Implementation of a public Transparency Register on beneficial ownership of legal entities.
Notification obligation applies to incorporated companies and certain other legal entities and arrangements; the beneficial owner may himself be obliged.
Notification deadline by October 1, 2017 at the latest, irrespective of nationality or domicile of beneficial owner.
Natural persons falling within the scope of the very broad definition of beneficial owner must be aware that their identity must be disclosed to the Transparency Register upon investing in Germany.
Management of German corporates, partners of registered partnerships, trustees and fiduciaries domiciled and seated in Germany must request information on beneficial owners from persons holding interests in the relevant entities and arrangements.
Type of information and data to be disclosed to and deposited with the Transparency Register.
1. What do Interest Holders and Investors need to know?
The amended German Anti-Money Laundering Act (Geldwäschegesetz – GwG) implements a new register: the Transparency Register (Transparenzregister) (the Register).
The Register will contain information on the identity of the beneficial owners and details on the beneficial interests held with respect to legal persons established under German private law, registered partnerships, but also with respect to foreign trusts and foundations without legal capacity which’ purpose serves their founder(s) as well as other similar legal arrangements.
The Register will be accessible to public authorities, persons obliged to proceed to KYC processes and third parties, such as journalists, NGOs and (potential) commercial partners, provided that any such third party is able to demonstrate a legitimate interest for the access to the registered information.
Entities falling under the scope of the amended GwG, as well as trustees and fiduciaries, have an obligation to obtain, keep up-to-date and file for registration the information on beneficial owners with the Register. Beneficial owners and interested holders controlled by a beneficial owners are obliged to provide the necessary information.
Notifications containing information on the beneficial owners will have to be submitted by October 1, 2017, at the latest. All entities and persons subject to the obligations for notification and information will have to ensure that they have requested or provided the information required under the GwG in order to enable the respective obligee to submit the required information on beneficial owners to the Register. A failure may lead to the opening of an administrative procedure which may lead to significant fines. Therefore, all corporate groups should proceed to a verification of their structure in order to identify entities, arrangements and individuals subject to obligations under the GwG. The more complex and internationalized a group structure, the earlier a group should begin the burdensome task of identifying the beneficial owners to be notified to the Register.
The legislative background, the concept of the Register, the obligees and the definition of beneficial ownership, the information to be disclosed and possible upcoming amendments are presented below.
2. Background – Transposition of the Fourth EU Anti-Money Laundering Directive
The clock was ticking for the German legislator as it had to urgently transpose the Fourth EU Anti-Money Laundering Directive – (EU) 2015/849 (AML Directive) into German law by June 26, 2017. On May 18, German parliament adopted the Act on the Transposition of the AML Directive (the Bill), which came into force on June 26, 2017. The Bill amends, inter alia, the GwG so to prevent the misuse of the financial systems for the purposes of money-laundering and the financing of terrorism.
The Bill implements new provisions on the tracing of profits from severe criminal offences providing, inter alia, for new compliance obligations with respect to KYC processes, a severe increase of financial sanctions and obligations for legal entities and the beneficial owners to disclose specific information and data on the beneficial owners, which will be registered with the new Transparency Register. The Register will be accessible to public authorities, persons obliged to proceed to KYC processes and third parties, such as journalists, NGOs and (potential) commercial partners, provided that any such third party is able to demonstrate a legitimate interest for the access to the information.
It goes without saying that registration in a register accessible to persons alleging a legitimate interest strongly affects the interests of private equity firms, family offices and other economic actors not to make public their diverse investments, knowing that this discretion has nothing to do with any criminal intentions, but derives from legitimate commercial and private interests to not publicly disclose one’s commercial activities. Such disclosure could be used by criminals to obtain information on wealthy private persons or by competitors in order to analyze the current and future strategies of an undertaking.
However, the Transparency Register will be fully operative by the end of the year and will be accessible to third parties, which can demonstrate a legitimate interest. Therefore, legal entities registered in Germany and other legal entities and arrangements falling under the scope of the amended GwG, their legal representatives, partners or administrators and the beneficial owners holding interests in those legal entities have to be aware that they will be obliged to provide relevant information with respect to the economic beneficiaries to the Register.
3. The Transparency Register
The concept of the Transparency Register is as follows:
Entities subject to the GwG have to obtain, keep up-to-date and file for registration information on their beneficial owners. The GwG sets out a very broad definition of the beneficial ownership. The information to be disclosed must, inter alia, contain information on the grounds and the extent of the beneficial ownership. This includes the disclosure of the existence of arrangements with other shareholders or between a nominee shareholder and third parties. The information will be accessible to certain authorities, obliged persons under the GwG and third parties able to demonstrate a legitimate interest.
a) A broad definition of beneficial ownership
The GwG gives a very broad definition of the beneficial owner:
Beneficial owner of a legal person other than a foundation with legal capacity, companies listed on an organized market or companies subject to transparency requirements according to EU law or other equivalent international standards within the meaning of the GwG shall be every natural person who directly or indirectly:
Holds more than 25 percent of the shares or ownership interest;
Controls more than 25 percent of the voting rights; or
Exerts control in a similar way.
Indirect control is in particular given in the event one or multiple corporate entities, which are under the control of the same natural person, hold more than 25 percent of the share or ownership interest or the voting rights. More generally, control consists in dominating influence, which may inter alia be qualified by (i) the right to appoint or dismiss the majority of the members of the administration, direction or supervising organ conducting the entity’s business, (ii) the entitlement to conduct the business of an entity according to a domination agreement or the articles of association, or (iii) the bearing of the majority of the risks and opportunities in connection with an entity, being a special purpose vehicle as defined in the German Commercial Code.
A beneficial owner of foundations with legal capacity or legal arrangements which manage or distribute assets on a fiduciary basis or which commission third parties to manage or distribute assets or similar legal forms shall be:
Every natural person who acts as trustor, trustee or protector, who is a member of the management board of a foundation;
Every natural person who has been designated as a beneficiary;
Every group of natural persons to the benefit of assets which shall be managed or distributed; and
Every natural person who by any other means directly or indirectly exerts dominating influence on the management or distribution of managed assets.
If no natural person can be clearly identified as beneficial owner, the legal representative or managing partner of the entity in question shall be deemed to be the beneficial owner.
b) The obligees: Legal entities, shareholders and other interest holders, trustees and fiduciaries
In order to ensure that adequate beneficial ownership information is provided to the Register the GwG stipulates obligations for the entities as well as for the interest holders or the beneficial owners of these entities.
The entities subject to the GwG are legal persons established under private law, registered partnerships, trusts, foundations without legal capacity which’ purpose serves their founder(s) and similar legal arrangements. These entities are, through their legal representatives, general partners, trustees or fiduciaries (Representative), obliged to obtain, archive, keep up-to-date and finally file for registration specific information and data on their beneficial owners. The Representatives have to request from the interest holders, limited partners, settlors and founders to get provided with the beneficial owner information which has to be filed with the Register. A failure to do so may result in administrative fines for the entity and in a personal liability for a Representative in case he has breached his duties.
As said, shareholders or interest holders who are beneficial owners or who are directly controlled by a beneficial owner, must provide the entity in question with the necessary information about themselves or the beneficial owner, irrespective of whether such shareholder or interest holder resides in Germany or not. The same obligation applies to members of associations or cooperatives holding more than 25 percent of the voting rights. With respect to foundations the obligation applies to the persons who are deemed to be considered as beneficial owners of a foundation.
An interest holder which is NOT himself a beneficial owner or directly controlled by such has NO obligation to indicate a beneficial owner which is in a higher position of the chain. This means that a beneficial owner indirectly controlling an interest holder has to provide the information himself in case he is indirectly controlling the interest holder. In the latter case, any failure to provide the information requested under statutory law would entail the administrative punishability of the beneficial owner himself. Nevertheless, an entity obtaining information on the beneficial owner by other means than notices from its interest holders, is obliged to notify such information to the Register.
The administrative burden of such notifications is, however, reduced as the obligation to notify shall be deemed fulfilled, if and to the extent the relevant information on the beneficial owner is already electronically available through the commercial register, the partnership register, the register of associations or the register of undertakings. Furthermore, companies listed on an organized market or subject to transparency requirements according to EU law or other equivalent international standards are not subject to the amended GwG.
c) Information to be disclosed
The following data and information shall be held by the Register and will thus have to be communicated by the beneficial owner and the entity in question:
Given name and surname;
Date of birth;
Details on nature and extent on the economic interest held.
The details on the economic interest shall indicate the grounds from which the beneficial ownership arises by giving the amount of the equity interest or voting rights, details about the exertion of control by other means, particularly through agreements between a third party and an interest holder or among several interest holders; or through the right granted to a third party to appoint legal representatives or members or other entity organs or from the exercise of the function of a legal representative, managing interest holder or partner; or the functions described in b) above in a foundation, trust or similar legal arrangement.
d) Submission of Information to the Register
The information to be disclosed must be submitted through the technical infrastructure for the Register. The infrastructure has been set up in form of an internet platform administrated by the Bundesanzeiger Verlag GmbH, the entity entrusted with the operation of the Register. The platform is operational since July 5. Details with respect to the submission (e.g. use of specific forms provided by Bundesanzeiger Verlag GmbH) are set out in the Regulation regarding the Transfer of Data to the Transparency Register (Transparenzregisterdatenübermittlungsverordnung).
e) Access to the Register
The GwG, following the stipulations of the AML Directive, stipulates that unrestricted access shall only be granted to specific authorities to the extent necessary to the fulfilment of their competences (supervising authorities, the Central Unit for the Investigation on Financial Transactions, authorities competent according to the Federal Act on Foreign Trade, the prosecution authorities, the Federal Central Tax Office and local financial authorities and authorities competent for the investigation, prevention and elimination of dangers) and to certain institutions, service providers and advisors (inter alia credit, financial services institutions, payment and e-money institutions, certain financial and insurance companies, insurance brokers, capital management companies, certain legal, tax and financial advisors with respect to certain transactions, real estate brokers) to the extent necessary to comply with their KYC obligations.
Any person that can demonstrate a legitimate interest, shall be granted access to the deposited information, whereby the day of birth; and the exact address of the Beneficial Owner shall not be disclosed. According to the explanatory statement to the Bill a legitimate interest shall be any objective interest justified by factual circumstances. Such legitimate interest shall, in particular, exist, when it is related to the purpose of preventing and combatting money laundering, corruption or the financing of terrorism. Particularly non-governmental organizations committed to the combating of money laundering and the financing of terrorism or specialized journalists investigating on such criminal activities shall be regarded as having a legitimate interest. The explanatory statement refers to a stipulation applicable with respect to the legitimate interest for the access to German land registers held by German local courts, in order to give guidance to the concept of legitimate interest. With respect to the access to information held by the land registers German courts have decided that a real economic, e.g. access in relation to concrete contractual negotiations, or public interest may be considered a legitimate interest. It is therefore likely that every potential contractual partner of an entity with which the entity has already entered into contractual negotiations will be considered as entitled to retrieve beneficial ownership information in order to enable him to identify the natural persons standing behind his contractual partner.
A beneficial owner may apply for a partial or complete restriction of the access to the information, if he can demonstrate, that his overriding and protection worthy interests require such restriction in his particular case. Protection worthy interests are circumstances from which it infers that the beneficial owner may be exposed to the risk of the following criminal offences: Fraud, kidnapping, hostage-taking, blackmail, criminal offences against body or life, coercion, threatening. Furthermore, the beneficial owner has a right to apply for a restriction of the access in case he is minor or otherwise incapable.
f) Administrative fines
Any failure to comply with the obligations to request, archive, actualize or correctly or completely notify beneficial owner information to the Register constitutes an administrative offence. Such administrative offence may be sanctioned by significant administrative fines of up to 100,000 Euros. The fines may be increased to one million Euros in case of serious, continuous or systematic infringements.
g) A Gateway to other registers
The Register will furthermore serve as a gateway to other electronic registers which store documents containing information on beneficial owners of an entity, such as the commercial register, the registers of partnerships, cooperatives and associations; as well as to certain publications and notifications, such as notifications on the acquisition of a significant shareholding or the major holdings of voting rights in a German stock corporation.
h) Amendments to the obligatory list of shareholders of German limited liability companies - GmbH
An additional aspect not directly related to the Register itself but of significant importance is the modification of the material requirements with respect to the content of the list of shareholders, a list which has to be deposited with the commercial register for German limited liability companies. The Bill now sets out certain elements to be contained in the list of shareholders and which already had become best practice (which are the court of registration and the registration number of an entity). Furthermore, the Bill introduces the obligation to also express the shareholding of every shareholder in percentage rates, what is supposed to facilitate the identification of possible beneficial owners. In the event of any change triggering the obligation to deposit an updated list of shareholders, e.g. after a transfer of shares or a change of name, domicile or seat of a shareholder, such a new list will have to meet the new requirements. An update to already deposited shareholder lists is, however, not required.
4. Outlook on possible amendments imposed by EU law
Even if the German legislator has decided to adhere to a concept of a restricted access to the Register, it may soon be obliged by the EU to revise its decision. The Commission of the EU has already made a proposal for a directive amending the AML Directive and of directive (EC) 2009/101 (coordination of safeguards to the benefit of members and third parties vis-à-vis certain companies – inter alia limited liability and stock companies). This proposal is subject to works of the European Parliament (EP) and its various committees and is currently awaiting its first reading. The current report on the proposal published by the EP provides in recital (22) that the information on the beneficial ownership of companies, trusts and other legal arrangements should be publicly available in all member states to avoid distortions due to different levels of protection of third parties deriving from the fact that not all member states would make information on beneficial ownership publicly available. Recital (23) explicitly states that the aim is to harmonize national provisions on disclosure of information on beneficial ownership. As a consequence, the latest version stipulates that beneficial ownership information shall be accessible to the public in general and not only to persons demonstrating a legitimate interest. Furthermore, the scope of the directive is extended to tax crimes and the threshold for beneficial ownership shall be reduced to just more than 10 percent.
This intention to make beneficial owner information publicly available raises serious concerns with respect to data protection and even with respect to conformity with the German constitution. An unrestricted access to the beneficial owner information held by or available through the Register could infringe the beneficial owners’ individual rights to privacy and informational self-determination as protected by the German constitution. Serious concerns also have been raised by the European Data Protection Supervisor.
5. What other EU Member States do
Whereas the UK was first to take action with regard to transparency of the beneficial ownership of UK companies, Limited Liability Partnerships and Societates Europaeae by requiring these entities to maintain a register of people with significant control (“PSC register”) and provide this to the UK registrar of companies (“Companies House”) through the Small Business, Enterprise and Employment Act 2015, and a subsequent suite of regulations in March 2016 several other EU member states have not yet transposed into their national laws the AML Directive. In the Grand Duchy of Luxembourg, bill of law number 7128 was submitted to Parliament on April 26, 2017. The bill of law is still in discussion and the State Council (Conseil d’Etat) has not yet provided its comments and recommendations. Whilst the bill of law replicates the content of the AML Directive, it does however not provide information on how the Transparency Register will be implemented in Luxembourg. The Member States should have all notified the transposition of the 4th AML Directive by June 26, 2017. The European Commission has initiated a check of the transposition, the result of which are still pending.