The implementation of the Fifth Anti Money Laundering Directive in German Law – Tighten the tight?

Deutsch: Die Umsetzung der Fünften Richtlinie zur Bekämpfung der Geldwäsche in deutsches Recht – Die Zügel werden weiter angezogen!

1. Introduction

In the course of the “Panama Paper” scandal, Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing – known as 4. Anti-Money Laundering Directive (“4. AMLD”) – was amended by Directive (EU) 2018/843 which is known as the Fifth Anti-Money Laundering Directive (“5. AMLD”), despite being only an amendment to 4. AMLD. 5. AMLD came into force mid-2018. Each EU-member state must transpose 5. AMLD into the national legislation by 10^th January 2020.

In general, the 5. AMLD implements the following changes:

• Virtual currency platforms and wallet providers, tax related services and traders of art shall be in scope of anti-money laundering (“AML”) provisions;
• General public shall receive access to beneficial ownership information of EU based companies;
• An obligation to consult the beneficial ownership register when performing AML due diligence (“AML-DD”);
• Member states must create a list of national public offices and functions that qualify as politically exposed persons (“PEP”);
• Strict enhanced AML-DD measures for financial flows from high-risk (third) countries;
• Information on real estate holders shall be centrally available to authorities;
• Lower thresholds for identifying purchasers of prepaid cards and for the users of e-money; and
• Further enhances of the powers of the Financial Intelligent Units and further facilitation of cooperation and information exchange among authorities.

Based on this, the German Ministry of Finance presented a draft bill (Referentenentwurf) of the implementation provisions in May 2019. In June 2019 the draft bill was revised by the German Government and a new government draft bill (Regierungsentwurf) was presented. In September 2019 the bill was submitted by the German Government to the Federal Council (Bundesrat). After the receipt of comments of the Federal Council, the bill was forwarded to the German parliament (Bundestag) at the beginning of October. Following the first consultation of the bill in the German parliament on 18th October 2019 and hearings in the competent parliament's committee it was recently adopted by German Parliament and finally the Federal Council on 29th November 2019, having implemented some of the changes from the committee (“Bill”).[1]

The adopted Bill implements the rules required under the 5. AMLD, however, also “gold plates” some of the provisions, especially by introducing new regulatory rules for crypto currency related businesses as well as making certain service providers including limited financial brokers and M&A advisors to be obliged persons (Verpflichtete), who now have to fully comply with the AML regulation. In addition, the opportunity is used to clarify and amend some of provisions which were not perfectly transferred into national law within the implementation of the 4. AMLD.

2. Implementation of AML Rules for M&A Advisors and further Providers engaged in Financial Industry.

When the Bill comes into force, inter alia the following service providers will be obliged persons (Verpflichtete) under the German AML rules:

• M&A advisors, i.e. entities mainly providing advice regarding capital structure, industrial strategy or questions connected to the above as well as providing M&A services and advice to businesses[2] (§ 2 (1) no. 6, § 1 (24) no. 5 of the German AML Law in the version of the Bill (Geldwäschegesetz - “GwG”));
• Brokers of non-securities and fund unit financial instruments pursuant to Sec. 34f of the German Trade Code (Gewerbeordnung) ((§ 2 (1) no. 6, § 1 (24) no. 4 GwG), who in addition will be subject to regulatory supervision from 2021;
• Buyers of claims for financing purposes (single factoring - certain fintechs may be caught by this provision) ((§ 2 (1) no. 6, § 1 (24) no. 2 GwG);
• Enterprises whose main activity is to acquire, hold and sell other undertakings. However, to this extent the legislator also implemented an exemption for (industrial) holding companies, which hold interests of undertakings outside of bank and insurance sector (i.e. below 5 %) without active ownership (§ 2 (1) no. 6, § 1 (24) no. 1 GwG);
• Own account financial instruments traders (§ 2 (1) no. 6, § 1 (24) no. 3 GwG);
• Non-German EU member state E-Money or Payment Service providers using agents in Germany (§ 2 (1) no. 4 GwG); and
• Art traders and art brokers (§ 2 (1) no. 16 GwG).

To cover further angles of M&A related services, the legislator is also introducing additional services of lawyers (Rechtsanwälte) resulting in a mandatory performance of AML obligations. These include (cf. the amended § 2 (10) GwG):

• Advice to the clients on capital structure, their industrial strategy or questions connected to the above;
• Advice or services in connection with M&A; and
• On a commercial basis, tax advice.

Based on this, certain players in the market would need to be fully AML compliant. In particular, the implementation of organizational structures (e.g. implementing AML policies and strategy, appointing an AML officer, etc.) and the performance of AML-DD, in particular identification, (e.g. obtaining documents regarding the contractual partner and its ultimate beneficial owner; for the above purposes review of the transparency register), before entering into a contractual relationship, will be mandatory.

3. Implementation of new regulatory regime for brokerage/custody of crypto (currency) assets

Though not required by 5. AMLD, the German legislator is, however, taking the opportunity and the requirements of 5. AMLD to introduce AML procedures for brokers/traders/market places of crypto assets and to implement a new regulatory basis for crypto assets. Instead of just amending the German AML provisions, the legislator has decided to designate the brokering or holding in custody of crypto assets for third parties as a financial service requiring a license under the German Banking Act (“KWG“) (Art. 2 of the Bill). Since financial services providers pursuant to KWG are obliged persons (Verpflichtete) ipso jure, such service providers will also be required to comply with German AML rules.

In this context the legislator also explicitly introduced crypto assets as a new financial instrument in KWG (even through the German regulator is of the opinion that crypto assets were already covered by KWG as financial instruments), therefore clarifying all doubts with regard to this question and resulting in the necessity of a MiFID II similar license without respective usual brokering obligations even if safekeeping, administration or safeguarding of crypto assets is concerned. The government proposal that if crypto assets related financial services are performed, no other financial or banking services can be performed at the same time by the same entity, has not been implemented in the adopted version of the Bill.

Providers of the captured crypto asset services will have the advantage of a transition period and will not be required to have a license until 30th November 2020. However, to benefit from this they must inform the regulator about the performed regulated activity by 31st March 2020.

4. Further increase regarding of AML-DD, especially for high risk countries and PEPs

In line with the 5. AMLD requirements, the German legislator implemented:

• The strict obligation to review the transparency register for AML-DD purposes. Furthermore, if inconsistencies of the transparency register are determined, such must be submitted to the competent authorities (amended § 11 (5) GwG, new § 23a GwG);
• Stricter AML-DD with regard to high risk counties and PEPs, i.e. if the transaction is related to such countries/PEPs (§ 15 (3) GwG). To this regard, member states will implement respective PEP lists;
• A new catalogue of mandatory measures in case of increased AML-DD obligations (§ 15 (5) GwG);
• A new requirement for persons resident in Germany, which are subject to AML-DD need to be identified under German interpretation and rules of the 5. AMLD (amended § 17 (3) GwG);
• Mandatory appointment of an AML officer and its deputy for businesses in the financial industry (§ 7 (1) GwG);
• Special AML-DD obligations of involved parties (i.e. brokers, notaries) related to real estate transactions (e.g. § 10 (6), (9) sentence 4, § 11 (2) and (5a) GwG) and the obligation of foreign entities to provide data to transparency register if they real estate in Germany (new § 20 (1) sentence 2 GwG);
• It is clarified that if there is no beneficial owner, a “fictive” quasi beneficial owner, being the management of the identified entity, needs to be determined (§ 3 (2) sentence 5 GwG); and
• Group wide compliance with AML rules (amended § 9 GwG).

5. Additional rules for reliance on compliance of third Parties

Last but not least, if an obliged person (Verpflichteter) would like to rely on other obliged persons (Verpflichteten) in the future for AML-DD, stricter requirements for reliance will be applicable. Such reliance with regard to persons resident in Germany will be only possible if the obliged third party on which the reliance is based performed the AML-DD in compliance with the German AML-rules (new § 17 (3) GwG). This may force foreign (financial) institutions providing AML onboarding services dealing in Germany to amend their processes to be compliant with the new rules.