In recent years, Germany has increasingly focused on implementing regulations and provisions linked to money laundering prevention. In doing so, Germany has followed EU requirements including the recently passed 5th Anti-Money Laundering Directive (Directive [EU] 2018/843 of 30 May 2018). Whereas both EU and German legislation have been traditionally focused on the prevention of the use of financial systems for the purpose of money laundering (or terrorist financing), the focus is now starting to shift to money laundering activities in other industries which are perceived by competent authorities as potential areas of risk. One of these industries is the real estate sector.
First German AML Analysis considers German real estate sector as a high-risk sector
In October 2019, the first German National Money Laundering Risk Analysis (Erste Nationale Risikoanalyse, the AML Analysis) was published for the years 2018/2019 by the German Ministry of Finance (Bundesministerium der Finanzen). According to this analysis, money laundering risks in the real estate sector are regarded as “high”.
The reasoning behind this assessment is that real estate is one of the major sources of national and international investment within the German market – due to high transaction volumes and value stability. In addition, real estate investments provide many possibilities to either disguise the source of the funds invested or to cover up the respective ownership structures, for example by using and incorporating complex corporate structures, making these activities particularly vulnerable to potential money laundering.
Lack of transparency in share deals
Despite real estate owners in Germany being listed in the land register (Grundbuch) to ensure a higher degree of transparency with regards to ownership, the German Ministry of Finance identified one particular investment scenario which may lead to complications when it comes to the identification of incriminated funds and to the identification of the real beneficiary. According to the AML Analysis, this risk is represented by so-called “share deals”.
In a share deal investment, the investor does not become the owner of the respective real estate but only purchases shares of a property company who in turn is the legal owner of the real estate and, as such, is the only participant in the deal that is listed in the land register. Share deals, therefore, can provide two major advantages for potential money launderers: (i) investors will not be listed in any register, and (ii) there is no need for a notarial certification since, under German law, such certification would only be necessary if the investor becomes the direct owner of the real estate. As a consequence, share deals are particularly suitable for concealing the true economic conditions in a real estate investment.
This observation is in line with a study from Transparency International published in December 2018, which also concluded that the real estate sector is particularly vulnerable to money laundering risks. According to the study, causes include the structure of the sector and inadequate laws and resources of investigating authorities.
Nevertheless, the presence of money laundering risks in real estate sector investments does not translate into an obligation by each market participant to implement specific preventive measures under the German Anti-Money Laundering Act (Geldwäschegesetz, GwG). The obligation to implement an anti-money laundering compliance management with specific measures only applies to certain “obliged entities” that are explicitly outlined in the GwG. Therefore, not each market participant who acts within the real estate sector is to be considered as such obliged entity, but must be assessed on a case-by-case basis. However, an amended version of the GwG will soon be implemented, which will expand the number of actors in the real estate sector required to take preventive measures, as well as giving more powers to the government’s Financial Intelligence Unit, including access to data from other investigative authorities.
Awareness within the financial sector
Credit and financial institutions should be aware of money laundering risks in connection with real estate investments and with share deals in particular, since it might become necessary for them to conduct enhanced due diligence with regards to such transactions. This also applies to attorneys, accountants and tax consultants that are somehow involved in these transactions.
 https://www.transparency.de/fileadmin/Redaktion/Publikationen/2019/Studie_Geldwa__sche_web.pdf (last access on 5 Nov 2019).