Due diligence requirements with regard to customers – Which are these?

Mann berüht einen Kreis aus diversen Symbolen mit Lupe im Zentrum

It is a central obligation according to the GwG that you must know, who you are doing business with. For this purpose, you must not only identify your customers but also check, if the details they have provided are correct.

You must always make sure to “know your customer”!

The following general due diligence requirements must be observed:

  1. identifying your contract partner or, if applicable, the person representing them, including verifying, whether this person is authorised,
  2. verifying, whether the contract partner is acting on behalf of a beneficial owner and, if applicable, determining and identifying the beneficial owner,
  3. gathering and assessing information about the purpose of the intended business relationship,
  4. determining, whether the contract partner of the beneficial owner is a politically exposed person, and
  5. continuous monitoring of the business relationship.

The specific scope of such customer due diligence requirements must be in line with the respective money laundering risk in relation to the contract partner, the business relationship or the transaction. Deviations from the general due diligence duties can therefore arise in areas in which a lower or higher risk of money laundering is to be expected. This means that simplified or enhanced due diligence requirements may apply according to the risk-based approach specified in the new GwG. This can be reviewed by the supervisory authority.

If you are unable to comply with the due diligence requirements indicated above (§ 10 subsection 1 no. 1 to 4 GwG), you must not establish or continue the business relationship or conclude the transaction, and any existing business relations must be terminated. Any violations are punishable by a fine.

The types of business transactions for which due diligence requirements may need to be fulfilled, can vary between different companies and groups of obliged entities:

  • establishment of a business relationship,
  • goods transactions (except precious metals) for which cash payments of at least EUR 10,000 are made or accepted by the obliged entity itself or via third parties,
  • transactions concerning precious metals, for which cash payments of at least EUR 2,000 are made or accepted by the obliged entity itself or via third parties.
  • Transactions amounting to at least EUR 10,000 for art objects, paid in cash or cash-free, applicable to goods traders, as well as art agents and art store keepers.
  • Serious interest signalled by a contracting party when arranging for real estate purchasing contracts, regardless of the payment mode.
  • When organising or brokering bets with a stake or profit of EUR 2,000, regardless of the payment mode.
  • Regular monitoring of an ongoing business relationship or in the event of significant changes to the business partner’s details.
  • Further reasons (this is not an exhaustive list).

Identification

Adequate identification in the sense of the law comprises determination of identity by gathering information and verifying the identity and the provided details using suitable, reliable documents.

The details and information gathered in the context of your due diligence duties must be recorded and retained. For example:

You gather the required details of a natural person using a documentation sheet and verify the information by requesting the person to present their original identity card (no photocopy!). You then document this verification by making photocopies of both sides of the identity card and keeping these copies as documentation.

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Clarifying the beneficial owner

It is defined in § 3 subsection 1 GwG that the beneficial owner is the natural person who is ultimately the owner or in control of the contract partner, or who ultimately arranges for the transaction to take place or the business relationship to be established. The beneficial owner is therefore the natural person in the background. It can also be the case that there are multiple natural persons who are in control of or are influencing the contract partner. This means that this person who is the beneficial owner must be identified for legal entities or private companies. It is not always possible to identify the beneficial owner by checking the trade register or its attachments. A multi-step clarification is often necessary, especially in the case of complex ownership structures.

This is why the transparency register was introduced, which is intended to allow for quicker and easier identification of beneficial owners.

Who can be the beneficial owner of a legal entity or private company?

For legal entities and private companies this is provided for in great detail in § 3 subsection 2 GwG:

For legal entities except for foundations with legal capacity, and other organisations that are not listed on an organised market pursuant to § 2 subsection 11 of the Securities Trading Act and that are not subject to any transparency requirements with regard to voting shares according to Community legislation or equivalent international standards (this refers primarily to stock companies that are traded at an intra-Community stock exchange or a stock market with comparable standards), the beneficial owners include all natural persons that

  1. hold more than 25 percent of capital shares either directly or indirectly,
  2. control more than 25 percent of voting rights, or
  3. exercise control in a comparable manner.

Who is the beneficial owner of a foundation?

foundations with legal capacity and legal forms for managing or distributing assets in a fiduciary capacity or for instructing third parties to manage such assets
According to § 3 subsection 3 GwG, the beneficial owners of foundations with legal capacity and legal forms for managing or distributing assets in a fiduciary capacity or for instructing third parties to manage such assets include:

  1. any natural person that acts as a settlor, trustee or protector, if applicable,
  2. any natural person that is a member of the foundation council,
  3. any natural person that has been specified as a beneficiary,
  4. the group of natural persons for whose benefit the assets are to be managed or distributed, provided that the natural person that shall be the beneficiary of the managed assets has not yet been determined,
  5. any natural person that has direct or indirect influence on management of the assets or distribution of the profits in any other way, and
  6. any natural person that has direct or indirect influence on an association, who is a member of the foundation council, or has been determined as the foundation’s beneficiary.

What happens if no beneficial owner can be determined?

If you are unable to determine the beneficial owner according to § 3 subsection 1 sentences 1 to 4 GwG (for example because there is no natural person who holds more than 25% of votes, or if the legal entity in question is based in a country or jurisdiction that does not disclose information about beneficial owners), the legal representative, the managing partner or the contract partner’s partner is considered the beneficial owner (§ 3 subsection 2 sentence 5 GwG). However, the contract partner is generally obliged to cooperate in determining the beneficial owner. If they refuse to do so, this is a suspicious factor that would justify reporting of a suspicion.

If the legal representative must be deemed the notional beneficial owner, the clarification process must be documented comprehensively. The documentation must show clearly, for which legal entity clarification was not possible.

Further information about the due diligence obligation and further recording and retention duties is available in our download area.