I. Implementation of Fifth Anti-Money Laundering Directive into German Law

With the Implementation Act which came into force on 1 January 2020, the amending directive to the Fourth EU Money Laundering Directive (so-called Fifth Money Laundering Directive) has been implemented in German law. In addition to numerous reforms for the financial sector (especially for service providers in the crypto value sector), provisions in the Money Laundering Act [Geldwäschegesetz – GwG] were amended which are significant for the practice of non-financial businesses. This newsletter article will present the main changes for these businesses. A separate newsletter article is dealing with important new regulations of practical relevance with regard to the transparency register, which was only introduced in 2017 and for which a right of access for the general public is now provided.

II. Practice-relevant changes for non-financial companies

1. Extension and concretisation of obligors under the GwG

The Implementation Act extends the circle of those who must fulfill obligations under money laundering law (“Obligors”): Since 1 January 2020, real estate agents have been considered Obligors not only with regard to their activities in the acquisition or sale of real estate, but also in the brokerage of real estate for rent or lease (“Rental Agents”). Moreover, in addition to art dealers, art intermediaries as well as art galleries, auction houses and warehouses for works of art are also considered Obligors.
The Implementation Act also provides clarity with regard to the obligatory status of industrial holding companies. The question of whether industrial holding companies, although they only hold shares in the individual group companies for the purpose of group management, should be considered financial companies within the meaning of the GwG has now been settled by the legislator. The new, independent definition of financial enterprises under money laundering law excludes holding companies which exclusively hold participations in enterprises outside the credit institution, financial institution and insurance sectors and which are not engaged in entrepreneurial activities beyond the tasks associated with the management of the participations from the definition of financial enterprises within the meaning of the GwG and thus from the group of persons liable under money laundering law.

2. Privileged Obligors

a) Threshold amount as a prerequisite for risk management and fulfillment of customer due care obligations

In accordance with the risk-oriented approach of the legislator, Obligors must take appropriate measures to prevent money laundering and financing of terrorism (only) with regard to the nature and scope of their business activities. The GwG therefore only imposes an obligation for legally prescribed risk management and the fulfillment of general customer care obligations for transactions involving (cash) transactions which (at least) reach a certain threshold amount for certain groups. The following will apply to these threshold amount regulations in the future:

• A threshold amount of EUR 10,000.00 applies to all transactions carried out by art dealers, art brokers and art storekeepers;
• Rental Agents are obliged to risk management and to fulfill customer due care obligations if they broker rental or lease agreements with a monthly rent or lease of at least EUR 10,000.00.
• Traders in precious metals (such as gold, silver and platinum) face a threshold amount of EUR 2,000.00 for cash transactions.
• Traders of other goods will only be left with a threshold amount for cash transactions of EUR 10,000.00.

However the regulation still provided for in the government draft, according to which goods traders, art intermediaries and art storekeepers should comply with the obligation to implement group-wide measures as parent companies of a group (section 9 GwG) even if they themselves fulfill the applicable privileged conditions, has not become law.

b) Minimum level of risk management despite privileges

For privileged Obligors in particular (as has already been observed under the old legal situation), the fulfillment of the conditions for privilege only reduces the scope of the obligations to be fulfilled. Certain obligations apply to all Obligors. In particular, all Obligors – irrespective of the type and amount of the transaction in question – must comply with the general duties of care or, if applicable, enhanced duties of care, as well as report any suspicions of money laundering (section 43 GwG) if there is any indication that money laundering may be involved. Even privileged Obligors will therefore have no choice but to maintain a certain level of risk management in their company in order to identify suspicious cases and to be able to react appropriately and in accordance with the law.

3. Risk management system

In the area of risk management under money laundering law (sections 4 to 9 GwG), there are two amendments of practical relevance to the GwG:
First, the legislator has clarified that the responsibility of the management level of a company for compliance with money laundering obligations remains in place even if a money laundering officer has been appointed.
The second essential amendment concerns the so-called group-wide measures in section 9 GwG. The law now makes a clear distinction between the group-wide obligations of an obligated parent company and the obligations of the Obligors belonging to the group. In particular, – if section 9 GwG is applicable -parent companies are required to

• establish group-wide risk analyses, security measures and processes,
• develop and implement a group-wide strategyagainst money laundering,
• ensure that group companies and branches in other EU countries comply with the national provisions for the prevention of money laundering and financing of terrorism applicable in the respective member state, and
• ensure that group companies in non-EU countries meet the requirements of the German GwG or at least take appropriate measures to counter the risk of money laundering and financing of terrorism.

Companies belonging to a group must implement the measures taken by their parent company in addition to the measures resulting from their position as Obligors under GwG.
Group companies which are themselves subordinated, but whose parent companies do not have to take group-wide measures, must, if certain conditions are met, assume the role of parent company and implement group-wide measures. This shifts the responsibility for group-wide measures to a lower level within the group hierarchy, particularly in the case of group structures with an industrial holding company as the parent company without its own operating business.

4. Customer due care obligations

In addition to setting up a risk management system, Obligors must comply with duties of care with regard to their customers. In this respect, the Implementation Act has brought into force a number of tightenings that have been observed in business practice since 1 January 2020.
In order to fulfill their general duty of care, Obligors are now required, at the start of a new business relationship with certain customers, either to request the information deposited in the transparency register or to obtain confirmation from the business partner that it has fulfilled its reporting obligations to the transparency register and to take appropriate measures to verify business partner’s beneficial owner(s). Measures to identify the beneficial owner(s) as well as the documentation of the ownership and control structure or any difficulties in identifying the beneficial owner(s) must be recorded and documented.
For companies operating on an international level the new regulation with regard to so-called high-risk countries could have significant effects on their daily business.Obligors now have to carry out enhanced customer care obligations whenever they wish to carry out transactions involving a higher risk third country or a natural or legal person from such a third country, i.e. to obtain additional information about their contracting party, the beneficial owner, the nature of the business relationship and the assets of the beneficial owner before entering into a business relationship, and to monitor the business relationship more closely. The EU Commission keeps a list of the third countries with increased risk that it has identified as such.

5. Other changes of practical relevance to the GwG

Companies should also be aware of the following additional changes:

• In future, Obligors will have to register electronically with the Central Financial Transaction Investigation Unit (Financial Intelligence Unit; “FIU”), regardless of whether a suspicious transaction report is submitted.
• Suspicion reports in accordance with section 43 GwG, which contain all information required in section 261 para. 9 sentence 1 German Criminal Code [Strafgesetzbuch – StGB], will in future also be regarded as voluntary reports under criminal law.
• The catalog of fine regulations has been extended. For some significant infringements, e.g. the failure to appoint a member of management responsible for risk management and the failure to appoint a (group) money laundering officer, the standard of fault triggering liability was reduced from recklessness to negligence. In all other cases, however, infringements can still only be punished by the competent supervisory authority if they were committed intentionally or recklessly.

III. Conclusion

The issue of money laundering will remain a hot topic (also) from the perspective of non-financial companies in 2020. Requirements for the fulfilment of customer due care obligations and their documentation by those obliged under money laundering law are increasing significantly. In order to pass audits by the competent supervisory authority, Obligors are advised to adapt their money laundering compliance system to the new legal situation.
For Obligors for whom the law provides for privileges, it is also worth checking whether they (can) fulfill the conditions to be granted privileges. Although privileged Obligors are not per se exempt from their obligations under money laundering law, they can significantly reduce the scope of their obligations under money laundering law and the associated requirements for the company’s internal compliance management system if compliance with the privileged conditions can be ensured (permanently).