Is the German transparency register becoming more transparent?

What is on the agenda? The Fifth EU Anti-Money Laundering Directive

Until 10 January 2020, the member states of the European Union must implement the fifth EU Anti-Money Laundering Directive (RL EU 2018/843) (5. AMLD). Its declared intention is the increase of transparency of financial transactions, of corporate and other legal entities (including trusts), to more effectively prevent terrorist financing and money laundering.

As for previous EU Anti-Money Laundering Directives, it was underlined that the prevention of money laundering and of terrorist financing cannot be effective unless the environment is hostile to criminals seeking shelter for their finances through non-transparent structures. However, it was also taken into account that amendments to the existing regime have to be in line with existing data protection standards as well as the principle of proportionality (Verhältnismäßigkeit).

End of May 2019, the German Federal Ministry of Finance (BMF) published a draft bill on the implementation of the 5. AMLD inter alia containing changes to the system of the German transparency register.

Transparency principles currently in place in Germany

Since 01 October 2017, German legal entities have to disclose their economic beneficiaries in the German transparency register. An economic beneficiary is any natural person who owns or effectively controls a company (as set forth in the German Anti-Money Laundering Act, Geldwäschegesetz (GwG)). In general, this will be the case if a person - directly or indirectly - (i) holds an equity share of 25 percent in a company, (ii) controls more than 25 percent of the voting rights of an enterprise or (iii) has the power to control the company in a comparable manner.

Under the current system, the economic beneficiaries themselves (or shareholder directly controlled by an economic beneficiary) are obliged to inform the companies’ managing directors about the legally required information on the economic beneficiaries of a company (name, date of birth, place of residence, nature, and extent of the commercial interest). Pursuant to the current provisions of the German Anti-Money Laundering Act the duty of the companies’ managing directors is then to collect, store, update and disclose the legally required information.

To date, the register is not freely available to the public. Only authorities and certain third parties with a specific and reasoned interest can have access to it.

What changes do we have to anticipate? The BMF draft bill to implement the 5. AMLD

The key changes to the German transparency register envisaged by the BMF are:

• Access of information to the public: Pursuant to the 5. AMLD the member states shall ensure that the information on the beneficial ownership is accessible in all cases to any member of the public. Accessible information shall include the name, the month and year of birth, the country of residence and the nationality of the beneficial owner as well as the nature and extent of the beneficial interest held. The BMF has translated this accordingly into its proposal for the changes of the German GwG.

  Lawmakers of course argue that only public access to the register finally makes the transparency register “transparent”. However, it has to be taken into account that shareholders may well have a legitimate interest not to disclose the shareholder structure of a particular company (this might be particularly true for family offices who do not want the public to know about their internal allocation of voting rights or financial situations). Another concern is data protection - especially in this regard the bill will have to be tested. It seems contradictory to on the one hand impose rigid GDPR obligations and on the other require shareholders to provide the public with their personal data. Good news at least is that the right of an economic beneficiary to limit the access to his information if he has a legitimate predominant interest in this regard shall remain. Yet, the question remains how the authorities handle (and will handle in the future) such requests.

• Investigation obligation for the companies: Pursuant to the BMF proposal a company (i.e. the managing directors of a company) which has not received the required information on its economic beneficiaries within a certain period has to investigate its corporate structure and request from its shareholders (as far as they are known to the company) information on the economic beneficiaries. The shareholders are obliged to provide the requested information within a reasonable time.

  This aspect of the BMF proposal has to be seen in the context of the discussions back in 2017 when the transparency register has been introduced. Then, it had been argued that the effort of implementation within the German companies would not be high because no investigation duty re the shareholder structure existed. This is about to change and will add an extra To Do (and liability potential) to the already extensive catalog of duties of German GmbH managing directors.

• Obligation to report inconsistencies: Furthermore, for certain individuals and legal entities as further specified in the GwG (including financial institutions, insurance companies, but also lawyers and notaries working on financial transactions or M&A deals), the BMF proposes to add a duty to report inconsistencies between the information available at the transparency register and the information made available to them on the economic beneficiaries of a company.

  This - at first glance harsh obligation – aims at implementing another requirement of the 5. AMLD. This duty will become a new item on the already long lists of compliance obligations, especially for financial institutions. Additionally, it remains to be seen if and how confidentiality and data protection issues arising from this obligation will be resolved.

• Fines will be triggered by simple negligence: The new proposal also tightens the liability standard. In the future, fines shall be triggered by simple negligence (einfache Fahrlässigkeit) whereas the current standard is gross negligence/recklessness (Leichtfertigkeit).

  Interestingly, this proposal of the BMF goes beyond the requirement of the 5. AMLD. Arguably the aim is to help to effectively sanction violations of the GwG. From the BMF’s point of view, the distinction between gross negligence/recklessness and simple negligence is hard to make and often does not fit into the EU sanction system.

Heading towards perceptible changes!

In sum, one may well conclude that – if implemented as proposed - the Fifth EU Anti-Money Laundering Directive will have a perceptible impact: More investigation work for managing directors (including with respect to information where he or she may face some resistance from the (ultimate) shareholder end to get access to), easier access of the public to the information (including higher hurdles to nonetheless achieve confidentiality) and a stricter liability system triggering fines also in cases of simple negligence. Finally, it remains to be seen how (legal) advisors will best comply with and address their obligation to even out inconsistent information they may come across.