On June 26, 2017 the Act for the Implementation of the Fourth EU Anti-Money Laundering Directive, for the execution of the EU Funds Transfer Regulation and for the reorganization of the central department for financial investigations became effective.
This Act reforms and completely restates the former version of the German Anti-Money Laundering Act (GwG). This client information presents important new features which are relevant for private equity funds and investors.
1. New Features Regarding Risk Management
The new Anti-Money Laundering Act leads to a further reinforcement of the risk-based approach. On one hand, the obliged entities gain additional freedom when selecting the measures to be taken. On the other hand, there are on many occasions no concrete legal provisions for the obliged entities providing reassurance that they are acting according to the law.
Anti-Money Laundering Officer
An important amendment for managers of private equity funds is that from now on also merely registered capital management companies (AIFMs) have to appoint an anti-money laundering officer (§ 7 GwG). Such appointment has to be announced to the regulatory authority in advance. The anti-money laundering officer has to be a person at management level. Furthermore, it is now a requirement that a person at management level is appointed to be responsible for risk management and compliance with the legal provisions regarding money laundering (§ 4 (1) GwG).
Another new feature of the amended Anti-Money Laundering Act is that an opportunity has to be created in order for employees to be able to confidentially report violations of the anti-money laundering guidelines internally. This provision complements the office for whistleblowers which has to be established according to § 53 GwG. It remains within the authority of the obliged entities to decide which internal office is responsible to receive the respective reports and also how the confidentiality of the affected employee's identity will be ensured.
2. Definition of Beneficial Ownership
The definition of beneficial ownership is to a large extent similar to the definition that was used so far.
However, the amended GwG adds a provision to the definition for the case that it is not possible to determine a natural person as the beneficial owner or that doubts remain. In this case, the legal representative, the managing partner or the partner of the contractual partner is considered as the beneficial owner.
Furthermore the Act extends the circle of beneficial owners in the case of incorporated foundations and fiduciary entities. From now on, inter alia, members of the board of directors as well as any beneficiary is encompassed, without reliance on the former shareholding threshold of 25%.
3. Identification and Identity Verification
Extent of Identification
The provisions regarding the extent of the process of gathering information from a person that needs to be identified are equivalent to the former provisions. As before, the contractual partner and if necessary the person acting on behalf of him as well as the beneficial owner have to be identified.
With regard to the verification of the identity of legal entities the former provisions continue to be valid. The fact that partnerships are not mentioned in § 12 (2) GwG is likely to be a mere editorial error, since the grounds of the law also refer to the former provision of § 4 (4) GwG (old).
The verification process for the identity of natural persons was substantially amended: The standard case as of the law is still the verification of the document which is presented on-site. Besides that, the Act now allows for a number of other verification processes (e.g. qualified electronic signature or the video identification process).
It is not clear yet, whether the current manner of identifying absent investors by transmitting certified identity documents is still a valid verification process. In our opinion, this verification process should at least still be sufficient in cases in which only a low risk of money laundering or terrorist financing exists.
The new Act only provides few provisions regarding the way that collectable proof is identified and reviewed if it is not possible to present originals. It is to be hoped that the practice carried out in other jurisdictions, which render confirmed copies by especially qualified people sufficient, even according to the new GwG and particularly in cases of simplified due diligence measures (§ 14 (2) no. 2 GwG), is not queried. Considering the increased burden of proof and documentation obligations, particularly for contractual partners oversees, it will be difficult to communicate this if from a German point of view only notarized copies satisfy the requirements of GwG.
4. Verification of the Authorization of the Acting Person
The Act introduced a duty to also verify the authorization of the person acting on behalf of the contractual partner (§ 10 (1) no. 1 GwG. So far, they merely needed to be identified. From now on, it also needs to be verified whether the person is authorized to act on behalf of the contractual partner (e.g. by presenting the letter of authorization or a list of the persons authorized to sign documents or verify the general commercial power of representation with the commercial register)
5. No New Identification of Existing Investors
In our opinion, it is not necessary to identify investors that have been acquired before June 26, 2017. This is made clear in the grounds of the law regarding the general due diligence measures (§ 10 GwG).
6. Transparency Register
Duty to Report to the Register
The Act establishes a transparency register at federal level for all beneficial owners of legal entities and registered partnerships.
Therefore, the duty to report to the transparency register exists especially for funds that are structured as a GmbH & Co. KG.
The report includes information regarding the beneficial owner, namely the given and family name, date of birth, place of residence as well as nature and extent of its economic interest.
In our opinion, there is no duty to gather new information about past circumstances. Rather, only those pieces of information have to be reported that are already known.
The initial reports to the register have to be conducted by October 1, 2017. The reports can be filed online via www.transparenzregister.de. The duty is considered to be fulfilled if the required information is already contained in a public register (e.g. commercial register, register of associations).
For investors who are invested in German funds it is important that they have to submit the required information to the fund manager as far as the investors are beneficial owners or are controlled by beneficial owners. This can be relevant especially for family office vehicles.
If the reporting duties are violated, a fine can be imposed.
Access to the Register
After prior online registration anyone who has a legitimate interest can generally examine the transparency register.
If the beneficial owner wishes to limit the access to his information in the register, he needs to file a request. In this request, the beneficial owner has to show that his interests worthy of protection prevail over the interest of access to the register. A fund manager should therefore inform his investors about the intended reports to the transparency register in a timely manner.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.