On August 1st, 2021, the new Transparency Register and Financial Information Act ("TraFinG") entered into force. The Act serves to implement Directive 2019/1153 of the European Parliament and of the Council of June 20th, 2019 on the use of financial information for the purpose of combating money laundering, terrorist financing and other criminal offences. This law significantly reforms the Money Laundering Act (GWG). One of the biggest innovations is the transformation of the transparency register from an "interception register" to a "full register". As a result, the companies concerned are now obliged to report their beneficial owners to the transparency register. Furthermore, the new regulation provides for the deletion without replacement of the notification fiction of sec. 20 para. 2 GWG (old version), so that in the future also listed companies and their subsidiaries will actually have to comply with their notification obligation.

Transparency register in the form of a full register

Section 4 of the TraFinG contains regulations on the reorganization of the German transparency register. The general objective of the transparency register is to identify the natural persons behind the legal entities who hold more than 25 % of the capital shares or voting rights or exercise control over the company in a comparable manner (beneficial owners within the meaning of sec. 3 para. 1 and 2 GWG). Previously, this register was designed as an interception register, so that a report of the beneficial owners to the transparency register pursuant to sec. 20 para. 2 sentence 1 GWG (old version) was unnecessary, insofar as all required information on the beneficial owner was already available from certain publicly accessible registers - such as the commercial, partnership, cooperative, association or company register. This is because the required data was made accessible via the website of the transparency register by the respective register (so-called notification fiction). With the entry into force of the new law, all German legal entities under private law, all registered partnerships and foundations without legal capacity - and, depending on the individual case, also certain foreign companies - are now obliged to report their beneficial owners to the German transparency register.

Linking the European Transparency Registers

The aim of the format change is to interconnect all European transparency registers. By establishing an overarching European platform, all data from the national transparency registers is to be made accessible to all member states of the European Union and retrievable at any time. The primary aim of the law is to create transparency about associations and their beneficial owners and to enable the exchange of relevant information at national and EU level.

Abolition of privileged treatment of listed companies

The TraFinG brings another significant change for listed companies. The changeover to the concept of a full register means that the previous privileged treatment of listed companies under sec. 3 para. 2 sentence 1 GWG (old version) no longer applies. According to the previous legal situation, the beneficial owners of legal entities (with the exception of foundations with legal capacity) and other companies that were not listed on an organized market pursuant to sec. 2 para. 11 of the German Securities Trading Act (Wertpapierhandelsgesetz) and were not subject to any transparency requirements under Community Law with regard to voting rights or equivalent international standards had to be identified and reported. As of August 1st, 2021, all associations subject to the GWG must now report their beneficial owners to the transparency register. This already applies when establishing business relationships with listed companies.

Extended duty to disclose information on the beneficial owner

However, the obligation to disclose information on beneficial owners has also been extended. Whereas under the previous legal situation it was sufficient for one of several nationalities of the beneficial owner to be stated in the transparency register, sec. 19 para. 1 GWG (new version) now requires all nationalities to be disclosed.

Extension of the obligation of foreign companies to report share deals

Under the previous legislation, foreign companies were already obliged to report their beneficial owners to the transparency register under sec. 20 para. 1 sentences 2 and 3 GWG (old version) if they wished to acquire ownership of real estate located in Germany and were not entered in a transparency register of another EU member state. In practice, this repeatedly resulted in problems and considerable additional work. The reasons for this were the lack of operational transparency registers in individual EU states, missing or delayed entries in the register (exacerbated by the COVID 19 pandemic, among other things) or the exclusion of individual states (e.g. Switzerland, United Kingdom) from the privileged status.

The TraFinG has now extended the obligation of foreign companies to report to the German transparency register. In future, there will also be a duty to register beneficial owners if a foreign company acquires an interest in a company with real estate in Germany (share deal) and thereby acquires a beneficial interest within the meaning of sec. 1 para. 3a GrEStG.

Example: If a foreign company wishes to acquire a majority of the shares of a German company that is the direct owner of a property in Germany, it must report its beneficial owners to the German transparency register.

This extension also affects the work of notaries, as the prohibition on notarization in sec. 10 para. 9 sentence 4 GWG was also extended to share deals in the course of the amendment. Consequently, the notary may only perform a notarization with the participation of a foreign company in those cases in which the latter has fulfilled its reporting obligations without exception.

According to the new regulatory situation, a considerable additional effort is to be expected in practice for real estate transactions with the participation of a foreign company.

Staggered Transition Periods

In view of the considerable effort required as a result of the abolition of the notification fiction pursuant to sec. 20 para. 2 GWG (old version), the TraFinG provides for certain transitional periods for the implementation of the required initial notifications to the transparency register.

Sec. 59 para. 8 GWG (new version) provides for a staggered transitional period for the subsequent reporting of beneficial owners of companies that are required to report for the first time as a result of the new regulation. Accordingly, the companies must comply with the reporting obligation

• in the case of an AG, SE or KGaA, by March 31st, 2022
• in the case of a GmbH, cooperative, European cooperative or partnership, by June 30th, 2022 and
• in all other cases, by December 31st, 2022.

(However, these transitional periods do not apply to newly established companies that were also subject to the notification requirement prior to August 1st, 2021).

During these transitional periods, the fine provisions for the registration of companies that were previously able to invoke the notification fiction are temporarily suspended:

• in the case of an AG, SE or KGaA until March 31st, 2023
• in the case of a GmbH, cooperative, European cooperative or partnership until June 30th, 2023 and
• in all other cases, by December 31st, 2023.

Discrepancy reports that would have to be submitted due to the absence of an entry in the transparency register are also not required to be submitted until April 1st, 2023, provided that the legal entity subject to the transparency register was entitled to refer to the notification fiction. Discrepancy reports that would have to be submitted for other reasons, however, must continue to be submitted without delay.

Conclusion

The aim of the TraFinG is to improve the quality of entries in the transparency register and to make them as comprehensive as possible. This serves to prepare for the European networking of transparency registers. In the context of European standardization, however, care should be taken to ensure that the information to be disclosed is materially consistent in order to avoid information asymmetries and gaps in the reporting obligation.

In practice, the changes explained above - in particular the elimination of the notification fiction - mean considerable additional work and possibly also additional costs for all parties involved. In any case, inspection of the transparency register as part of the customer identification process will be unavoidable in the future.

We would be happy to assist you in identifying beneficial owners and registering the relevant information with the transparency register. Please contact us!