Reminder: Expiry of the deadline for the mandatory registration obligation to the German Transparency Register on 31 March 2022 for German Aktiengesellschaften / AGs, Societas Europaeas / SEs and German partnerships limited by shares / KGaAs

With the introduction of the new German Money Laundering Act (Geldwäschegesetz; in short: GwG) by ways of the so-called German Transparency Register and Financial Information Act (Transparenzregister- und Finanzinformationsgesetz; in short: TraFinG) a now mandatory registration obligation of all ‘real’ or ‘fictive’ ultimate economic beneficiaries applies to all legal entities under German Private Law as well as to all registered partnerships. 

The ‘fictive’ ultimate economic beneficiary is defined in § 3 sec. 2, sentence 5 GwG.
According to this provision the legal representative, the managing shareholder or the partner of the contracting party shall be considered as so-called ‘fictive’ ultimate economic beneficiary, if - even after carrying out comprehensive assessments and without the existence of facts according to § 43 sec. 1 - an ultimate economic beneficiary according to sec. 1 or sentence 1 to 4 may not be identified by the reporting association / company according to § 20 sec. 1.  

The reporting obligation to the German Transparency Register foresees the following deadlines which are splitted on grounds of the entity form:

● Until 31 March 2022:
- for the German Aktiengesellschaft / in short: AG (German stock company);
- for the Societas Europaea / in short: SE;
- for the German Kommanditgesellschaft auf Aktien / in short: KGaA (German partnership limited by shares)

● Until 31 June 2022:
- for the German Gesellschaft mit beschränkter Haftung / in short: GmbH (German limited liability company)
- for the German Genossenschaft (registered cooperative)
- for the European cooperative or partnership

● Until 31 December 2022: in all other cases, e.g.
- the German Unternehmergesellschaft (haftungsbeschränkt) (German entrepreneurial company with limited liability);
- the Partnerschaftsgesellschaft (German partnership company);
- the German offene Handelsgesellschaft (German general partnership);
- the German Kommanditgesellschaft (German limited partnership);
- as well as the legal form connection of a GmbH & Co. KG

Expiry of the transitional period for AGs, SEs and KGaAs on 31 March 2022

Given the fact that the first transitional period for the binding registration to the German Transparency Register expires on 31 March 2022, German AGs, Societas Europaeas and German KGaAs should consider the expiry of this deadline and should have their ultimate economic beneficiaries registered by their internal legal departments or external legal advisors.

The issue of the registration obligation of ultimate economic beneficiaries moreover appears in the context of company share purchases / acquisitions and -sales.
The necessity of an assessment according to the Money Laundering Act by the notaries to be involved also arises in the context of M&A-transactions.

Complex assessment necessary in case of a so-called indirect participation of ultimate economic beneficiaries

In the context of an assessment according to Money Laundering Law, particularly, the question with regard to a so-called indirect participation of economic beneficiaries in the target company arises.

Ultimate economic beneficiaries in the sense of § 3 GwG are natural persons under whose ownership or control the company in question ultimately stands.

In case of legal entities under German Private Law and registered partnerships, natural persons are considered as ultimate economic beneficiaries according to § 3 Sec. 2 GwG, when they directly or indirectly

● own more than 25% of the company shares
● control more than 25% of the voting rights or
● exercise control in a comparable manner (e.g. as German Komplementär or by ways of a veto right)

The assessment of an indirect participation may be quite complex, especially in case of a Group with a leading mother company with several subsidiaries underneath.
In this case, the calculation shall be proceeded from the target company up to any possible economic beneficiaries.

For this reason, the necessity of a registration of the ultimate economic beneficiaries should be clarified already before the notarial appointment of a M&A-transaction and, optionally, it should be agreed upon with the notarizing notary in advance, whether or not a registration has be initiated / reviewed and by whom.
 

Recalculation of the participation levels from the intra-group target company up to any possible economic beneficiaries

In order to simplify the assessment of an indirect participation of any ultimate economic beneficiaries, a participation level should be assigned toeach intra-group company or rather the group structure should be divided in participation levels.

Each participation level should then be separately examined with regard to the share ratio, the voting rights or the exercise of control in a comparable manner.
 

Requirement of a necessary participation quota of 50% for controlled companies  

The following applies for the recalculation of the participation levels:

if the shares, the voting rights or the control in a comparable matter are held / exercised by an associated company, the natural person that controls the parent association in the sense of § 3 Sec. 2 sentence 2 to 4 GwG in conjunction with § 290 Sec. 2 to 4 HGB, is deemed to be the indirect ultimate economic beneficiary.
Generally, a control requires the hold of more than 50% of the shares or voting rights.

The required participation quota of 50% applies only to controlled companies, e.g. on a participation level between the ultimate economic beneficiary and a controlling stock company / AG or between a controlling stock company and its controlled GmbH.

In all other cases, a direct or indirect participation quota of 25% applies for the ultimate economic beneficiaries which needs to be maintained throughout the individual participation levels.

Entry details under ‘nature and extent of economic interest’ in the context of the registration of the indirect ultimate economic beneficiary within the Transparency Register

The options to choose under the entry detail ‘nature and extent of economic interest’ are defined in § 19 Sec. 3 GwG.

In case of an indirect participation of natural persons as ultimate economic beneficiaries of shares or voting rights through intermediate entities, the indirectly controlled shares or voting rights have to be indicated in the Transparency Register under ‘nature of economic interest‘.
The entry detail ‘participation in the association itself, in particular the amount of shares’ must be selected.

Especially, it is not a ‘control by other means‘, when shares or voting rights are indirectly controlled by other associations / companies or persons.

Possible application for an information ban according to § 23 GwG

When ultimate economic beneficiaries of a group-wide company are identified, the obligated registrants should be aware of the consequences that the reporting of sensitive data (full name, date of birth, main residence and nationality) may have for the often times very wealthy and / or politically or economically important ultimate beneficiaries.
A retrieval of the data then resembles a formality.
For this reason, it should be considered to restrict the retrievable information in individual cases with an information ban according to § 23 GwG.

The details with regard to an application for an information ban are regulated in the so-called Verordnung über die Einsichtnahme in das Transparenzregister (Transparenzregistereinsichteinahmeverordnung; in short TrEinV) of 19 December 2017.
Pursuant to § 12 Sec. 2 No. 3 TrEinV the predominant legitimate interests according to § 23 Sec. 2 sentence 2 No. 1 und 2 GwG are to be argued.   

The applicant must then present the facts that justify the assumption that the retrieval of information would expose the ultimate economic beneficiary to the risk of becoming a victim of the crimes listed exhaustively in § 23 Sec. 2 sentence 2 No. 1 a) to g) GwG.
The following circumstances may contribute to the existence of such a risk, whereby an overall view is always required:

● the extent of the wealth of the ultimate economic beneficiary
● the fact that the ultimate economic beneficiary has already been a victim of such crimes in the past or the indication of such plans
● the country of residence of the ultimate economic beneficiary, if there is a higher risk for the ultimate economic beneficiary to become a victim of such crimes due to the general safety situation

In addition to that, the application needs to argue that these legitimate interests prevail, taking all circumstances of the individual case into account, and thus contradict a retrieval of the information.

With regard to the fact that information bans may also be registered within a registration to the Citizen Service Center, the registration of an information ban within the Transparency Register should also be considered on a case-by-case basis.  

This leads to the following question that still needs to be clarified:

if the ultimate economic beneficiary has already applied for an information ban at his registration at a German Citizen Office, does this automatically justify an information ban within the Transparency Register?
Or can this at least be presented as a decisive argument when applying for an information ban?
 

Conclusion

Not only is there the risk of a substantial fine for a company that ignores its obligations according to the TraFinG.
Also in the specific field of M&A or intra-group restructurings, the risks of a non-compliance with the TraFinG are high and may be more expensive than having met those obligations.

We are happy to advise you on any questions that you might have. Please do not hesitate to get in touch with us.