I. Reporting and notification obligations under the Money Laundering Act

With the (electronic) transparency register in the Money Laundering Act (Geldwäschegesetz, GwG) introduced in 2017 and last amended with effect as of 1 January 2020, the legislator pursues the objective of identifying the beneficial owner(s) of a legal entity or registered partnership that is not listed on an organized market (companies subject to reporting requirements hereinafter referred to as “Reporting Companies”). Since 2017, Reporting Companies have therefore been required to obtain, retain and keep up-to-date information on the first and last name, date of birth, place of residence, nationality and type and scope of the economic interest (“Transparency Disclosures”) of their beneficial owners and to report this information without delay to the entity keeping the register for entry in the Transparency Register (Transparenzregister) (sec. 19, 20 GwG). In order to enable a Reporting Company to fulfill its notification obligations, its beneficial owners and – under certain conditions – its shareholders are obliged to notify their company without delay of all information required for Transparency Disclosures. Violations of reporting and notification obligations are administrative offenses and can – depending on the particular case – lead to fines of a considerable amount.
The key point of both the reporting and the notification requirements is the determination of the beneficial owner(s) of a Reporting Company under the GwG. In its Transparency Register Questions and Answers (“FAQs”) updated on 19 August 2020, the Federal Administrative Office (Bundesverwaltungsamt, “BVA”) has updated the criteria for determining the beneficial owner of a Reporting Company. The legal opinion recently adopted by the BVA has significant implications in practice. It will therefore be outlined below.

II. Determination of the beneficial owner

According to the relevant legal provisions in sec. 19 and sec. 3 GwG, the beneficial owner of a Reporting Company is anyone who directly or indirectly (i) holds more than 25% of the capital shares, (ii) controls more than 25% of the voting rights, or (iii) exercises control in a comparable manner.

1. Relevant thresholds

In its FAQs, the BVA specifies the calculation methods for the relevant threshold (of more than 25%) with regard to capital shares and/or voting rights of a beneficial owner.
In this context, the BVA states on the one hand that the calculation of the capital shares or controlled voting shares held within the meaning of the law must be made without taking into account so-called treasury shares (eigene Geschäftsanteile), i.e. shares that the company holds in itself.

Example: The share capital of a limited liability company (Gesellschaft mit beschränkter Haftung, “GmbH”) amounts to EUR 50,000.00. It is held as follows: The GmbH itself holds own shares in the amount of EUR 30,000.00; person A holds shares in the amount of EUR 12,000.00 and person B holds shares in the amount of EUR 8,000.00.
Person A and person B are beneficial owners of this GmbH, because without taking into account their own shares in the company, A holds 60% and B 40% of the capital shares in the company.

On the other hand, the BVA clarifies that the capital shares or voting rights directly and indirectly controlled by a natural person are to be added together for the purpose of determining the relevant thresholds. As soon as a person subsequently holds more than 25% of the capital shares or controls more than 25% of the voting rights, he qualifies as the beneficial owner of the Reporting Company.

Example: the founder of a start-up holds – after consummation of the latest financing round – 20% of the shares in a GmbH directly and a further 10% of the shares in the GmbH via a holding company established for this purpose, of which he himself is the sole shareholder. The founder is the beneficial owner of the GmbH, because in total the founder controls 30% of the voting rights in the GmbH.

2. Prevention control as control in a comparable manner

According to its FAQs, the BVA recently does not only assume beneficial ownership of a natural person if he or she can actively control decisions at the level of the company. According to the new opinion of the BVA, it should be sufficient for the assumption of a control “in a comparable manner” according to sec. 19, 3 GwG that a natural person can (passively) prevent decisions at the level of the company. If, for example, unanimity is required for the adoption of shareholder resolutions, the BVA’s legal opinion is that each shareholder – irrespective of the size of its shareholding – is now deemed to be the beneficial owner. Likewise, it is supposed to be sufficient for a beneficial ownership on the basis of the constituent element of control in a comparable manner that a shareholder can prevent decisions of a shareholders’ meeting or general meeting by veto rights or any blocking minority. Regrettably, the BVA makes no statement as to what scope veto or opposition rights or unanimity requirements must have in order to be a sufficient basis for beneficial ownership. According to the BVA, a blocking minority should only be sufficient for this purpose if the shareholder can prevent fundamental resolutions (such as amendments to the articles of association or decrease of the company’s share capital) on the basis of his blocking minority.
Following its legal interpretation of preventive control, the BVA also reassesses indirect participation structures in its current FAQs. Whereas it was previously considered necessary for the beneficial ownership in multi-level group structures that the natural person was able to exercise a controlling influence at the upstream group level, i.e. regularly had to hold more than 50% of the voting or capital shares, in the opinion of the BVA it should now be sufficient for the natural person to be able to prevent decisions also at the level of the subsidiary by means of rights of objection or veto, existing unanimity requirements or another blocking minority at the level of the parent company.

Example: A joint stock company (Aktiengesellschaft, “AG”) holds 30% of the capital shares in a subsidiary GmbH. The shareholders of the AG are the natural persons A, B and C. A controls 90% of the voting rights, B controls 9% of the voting rights and C controls 1% of the voting rights in the AG. The statutes of the AG provide for unanimity for the adoption of resolutions by the General Meeting. Thus – in the opinion of the Federal Administrative Office – A, B and C are beneficial owners of the AG and the subsidiary GmbH.

III. Criticism regarding the FAQs

With the recent update of its FAQs, the BVA has greatly expanded the group of potential beneficial owners. This extension is understandable with regard to the non-consideration of own shares and the aggregation of the shareholdings of a beneficial owner. The BVA’s view on the so-called prevention control, on the other hand, is justifiably strongly criticized in the legal literature. The extension of the criteria that may give rise to beneficial ownership of natural persons finds no support in the wording of the law in sec. 3 GwG. Moreover, there are considerable doubts as to whether such a far-reaching interpretation is still compatible with the purpose pursued by the legislator with the Transparency Register. In the explanatory memorandum to sec. 3 GwG, reference is made to group law provisions (sec. 290 para. 2 to para. 4 German Commercial Code (Handelsgesetzbuch, “HGB”)) for the determination of the controlling influence. According to this, however, dominant influence is not characterized by destructive prevention, but by active steering of the company’s activities. In addition, there is considerable legal uncertainty for the person applying the law when applying the new criteria, because the BVA has not specified how exactly the “prevention control” of a natural person must be structured in order to establish his or her beneficial ownership.

IV. Consequences for the practice

Despite the growing criticism of the BAV’s new FAQs, Reporting Companies, shareholders and potential beneficial owners should carefully review (or have reviewed) their reporting and notification obligations with regard to the Transparency Register on the basis of the current FAQs. Although the FAQs do not impose any direct legal obligations, they do reflect the BAV’s audit and sanctions practices. Those required to report and notify risk fines if they do not comply with the BAV’s requirements. A person affected would have to have any penalty notice issued reviewed in the context of administrative offense proceedings. The prospects of success of such proceedings must be regarded as open, as they depend to a large extent on whether case law will follow the BVA’s view – even on controversial issues.
The latest developments also show once again that the review of the reporting obligations to the Transparency Register is one of the tasks to be performed on an ongoing basis in the context of corporate compliance and must be considered, in particular, in any new or reorganization of corporate law.