Money laundering impacting real estate deals: laws to be tightened
Germany’s money laundering laws affecting real estate deals are being tightened yet again: in the case of deficient transparency, notaries will be required to decline notarisation instructions under certain circumstances.
The Bundestag, or lower house of parliament, has drafted new laws aimed at increasing transparency in the case of real estate purchases by foreign investors, and enforcing stricter reporting requirements for real estate brokers, in an overall effort to combat money laundering. The drafts still require the approval of the Bundesrat upper house.
The “re-tightened” draft of the law for the implementation of the 4th EU money laundering directive amendment guideline concluded by the federal financial committee on 13th November is intended amongst other things to create greater transparency in the case of real estate transactions and increase the effectiveness of the preventative measures against money laundering. This objective complies with the 5th EU money laundering directive, whose regulations build on the 4th directive and which Germany is required pass into federal law by 10th January 2020.
In future, a notary will be required to decline a notarisation instruction for the purchase of a property if a foreign real estate investor does not disclose its ownership structure. Transparency registers are available to prevent transactions being carried out by “men of straw”.
Money laundering: real estate brokers required to report suspicious lease contracts
Real estate brokers have been regulated by the German money laundering act (Geldwäschegesetz – GwG) for many years. However, amongst other things the new law will require that suspicious activity is reported at an earlier stage than in the past, and brokers must now comply with the EU guideline not only in the brokerage of purchase contracts, but must also report lease contracts and operating leases with a rent of over €10,000 p.m. to the government’s Financial Intelligence Unit (FIU) which is part of federal customs. Also new is that notaries must report certain suspicious real estate deal structures to the FIU. There is now an electronic transparency register available for this purpose.
FIU: real estate market extremely vulnerable
The annual report of the Bonn-based FIU lamented the extreme vulnerability of the real estate market in terms of dubious practices: in actual fact, very few cases in the sector have been reported to them. According to the FIU, of the 77,252 reported cases of suspected money laundering or the financing of terrorism, 76,137 emerged from the financial sector and just 597 from other segments, of which just 31 were from real estate brokers. According to the FIU report, the greatest proportion of reports came from the banking sector, with 84%. The number of obligatory participants from both the financial and non-financial sectors rose from 1,220 in 2017 to 1,591 in 2018.
According to a report by the German Association for Housing, Urban and Spatial Development (Deutscher Verband für Wohnungswesen, Städtebau und Raumordnung) the most important investment class in Germany is real estate with gross assets in the order of around €13.9 trillion in 2016 (80.3% of all investment assets), making it particularly vulnerable to criminal activity. The real estate sector has itself been busy in this regard, with trade association RICS supported by its member market participants having already drawn up global anti-corruption guidelines, which came into force on 1st September.
More and more mafia groups are shaking up the German real estate market
According to a study by Transparency International, around €30 billion was laundered via German real estate in the year 2017 alone, including huge amounts laundered by the mafia from the cocaine trade. In the recent past, 77 properties in Berlin and Brandenburg with a value of around €9 million were confiscated, as they had supposedly been purchased with the proceeds of crime.
The German government is aware that the German real estate market is attracting more and more mafia groups, primarily from Russia and Italy: in June 2018, the government reported that of the 563 recorded cases brought against organised crime in the year 2016, 7% had involved money laundering activity via real estate investments. At the same time there are huge numbers of unreported cases. According to the government, €237.5 billion changed hands in the real estate sector in 2016. In the same year the state preliminarily confiscated €61 million worth of property because of suspicious activity in the real estate sector. In June 2018, the federal government conceded that there had previously been a lack of control by the authorities in this regard.
Greater powers for the Financial Intelligence Unit (FIU)
In order to avoid the infiltration of illegal money into legal currency, the FIU will in future have increased authority and knowledge-gathering powers in terms of automated data matching with the various data banks operated by the police authorities (INPOL Bund), which will include the matching of highly sensitive data. In future there will also be money laundering obligations in the case of auctions by the public sector, in particular in the area of forced sales ordered by the courts.
According to the FIU, most suspicious activity in the case of real estate transactions was reported as a result of payments in cash: the determination of the origin or use of funds had been either impossible or only possible by means of extensive investigation. A further risk factor presented by money laundering is the overvaluation or undervaluation of properties. In this case the processes covered by the law, by which inexplicable value deviations involving a sale property are established, were often associated with a quick resale of the property or structures by which the purchaser and seller were already associated.