Regulation on Reporting Duties under the German Money Laundering Act - Real Estate (GwGMeldV-Immobilien)
– New Reporting Duties for Legal and Tax Advisory Professionals in Real Estate Transactions –
On 1 October 2020 the new regulation on reporting duties under the German Money Laundering Act - Real Estate (hereinafter the "Regulation") has come into force.
With the Regulation, the legislator seeks to extend the already existing duties to report suspicions of money laundering or terrorist financing in the area of real estate transactions to the Financial Intelligence Unit (FIU). The scope of application of the Regulation is the acquisition of domestic real estate effected or intended by means of an asset or share deal or other corporate transaction in which the domestic real estate is transferred to another legal entity, e.g. in the case of a merger (hereinafter "Acquisition Process").
From the legislator's point of view, the Regulation was needed because a national risk analysis conducted in 2019 identified the real estate sector as an area with increased money laundering risks.
The Regulation is directed, inter alia, at lawyers, notaries and tax advisors (hereinafter "Obliged Parties") who are subject to money laundering obligations under section 2 para. 1 no. 10 or 12 of the German Money Laundering Act(GwG) and who assist in Acquisition Processes.
Facts subject to reporting
The Regulation covers certain facts which, according to the risk analysis from the point of view of the Federal Ministry of Finance, typically occur in the course of money laundering or which give rise to such suspicion.
The facts triggering the duty to report can be roughly classified as follows:
- Reference to risk states or lists of sanctions
- Irregularities relating to the parties involved in the Acquisition Process or the beneficial owners
- Irregularities with regard to representation
- Irregularities relating to price, purchase or payment methods
Reporting duty when referring to risk states or lists of sanctions
A duty to report does exist if a participant in the Acquisition Process or a beneficial owner is resident in a risk country or has an equally close relationship with a risk country. Mere nationality or birth in a risk country will not trigger the reporting duty. A duty to report does also exist if the object of the transaction or a bank account used in the Acquisition Process has a close connection to a risk country.
Risk countries include those classified by the European Union (EU) as "third countries with a high risk of money laundering" and those classified by the Financial Action Task Force (FATF) as "countries with strategic deficiencies". To facilitate this, the FIU has made available on its website the two lists of countries classified as high-risk countries. According to the current assessment of the EU and the FATF, the countries classified as high-risk countries include, inter alia, Bahamas, Iraq, Jamaica, Yemen, Korea, Panama, Syria.
Acquisition Processes with participants or beneficial owners who are on so-called sanctions lists of the EU, among others, are also subject to reporting requirements. These sanctions lists can also be consulted on the above-mentioned FIU website.
Reporting duty with regard to irregularities relating to the parties involved in the Acquisition Process or the beneficial owners
A duty to report does also exist if the parties involved in the Acquisition Process do not comply with their obligations to provide information and evidence under the German Money Laundering Act or if they knowingly provide incorrect or incomplete information on the identity of the parties involved or beneficial owners.
Fiduciary relationships without an obvious economic or other lawful purpose shall also trigger the reporting duty. Furthermore, criminal investigations and criminal proceedings for money laundering against persons involved in the Acquisition Process or beneficial owners and their convictions are subject to the reporting duty.
A situation triggering the duty to report is also deemed to exist if the Acquisition Process is grossly disproportionate to the income and financial circumstances of the seller, purchaser or beneficial owner.
A reporting duty also exists if it is clear from the ownership/control structure that the chain leads to the beneficial owner via a company domiciled in a third country and the beneficial owner is not resident in this third country. A third country is a country that is neither a member state of the EU nor a contracting state to the Agreement on the European Economic Area. A third country is in particular also Switzerland. Exceptionally, the duty to report shall not apply if the intermediary of this company has an obvious economic or lawful purpose.
Cross-border tax arrangements are also subject to the reporting duty if the Obliged Party participates in such arrangements as an intermediary in accordance with section 138d para. 1 German Fiscal Code (AO). This reporting duty exists in addition to the obligation to notify the Federal Central Tax Office of the tax planning.
Irregularities with regard to representation
A duty to report does also exist in the event of irregularities with regard to a representation. Such irregularities are to be assumed if
- a written power of attorney is not subsequently submitted within two months, or
- a false or falsified power of attorney is presented, or
- the basic relationship of the power of attorney is not identifiable or
- the power of attorney has been authenticated by employees of the consular post of the Federal Republic of Germany in a third country.
Irregularities relating to price, purchase or payment methods
A duty to report does also exist if the purchase price is to be paid in full or in part with cash in excess of EUR 10,000 or with cryptographic values. A bank account in a third country shall also constitute an irregularity requiring notification unless the registered office, domicile or habitual residence of the contracting party using the bank account is located in this third country.
There is also a reporting duty if the purchase price differs significantly from the actual market value. In particular, a significant deviation shall be deemed to exist if the purchase price is at least 25% above the market value. However, there is no obligation to determine the market value so that the duty to notify only applies if the significant deviation is obvious.
Furthermore there are reporting duties for
- full or partial payment prior to the conclusion of the legal transaction, provided that the payment amount is more than EUR 10,000 and the selling person is not a legal entity under public law
- Payments from or to a third party not involved in the Acquisition Process (exceptions include parties by virtue of office, former or current spouses or life partners, first and second degree relatives and their spouses or life partners, affiliated companies, creditors entered in the land register, legal entities under public law, domestic banks providing financing (foreign banks, provided that banking supervision comparable to that in Germany exists).
- Resale within three years with a significant price deviation (at least 25%) without a comprehensible reason.
- Selling back within three years to previous owner without a comprehensible reason.
- Use of a discretionary account (not a notary trust account) without comprehensible reason.
As soon as an Obliged Party is or becomes aware of one or more of the above-mentioned risk-generating circumstances, it is as a matter of principle obliged to report. However, the Obliged Party has no obligation to investigate the circumstances giving rise to the risk.
Exemptions from the reporting duty
The Regulation provides that the reporting duty should exceptionally not apply if there are special circumstances/reasons in individual cases which rule out the suspicion of money laundering or terrorist financing. Such a comprehensible reason should, for instance, be assumed in the case of a resale within three years to the previous owner when exercising a right of pre-emption or a statutory provision (e.g. contestation, withdrawal).
The facts which may clear the suspicion of money laundering must be documented by the Obliged Parties in accordance with the recording and retention obligations under money laundering law.
Notifications of suspicion and their consequences
If there are no facts to dispel the identified typified suspicion of money laundering or if doubts remain, the Obliged Party must immediately submit a so-called Suspicious Activity Report (SAR). The report must be made in electronic form to the FIU, a central office for financial transaction investigations set up within the Customs Criminal Investigation Office in Cologne.
As a consequence of the reporting duty, the Obliged Party (with the exception of transactions which cannot be delayed) is obliged to carry out the transaction at the earliest when it has received the approval of the FIU or the public prosecutor's office, or when the third working day after the report was made has passed without the FIU or the public prosecutor's office having prohibited the execution of the transaction (so-called "duty to stop").
Furthermore, the Obliged Party is prohibited from passing on information on reports to the parties involved in the Acquisition Process.
Relevance in practice
Uo to now, due to the general duty to report under 43 para. 1 GWG, only few suspicious transaction reports have been made by the Obliged Parties. This is due to the professional confidentiality obligations of the Obliged Parties in the client relationship, on the basis of which the Obliged Parties are not entitled to make a report.
The Regulation now sets out more far-reaching substantive legal elements. If these are given, the Obliged Parties must now report any suspicions they may have, contrary to their obligation of confidentiality.
In the event of a breach of this reporting duty, the Obliged Parties will be subject to a substantial fine of up to EUR 150,000 for simple breaches and up to EUR 1 million for serious or repeated breaches, or up to twice the economic benefit derived from the breach.
With this in mind, a much higher number of reports is to be expected in the future, especially in the real estate sector.
As of 27 October 2020