Final yr’s FATF report for Germany has recognized weaknesses of German Anti Cash Laundering (AML) laws and practices with respect to the usage of authorized entities to cover and obscure sources of earnings in addition to the laundering of cash by means of the acquisition of actual property. Simply in time for the brand new yr, the German legislator now launched a number of modifications to the German Anti Cash Laundering Act (Geldwäschegesetz, GwG) in relation to buying and proudly owning actual property in Germany (as a part of the so-called Sanctions Enforcement Act II).

The legislator has not solely elevated the scope of transparency register obligations with respect to German actual property holdings (see our blogpost), but in addition launched a ban of money funds, crypto funds and sure different technique of funds for the acquisition of actual property in Germany within the new part 16a(1) GwG, on which we intend to shed some mild with this weblog submit.

The brand new money fee ban in part 16a(1) GwG

In-scope acquisitions

The ban applies to the buy and alternate of actual property in Germany, regardless of whether or not

• any of the events is an obligated entity inside the that means of the GwG or not,
• the events are pure individuals or authorized entities or partnerships, or
• any of the events acts commercially or not.

As well as, the ban will apply to the acquisition of shares in an organization (i.e. a share deal) that straight or not directly owns, amongst others, actual property in Germany, regardless of

• the corporate having its seat in Germany or not,
• the quantity of capital or voting rights acquired in that firm, and
• the quantity and worth of actual property that the corporate owns in Germany.

The brand new ban in part 16a GwG won’t solely be related for the German actual property market however might also grow to be a restriction in M&A transactions. Whereas crypto-based funds are under no circumstances a frequent technique of fee in an M&A context but, part 16a GwG might thwart an elevated significance of crypto funds on this respect, at the very least with respect to targets that personal actual property in Germany.

The brand new fee ban won’t apply to transactions which have been concluded previous to 1 April 2023 (Part 59(11) GwG). The wording of this grandfathering provision means that it refers back to the conclusion of the acquisition settlement and never the completion of the acquisition.

Varieties of banned funds

Not like the title of the brand new part 16a GwG (“money fee ban”) suggests, its prohibition isn’t restricted to money but in addition captures funds made in crypto property, gold, platinum, and valuable stones. Whereas money, gold, platinum and valuable stones are kind of self-explanatory, figuring out crypto asset funds in apply might show to be tougher.

For the definition of crypto property, the GwG refers back to the German Banking Act (Kreditwesengesetz, KWG). This definition covers a broad vary of token courses:

• It captures most forms of fee tokens (e.g. Bitcoin, Ether, and so forth.).
• Non-fungible tokens (NFTs) might also qualify as crypto property. Whereas there may be but little administrative steerage on what precisely brings NFTs into the scope of the definition as crypto asset, warning must be exercised if, on account of its design, the person NFT creates an investor-like expectation as to their efficiency and could also be thought-about an funding. The same check can also be proposed by the FATF (no. 53) https://www.fatf-gafi.org/en/publications/fatfrecommendations/paperwork/guidance-rba-virtual-assets-2021.html. This implies, nevertheless, that just some NFT might be topic to the prohibition.
• The concerned events might face comparable difficulties with respect to so-called utility tokens, which can or is probably not considered crypto property, relying – once more – on whether or not they create investor-like expectations as to their efficiency.
• Securities usually are not crypto property. This even applies to digital securities which can be registered in an digital securities register primarily based on DLT expertise. (Digital) securities will, due to this fact, proceed to be eligible strategies of fee, which can be of explicit relevance in an M&A context. Nonetheless, there may be much less authorized certainty than one might anticipate: Safety tokens that don’t fulfil the standards for “securities” will nonetheless be in scope of the ban.
• E-money funds usually are not prohibited. Subsequently, PayPal and comparable technique of funds usually are not topic to the fee ban. This additionally applies to stablecoins insofar they fall inside the definition of e-money.

Nonetheless, an outright ban of all crypto property (as outlined within the KWG) as a way of fee appears, in our view, disproportionate and never appropriate.

On the one hand, the ban is overinclusive: It doesn’t take note of the various legislative initiatives that already mitigate AML dangers within the crypto sector on a nationwide and European degree:

• The fifth AML Directive requires European custodian pockets suppliers and fiat-to-crypto alternate service suppliers to register with their native AML authorities and topics them to native AML legislation. Because of this the “on-ramp” and “off-ramp” between crypto and fiat is already topic to KYC and their holders are recognized. The German legislator even launched a licensing requirement for custodian pockets suppliers, which are actually regulated as monetary establishments in Germany (see our shopper briefing for extra element) bringing them fully into the scope of German AML legal guidelines.
• In 2021, Germany has applied the FATF’s Journey Rule on crypto asset transactions. This requires obliged entities which can be concerned in crypto asset transfers to acquire, document and switch data on the sender and recipient of crypto property (see our weblog submit on the journey rule).
• The Markets in Crypto-assets Regulation (MiCAR, see our blogpost for additional insights), the FATF’s Journey Rule on crypto asset transactions, as included within the Funds Switch Regulation, will set up a complete AML regime for crypto-asset service supplier inside the European Union.

The outright ban ignores these authorized initiatives. Prohibiting funds by way of crypto property from one un-hosted pockets to a different or from and to wallets hosted exterior Germany (or the EU) would, in our view, have been ample to deal with related AML dangers.

However, the present ban does – on account of its easy reliance on the crypto asset definition within the KWG – not comprise token that additionally qualify as e-money (similar to some stablecoins), no matter whether or not its issuer is duly regulated and has carried out KYC obligations.

Obligations of the events

Acquirers and sellers in actual property transactions might be required to show to the collaborating notary that the consideration for the acquisition was paid by means aside from money, crypto property, gold, platinum or valuable stones. Acceptable proof shall, specifically, be confirmations of fee from credit score establishments concerned on the acquirer’s or vendor’s facet within the transaction are appropriate. Towards this backdrop, wire transfers appear to be the popular technique of fee within the eyes of the legislator. Nonetheless, different technique of affirmation also needs to be acceptable, specifically in instances the place the fee was made by utilizing different technique of funds, similar to e-money.

The same requirement does, nevertheless, not appear to use to the oblique acquisition of actual property in Germany by way of a share deal. In these instances, solely the money fee ban applies, with none subsequent obligations of the events or the notary.

Obligations of notaries

Underneath German legislation, the acquisition of actual property typically requires the involvement of a notary. This contains, for instance, the notarization of the acquisition settlement and the submission of the applying for registration of the title switch to the land register. Along with these obligations, the money fee ban now imposes extra necessities on German notaries:

• Notaries will now be required to evaluate the conclusiveness of the proof offered to him/her by the events.
• The notary shall solely ahead the applying for registration of the acquisition to the land registry (Grundbuchamt) if he/she has carried out this conclusiveness examine or was not in a position to take action after unsuccessfully requesting the events to supply the proof inside an affordable time frame.
• If the notary has info that give rise to the suspicion that the actual property transaction serves the aim of cash laundering or financing terrorism, he should report the info to the competent physique for monetary transaction investigations directly and will apply for the switch of possession solely beneath sure circumstances.
• As well as, notaries might be obligated to tell the concerned events concerning the money fee ban in addition to its civil legislation penalties.

For a interval of as much as one yr, the notary could also be topic to downstream verification duties if the events agree that the contractual consideration is due solely after the applying for registration has been filed. Neither the events’ obligations to supply proof nor the notary’s verification duties shall apply if the consideration doesn’t exceed EUR 10,000 or to the extent that conclusive proof isn’t accessible for a partial quantity of the consideration of as much as EUR 10,000. Similar applies if the consideration was paid utilizing an escrow account (Anderkonto) of the notary.

This exemption shall be certain that the trouble related to monitoring the prohibition of money funds is in affordable proportion to the worth and cash laundering dangers of the consideration in query.

Enforcement of the money fee ban

Infringements of the money fee ban shall not be a legal or administrative offence. The legislator relatively follows a unique strategy.

• First, the involvement of the notary within the course of shall be certain that money funds and different captured funds can’t be used for the acquisition of actual property. The applying to the land registry for the switch of possession of the property can now solely be made by the notary (on behalf of the events). The notary should not ahead the applying to the land registry with out assessing the conclusiveness of the proof offered to him/her. This in itself goals at guaranteeing that no money funds and different technique of funds are used for the acquisition of actual property.
• Second, part 16a(1) GwG is in its nature a civil legislation statute. The contractual fee obligation beneath a purchase order contract shall not be thought-about to be fulfilled if the fee is made in money or different captured technique of fee. As such, events that make funds in money or different captured technique of fee shall have the ability to reclaim this fee from the recipient.