The German Government is introducing further amendments to the German Prevention of Money Laundering Act, similar to recent amendments to the money laundering provisions already introduced for ‘e-money institutions’ as part of Germany’s implementation of the Second Electronic Money Directive at the end of April 2011, the German Government has now published a further draft of an additional amendment initially proposed in May 2011. The German Bundesrat considered the new draft at the beginning of July 2011.
In February 2010, the Financial Action Task Force on Money Laundering (FATF) identified weaknesses in the German anti-money laundering regime. The proposed amendment is designed to abolish these shortcomings, and the German government is aiming is to implement these amendments into German law before the next FATF-evaluation in February 2012.
The broad intention to reduce money laundering and strengthen the German financial sector is to be welcomed. However, the planned amendments will require much more time and effort from affected companies than the government is willing to admit at present.
Who are the affected parties?
In addition to banks and payment service providers, non-banking institutions will be affected by the amendments. According to the relevant Government committee, affected parties should be restricted to companies which deal in ‘high quality’ consumer products. In addition, distribution agents who sell e-money for banks will also be caught. The proposal will particularly affect banks based in other EU Member States who do not have branches in Germany. The German Prevention of Money Laundering Act does not apply to these banks, but the German authorities will, in practice, seek to force them to comply with German standards through their distribution agents.
What are the main changes for banks?
If a payer makes a cash payment exceeding €1000 to a customer of another bank, the recipient’s bank must carry out identification and verification checks on the payer. This will impose additional work and expense on banks, and so it appears likely that banks will cease to allow cash payments above €1000. Where simplified customer due diligence applies, banks will only have to identify the payer (by checking their passport or identity card). If there is an ongoing business relationship between the payer and recipient’s bank, the bank will need to carry out continuous monitoring of the payer. It may, however, be possible in certain individual cases to reduce the amount of identification and ongoing monitoring.
The proposal will also require banks to record German politically exposed persons, which goes beyond the existing obligations under the Third Prevention of Money Laundering Directive or the FATF- evaluation. That Directive defines politically exposed persons as being people with prominent public functions and close family and associates.
Furthermore, banks will need to carry out money laundering checks on the beneficial owner of an account as well as the account holder.
To assist reporting, affected businesses with more than nine employees will have to appoint a money laundering officer. The German supervisory authorities will provide non-banking institutions with advice to help them meet client due diligence and internal safeguarding requirements. The amendments will help banks improve and control their compliance with anti-money laundering rules.
Is this the end for anonymous prepaid products?
Under the proposed amendment, the threshold level for identification and verification checks will drop to zero where agents distributing prepaid cards accept cash payments on behalf of banks. This will mean that every customer who wants to buy a prepaid card by paying cash needs to be identified by the agent in accordance with the German Prevention of Money Laundering Act. This regulation already applies to agents located in Germany distributing e-money on behalf of e-money institutions. Furthermore, an e-money issuer needs to keep an account for every e-money holder, and record every issuance and redemption of e-money. This change means that the e-money issuer must record the transactions for each holder as well as for each card. For rechargeable anonymous prepaid cards, firms will need to identify the owner in order to collect transactions made using several cards onto one combined account.
Consequences
Due to the proposed amendments, anonymous internet payments by prepaid card will no longer be possible. Prepaid card issuers and distribution agents believe that the proposed changes are excessive. The amendments go beyond the relevant EU-standards and risk making German institutions uncompetitive in both wholesale and retail markets. Furthermore, recent data protection problems relating to the internet support the use within the EU of anonymous prepaid cards with maximum storage limits up to €250.
Richard Reimer is Counsel at Hogan Lovells;, Thomas Robinson is an Associate at Hogan Lovells and Laura Rosca is Referendar at Hogan Lovells.
