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On 22th February 2017, the German Federal Government Cabinet approved the draft for a revised law on the combat of Money Laundering (AML) and Terrorism Financing (CTF) (“Geldwäschegesetz – GwG”). The draft seeks transposing the EU-Directive 2015/849 against Money Laundering and Terrorism Financing (4th EU AML-Directive) into German law by June 2017. The legislative process will commence with the first hearing end of March. The draft has undergone substantial changes compared to an earlier ministerial draft published in December 2016. Key elements of the cabinet draft are:

  • Extension of scope to the whole gambling sector: the cabinet draft foresees that all providers of gambling services will be in scope (so called “obliged parties”), for example providers of sports betting, instead of only Casinos and online gambling providers. Exceptions apply in low risk areas, for example for operators of gambling machines in gambling houses, restaurants, bars and pubs, horse riding bets within equestrian clubs and for lotteries having a government license provided tickets are not sold online.
  • Inclusion of all Goods Traders: Companies trading in goods will be fully in scope of the new law provided they make or receive cash payments in an amount of 10.000 Euros or more, irrespective of whether the transaction is carried out in a single operation or in several operations which appear to be linked. Exceeding the requirements of the EU-Directive, and unique among EU-countries, all other goods traders (with or without cash business) will remain in scope of the law (obliged parties) even though substantial exemptions from the catalogue of AML related duties will apply (privileges). In particular, these traders in goods will neither be under an obligation to establish AML specific policies, controls and procedures nor to extend their AML policies groupwide; further, they will not be required to conduct AML specific risk assessments, nor to name an AML officer and deputy, to have their AML policies independently reviewed or conduct AML specific customer due diligence (KYC). However, all goods traders remain obliged to report suspicious transactions and to carry out customer due diligence in such case, irrespective of the amount of a transaction.
  • EU-wide High Risk Third Country List: The fact that a country is one of the High Risk Third Countries defined by the EU-Commission according to Article 9 of the 4th EU AML- Directive, will be a risk factor that must be taken into account when analyzing a particular business relationship or transaction. Neither the 4th EU AML-Directive nor the draft foresees an equivalent concept (“list”) of low risk third countries.
  • High Risk and Low Risk Factors: in line with the 4th EU AML-Directive, the draft drastically changes the way obliged parties are expected to deal with AML and CTF risks. First, obliged parties must consider and follow the findings and recommendations of an EU-wide risk analysis the EU-Commission will conduct, and of a corresponding national risk analysis that the German government must conclude under the EU-Directive. Further, under the draft obliged parties must evidence they have assessed and given consideration to the high risk and low risk factors contained in a non-comprehensive catalogue annexed to the draft, when applying a certain risk rating to each contract partner or partner of a transaction.
  • Customer Due Diligence: in accordance with the 4th EU AML-Directive, the draft extends the definition of politically exposed persons (PEP) to include domestic PEPs i.e. those in prominent public functions in Germany, and to members of the governing bodies of political parties. Obliged entities will have to review their customer base and ascertain the need to reclassify and apply enhanced CDD to any existing customers as PEPs under the new definition, as well as applying these measures to new customers. In addition, the time during which PEP specific risks require monitoring will be extended to a period of at least 12 months after the person’s PEP status ends and will continue as long as the specific risks from the PEP status persist.
  • Group-wide Application: Under the current European legislation, banks and certain other companies in the finance sector are already obliged to establish group-wide AML systems. The draft extends this obligation to other obliged entities and their branches and subsidiaries in foreign countries; a company may ultimately need to discontinue its business operations in another country if money laundering and terrorism financing risks cannot be effectively combated in such foreign countries.
  • Document Retention: The draft includes a maximum retention period for Customer Due Diligence documentation after the business relationship has ended, set at 5 years. In exceptional cases this period can be extended by up to 10 years.
  • National Register of Beneficial Owners (Transparenzregister): the draft introduces a central electronic register of ultimate beneficial owners (UBOs). All legal persons, registered partnerships, as well as trusts and similar legal arrangements will be obliged to collect, update and report their beneficial owners to the register provided these are not visible from other, already existing registers. The competent authorities (such as the Financial Intelligent Unit -FIU- or supervisory authorities) will be granted unlimited access to all data in the register; obliged parties will obtain access for the purpose of performing AML specific customer due diligence (KYC); other persons and organizations capable of evidencing a ‘legitimate interest’, e.g., an interest relating to money laundering, may be granted access. Beneficial owners may have access to their data limited, completely or partially, while off age, legally incompetent or in case access exposes them to the risk of becoming victim of serious crimes. Earlier plans to make the register available to the general public, with no need to demonstrate a legitimate interest, have been desisted.
  • Re-Organization of the German FIU: An important organizational change is marked by the transfer of the German FIU (so far: Central Bureau for Suspicious Transaction Reports, located within the Federal Criminal Agency (BKA) at Wiesbaden and under supervision of the Ministry of Interior). The FIU will be renamed Central Bureau for Investigation of Finance Transactions, and will be relocated to the General Customs Directorate (Generalzolldirektion) in Berlin, under the supervision of the Ministry of Finance. In future, the FIU will exercise a filter function and pass on STRs to local prosecution authorities only in case an initial comparison with other relevant data requires follow up.
  • Sanctions: the draft foresees specific and far-reaching powers to supervisory authorities; it extends the number of sanctionable offenses (Ordnungswidrigkeiten) to more than 70 (!) individual situations, and raises the applicable fines for serious, repeated or systematic breaches to max 1 million Euros (so far 100.000 Euros) or twice the amount of the benefit derived from the breach where that benefit can be determined; for credit and finance institutions the max fine can be up to 5 Million Euros or 10% of the annual turnover according to the latest available accounts approved by the management body. Following the “naming and shaming” approach of the EU-Directive, the competent supervisory authorities shall publish decisions on breaches, unless overriding reasons require an anonymous publication.

Jürgen Krais is a Senior Compliance Inhouse Counsel at the Munich office of a major German DAX company and attorney at law (Rechtsanwalt) in Augsburg/ Germany. He focuses his practice on internal compliance investigations and advice on EU and German AML law as well as Compliance topics, in general. He has been lecturing on AML law, and publishes regularly in renown legal journals.