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19.03.2021 | KPMG Law Insights

Money laundering – reporting obligations in the real estate sector due to the new Money Laundering Act Reporting Ordinance-Immobilien (GwGMeldV-Immobilien)

Reporting obligations in the real estate sector due to the new Money Laundering Act Reporting Ordinance-Immobilien (GwGMeldV-Immobilien)

I. Overview

As of October 1, 2020, the Money Laundering Reporting Ordinance-Immobilien (GwGMeldV-Immobilien, hereinafter the “Ordinance”) will enter into force. This is aimed at promoting money laundering prevention in the real estate market, in particular strengthening suspicious activity reporting and seizing incriminated funds. This regulation is of great relevance to the Federal Ministry of Finance because, in the opinion of the legislator, the real estate sector poses a significant money laundering risk and a large part of incriminated funds would be recirculated through the real estate market.

The obligation to report certain professionals in real estate transactions is intended to make it possible to identify money laundering practices more quickly without restricting the duty of confidentiality of the professionals concerned. Consequently, higher reporting volumes of the legal advisory professions and a strong awareness of money laundering and terrorist financing risks are expected in the future.

 

II. Relationship to the general obligation to report under Section 43 AMLA

Legal professionals were and are generally obligated (if applicable. Privileging according to
§ 43 para. 2 GwG) to report suspicious circumstances in the real estate sector. This general duty to report suspicions pursuant to Section 43 AMLA remains unaffected by the new ordinance. Rather, the regulatory technique is to expand the reporting requirement by regulation.

The general duty to report pursuant to Section 43 AMLA determines a general duty of observation and due diligence. Obligated persons are required to report business relationships, transactions or corresponding preparatory acts that strengthen the suspicion of money laundering. Such suspicious circumstances include, but are not limited to, transactions conducted electronically or cash transactions related to terrorist financing, as well as other transfers of assets that could constitute a predicate offense to money laundering. A suspicious circumstance may already exist when a business relationship is initiated.

The regulation supplements standardized facts that occur during the commission of money laundering or where a connection to money laundering is suggested.

 

III. obligated parties according to GwGMeldV real estate

The ordinance is addressed to obligated parties pursuant to § 2 para. 1 No. 10 and 12 of the MLA, i.e. to attorneys-at-law, chamber attorneys, patent attorneys as well as notaries, insofar as they have provided certain services specified in Section 2 Para. 1 No. 10 and to auditors, certified public accountants, tax advisors, tax agents and the associations referred to in Section 4 No. 11 of the Tax Advisory Act.

 

IV. Facts subject to mandatory reporting under the AMLA Real Estate Reporting Ordinance (GwGMeldV-Immobilien)

The regulation links to various factors that, from the legislator’s point of view, constitute risk:

  • Reference to risk states or sanctions lists (§ 3)
  • conspicuousness in connection with the persons involved (§ 4)
  • Conspicuousness in the case of deputization (§ 5)
  • anomalies in the purchase price or payment terms (§ 6)

Only if there are facts which, in the case of the circumstances specified in §§ 3 to 6 of the regulations, invalidate indications of the origin of an object from a criminal act, a criminal predicate offense or a connection with terrorist financing, is there no obligation to report (§ 7). The reasons for not reporting must be documented.

 

1. reporting obligations due to a reference to risk states or sanctions lists

  • Obligation to report if a party to the acquisition transaction or a beneficial owner is a resident of the risk state or has an equally close connection or is on a sanctions list of the European Union
  • Reporting obligation if business object or bank account have a sufficiently close connection to a risk state

According to the explanatory memorandum to the Ordinance, whether a “sufficiently close connection” of a party to the acquisition transaction exists is to be assessed on the basis of an overall view of the following connecting factors:

  • Person involved has (second) citizenship of a risk state
  • Frequent stays in risk states
  • Family members or related persons are resident in a risk state
  • Direct or indirect business relations with a risk state

Risk states within the meaning of the GwGMeldV-Immobilien are the states identified by the European Commission as “high-risk third countries” and those states which are classified as “states with strategic deficiencies” in the respective current information reports of the Financial Action Task Force (FATF). As a convenience, the Financial Transaction Investigation Unit (FIU) provides on its website a list of the countries mentioned in the latest FATF information reports.

 

2. reporting obligations due to anomalies in connection with the persons involved or the beneficial owner

According to the legislator’s explanatory memorandum to the ordinance, there is a reporting obligation if there are indications that the identity of the beneficial owner is being concealed. Concealment of identity is therefore to be assumed under the Regulation in particular in the following cases:

  • Recognizably incorrect or incomplete information on beneficial owners
  • Fiduciary relationships without an obvious economic or other lawful purpose
  • Knowledge of preliminary proceedings pursuant to Section 261 of the German Criminal Code (StGB) or relevant catalog offenses against persons involved therein
  • A disparity between the income or assets of the acquisition and the purchase price.

 

3. reporting obligations due to anomalies in connection with deputization

  • Obligation to report anomalies in connection with powers of attorney, in particular
  • lack of written form,
  • Suspicion of forgery or
  • Certifications from at-risk states.

 

4. reporting obligations due to anomalies in connection with the price or a purchase or payment method

A reporting obligation exists in connection with the price or a purchase or payment method in particular if

  • Payment before the conclusion of the legal transaction (because the legal transaction could serve as a supposed legal ground for the financial transaction).
  • Purchase price payment is made by means of cash or cryptocurrency.
  • Short-term resale with significant price variance (in either direction) or resale back to the previous owner(s).
  • Payment through attorney escrow accounts without legitimate security interest.

 

V. Comments of the associations

Numerous associations have commented on the draft bill of the Federal Ministry of Finance, on which the ordinance is essentially based without any changes.

Criticism is levelled in particular at the encroachment on the relationship of trust between legal counsel and client as a result of the obligation to report, which raises constitutional concerns in view of the theory of materiality.

In addition, it is criticized that the regulation only introduces exemplary lists and indeterminate legal terms, which would result in a multitude of open, interpretable issues. In this regard, a contouring of the reportable facts is required in order to avoid a build-up of bureaucracy due to overly cautious suspicious activity reports.

The discrimination of those involved in a real estate transaction is also questionable. The regulation places persons from designated risk countries under general suspicion. Problematic here, he said, are the insufficiently legitimate references to lists of suspect states or persons that are not maintained by states or associations of states.

 

VI. Implications for practice and criticism

Regardless of the procedural concerns expressed in the initial comments, we anticipate a massive impact on real estate transaction practice.

 

1. from the perspective of the obligated professional groups

In contrast to the general provision of Section 43 AMLA, which requires facts indicating a nexus relevant to money laundering, the Ordinance reverses the duty to act for certain professionals involved in real estate transactions. If one of the anomalies regulated in the ordinance is present, then it is mandatory to submit a SAR. An exception to this (reversal) rule only exists if there are facts that invalidate the conspicuousness.

Against the background of potential personal liability and the documentation requirements in the event of non-reporting, an obligated party will think twice before investigating the transaction more closely – if necessary under time pressure – in order to find exculpatory facts or whether, for reasons of simplification, it should not withdraw from the reporting obligation stipulated by the legislator. This is particularly the case if he is only selectively involved in the transaction.

In addition, with regard to legal advisory activities and the role of in-house lawyers who handle in-house real estate transactions (of their own employer), there is considerable uncertainty as to how the reporting obligations under the Regulation will be handled.

 

2. from the point of view of the buyer / seller

From October 1, 2020, buyers and sellers of real estate will be subject to “general suspicion” in the event of the circumstances regulated by the legislator. You must expect that notaries or, if applicable, also legal advisors involved will submit corresponding suspicious activity reports.

This can affect the employee of a German corporation who is sent to China, for example, and sells his home in Germany. Or the German/Tunisian couple buying a student apartment for one of their children.

Also an investment company that buys a property through a Luxembourg structure, the headquarter is located in London and the beneficial owner is resident in Paris, will in principle face a suspicious activity report from the notary.

This can only be countered if facts can be presented to the notary in accordance with § 7 of the Ordinance which, in the view of the notary, invalidate the indications of money laundering defined by the legislator. I.e., information from the personal/internal sphere would have to be disclosed to avoid a SAR.

 

3. from the point of view of other obligated parties according to § 2 GwG

The effects at the level of the buyer or seller also have a significant impact on other obligated parties, especially real estate agents. This affects both independent brokers and “in-house” brokerage departments of real estate companies. You must be prepared for the fact that suspicious activity reports will be issued by notaries regarding some of your customers.

In addition, they may find themselves in a quandary with regard to their own suspicious activity reports:

The obligation incumbent upon you to check the submission of SARs is based on Section 43 AMLA, so that the indications of suspicion applicable in the Ordinance do not apply directly.

This means that a real estate agent must comply with increased due diligence requirements when dealing with a client from a risky state, but does not necessarily have to file a SAR. However, the notary public will file a SAR based solely on the reference to an at-risk state.

If, after a real estate transaction, it turns out that incriminated funds were used, there is a risk that the broker may have to justify to an investigating authority years later that he did not file a SAR.

Only complete documentation of the KYC process and the trade-offs against reporting suspicions will help here.

 

IV. Conclusion and recommendation for action

The regulation has set itself the goal of increasing SARs, particularly in terms of quantity, and will in all likelihood achieve this goal.

In this context, too, violations are subject to severe fines. Thus, since January 1, 2020, the administrative offense can be punished with up to 150,000 euros for a “simple” but intentional commission. In the event of serious, repeated or systematic violations, the company may even face a fine of up to one million euros or a fine of up to twice the economic benefit derived from the violation.

Against this background and the above-mentioned effects on practice, not only those obligated by the Regulation but also the other obligated parties under the AMLA should regularly review compliance with their obligations under money laundering law (especially in the area of their own suspicious activity reporting).

We will be happy to support you in analyzing and identifying possible obligations to act and in implementing them in a pragmatic and solution-oriented manner.

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