Beneficial owners –Transparency Register and new rules regarding anti-money laundering checks by notaries
On 1 January 2020, the Act implementing the Directive on the amendment of the Fourth EU Money Laundering Directive entered into force and amended the German Money Laundering Act (Geldwäschegesetz, GwG), among others. With this change in mind, we will look at the issue of "beneficial owners" and how they are to be identified and registered. We also look at how and when this issue can play a role for start-ups.
Regardless of the existing notification requirements of the beneficial owner under the Transparency Register (see under 1), the determination and notification of the beneficial owner is particularly relevant for company and real estate procedures and transactions because notaries have a broad obligation to determine the beneficial owner of any parties before them. The changes to the law (GwG) even introduce in certain constellations a prohibition against issuing notarial acts or deeds for certain procedures, if the beneficial owner cannot be determined or is not registered in the Transparency Register. In the light of this, companies can expect to be asked more frequently to provide information about their beneficial owners when corporate and real estate procedures are to be notarised (see under 2). In particular prior to financing rounds, founders will have to be prepared to name or respectively determine the beneficial owners of all persons and companies involved, i.e. all current and future shareholders.
1. NOTIFICATIONS TO THE TRANSPARENCY REGISTER
Since October 2017, legal persons under private law (i.e. the classical forms of limited liability companies (GmbH) and entrepreneurial companies with limited liability (Unternehmergesellschaft / UG (haftungsbeschränkt), see below under 1.2), and registered partnerships have been required to electronically register their beneficial owners in the Transparency Register with the body empowered to maintain the register, the Bundesanzeiger Verlag GmbH, via the website www.transparenzregister.de. Full name, date of birth, address and nationality of the beneficial owners, as well as the nature and extent of their economic interest must be provided.
Significant fines can be imposed for infringements of these and other obligations under the GwG. The German Federal Office of Administration (Bundesverwaltungsamt, BVA) is much more lenient with penalties for late notifications than it is for the failure to register – according to the BVA’s catalogue of fines, failure to notify is five times higher than the fines for late notification.
Irrespective of the significant fines, starting January 2020, final and binding fining decisions imposed for infringements of the notification requirement are to be published online in accordance with new § 57 GwG.
The obligation to register this information in the Transparency Register applies initially for domestic companies. Nevertheless, a foreign company must be registered in the German Transparency Register or in the Transparency Register of another EU Member State if it intends to acquire real estate in Germany (see under 2).
1.1 Beneficial owner
A beneficial owner must be a natural person. Determining their identity is multi-tiered and should follow the following principles:
- For limited companies or partnerships, the beneficial owners is/are the natural person(s), who directly or indirectly hold(s) 25% of the capital or voting rights or exercise control in a comparable manner.
- If, at this first level, shares are held by companies as well as natural persons, the shareholders of those companies must in turn also be considered (second shareholding tier); the 25% threshold no longer applies to this tier. Here it depends whether control can actually be exercised. This will be the case in particular when a shareholder holds more than 50% of the equity, controls more than 50% of the voting rights or can exercise a controlling influence. This analysis must be carried out for every company until the identity of the natural persons is identified in each case.
- In addition, it must be clarified whether natural persons can significantly influence or prevent decisions of the company in some other way (e.g. control agreements, special rights, blocking minorities, the addition of indirect shareholdings, vote pooling agreements, etc.). Where shares are held by a trustee, the beneficial owner is the trustor.
- If these principles don not allow for any beneficial owner to be identified (e.g. because the five shareholders of a company each hold 20% of the shares), in accordance with § 3 para. 2, fifth sentence GwG, the beneficial owner will be the legal representative, managing director or the partner of the contractual partner. Accordingly, a beneficial owner can always be determined.
These principles show that the question of the beneficial owner can be a complex one and can require closer examination, particularly in the case of multi-tier shareholding structures or deviations from the control structure of shareholding structures (e.g. trustee, voting pool, or control agreement).
1.2 Notification requirements for GmbHs and entrepreneurial companies (limited liability)
The good news is that when GmbHs and limited liability entrepreneurial companies are used for start-ups, which will often be the case, a legal fiction of the notification of the beneficial owner will apply under § 20 para. 2 GwG according to which it is possible to access the list of shareholders (or the model protocol) in the commercial register. Where this is the case, the company will be (automatically) registered in the Transparency Register. The excerpt from the Transparency Register will in any case contain the notice that no information has been provided about the beneficial owners (so-called negative test).
However, the obligation to provide information about the beneficial owners continues to apply, despite an electronically accessible list of shareholders, if the beneficial owners cannot be directly identified from the list of shareholders, e.g. because the shares are held on trust or by legal persons or partnerships, or where the beneficial owners cannot be determined from electronically accessible documents or entries (as will often be the case for companies registered in another country).
For any financing round, in which an investor has acquired more than 25% of the shares in the start-up (or has now reached this threshold as a result of the financing round), one should assess whether the notification obligation has been triggered (see under 1.4). Bear in mind that the shareholdings of a number of investors may need to be added together (e.g. due to voting pools or the fact that one party exercises control over a number of investors).
1.3 Notification requirements for limited commercial partnerships (KGs)
The legal fiction of notification under § 20 para. 2 GwG only applies in exceptional cases to so called Kommanditgesellschaften (KGs). This is because only the amount of liability of the limited partner is registered in the commercial register in accordance with § 171 German Commercial Code (Handelsgesetzbuch, HGB), but not their compulsory capital contributions (= share in the capital). The amount of liability and the share in the capital can differ significantly. In addition, without knowing the equity interest of the general partner, which is also not registered in the commercial register, it is impossible to determine the percentage of shareholding held by the general partner.
As the legal fiction of notification does not apply, there will generally be an obligation on KGs to notify their beneficial owners to the Transparency Register.
1.4 Investigation and documentation requirement
If a company has not received any information about its beneficial owners (§ 20 para. 3 GwG), it must request appropriate information on the beneficial owners from its shareholders. Pursuant to § 20 para. 3a new GwG, the company must document the request for information as well as the information it receives. Fines may be imposed for failure to comply.
2. MONEY LAUNDERING CHECKS BY NOTARIES – IN PARTICULAR THE IMPACT ON FINANCING ROUNDS
Notaries are always required to formally identify the parties appearing before them (through a valid identity card or passport).
In addition, for all notarizations in the field of corporate law (for GmbHs in particular: the establishment, amendments of articles of association, increases in capital and share sale and transfer agreements; as a result in every financing round) notaries must also identify the beneficial owners.1 Where the effect of the legal fiction of notification applies (see above 1.2 and 1.3), it will be sufficient for notarial assessment purposes that the evidence of registration in a Register is provided to the notary by the company or that the notary accesses the Register himself (in particular access of the list of shareholders of a GmbH). Additionally, the parties concerned must also confirm that the information contained in the Register provides a complete picture of the beneficial owner(s). This is because there may be arrangements, such as voting pool or trustee agreements, which have the result that the beneficial owner cannot be ascertained from the list of shareholders.
If a start-up has a number of shareholders, the determination of the relevant beneficial owners of each shareholder can be time consuming and complicated, especially where foreign shareholders are involved. This should be taken into account when preparing financing rounds because otherwise the mandatory assessment by the notary and the necessity of answering of corresponding questions for the start-up might lead to delays.
1For completeness – even if it is of little relevance for most start-ups – we note the stricter obligations of notaries with respect to real estate transactions since 1 January 2020: where companies are involved in transactions that fall within the scope of § 1 German Real Estate Transfer Tax Act (Grunderwerbsteuergesetz, GrEStG – particularly contracts for the sale and purchase of real estate and for transactions under company law involving the transfer of real estate in Germany to another legal entity), notaries must make enquiries as to the ownership and control structure of the company(ies) involved. If the parties are unable to present conclusive documentation of the ownership and control structure, a prohibition against the notarization of the contract applies. In addition, where a foreign company acquires real estate, it must be registered in the Transparency Register in Germany or another EU Member State. Evidence of this registration must be provided before the notarial certificate is issued or the notary must have viewed the entry in the Transparency Register himself. Otherwise, the notarization will be prohibited.
Dr Eva Kreibohm
Lawyer, Notary - registered office Berlin