On 28 December 2022, Germany’s Second Sanctions Enforcement Act [Sanktionsdurchsetzungsgesetz II – SDG II] entered into force. It prohibits cash payments for real estate acquisitions and requires certain types of land register information, such as beneficial ownership, to be registered in the public Transparency Register. This Act will probably have a major impact on real estate transactions and is drawing criticism from interest groups within the legal field.

Overview and context

On an international comparison, the German economy is regarded as particularly susceptible to money laundering. This is the reason why Germany’s Social Democratic Party (SPD), Green Party (Grüne) and Liberal Democrats (FDP) therefore set the goal of making action against money laundering more effective across Europe and of “taking appropriate steps to combat illegal financing in real estate”. At the same time, the coalition parties indicated their wish to improve the quality of the data held in the Transparency Register and to “link the database of the land register with the Transparency Register”.

The First Sanctions Enforcement Act [Sanktionsdurchsetzungsgesetz I – SDG I] entered into force in May 2022. The intention of SDG II is now to improve the structure for the operative implementation of sanctions and for combating money laundering.

Content of the draft of the Act

The Act introduces a number of changes. Of particular relevance to the real estate sector are the planned changes to the German Money Laundering Act [Geldwäschegesetz – GwG]:

1. Prohibition on cash payments in real estate transactions (Sec. 16a GwG)

Although this is not commonly done in sound business practice, it has been possible up to now to purchase real estate in cash. This practice is now being abolished by the introduction of Sec. 16a GwG. From 1 April 2023, it will only be possible to purchase real estate using means of payment other than cash, crypto assets, gold, platinum or precious stones. All parties to the transaction are required to present satisfactory proof of payment, for example a payment confirmation from a financial institution. Exceptions from this requirement are permitted if the consideration does not exceed EUR 10,000.00 or is processed through a notarial escrow account. Notaries then have to examine whether the evidence submitted is plausible and may make the formal request for transfer of title in the land register only when they have established such plausibility, or when a request they made to the parties to submit plausible evidence has been unsuccessful. If there are reasonable grounds to suspect money laundering, the request for transfer of title in the land register may be made only if the reporting obligation under Sec. 43 Para. 1 GwG has been complied with.

Moreover, notaries remain under an obligation to undertake a plausibility examination within one year after submission of the request for transfer of title in the land register if any consideration remains to be made post transaction. This could be the case, for example, where amounts retained from the purchase price are released.

2. Expansion of the Transparency Register (Secs. 19a et seq. GwG-E)

Another change under the new Act is that from 1 January 2023, the information held in the Transparency Register is expanded to include certain types of land register information, specifically the Local Court [Amtsgericht – AG] having jurisdiction, the land register district [Grundbuchbezirk], the number of the land register folio and all plots registered in the land register index [Bestandsverzeichnis] as well as the nature, scope, commencement and end of the rights the respective beneficiary has over the real estate concerned. The land register office [Grundbuchamt] transfers this information, specifying the owners registered in Division I of the land register, to the registrar entity [registerführende Stelle], where it will be accessible not only to public authorities and the notary’s office, but also to credit institutions and financial services institutions and insurance companies. This means that it will be possible to identify the real estate assets owned by a company registered in the Transparency Register directly on the basis of the information held in the Transparency Register, without the need to inspect the respective land register. The transfer of information from the land register is due to be completed by 31 July 2023.

If obliged entities [Verpflichtete], as defined in the GwG, find any discrepancy between the information the Transparency Register holds about a specific real estate asset and the information submitted to them, they are required to notify the registrar entity without undue delay.

Evaluation

Germany’s voluntary lawyers’ association Deutscher Anwaltverein e.V. (DAV) and the German Federal Chamber of Notaries [Bundesnotarkammer – BNotK] joined other interest groups within the legal field in the criticism they made (some of them in strong terms) upon the original draft of the Act. In response to this criticism, some of the requirements of the original draft were mitigated (e.g. the obligation of notaries to exercise post-transaction control was reduced from two years to one year). Nevertheless, concerns remain:

Although the prohibition on cash payments and the improvements in the facilities for Germany-wide searches for real estate assets are widely welcomed in principle, both the DAV and the BNotK raised major concerns about how the planned changes are to be implemented based on the proposed draft. In the opinion of the DAV, the examination for plausibility is not sufficiently defined, which makes the outcome of notaries’ examination prone to dispute and litigation and risky in practice. The BNotK also rigorously opposes the obligation to exercise post-transaction control once the transfer of title has been entered in the land register, stating that this is incompatible with the overall system, creates both problems in practice and unnecessary work and effort without achieving the desired result. Instead, the BNotK proposed a reporting obligation in cases where the consideration or any part of it is to be made after the purchase without due reason or explanation. However, this proposal did not make it into the final draft for the Act.

The manner in which the Transparency Register is to be expanded is also met with criticism. The BNotK pointed out that the requirement of a legitimate interest as justification to inspect the land register is circumvented if information about real estate assets is accessible not only to notaries but, through the Transparency Register, also to financial institutions. Apart from that, it stated, double record keeping increases the potential for mistakes and creates unnecessary bureaucracy. Apart from that, according to the BNotK, there is no clear concept to be seen for the future “landscape” of registers: It can be inferred from the cover letter by which the draft for the Act was circulated to stakeholders that plans exist to introduce a database of real estate transactions. However, it is not clear how this is to interlink with the (expanded) Transparency Register and the land register.

Conclusion and outlook

As the saying goes, having good intentions is not enough. This rings true both for the manner in which the prohibition on cash payments is to be implemented and for the expansion of the Transparency Register. The prohibition on cash payments places a whole range of new obligations on notaries that will cause a considerable amount of additional work and effort in practice – if it is practicable at all. Apart from that, it is not clear what effect non-compliance with the requirement to pay the purchase price by correct means would have if title has already been transferred in the land register. The expansion of the Transparency Register is also not the right means to achieve the desired purpose. It would indeed be good to have a way to run Germany-wide searches for real estate assets. However, a single, Germany-wide database (the legal basis for which has been in place since 2013) with suitable search tools would have been a much better way to achieve this. Instead, the expansion of the Transparency Register results in unnecessary double data storage and dilution of the requirement for a legitimate interest to justify the inspection of information held in the land register.