Germany: Implications of the Bill for the Transposition of the Fourth EU Anti-Money Laundering Directive

The bill will transpose the Fourth Anti-Money Laundering Directive (Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015) into German law. In this context, a few probable changes pursuant to the proposal of the Commission to amend the Fourth Anti Money Laundering Directive are also already anticipated. In addition, the Financial Intelligence Unit (FIU) of the German Federal Criminal Police Office will be integrated into the highest German customs authority (Generalzolldirektion) at the Federal Ministry of Finance and reoriented. The changes are to take effect on 26 June 2017.

Owing to the transposition of the Fourth Anti Money Laundering Directive, the provisions of the German Anti-Money Laundering Act (GwG) will be recast. In this context, the German Insurance Supervision Act (VAG) will also be amended.

This article is intended to provide a brief outline of the (new) regulations and changes relevant to the insurance sector.

1. Obliged entities under the law for the prevention of money laundering: insurance undertakings

As before, obliged entities are insurance undertakings as defined in Article 13 No 1 of the Solvency II Directive and branches located in Germany of such companies abroad to the extent they offer life insurance services or accident insurance contracts with return of premiums covered by the Solvency II Directive. In this regard, there will be no changes to the current legal situation.

In the future, however, insurance undertakings that grant loans within the meaning of section 1 (1) sentence 2 No 2 of the German Banking Act (KWG) (thus monetary loans or acceptance facilities) will be explicitly obligated. The reason for this extension is that these are transactions that are typically also offered in this specific way or in a similar way by financial institutions that are subject to the duties under the law for the prevention of money laundering. According to the recitals, it is intended to create a synchronisation with regard to the duties under anti-money laundering law.

The proposal contained in the ministerial bill to include pension funds as well if they offer insurance that does not serve company pension plan purposes was not adopted. The recitals of the bill do not give any reasons for this.

Since the group of obligated insurance undertakings was extended in section 2 (1) No 7 of the Anti-Money Laundering Act, the group of obligated insurance intermediaries pursuant to section 2 (1) No 8 of the Anti-Money Laundering Act was also adjusted accordingly. Intermediaries are thus subject to the Anti-Money Laundering Act if they broker the activities, transactions, products or services covered by No 7. An exemption applies to the insurance intermediaries acting under section 34d (3) and (4) of the German Trade, Commerce and Industry Regulation Act (GewO) – thus tied intermediaries and intermediaries offering insurance in addition to their principal products/services. As before, branches located in Germany of corresponding insurance intermediaries domiciled abroad are obligated under anti-money laundering law.

2. Due Diligence Obligations

In transposing the Fourth Anti Money Laundering Directive, the risk-based approach that had already been encoded in the Anti-Money Laundering Act previously is defined in more detail. In the future, all entities subject to anti-money laundering law must generally review every business relationship and transaction individually as to the respective risk with regard to money laundering and terrorist financing and take addi-tional measures to reduce the money-laundering risk, if necessary. In this context, scenarios that previously led to a low risk classification subject to the assessment of the specific case are considered only as factors within the framework of the overall assessment to be carried out. Conversely, there are still scenarios that automatically lead to a higher risk classification. The minimum requirements for the relevant risk factors are listed in Annexes 1 ("Potentially lower risk factors") and 2 ("Potentially higher risk factors") to the Anti-Money Laundering Act, which correspond to Annexes II and III of the Fourth Anti Money Laundering Directive.

Moreover, the EU Commission and the EU Member States will each carry out their own risk analyses for the supranational or relevant national levels in the future. The European supervisory authorities are also obligated to produce a statement regarding the risks of money laundering and terrorist financing for the financial sector every two years. With regard to Germany, the Federal Ministry of Finance will produce such a risk analysis. Information based on this national risk analysis will be made available to the obliged entities to facilitate their own risk assessment.

a) General Due Diligence Obligations, section 10 of the Anti-Money Laundering Act

The general due diligence obligations will be listed in detail in section 10 (1) of the Anti-Money Laundering Act in the future.

aa) Individual Obligations

As before, the contractual partner's identity must be established in accordance with section 11 of the Anti-Money Laundering Act. The identification duty now also applies to persons acting on behalf of the contracting party. Furthermore, it must be checked in the future whether the person acting on behalf of the contracting party is authorised to do so (section 10 (1) No 1 of the Anti-Money Laundering Act).

How the identification is to be carried out will be subject to sections 11ff. of the Anti-Money Laundering Act in the future.

It must also be clarified whether the contracting party is acting on behalf of a beneficial owner. If this is the case, the beneficial owner must be identified as well (section 10 (1) No 2 of the Anti-Money Laundering Act).

As before, information must be obtained as to the purpose and the intended type of the business relationship. The obliged entity must assess this information (section 10 (1) No 3 of the Anti-Money Laundering Act).

What is new is the (explicit) duty to ascertain whether the contracting party or the beneficial owner is a politically exposed person (PEP) (section 10 (1) No 4 of the Anti-Money Laundering Act). This has so far not been explicitly codified in the Anti-Money Laundering Act and accounts for the fact, according to the recitals, that the obliged entities usually carry out this verification when they fulfil the obligations under (1) Nos 1 and 2 with regard to all customers, because without prior clarification of the PEP status, it cannot be finally decided whether general or enhanced due diligence obligations concerning customers must be applied to a specific customer. In purely practical terms, however, the new wording of the statutory provision does not make any difference. It had not been necessary before to verify whether the contracting party, beneficial owner or authorised recipient was a PEP in order to assess whether enhanced due diligence obligations were to be applied.

Finally, the business relationship including the transactions must be monitored continuously as before (section 10 (1) No 5 of the Anti-Money Laundering Act).

bb) Time of Fulfilment

As before, these duties must be fulfilled when the business relationship is established and when transactions outside a business relationship are conducted (under certain circumstances specified in more detail in the Act). Other relevant points in time are when there are indications of money laundering or terrorist financing and doubts as to whether the details regarding the identity of the persons to be verified are correct.

The lawmakers explicitly point out now in section 10 (3) of the Anti-Money Laundering Act that these duties must be performed with regard to all new customers. Concerning already existing business relationships, they must be performed within reasonable periods, particularly when a customer's relevant circumstances change.

cc) Scope of the Measures

The obliged entities determine the specific scope of the measures pursuant to Nos 2 to 5 (thus not that of the identification itself!) in accordance with the relevant risk of money laundering or terrorist financing. In this context, the risk factors mentioned by way of example in Annexes 1 and 2 to the Anti-Money Laundering Act must be considered. Furthermore, the purpose of the business relationship, the amount of the assets paid in by the customer or the scope of the conducted transaction and the regularity or duration of the business relationship must be taken into account (section 10 (2) of the Anti-Money Laundering Act).

b) Simplified Due Diligence Obligations, section 14 of the Anti-Money Laundering Act

Obliged entities must fulfil only simplified due diligence obligations if they find during their risk analysis or in the individual case, taking into account the risk factors mentioned in Annexes 1 and 2 to the Anti-Money Laundering Act, that there is only a low risk of money laundering or terrorist financing in certain areas, particularly with regard to customers, products, services or transactions.

Considerable changes have been made in this context:

For one, the application of simplified due diligence obligations is – unlike before – no longer restricted to certain groups of cases as a rule.

For another, a complete exemption from due diligence obligations is no longer possible. On the contrary, all five due diligence obligations concerning customers must still be fulfilled. When implementing the risk-based approach, however, the scope of the measures to be taken can be reasonably reduced.

c) Enhanced Due Diligence Obligations, section 15 of the Anti-Money Laundering Act

If there is a higher risk of money laundering or terrorist financing, enhanced due diligence obligations must be fulfilled; the scope of these obligations results in detail from section 15 (4) to (6) of the Anti-Money Laundering Act. These extended obligations must be fulfilled in addition to the general due diligence obligations, and thus do not replace them.

The obliged entities must determine a higher risk of money laundering within the framework of their risk analysis or in the individual case, taking into account the risk factors mentioned in Annexes 1 and 2 to the Anti-Money Laundering Act. Emphasised examples are, in particular, PEPs and persons domiciled in a third country found by the EU Commission to have a high money laundering risk. Insurance undertakings must therefore be up to date in the future with regard to what countries are to be considered high-risk third countries.

Furthermore, the cases of especially complex or huge transactions, transactions carried out in an unusual way or transactions without apparent economic or lawful purpose are mentioned.

The obliged entities, in turn, must generally decide themselves what specific measures are to be taken in the event of higher risk. Certain minimum measures must be taken in this context, however, such as obtaining the consent of a member of management, obtaining information to determine the origin of the assets or continuously monitoring the business relationship.

Moreover, the European regulatory authorities will produce guidelines for the obliged entities as to what risk factors must be taken into account or what measures must be taken in cases where enhanced due diligence obligations towards customers are appropriate. Also in this regard, the insurance undertakings will be responsible in the future for including the guidelines in their examinations based on anti-money laundering law.

3. Amendments to the Insurance Supervision Act

Sections 52ff. of the Insurance Supervision Act contain special money laundering regulations for insurance undertakings that supplement the general regulations contained in the Anti-Money Laundering Act. The regulations are applicable to all insurance undertakings in terms of section 52 of the Insurance Supervision Act – and thus to the insurance undertakings in terms of section 2 (1) No 7 of the Anti-Money Laundering Act.

In the course of the transposition of the Fourth Anti Money Laundering Directive, these provisions will be fundamentally revised. This will result in some changes, from a practical perspective, for the insurance undertakings in question.

a) Section 53 of the Insurance Supervision Act – Internal Security Measures

Section 53 of the Insurance Supervision Act still contains provisions concerning the internal security measures to be taken. The risk-based approach specified to date in section 53 (1) of the Insurance Supervision Act is no longer mentioned, however, because it will apply in the future to all obliged entities under the Anti-Money Laundering Act as amended, according to sections 3 to 5 of the Anti-Money Laundering Act.

Moreover, (2) sentences 1 and 2 (examination, documentation and retention obligations) and (3) (anti-money laundering officer), (5) (insurance holding companies) and (6) (orders from the regulatory authority) of the current version will not be retained, because corresponding provisions that are "generally applicable" to all obliged parties are to be found in the recast Anti-Money Laundering Act.

The only subject for special regulation is now the option of transmission of information, which has been provided for to date in similar form in section 53 (2) sentences 3ff. of the Insurance Supervision Act, and the previous (4) (internal audit).

b) Section 54 of the Insurance Supervision Act – General Due Diligence Obligations with Respect to the Beneficiaries

Section 54 of the Insurance Supervision Act previously regulated when simplified due diligence obligations were to be applied beyond the cases mentioned in the Anti-Money Laundering Act. The groups of cases mentioned there were conclusive. Because the rules concerning simplified due diligence obligations will be regulated in the future for all of the obliged entities – thus also for insurance undertakings – only in section 14 of the Anti-Money Laundering Act, there is no longer any need, according to the recitals, for special rules in the Insurance Supervision Act to apply to insurance undertakings.

Section 54 of the Insurance Supervision Act now contains provisions concerning general due diligence obligations especially with respect to the beneficiaries. Basically, the due diligence obligations previously mentioned in section 55 (3) of the Insurance Supervision Act were included, but they are more comprehensive. Duties to document and to report suspicions were also included.

c) Section 55 of the Insurance Supervision Act – Enhanced Due Diligence Obligations

To date, section 55 of the Insurance Supervision Act has determined what simplifications were possible with regard to the execution of an identification procedure (payment by way of direct debit, presumptive effect of a payment of premiums via certain accounts). This provision has been deleted without replacement. The lawmakers justify this by stating that the fact – alone – that a payment is made by direct debit from a specified account does not constitute a reliable basis for a verification of the identity of the contracting party, nor can this ensure that the account in question is even an account belonging to the contracting party. This applies similarly with respect to the pre-sumptive effect of a premium payment via a specified account.

Therefore, the rules for identification pursuant to section 11 of the Anti-Money Laundering Act that apply to all obliged entities apply without restriction to insurance undertakings as well. In the future, insurance undertakings will thus no longer be able to rely on the rules for a simplified identification that applied to date.

Section 55 of the Insurance Supervision Act will in the future contain enhanced due diligence obligations that go beyond section 15 of the Anti-Money Laundering Act with regard to a beneficiary that is not the contracting party is a PEP, a member of the PEP's family or a person known to be closely related to the PEP. Section 56 of the Insurance Supervision Act, current version, will thus be deleted

4. Other Amendments

Reference should be made to amendments of the regulations regarding fines (in the future, section 56 of the Anti-Money Laundering Act) for breaches of the duties under anti-money laundering law. The limits for fines, in particular, will be raised, and a three-level system will be introduced: on the first level, the maximum fine of €100,000 that applied to date will remain in effect. On the second level, fines of up to €1 million or up to twice the financial advantage gained as a result of the breach will be possible for grievous, recurring or systematic offences. On the third level, the amount of the fine for certain obliged entities, including insurance undertakings, can be up to €5 million or 10 per cent of the total turnover.

The principle of "naming and shaming" that will be found in section 57 of the Anti-Money Laundering Act in the future is new in the transposition of the Fourth Anti Money Laundering Directive. Final and conclusive measures and decisions on fines that have become incontestable due to a violation of the provisions of the Anti-Money-Laundering Act must be published by the regulatory authorities on their websites in the future. Information concerning the type and nature of the offence must be included in the notification.

Finally, a so-called transparency register will be established in the future (sections 18ff. of the Anti-Money Laundering Act. Information concerning beneficial owners will be collected and made available in this register. Whereas the preliminary ministerial draft still provided that the transparency register was supposed to be made accessible to the public, only the authorities and persons specified in section 23 of the Anti-Money Laundering Act will have access in the future, according to the bill. Obliged entities – and thus also the obliged insurance undertakings – may inspect the register provided that they can demonstrate that the inspection is required to fulfil their due diligence obligations. Other persons may inspect the register only if they can demonstrate that they have a "legitimate interest". According to the recitals, this is supposed to be a "reasonable interest justified by the facts".

5. Outlook

Consequently, not very much will change for insurance undertakings in terms of content due to the new Anti-Money Laundering Act. In view of the changed (increased) limits for fines, however, every insurance undertaking subject to the Anti-Money Laundering Act can only be advised to continue to fulfil its obligations diligently also in the future.