New Money Laundering Provisions in Germany

A quite popular German folk song goes as follows “Show me your feet, show me your shoes…” If the folk song has its way, washing is hard work. However, those who are not involved could take off their shoes and put their feet up to watch the others wash. This does not apply to notaries, but also to a certain circle of clients. With some effort you must rather try to prevent washing. A change in the law now provides additional work.

Of course we are talking about money laundering. Money is “laundered” because it cannot easily be used for “normal” payments if it comes from drug or arms trafficking, prostitution, illegal gambling, corruption or even robbery and extortion. Cash transactions involving large sums of money rightly make the recipient suspicious. And even when larger sums are transferred, it must be possible to provide a plausible explanation for the legal origin of the money. If it is missing, such funds are “dirty”.

They are therefore “washed clean” with high criminal energy. The methods are manifold. They range from simple constructions such as payments to dummy companies whose payouts to the perpetrator appear unsuspicious (famous example are Al Capone’s laundrettes) to complicated international transactions at the end of which the “dirty” money looks like the result of a “clean” investment. The purchase of real estate is particularly popular, among other things because it transfers very large values and the ownership structures can be complex and confusing.

The Money Laundering Act (GWG) is designed to protect against such criminal activities. Notaries play a central role in the fight against money laundering regulated by the Act.

This is nothing new: notaries already make an important contribution to the fight against money laundering and terrorist financing by reliably checking and documenting the identity of the parties involved, by keeping notarial deeds for many years and by filing tax returns to the tax authorities. The reports on the registers and land registers also ensure a high degree of transparency. The notary checks and documents the concrete money laundering risk individually for each transaction within the scope of the GWG. All those who wish to engage in money laundering are thus given a clear understanding that notarial services are not suitable as a “wash”.
Since 1.1.2020, new obligations have been introduced, particularly in the real estate sector, which are intended to ensure even greater transparency, but unfortunately also create additional work for the parties to the deed.

Accordingly, when a business relationship is newly established with a legal person under private law, a registered partnership or an administrator of a trust, the notary must determine the beneficial owner on the basis of the entries in the registers (transparency register, commercial register, register of cooperatives, association, partnership register). These checks are part of the notary’s general duty of care. Depending on the status of the entries in the register, however, it may be that the parties involved will have to provide the notary with more detailed information, which they are also legally obliged to do.

In any case, the companies involved in the deed must cooperate in acquisition transactions within the scope of application of Section 1 of the German Real Estate Transfer Tax Act (GrEStG), i.e. in particular in land purchase contracts or real estate transactions based on company law transactions. In this case, it is mandatory to submit plausible documentation of the ownership and control structure of the companies involved in the transaction in text form before the notarisation, if necessary from both the buyer and the seller side. It is therefore up to the parties to the contract to prepare and submit these documents.

Some of those involved do not have much trouble with this, because they have already answered these questions for other reasons, e.g. for entry in the transparency register or in communications with banks. If necessary, however, we also provide all those affected by the regulation who have not yet provided the information with a questionnaire with explanations and, of course, we are happy to help them fill it out correctly.

The identification of the beneficial owner is simple if only natural persons hold shares in a company and the control relationships correspond to the shareholding relationships. However, if the shareholders are in turn companies, the beneficial owners must be further identified and so on. At the first level of participation, more than 25% of the capital or voting rights, at the next level more than 50% confer economic entitlement or controlling influence (which can also be created by other means). If no natural person can be identified as the beneficial owner, the legal representative, the managing partner or the partner of the company is considered to be the beneficial owner.

The notary must be able to check the plausibility of the relevant information and documents. This documentation must be presented to the Central Office for Financial Transaction Investigations or the law enforcement authorities on request. As long as the documentation is not available to the notary, the notary must refuse the notarisation.
Such a prohibition on notarisation also exists if a foreign company wishes to purchase a property, but has not yet been entered in the transparency register.

The fact that in certain cases the notary is even forbidden to certify the deed illustrates the importance which the legislator (now) attaches to the fight against money laundering, particularly in real estate transactions. Unfortunately, these regulations sometimes entail a considerable amount of additional work for the parties involved in the notarisation process. However, we cannot simply stand by and watch when today it is criminals instead of the “washerwomen” in the nursery rhyme, who are said to “wash, they wash, they wash all day long”.