I. The Transparency Register – A Recap
The 4th EU-Money-Laundering Directive (2015/849), which entered into force in mid-2015, required national legislators of EU Member States to establish, in each jurisdiction, a register for information on the beneficial owners of companies and other undertakings located in such jurisdictions (“Transparency Register”). Echoing Justice Louis D. Brandeis’ famous metaphor of publicity as a remedy for social and industrial diseases, the Directive states that information on the beneficial ownership of companies is a key factor for tracing criminals who might otherwise hide their identity behind corporate structures.
In Germany, as reported in one of our previous blog posts, the Transparency Register has been established in late 2017. Since October 1, 2017, all legal entities and certain other types of associations having their statutory seat in Germany have to provide information (to the extent available to them) on their beneficial owner(s), i.e. individuals holding 25% or more of capital or voting rights or able to exercise control in a comparable way, to the Transparency Register. The information to be provided comprises the name of the beneficial owner, the date of birth, the place of residency and information regarding the economic interest (e.g. the percentage of capital interest or voting rights). As of today, only certain public authorities have immediate access to the Transparency Register, and other persons or entities may only be granted access, if they can demonstrate a legitimate interest within the context of the prevention of money laundering.
Since its launch, the concept of the Transparency Register has been subject to criticism and its practical relevance for law enforcement has been limited.
- Some have argued that the transparency achieved by the current rules goes beyond what the government should reasonably request to be disclosed by private individuals. Indeed, while targeted at criminals hiding behind corporate structures, the obligation for beneficial ownership interests in German companies to be disclosed in the Transparency Register also captures investors who legitimately seek confidentiality of their investments such as private investors or family offices.
- Others have argued that the achieved level of transparency is not yet sufficient. They point to the fact that, under the current rules, not all major participations in German companies are recorded in the Transparency Register and there is room for circumvention.
Indeed, under the current rules, certain holding structures may not be captured by the disclosure obligations. E.g. in cases in which an individual indirectly holds a participation (> 25% of capital or voting rights) in a German company through another corporate vehicle which is not controlled, i.e. in which the indirect investor holds 50% or less of the capital or voting rights, such individual does not qualify as beneficial owner of the German company. In such a case, as a replacement, the managing director of the German company will be recorded in the Transparency Register as a (fictitious) beneficial owner.
II. New Rules in the Making
In mid-2018, an amendment of the 4th EU-Money-Laundering Directive (2015/849), also known as 5th EU-Money-Laundering Directive (2018/843), has been adopted at the EU level, requiring national legislators of EU Member States to make certain adjustments to the rules on the Transparency Register by January 2020. With a view thereto, the German government has published a draft bill (Referentenentwurf) of an implementing act on May 20, 2019 (“Draft Bill”). In short, both the 5th EU-Money-Laundering Directive and the Draft Bill seem to echo those critics who consider the current level of transparency not yet sufficient (although the most stringent proposals made by some of those critics have not been implemented).
The following are the key changes that will be introduced should the Draft Bill be enacted as proposed:
- General access: Any member of the general public will be allowed, without having to demonstrate a legitimate interest, to access the Transparency Register and obtain information on beneficial owners.
- Mandatory use: Persons who are subject to the obligations under the German Anti-Money Laundering Act (Geldwäschegesetz), such as banks, lawyers, notaries or tax advisors, will be required to obtain an excerpt from the Transparency Register, or other evidence of registration, before entering into a commercial relationship with a German company. Also, the Draft Bill will categorize the deposit, administration and custody of crypto assets as a financial service within the meaning of the German Banking Act (Kreditwesengesetz); as a result, persons engaging in these activities will qualify as financial services provider and, in addition to becoming subject to a license requirement under the German Banking Act, become subject to the obligations under the German Anti-Money Laundering Act. In addition, brokers engaged in the brokering of real estate for lease (lease brokers) and certain persons active in the art sector (including art dealers, gallerists, auction houses) will be made subject to the obligations under the German Anti-Money Laundering Act and, as a consequence, have to consult the Transparency Register before entering into a commercial relationship with a German company.
- Accuracy: Persons who are subject to the obligations under the German Anti-Money Laundering Act will be required to inform the administrator of the Transparency Register of any information contained in the Transparency Register which, based on the information available to them, appear to be inconsistent or inaccurate. The administrator will then initiate administrative procedures aimed at verifying and, if necessary, correcting the relevant information in the Transparency Register.
- Network: The Transparency Registers of the individual EU Member States will be connected with each other through a European Platform.
III. A Hint of Brandeis
If enacted as proposed, the Draft Bill will leave the key concepts of the legal regime on the Transparency Register such as beneficial ownership and control as well as the ownership thresholds triggering the qualification as beneficial owner unchanged – the latter despite efforts aimed at lowering the relevant threshold to as low as 10% of capital or voting rights (as is the case for purposes of foreign investment control with regard to critical infrastructures). The general trend transpiring from the proposed amendments, though, seems clear: General access; extended pool of persons subject to the obligations under the German Anti-Money Laundering Act and mandatory use by such persons of the Transparency Register; quest for accuracy. The generalized access, in particular, marks a paradigm shift: Pursuant to the 5th EU-Money-Laundering Directive, the opening of the Transparency Register to the general public is aimed at allowing greater scrutiny by civil society, including by the press, and contributing to the preservation of trust in the integrity of business transactions and of the financial system.
It remains to be seen whether, once in effect, the new rules bring about the desired effects and, as Justice Brandeis might have said, shed sunlight or electric light on German corporate structures. Meanwhile, it is not hard to predict what might be next: Expansion of the pool of companies or undertakings subject to the registration requirements under the German Anti-Money Laundering Act and lowering of the relevant ownership thresholds.
Any investor legitimately seeking confidentiality of his or her investment holdings, such as private investors or family offices, should therefore be aware of the proposed amendments contained in the Draft Bill and any further amendments that may possibly be introduced during the legislative process or at a later stage.