Last year’s FATF report for Germany has identified weaknesses of German Anti Money Laundering (AML) legislation and practices with respect to the use of legal entities to hide and obscure sources of income as well as the laundering of money through the acquisition of real estate. Just in time for the new year, the German legislator now introduced several changes to the German Anti Money Laundering Act (Geldwäschegesetz, GwG) in relation to acquiring and owning real estate in Germany (as part of the so-called Sanctions Enforcement Act II).
The legislator has not only increased the scope of transparency register obligations with respect to German real estate holdings (see our blogpost), but also introduced a ban of cash payments, crypto payments and certain other means of payments for the acquisition of real estate in Germany in the new section 16a(1) GwG, on which we intend to shed some light with this blog post.
The new cash payment ban in section 16a(1) GwG
The ban applies to the purchase and exchange of real estate in Germany, irrespective of whether
- any of the parties is an obligated entity within the meaning of the GwG or not,
- the parties are natural persons or legal entities or partnerships, or
- any of the parties acts commercially or not.
In addition, the ban will apply to the purchase of shares in a company (i.e. a share deal) that directly or indirectly owns, among others, real estate in Germany, irrespective of
- the company having its seat in Germany or not,
- the amount of capital or voting rights acquired in that company, and
- the number and value of real estate that the company owns in Germany.
The new ban in section 16a GwG will not only be relevant for the German real estate market but may also become a restriction in M&A transactions. While crypto-based payments are by no means a frequent means of payment in an M&A context yet, section 16a GwG may thwart an increased importance of crypto payments in this respect, at least with respect to targets that own real estate in Germany.
The new payment ban will not apply to transactions that have been concluded prior to 1 April 2023 (Section 59(11) GwG). The wording of this grandfathering provision suggests that it refers to the conclusion of the purchase agreement and not the completion of the acquisition.
Types of banned payments
Unlike the title of the new section 16a GwG (“cash payment ban”) suggests, its prohibition is not limited to cash but also captures payments made in crypto assets, gold, platinum, and precious stones. While cash, gold, platinum and precious stones are more or less self-explanatory, identifying crypto asset payments in practice may prove to be more challenging.
For the definition of crypto assets, the GwG refers to the German Banking Act (Kreditwesengesetz, KWG). This definition covers a broad range of token classes:
- It captures most types of payment tokens (e.g. Bitcoin, Ether, etc.).
- Non-fungible tokens (NFTs) may also qualify as crypto assets. While there is yet little administrative guidance on what exactly brings NFTs into the scope of the definition as crypto asset, caution should be exercised if, due to its design, the individual NFT creates an investor-like expectation as to their performance and may be considered an investment. A similar test is also proposed by the FATF (no. 53) https://www.fatf-gafi.org/en/publications/fatfrecommendations/documents/guidance-rba-virtual-assets-2021.html. This means, however, that only some NFT will be subject to the prohibition.
- The involved parties may face similar difficulties with respect to so-called utility tokens, which may or may not be regarded as crypto assets, depending – again – on whether they create investor-like expectations as to their performance.
- Securities are not crypto assets. This even applies to electronic securities that are registered in an electronic securities register based on DLT technology. (Electronic) securities will, therefore, continue to be eligible methods of payment, which may be of particular relevance in an M&A context. However, there is less legal certainty than one may expect: Security tokens that do not fulfil the criteria for “securities” will still be in scope of the ban.
- E-money payments are not prohibited. Therefore, PayPal and similar means of payments are not subject to the payment ban. This also applies to stablecoins insofar they fall within the definition of e-money.
However, an outright ban of all crypto assets (as defined in the KWG) as a means of payment seems, in our view, disproportionate and not suitable.
On the one hand, the ban is overinclusive: It does not take into account the many legislative initiatives that already mitigate AML risks in the crypto sector on a national and European level:
- The 5th AML Directive requires European custodian wallet providers and fiat-to-crypto exchange service providers to register with their local AML authorities and subjects them to local AML law. This means that the “on-ramp” and “off-ramp” between crypto and fiat is already subject to KYC and their holders are identified. The German legislator even introduced a licensing requirement for custodian wallet providers, which are now regulated as financial institutions in Germany (see our client briefing for more detail) bringing them entirely into the scope of German AML laws.
- In 2021, Germany has implemented the FATF’s Travel Rule on crypto asset transactions. This requires obliged entities that are involved in crypto asset transfers to obtain, record and transfer information on the sender and recipient of crypto assets (see our blog post on the travel rule).
- The Markets in Crypto-assets Regulation (MiCAR, see our blogpost for further insights), the FATF’s Travel Rule on crypto asset transactions, as included in the Funds Transfer Regulation, will establish a comprehensive AML regime for crypto-asset service provider within the European Union.
The outright ban ignores these legal initiatives. Prohibiting payments via crypto assets from one un-hosted wallet to another or from and to wallets hosted outside Germany (or the EU) would, in our view, have been sufficient to address relevant AML risks.
On the other hand, the current ban does – due to its simple reliance on the crypto asset definition in the KWG – not comprise token that also qualify as e-money (such as some stablecoins), regardless of whether its issuer is duly regulated and has carried out KYC obligations.
Obligations of the parties
Acquirers and sellers in real estate transactions will be required to prove to the participating notary that the consideration for the purchase was paid by means other than cash, crypto assets, gold, platinum or precious stones. Appropriate evidence shall, in particular, be confirmations of payment from credit institutions involved on the acquirer’s or seller’s side in the transaction are suitable. Against this backdrop, wire transfers seem to be the preferred method of payment in the eyes of the legislator. However, other means of confirmation should also be acceptable, in particular in cases where the payment was made by using other means of payments, such as e-money.
A similar requirement does, however, not seem to apply to the indirect acquisition of real estate in Germany via a share deal. In those cases, only the cash payment ban applies, without any subsequent obligations of the parties or the notary.
Obligations of notaries
Under German law, the acquisition of real estate generally requires the involvement of a notary. This includes, for example, the notarization of the purchase agreement and the submission of the application for registration of the title transfer to the land register. In addition to these obligations, the cash payment ban now imposes additional requirements on German notaries:
- Notaries will now be required to assess the conclusiveness of the evidence provided to him/her by the parties.
- The notary shall only forward the application for registration of the acquisition to the land registry (Grundbuchamt) if he/she has conducted this conclusiveness check or was not able to do so after unsuccessfully requesting the parties to provide the evidence within a reasonable period of time.
- If the notary has facts that give rise to the suspicion that the real estate transaction serves the purpose of money laundering or financing terrorism, he must report the facts to the competent body for financial transaction investigations without delay and may apply for the transfer of ownership only under certain conditions.
- In addition, notaries will be obligated to inform the involved parties about the cash payment ban as well as its civil law consequences.
For a period of up to one year, the notary may be subject to downstream verification duties if the parties agree that the contractual consideration is due only after the application for registration has been filed. Neither the parties’ obligations to provide evidence nor the notary’s verification duties shall apply if the consideration does not exceed EUR 10,000 or to the extent that conclusive evidence is not available for a partial amount of the consideration of up to EUR 10,000. Same applies if the consideration was paid using an escrow account (Anderkonto) of the notary.
This exemption shall ensure that the effort associated with monitoring the prohibition of cash payments is in reasonable proportion to the value and money laundering risks of the consideration in question.
Enforcement of the cash payment ban
Infringements of the cash payment ban shall not be a criminal or administrative offence. The legislator rather follows a different approach.
- First, the involvement of the notary in the process shall ensure that cash payments and other captured payments cannot be used for the acquisition of real estate. The application to the land registry for the transfer of ownership of the property can now only be made by the notary (on behalf of the parties). The notary must not forward the application to the land registry without assessing the conclusiveness of the evidence provided to him/her. This in itself aims at ensuring that no cash payments and other means of payments are used for the acquisition of real estate.
- Second, section 16a(1) GwG is in its nature a civil law statute. The contractual payment obligation under a purchase contract shall not be considered to be fulfilled if the payment is made in cash or other captured means of payment. As such, parties that make payments in cash or other captured means of payment shall be able to reclaim this payment from the recipient.