the transparency register for UBOs based on certain personal data.
Furthermore, the Financial Action Task Force (FATF) is currently auditing Germany. The on-site inspection at BaFin is expected to take place within the next few months. The results may foster further legislative changes.
With so much going on in the German AML environment, corporations need to work extra hard to keep track of developments – and understand how their compliance operations might be affected.
You may also be interested in our global enforcement outlook report for 2021.