Hot Issue (#01-02 January-February 2020)

The Implementation of the Fifth Anti-Money Laundering Directive in German Law Tightening of the Screw?

Dr. Timo Holzborn, Olexiy Oleshchuk

In the course of the Panama Paper scandal, EU Directive 2015/849 on prevention of the use of the financial system for the purposes of money laundering or terrorist financing known as 4. Anti-Money Laundering Directive (4. AMLD) was amended by EU Directive 2018/843, which is known as the Fifth Anti-Money Laundering Directive (5. AMLD), despite being only an amendment to 4. AMLD. 5. AMLD came into force in mid-2018. Each EU member state must transpose 5. AMLD into national legislation by 10 January 2020.

In general, the 5. AMLD implements the following changes:

Virtual currency platforms and wallet providers, tax-related services and art traders shall come into the scope of anti-money laundering (AML) provisions; the General public shall receive access to beneficial ownership information regarding EU-based companies;

An obligation to consult the beneficial ownership register when performing AML due diligence (AML-DD);

Member states must create a list of national public offices and functions that qualify as politically exposed persons (PEP1); Strict enhanced AML-DD measures for financial flows from high-risk (third) countries;

Information on real estate holders shall be centrally available to the authorities;

Lower thresholds for identifying purchasers of prepaid cards and for the users of e-money; and

Further enhances of the powers of the Financial Intelligent Units and further facilitation of cooperation and information exchange between authorities.

It was on the basis of this that the German Finance Ministry presented a draft law of the implementation provisions in May 2019. With the respective legislation procedure out of the way, the law was recently published on 19December2019 and the most relevant provisions entered into force on 1 January 2020.

The adopted law implements the rules required under the 5. AMLD, however, also gold plates some of the provisions, especially by introducing new regulatory rules for crypto currency related businesses as well as making certain service providers, including limited financial brokers and M&A advisors, to be obliged persons), who now have to fully comply with the AML regulation. The opportunity is also used to clarify and amend some provisions which were not perfectly transferred into national law within the implementation of the 4. AMLD.

Implementation of AML Rules for M&A advisors and further providers engaged in financial industry

Pursuant to the new law inter alia the following service providers will be obliged persons under German AML rules:

M&A advisors, i.e. entities mainly providing advice regarding capital structure, industrial strategy or questions connected to the above as well as providing M&A services and advice to businesses;

Brokers of non-securities and fund unit financial instruments will, pursuant to the German Trade Code, also be subject to regulatory supervision from 2021;

Buyers of claims for financing purposes (single factoring certain FinTechs may be encompassed by this provision);

Enterprises, whose main activity is to acquire, hold and sell other undertakings. However, to this extent legislators also introduced an exemption for (industrial) holding companies, which hold interests of undertakings outside the banking and insurance sector (i.e. below 5 %) without active ownership;

Own account financial instruments traders;

Non-German EU member state E-Money or Payment Service providers using agents in Germany; and

Art traders and art brokers.

To cover further angles of M&A related services, legislators are also introducing the additional services of lawyers resulting in mandatory performance of AML obligations. These include:

Advice to clients on capital structure, their industrial strategy or questions connected to the above;

Advice or services in connection with M&A; and

Tax advice, on a commercial basis.

Based on this, certain players on the market would need to be fully AML compliant. In particular, the implementation of organizational structures (e.g. implementing AML policies and strategy, appointing an AML officer, etc.) and the performance of AML-DD, in particular identification, (e.g. obtaining documents regarding the contractual partner and its ultimate beneficial owner; for the above purposes review of the transparency register), before concluding a contractual relationship, will be mandatory.

Implementation of a new regulatory regime for brokerage/custody of crypto (currency) assets

Though not required by 5. AMLD, German legislators take the opportunity and the requirements of 5. AMLD to introduce AML procedures for brokers/traders/market places of crypto assets and to implement a new regulatory basis for crypto assets. Instead of just amending the provisions of German AML, legislators decided to designate the brokering or holding in custody of crypto assets for third parties as a financial service requiring a license under the German Banking Act (KWG). Since financial services providers pursuant to KWG are obliged persons ipso jure, such service providers will also be required to comply with German AML rules.

In this context legislators also explicitly introduced crypto assets as a new financial instrument in KWG (even through the German regulator is of the opinion that crypto assets were already covered by KWG as financial instruments), thereby clarifying all doubts with regard to this question and resulting in the necessity of a MiFID II2 similar license without respective brokering obligations. The governments proposal that if crypto assets related financial services are performed, no other financial or banking services can be performed at the same time by the same entity, has not been implemented in the adopted version of the law.

Providers of captured crypto asset services will have the advantage of a transition period and will not be required to have a license until 30November 2020. However, to benefit from this they must inform the regulator about the performed regulated activity by 31March 2020.

Further increase regarding AML-DD, especially for high risk countries and PEPs

In line with 5. AMLD requirements, German legislators implemented:

The strict obligation to review the transparency register for AML-DD purposes. Furthermore, if inconsistencies of the transparency register are determined, such must be submitted to the competent authorities;

Stricter AML-DD with regard to high risk countries and PEPs. That is, if the transaction is related to such countries/PEPs. In this regard, member states will implement the respective PEP lists;

A new catalogue of mandatory measures in the event of increased AML-DD obligations;

A new requirement for persons resident in Germany, which are subject to AML-DD need to be identified under German interpretation and rules of the 5. AMLD;

Mandatory appointment of an AML officer and its deputy for businesses in the financial industry;

Special AML-DD obligations of involved parties (i.e. brokers, notaries) related to real estate transactions and the obligation of foreign entities to provide data to the transparency register if they own real estate in Germany;

It is clarified that if there is no beneficial owner, a fictitious quasi beneficial owner, being the management of the identified entity, needs to be determined; and

Group-wide compliance with AML rules.

Additional rules for reliance on compliance of third parties

Last but not least, if an obliged person would like to rely on other obliged persons in the future for AML-DD, stricter requirements for reliance will apply. Such reliance with regard to persons resident in Germany will be only possible if the obliged third party on which the reliance is based performed the AML-DD in compliance with German AML rules. This may force foreign (financial) institutions providing AML onboarding services dealing in Germany to amend their processes to be compliant with the new rules.

Why are the new rules of relevance for Ukraine?

By increasing the standards for an AML-DD, investments of Ukrainian money in the EU generally and in Germany in particular, may become more difficult in the future. Not only for the opening of an account at the bank (which is already covered by the applicable AML rules), but even for M&A advisors, lawyers or real estate brokers services which are to be provided to a Ukrainian client, the performance of respective AML-DD will be required. Furthermore, if a PEP is involved somehow what is not a rarity in the event of Ukrainian related investments very high standards with regard to the AML-DD will need to be complied with, additionally. In this event the following measures need to be conducted by the relavant obliged person responsible for the AML-DD:

senior management of the needs to approve the business relationship;

adequate measures must be taken to establish the source of wealth and the past of the funds that are affected in the business relationship or the transaction with the PEP; and

enhanced ongoing monitoring will be necessary.

For example Ukrainians which are UBOs of entities which are holding real estate in Germany need to comply with new disclosure rules with regard to the data to be provided to the transparency register. Omissions to this extent may lead to potential significant administrative liability in Germany (and in consequence for example to revocation of visas in the worst case).

To mitigate respective risks, accelerate respective know your customer (KYC) process and avoid that the entrance of respective relationships is declined by the counterparty due to compliance/AML issues, it is key (at least in potential difficult situations) involving experts who are able to address respective risks with compliance/AML officers of the obliged party and also to assist with the preparation of respective and proper documentation. For example, lawyers, who are the first point of contact if an investment shall be performed normally, as obliged persons and reliable third parties may issue special opinion letters to other obliged persons (e.g. banks) confirming the due AML indemnification and compliance. This may result in limited paper work, quicker KYC processes and also enhanced reliance of the respective third party due to the fact that by requesting a respective opinion letter from a lawyer, it is shown that the potential contractual party is taking AML compliance seriously.

Dr. Timo Holzborn is a partner at Orrick, Herrington & Sutcliffe LLP

Olexiy Oleshchuk is a senior associate at Orrick, Herrington & Sutcliffe LLP

1 PEP is defined as an individual who is or has been entrusted with prominent public functions, such as heads of state, ministers and members of parliament, as well as certain relatives of such individuals.

2 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU.

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