Germany fights back against money laundering in the property market

It is widely acknowledged that for all the positive appeal of the German legal environment and investment framework, which practically acts as a guarantor of good and safe title to almost any property acquisition, the German real estate market has other attributes that make it attractive to international capital. For all the capital inflows stemming from legitimate corporations and private equity, a portion of that capital is recognised as being of dubious provenance, and would not hold up too well to close scrutiny as to its origins, as many shadowy organisations who move money around the world are all too aware.

Among the characteristics of the German real estate market, belying the reputation of the country as a safe and well-regulated jurisdiction, is that it is extremely susceptible to money laundering. Dubious transactions via straw men or deals between criminal clans are a big problem, above all in Berlin. According to an investigation from the year 2015, several billion Euros are laundered every year via the purchase of German properties, which reached record levels in 2019. 1,266 cases of suspected money laundering were reported over the last year according to an annual report by the Financial Intelligence Unit (FIU), the German government’s anti-money laundering unit, now part of German customs. There was a huge increase in the number of cases reported by brokers, which had risen to two and a half times as many as those reported in 2018.

The real estate sector is a very small part of the overall problem, accounting for only around 1% of all reported cases. In fact most cases arise from the financial services sector, which has seen a 12-fold increase in reports since 2009. A big problem for the authorities is the financing of purchase prices via complex - often foreign - company structures, whereby the shareholders are difficult to identify or companies with no record of commercial activities are set up purely for the purposes of transaction financing.

The German government has acknowledged the problem and the German anti-money laundering act (Geldwäschegesetz - GWG) has been tightened over the years, for example it now allows the government not only to investigate investment transactions but also letting deals where the rent is in excess of €10,000 per month.

On 1st August, the anti-money laundering act was amended to introduce the transparency register and financial Information Act (Transparenzregister- und Finanzinformationsgesetz - TraFinG). This now imposes obligations on companies which buy German properties in the form of share deals. The purpose of the act is to combat money laundering and the financing of terrorism and to bring greater transparency with regard to companies and their commercial beneficiaries, which are defined as those persons who own over 25% of the capital or voting rights either directly or indirectly or otherwise exert control. All listed companies and other entities, for which information is otherwise available from the commercial registers or companies registers, will also have to report this information separately to the transparency register.

Civil law partnerships (Gesellschaften bürgerlichen Rechts - GbR) are excepted but only for the time being. They will also be subject to the obligations from January 2024 when the Act for the Modernisation of Private Limited Company Law (Gesetz zur Modernisierung des Personengesellschaftsrechts - MoPeG) comes into force.

The increased registration obligations regulate not only companies themselves but also the many real estate transactions carried out by foreign purchasers. Foreign associations and trusts, which have not already listed their commercial beneficiaries in the register of another EU member state, must now report the details to the German transparency register when they purchase a property in Germany. This had previously only related to the direct purchase of a German property, but the TraFinG has extended the obligation to include share deals. If the foreign company does not comply with its registry obligation, the notary may not notarise the transaction.

In order to avoid problems for companies which have not previously been required to register, there is now a set of transition periods, which will end in March, June or December of next year depending on legal form of the company. There are no transition periods in the case of property transactions.

As the German market, and particularly the Berlin market, is so vulnerable to money laundering, the State of Berlin senate had developed proposals for a national property register. Berlin’s justice senator Dirk Behrendt (Greens) says that money launderers have never had it so easy, especially in the German real estate market, which is why the State of Berlin wanted to push forward with a nationwide property register.

The purpose of the central property register for Germany was to create greater transparency relating to the ownership of properties and combat deception in the real estate market. The paper submitted by the State of Berlin and discussed by state parliaments in March asks the German government to make changes to amongst other things the land register ordinance (Grundbuchordnung - GBO). But only a minority voted in favour. The proposals were rejected by the Federal Council (Bundesrat) in March of this year. The federal government was also not in favour of a national register. The reasons for turning down the register were that “the introduction of a register would result in significant costs and additional bureaucratic effort and the fact that there has been no impact assessment to date."

A planned uniform land register data base to combat money laundering in the real estate sector due to be introduced in November 2019 collapsed. The government says that nothing will happen before March 2024 because of the great expense and effort in the digitalisation of all the data.

Another idea from the State of Berlin is to exert influence in the real estate sector by the control of notaries, as all deals must be notarised. It feels hindered by central government in the fight against money laundering in real estate deals and now feels held back by the reform of the money laundering act.

In January 2020, the Berlin Senate set up a five-man task force to sit with the notary supervisory authority at regional court level in order to review the activities of notaries. Behrendt says this does not imply that notaries are partly to blame for money laundering itself, but that they should be obliged to check a real estate deal for plausibility.

Until July of this year, the money laundering supervisory authority (Geldwäscheaufsicht) was allowed to report suspicious activity to the central authority for investigations into financial transactions. From August, such reports may only be made when definite cases of money laundering become known. This makes the task very difficult for the task force, says the senator for justice. By the end of July, the Berlin task force had reported 86 cases of suspicion resulting from the supervision of notaries. This is no longer possible due to the changes in the money laundering act, says a lawyer acting on behalf of the senate.

Most observers agree that, whilst legislation is in place in an attempt to control money laundering, taking the fight directly to the criminals who use the real estate market as a money laundering instrument may be some way off as the sheer level of bureaucracy required in such a huge segment is prohibitive.