Compliance Guidelines:

Regulatory Bodies in Germany

BaFin (Federal Financial Supervisory Authority or Bundesanstalt für Finanzdienstleistungsaufsicht)

BaFin is the main regulatory body overseeing financial institutions and ensuring compliance with Germany’s AML laws. BaFin issues licenses, conducts inspections, and takes enforcement actions against non-compliant entities.

FIU (Financial Intelligence Unit)

Situated within the General Customs Directorate (Zollkriminalamt – ZKA), the German FIU is responsible for collecting and analyzing suspicious transaction reports related to money laundering and terrorist financing. The FIU then disseminates relevant intelligence to law enforcement agencies.

The Anti-Money Laundering Act in Germany (Geldwäschegesetz—GwG)

The Money Laundering Act, known as “Geldwäschegesetz” (GwG) in Germany, is a set of laws and regulations designed to combat money laundering and terrorist financing. These regulations are in line with international standards and are intended to prevent illicit funds from entering the financial system.

Section 3(1): General Due Diligence Requirements

Institutions and persons, as detailed in section 2 (1), are required to:

• Identification: Identify the contracting party as described in section 4 (3) and (4).
• Purpose of Business: Obtain information about the purpose and intended nature of the business relationship.
• Beneficial Ownership: Determine if the contracting party represents a beneficial owner. If the contracting party isn’t a natural person, understand its ownership and control structures.
• Continuous Monitoring: Continually observe the business relationship and ensure all transactions are in line with the institution’s knowledge of the contracting party, beneficial owner, and their business profile. Update relevant information at appropriate intervals.

Section 3(2)

Due diligence must be exercised:

• Establishing a Business Relationship: Anytime a new business relationship is formed.
• Transactions Beyond Set Threshold: For transactions exceeding EUR 15,000, or cumulative transactions suspected to be linked reaching this amount. This also applies to transfers outside of an existing business relationship exceeding EUR 1,000, referencing Regulation (EC) No 1781/2006.
• Suspected Illegal Assets: If there are signs that assets are a result of a crime per section 261 of the Criminal Code or related to terrorist financing.
• Doubts about Information: If there’s uncertainty about the collected data regarding the identity of the contracting party or the beneficial owner. Certain thresholds and conditions apply.

Initial Identification

• Requirement to Identify: Institutions and persons covered by the Act are mandated to identify contracting parties and, where applicable, beneficial owners before entering into a business relationship or executing a transaction.
• Conditions for Identification during Business Establishment: The identification process can be done while the business relationship is being formed if:
  • It is necessary to prevent disruption of regular business proceedings.
  • The risk of money laundering or terrorist financing is minimal.

Subsequent Identification

Waiver of Repeated Identification: Identification isn’t needed again if:

• The contracting parties and beneficial owners have already been identified previously.
• The previously obtained information has been documented.
• There are no external factors causing doubt about the previous identification’s accuracy.

Verification of Identity

Verifying Natural Persons: Institutions must verify the accuracy of the collected information using:

• An official identification card meeting German identification standards.
• German passports or equivalent.
• Personal identification cards or recognized/accepted substitutes under foreign law.

Verifying Legal Entities or Partnerships:

Verification can be done using:

• Extracts from the commercial register or similar official registers.
• Incorporation documents or documents with equivalent evidential value.

Additional Verification Tools

The Federal Ministry of the Interior, in conjunction with the Federal Ministry of Finance, can designate more documents suitable for identity verification through a Regulation, which doesn’t need the Bundesrat’s consent.

Beneficial Owner Identification

Requirement for Beneficial Owner Identification: Institutions must establish the identity of beneficial owners by:

• Recording their names.
• Gathering more identifying details if there’s a risk of money laundering or terrorist financing.

Section 5 (1) of the Act

• Simplified due diligence can be adopted unless the criteria of section 6 are met.
• Institutions and persons under the Act may use simplified measures after conducting a risk assessment based on specific circumstances.
• These simplified measures include identification (as per section 3 (1) no. 1) and, for business relationships, continuous monitoring (as per section 3 (1) no. 4).
• The scope to verify identity (section 4 (4)) and to monitor can be appropriately reduced.
• Section 3 (4) sentence 2 is applied analogously.

Low-Risk Situations for Simplified Due Diligence
Section 25d of the Banking Act; Section 6 (5) of the Investment Act; Section 80e of the Insurance Supervisory Act (Versicherungsaufsichtsgesetz – VAG); Directive 2005/60/EC; Section 2 (5) of the Securities Trading Act; Section 1 (4) of the Administrative Procedure Act (Verwaltungsverfahrensgesetz – VwVfG))

Section 5 (3) of the Act

• Simplified due diligence measures are not applicable if there’s information suggesting that a specific transaction or business relationship isn’t low-risk in terms of money laundering or terrorist financing.

Directive 2005/60/EC

The Federal Ministry of Finance can, with agreement from various other Federal Ministries:

• Set further criteria to determine low-risk situations in alignment with the European Commission’s measures.
• Implement decisions by the European Commission concerning cases described in Article 12 of Directive 2005/60/EC.

Section 6: Enhanced Due Diligence

In scenarios where there’s a potential for higher risk of money laundering or terrorist financing, institutions and individuals governed by this Act must implement additional risk-appropriate enhanced due diligence measures. This is in alignment with Section 3 (4) sentence 2 and (6).

Politically Exposed Persons (PEPs) : Article 2 of Commission Directive 2006/70/EC

• Institutions and individuals must adopt appropriate risk-based procedures to determine if the contracting party or beneficial owner is a PEP, an immediate family member, or close associate of such a person.
• Public offices below the national level typically aren’t seen as having prominent public functions unless they hold political significance comparable to national level roles.
• Due diligence in this context encompasses: a) Business relationships established by someone representing institutions/individuals under the Act require superior approval. b) Measures to identify the origin of assets or property involved. c) Continuous enhanced monitoring of the business relationship.
• If the PEP status of a party is only known after the establishment of the business relationship, superior approval is needed for its continuation.
• Contracting parties need to provide necessary clarification and updates on any changes during the relationship.

Enhanced Monitoring Based on External Ratings and Facts

• If there’s a potential higher risk identified by national or international agencies tackling money laundering and terrorist financing, especially concerning due diligence in certain countries, the relevant authority (specified in section 16 (2) no. 2h to no. 9) may demand increased monitoring.
• This includes paying attention to the origin of assets, transactions, and adherence to due diligence and organizational mandates.
• Certain professional bodies like the Federal Chamber of Lawyers and Federal Chamber of Tax Advisors can also issue such orders for their members.

Legal Profession Act (Bundesrechtsanwaltsordnung – BRAO)

The primary purpose of BRAO is to regulate the practice of law, it also has implications for anti-money laundering (AML) compliance, as lawyers can play a critical role in AML efforts due to their involvement in various financial transactions and legal matters.

Client Identification and Verification (§ 3 BRAO)

• BRAO establishes requirements for lawyers to identify and verify the identity of their clients.
• This is in line with AML regulations, which mandate customer due diligence (CDD) processes to prevent money laundering and terrorist financing.

Enhanced Due Diligence (§ 3a BRAO)

• Section 3a of BRAO allows lawyers to conduct enhanced due diligence measures when dealing with clients or transactions that present a higher risk of money laundering or terrorist financing.

Anti-Money Laundering Directive (EU) 2015/849 (AMLD IV)

While not a German-specific act, the EU’s AMLD IV has been implemented in Germany and sets out the requirements for AML compliance in line with EU directives. It addresses issues such as beneficial ownership, politically exposed persons (PEPs), and risk assessment. AMLD IV was adopted on May 20, 2015, and EU member states were required to transpose it into their national laws by June 26, 2017.

Risk Assessment (Articles 6-8)

• Article 6: Obligates the European Commission to identify high-risk third countries with strategic deficiencies in their AML/CFT regimes.
• Article 7: Sets out the enhanced due diligence measures that obliged entities must apply to business relationships and transactions with natural or legal persons from high-risk third countries.
• Article 8: Describes the criteria the Commission should take into account when identifying high-risk third countries.

Customer Due Diligence (Articles 13-24)

• Article 13: Outlines the customer due diligence (CDD) measures that must be applied by obliged entities. This includes identifying and verifying customers and beneficial owners.
• Article 14: Details situations in which obliged entities may apply simplified due diligence, depending on a lower risk assessment.
• Article 15: Enumerates cases where obliged entities must apply enhanced due diligence measures due to higher risks.
• Articles 16-24: Cover various scenarios and specifics of CDD, including dealing with third-party equivalence, relying on third parties to conduct CDD, timing of verification, and more.

Beneficial Ownership Information (Articles 30-31)

• Article 30: Obliges companies and other legal entities to obtain and hold accurate information on their beneficial ownership. Member States must ensure that this information is stored in a central register, which is accessible to competent authorities and obliged entities.
• Article 31: Applies similar obligations to trusts and similar legal arrangements.

Data Protection and Other Provisions (Articles 40-67)

• Article 40: Directs Member States to ensure that the processing of personal data carried out under AMLD IV is compliant with Directive 95/46/EC.
• Article 41: Discusses the sanctions regimes that Member States must implement for breaches of national provisions transposing AMLD IV.
• Articles 42-67: Cover various other topics, including the power to adopt delegated acts by the Commission, the establishment of the list of high-risk third countries, and transitional provisions.

Securities Trading Act (Wertpapierhandelsgesetz – WpHG)

• While the WpHG is primarily a securities law, it also has provisions related to anti-money laundering (AML) and customer due diligence (CDD) requirements.

Due Diligence Obligations (§ 63)

• Sets out the duties of enterprises concerning the interests of their clients.

Recording and Retention of Data (§ 83)

• Outlines the requirements for recording, retaining, and reporting transactional data.

Transparency of Ownership in Listed Companies (§ 33 and § 34)

• Details the responsibilities of voting rights holders, issuers, and holders of financial instruments to notify BaFin and the issuer about the changes in major shareholdings.

Reference

1. BaFin
2. Money Laundering Act (Geldwäschegesetz – GwG)
3. GwG – Money Laundering Act (in German)
4. Commission Directive 2006/70/Ec
5. BRAO – Federal Lawyers Act
6. Directive (Eu) 2015/849 Of The European Parliament And Of The Council