The Fight Against Money Laundering: Germany Expands its Transparency Register

Axel Spies

German attorney-at-law (Rechtsanwalt)

Dr. Axel Spies is a German attorney (Rechtsanwalt) in Washington, DC, and co-publisher of the German journals Multi-Media-Recht (MMR) and Zeitschrift für Datenschutz (ZD).

In Germany and the United States, criminals often hide behind a complicated web of companies that does not reveal the individuals who control the entities. But there are also many legitimate reasons a group of companies is structured in a certain way, e.g. for tax reasons. Public transparency registers are important tools (in Europe mostly governed by EU law) to give the public more information about who controls which entities. The German register of beneficial owners of German companies and other entities has mostly been lying dormant since its creation in 2017. But this is set to change radically.

The recent reform of the German transparency register affects almost all companies in Germany and greatly expands the reporting obligations for German entities. The Transparency Register and Financial Information Act (Transparenzregister- und Finanzinformationsgesetz / TraFinG) entered into force on August 1, 2021. According to the TraFinG, German companies must report their beneficial owners (individuals) to the transparency register, which is public.

As the European transparency registers within the EU will at some point be electronically connected, the registers could become an EU wide data base for more transparency to fight serious crimes such as money laundering. It is likely that in the future the transparency registers in the EU will exchange their data on relevant companies. This online connection between the registers was already scheduled for March 2021. But due to the Corona Pandemic, it is delayed. Despite this development, it will still be difficult to compare entities because the “beneficial owners” are not defined identically everywhere. To make it work, the affected companies will have to ensure that their corporate groups submit the same information to every register.

This register is not new. Since October 2017, all German private legal entities and registered partnerships are already obliged to file information on their ultimate beneficial owners to the German transparency register. Under the existing law applicable until July 3, 2021, no filings are required if the necessary information on ultimate beneficial owners is available in certain publicly accessible electronic registers. This exemption to avoid double filings is now removed. All legal entities and registered partnerships in Germany will be obliged to file details of their ultimate beneficial owner(s), including any changes, directly with the German transparency register and keep the information current.

The general definition of ultimate beneficial owners in German legal entities remains unchanged. A beneficial owner is any natural person who ultimately owns or controls the company. In the case of legal entities, the definition of ultimate beneficial owners covers any natural person up the corporate chain who directly or indirectly:

• holds more than 25% of the share capital;
• controls more than 25% of the voting rights; or
• exercises control in a comparable manner.

The reporting obligation covers all nonpublic entities under German law (AG, GmbH, KGaA, SE, cooperatives, and foundations) and partnerships registered in the commercial register (OHG, KG; GmbH & Co. KG). There are also special rules for the real estate sector, which is considered particularly vulnerable to money laundering.

The transparency register can be inspected by anyone without any special reason. In accordance with data protection regulations, the beneficial owners can apply for a restriction of the inspection right according to the Money Laundering Act in specific cases.

The notification must be filed without delay. However, the following transitional periods apply, within which the notification of the beneficial owner must be carried out if a notification obligation did not previously exist:

• AG, SE, KGaA until March 31, 2022
• GmbH, cooperative, European cooperative, partnership until June 30, 2022
• All other cases: until December 31, 2022

As a caveat, newly established companies do not benefit from this transition period. Moreover, any change in the person of the beneficial owner must also be reported immediately to the transparency register.

The Political Implications of the New Law

The TraFinG is part of a global trend in favor of more transparency. Earlier this year, the U.S. Congress passed the Corporate Transparency Act (CTA) as part of the National Defense Authorization Act. Under the CTA, a broadly defined “reporting company” must report certain beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN) within the U.S. Treasury. As with the CTA in the United States, German federal agencies and state and local law enforcement agencies will have greater access to beneficial ownership information through the transparency register.

The new law will make it easier to trace the persons ultimately owning or controlling the relevant legal entities or registered partnerships. But it will also increase German companies’ compliance efforts. They must ask their shareholders for a lot of sensitive information, and these shareholders may need to disclose who their ultimate shareholders (natural persons) are. Even if they cooperate, many shareholders do not know the exact percentages of the ownership of natural persons and there is a reluctance to disclose that information. However, if the shareholders refuse to cooperate, they themselves may be subject to fines.

There will likely be some (continued) confusion between the German commercial register and the transparency register. The German commercial register (Handelsregister) does not require any filings regarding the disclosure of beneficial owners of German companies. It contains some basic data of German companies which need to be updated in case of changes (for instance, data on managing directors, a list of shareholders and articles of association). The German transparency register is the only register in Germany in which beneficial owners of German companies have to be disclosed.
A lack of action can put a company on the watch list. All parties with entities in Germany should expect increased checks and audits by the authorities, especially after the transitional periods have expired.