Using LEDVANCE GmbH as an example, this paper shows which problems arise for goods traders in the practical implementation of the new Money Laundering Act (GwG) 2020. In particular, it addresses the questions of 1) whether a company's legal department now needs its own money laundering officer and 2) whether group companies are also liable for violations committed by their foreign subsidiaries.
The aim of this paper is to address the most important aspects of the topic and to discuss the two issues mentioned above. The introduction and introduction to the topic in the first chapter is followed in the second chapter by an overview of relevant legal principles and explanations of the key terms relating to the most important components of the topic. The third chapter then deals with the analysis and discussion of the topic under investigation, and the fourth chapter concludes with a summary.
On December 12, 2019, the "Act on the Implementation of the Amending Directive to the Fourth EU Money Laundering Directive" was passed by the Bundestag and the Bundesrat and published in the Federal Law Gazette Year 2019 Part I No. 50, issued on December 19, 2019. The Act serves to implement the "Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing and amending Directives 2009/138/EC and 2013/36/EU" (5th EU Money Laundering Directive).
The fight against money laundering is carried out through a repressive side, in which perpetrators are apprehended and punished, and a preventive side, in which the reporting of suspicious cases is intended to increase the transparency of financial flows and prevent the concealment of illegal money flows.
The Money Laundering Act covers the preventive side of the fight against money laundering. It obliges certain groups of persons to exercise special care and supervision. This is intended to prevent anonymous economic transactions. Banks and insurance companies, as well as real estate agents, casinos and dealers in goods, are therefore obliged to identify their business partners and to monitor transactions or business relationships on an ongoing basis. They must report suspicious transactions or business relationships to the relevant authorities as early as possible.
Table of contents
Table of contents
List of abbreviations
1 Introduction
2 Overview of legal foundations
2.1 International and European level
2.1.1 International fight against money laundering
2.1.2 EU Money Laundering Directives
2.2 National legal situation
2.2.1 Section 261 German Criminal Code
2.2.2 Money Laundering Act
3 Definitions
3.1 Money laundering
3.2 Goods dealers
3.3 Risk Management
3.4 Due diligence
4 Analysis and discussion
4.1 Implementation in LEDVANCE GmbH
4.1.1 About LEDVANCE
4.1.2 Compliance at LEDVANCE
4.2 The Money Laundering Officer in the Legal Department
4.2.1 Money laundering obligation
4.2.2 Appointment of a money laundering officer
4.3 Money laundering prevention in corporations
4.3.1 Group-wide duties
4.3.2 Liability for foreign companies
5 Summary
Bibliography
Appendices
List of abbreviations
AAH Interpretation and Application notes
AG Stock corporation
AO Tax code
BGBl. Federal Law Gazette
BMI Federal Ministry of the Interior, for Construction and Home Affairs
BRAK German Federal Bar Association
BRAO Federal Lawyers' Act
CMS Compliance Management System
Co. Company
EC European Community
EEC European Economic Community
EU European Union
EUR Euro
GmbH Limited liability company
KYC Know Your Customer
LED Light emitting diode
LTD. Limited
MLA Money Laundering Act (German GwG)
OJ Official Journal
OrgKG Law to Combat Illegal Drug Trafficking and Other Forms of Organized Crime
Pep Politically exposed person
RAK Bar Association
StGB German Criminal Code
With regard to other abbreviations, see Kirchner, Hildebert/Butz, Cornelie, Abkürzungsverzeichnis der Rechtssprache, 9th ed.
1 Introduction
On December 12, 2019, the "Act on the Implementation of the Amending Directive to the Fourth EU Money Laundering Directive" was adopted by the German Bundestag and the German Bundesrat and published in the Federal Law Gazette Year 2019 Part I No. 50, issued on December 19, 2019. The Act serves to implement the "Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing and amending Directives 2009/138/EC and 2013/36/EU" (OJ L 156, 19 June 2018, p. 43) (5th EU Money Laundering Directive). It entered into force on January 1, 2020. This Act again amended the "Act on the Tracing of Profits from Serious Crimes (Money Laundering Act - MLA)" of June 23, 2017 (Federal Law Gazette I, p. 1822), which was last amended by Article 5 (12) of the Act of June 21, 2019 (Federal Law Gazette I, p. 846). The amendments are associated with numerous new regulations and increased requirements.
According to the Federal Ministry of the Interior, for Construction and Homeland, the basic motivation of organized crime is the pursuit of maximum profits. Therefore, effective and concerted action against money laundering and the collection of the incriminated funds, are essential in the fight against money laundering and thus against organized crime. The aim of the fight against money laundering is to prevent the perpetrators from infiltrating illegally generated money into the legal economic cycle, thus giving it the appearance of legality, i.e., it should not be usable for legal everyday business.
The fight against money laundering is carried out through a repressive side, in which perpetrators are (supposed to be) apprehended and punished, and a preventive side, in which the reporting of suspicious cases is supposed to increase the transparency of financial flows and prevent the concealment of illegal money flows.
The Money Laundering Act covers the preventive side of combating money laundering. It obliges certain groups of persons (obligated parties) to exercise particular care and supervision. This is intended to prevent anonymous economic transactions. Therefore, banks and insurance companies, but also real estate agents, casinos and goods dealers are obliged to identify their business partners and to continuously monitor transactions or business relationships. They must report suspicious transactions or business relationships (suspicious cases) to the relevant authorities as early as possible.1
Using LEDVANCE GmbH as an example, this paper shows which problems arise for goods traders in the practical implementation of the new Money Laundering Act (MLA) 2020. In particular, it addresses the questions of 1) whether a company's legal department now needs its own money laundering officer and 2) whether group companies are also liable for violations committed by their foreign subsidiaries. The aim of this paper is to address the most important aspects of the topic and to discuss the two issues mentioned above. The introduction to the topic in the first chapter is followed by an overview of relevant legal principles in the second chapter and by explanations of the key terms relating to the most important components of the topic in the third chapter. The fourth chapter then deals with the analysis and discussion of the topic under investigation, and the fifth chapter concludes with a summary.
2 Overview of legal foundations
2.1 International and European level
2.1.1 International fight against money laundering
Money laundering is used to legalize profits from criminal activities such as drug trafficking, human trafficking, prostitution, illegal arms trafficking, smuggling, etc. These illegal activities very often take place on an international level. Money laundering must therefore be combated not only nationally, but in particular internationally.2
2.1.2 EU Money Laundering Directives
The EU anti-money laundering directives are issued periodically by the European Parliament and must be implemented accordingly by the Member States under their national legislation. The purpose of these EU directives often simply referred to as "money laundering directives", is to create a uniform regulatory environment through which new types of money laundering and terrorist financing can be countered. In the meantime, the 6th Money Laundering Directive (EU 2018/1673), has already been issued. The 5th Money Laundering Directive (EU 2018/843), on which the current MLA is based, is relatively similar to the 4th Money Laundering Directive (EU 2015/849), but it includes the strengthening and expansion of existing regulations as well as new regulatory measures for cryptocurrencies.3
2.2 National legal situation
2.2.1 Section 261 German Criminal Code
The offense of money laundering was introduced into the Criminal Code by the Act to Combat Illegal Drug Trafficking and Other Forms of Organized Crime (OrgKG) of July 15, 1992 (Federal Law Gazette I 1302). In doing so, the legislature implemented international obligations to create a criminal offense against money laundering and, in particular, the Community law requirements of the First Money Laundering Directive 91/308/EEC of 10 June 1991 (OJ 1991 L 199, 77).4 Section 261 of the German Criminal Code (StGB) makes the relevant elements of the offense punishable; even an attempt is punishable. The range of punishment is 3 months to 5 years and in particularly serious cases 6 months to 10 years imprisonment.5
2.2.2 Money Laundering Act
An important addition was made to Section 261 of the German Criminal Code by the "Act on the Tracing of Profits from Serious Crimes (Money Laundering Act - MLA)", which came into force on June 26, 2017 to implement the Fourth EU Money Laundering Directive and has since been amended.6 The MLA regulates extensive monitoring and reporting obligations for financial institutions and other companies. In its seven sections, it deals, among other things, with the necessary risk management and due diligence obligations of obligated parties, the establishment of a central transparency register, the Central Financial Transaction Investigation Authority, obligations in connection with reports of circumstances and supervision, cooperation, provisions on fines and data protection.
One of the most important changes, compared to previous versions of the MLA, results from the expansion and concretization of the list of fines in Section 56 of the MLA, according to which it is possible to impose a fine of up to five million euros, or alternatively a fine of up to ten percent of the total turnover of the previous fiscal year, on obligated parties pursuant to Section 2 (1) Nos. 1-3, 6-9 of the MLA that are legal entities or associations of persons.7
3 Definitions
3.1 Money laundering
Money laundering as defined in Section 1 (1) MLA is a criminal offense under Section 261 of the German Criminal Code.8 The term money laundering is not defined in more detail in Section 261 of the Criminal Code.9 In general, however, this term refers to a process aimed at concealing the existence, origin or destination of assets derived from illegal transactions in order to make them appear as legitimate income.10 The object of money laundering is usually an object (or a surrogate) derived from a predicate offense.11 The predicate offenses for money laundering include all felonies and the misdemeanors listed in Section 261, Paragraph 1, Nos. 2–5 of the Criminal Code, e.g., bribery, narcotics offenses, tax offenses, and various other offenses, provided they were committed on a commercial or gang basis (e.g., pimping, human trafficking, gambling).12
In this respect, money laundering is understood to mean the following acts committed intentionally: i) converting assets knowing that they originate from criminal activities, ii) concealing the true origin of the assets, iii) acquiring or possessing such assets knowing that they are illegal assets and engaging in such an act.13
There are various models applied to the process of money laundering, e.g., the "three-phase model" in which the money laundering process takes place in the three steps: i) placement / feeding (placement); ii) splitting / concealing (layering); and iii) integration.14
3.2 Goods dealers
In addition to various other obligated parties, which, pursuant to Section 2 (1) Nos. 1 to 15 MLA, are predominantly assigned to the financial sector or related sectors, the revised version of the MLA now also explicitly names goods dealers as obligated parties. A dealer in goods as defined in Section 2 (1) No. 16 MLA is any person who sells goods on a commercial basis, irrespective of in whose name or for whose account he acts. Compared to other obligated parties pursuant to Section 2 (1) MLA, goods dealers are, however, subject to lower requirements in terms of risk management and due diligence if certain conditions are met.15
3.3 Risk Management
In order to prevent money laundering and terrorist financing, obligated parties must have an effective risk management system in place which, pursuant to Section 4 (1) MLA, is appropriate with regard to the type and scope of their business activities. Risk management in turn consists of a risk analysis pursuant to Section 5 MLA, i.e. the identification and assessment of money laundering and terrorist financing risks within the specific business activity of the obligated party, as well as internal security measures (e.g. internal rules, processes and controls, appointment of an anti-money laundering officer) pursuant to Section 6 MLA.16 For goods dealers, the obligation for effective risk management only exists if, pursuant to Section 4 (5) No. 1 MLA, cash payments of at least EUR 10,000 are made or received in the course of a transaction involving other goods (not works of art, not high-value goods as defined by Section 1 (10) Sentence 2 No. 1 MLA) themselves or via third parties.17
3.4 Due diligence
In addition to risk management, obligated parties must fulfill additional due diligence obligations with regard to their customers. These follow the so-called KYC ("Know Your Customer") principle. The general due diligence obligations pursuant to Section 10 MLA are: i) identification of the business or contractual partner; ii) clarification of the beneficial owner pursuant to Section 3 MLA; iii) determination of whether the contractual partner or beneficial owner is a politically exposed person (pep) pursuant to Section 1 (12) MLA; iv) obtaining information on the purpose and nature of the intended business activity; v) continuous monitoring of the business relationship.18 Obligated persons are only required to fulfill simplified due diligence obligations within the meaning of Section 14 MLA or enhanced due diligence obligations within the meaning of Section 15 MLA if they determine, as part of the risk analysis or in individual cases, taking into account the risk factors listed in Annexes 1 and 2 of the MLA (for a summarized overview, see Annex 1) (e.g., customers located in certain geographical areas, cash-intensive businesses), that there is either only a low risk or a higher risk of money laundering or terrorist financing in certain areas, particularly with regard to customers, products, services or transactions.19
For privileged goods traders, the obligation to fulfill the due diligence obligations pursuant to Section 10 MLA applies analogously to the facilitated regulations on risk management pursuant to item 3.3. However, a single transaction of more than EUR 9,999.99 already leads to the permanent discontinuation of these facilitations.20 Privileged goods traders must therefore always ensure that i) the maximum limit for cash transactions is not exceeded; ii) there are no cases of so- called "smurfing", i.e. no concealment of the deposit of large sums of money into an account by splitting it into a large number of smaller sums of money; iii) indications of possible money laundering pursuant to Sections 10 (3) No. 3, 43 et seq. MLA are detected and reported to the competent authorities.
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1 https://www.bmi.bund.de/DE/themen/sicherheit/kriminalitaetsbekaempfung-und-ge- fahrenabwehr/geldwaesche/geldwaesche-node.html; as of 10/17/2020.