As part of the implementation of the 5th Anti-Money Laundering Directive, the German legislator introduced a small change to Section 154 of the German Fiscal Code (AO). Though it looks inconspicuous at first glance, a further inspection reveals significant consequences. Looking at the explanatory memorandum of this law, it was intended to make things easier for credit institutions (sic!). However, in reality it will make things more expensive. What exactly is all this about?
Table of Contents
The true-account principle of Section 154 AO
Section 154 AO is not part of anti-money laundering law but tax law. The German Fiscal Code concerns the effective and accurate levying of taxes and duties. Section 154 AO contains an important principle in this respect, i.e. the true-account principle. According to Section 154 AO, institutions are obliged to identify the party they are holding an account for. Anonymous bank accounts (such as number accounts) or accounts which are held in the name of a pseudonym do not exist in Germany. Every account must be allocated to a known holder. Even if the explanatory memorandum to Section 154 AO only refers to credit institutions, Section 154 AO also applies to all other institutions that provide accounts (such as e.g. payment institutions or e-money institutions).
Credit institutions have to additionally adhere to Section 24c of the German Banking Act (KWG), according to which they need to record all accounts that fall under Section 154 AO in a data system and provide for automatic access by BaFin or the German Financial Intelligence Unit.
Which accounts are subject to Section 154 AO?
Pursuant to the application decree for Section 154 AO (AEAO), the term “account” refers to “any account on behalf of a third party which is provided as part of a current business relationship and which records incoming and outgoing assets”. As a rule of thumb, all types of accounts will fall under this, unless they are mere internal accounts.
Who needs to be identified pursuant to Section 154 AO?
First, the account holder needs to be identified. This is not an additional obligation as account holders already need to be identified as part of anti-money laundering obligations before a business relationship is established.
In addition to the information required to be recorded under anti-money laundering laws, such as name, address etc., credit institutions also need to record the relevant person’s tax identification number.
In the case of natural persons, this would be the tax identification number within the meaning of Section 139b AO. This is automatically allocated to a person at birth by the German Federal Tax Office. One of the first items of mail new parents receive for their child, apart from a toothbrush from social services, is a letter from the German Federal Tax Office. I could wax lyrical about the connection behind brushing your teeth and paying your taxes but for now I will concentrate on the legal facts.
For legal persons the economic identification number within the meaning of Section 193c AO needs to be recorded. However, this allocation has not yet started and it is still unclear when this identification number will actually be introduced. In the meantime, the tax number of legal persons must therefore be recorded.
In addition to the account holder, the beneficial owner(s) also need(s) to be identified. This, too, is already a requirement under applicable anti-money laundering law. The additional requirement is here, again, the tax number.
Additionally, pursuant to Section 154 AO all persons entitled to dispose over the account (hereinafter referred to as “authorised persons”) have to be identified and their tax number recorded. This is an additional requirement which doesn’t already apply under anti-money laundering law. Such persons include legal representatives of the account holder as well as persons holding a power of attorney with respect to the account.
Current legal situation regarding the identification of authorised persons
Up to now, Section 154 para. 2 AO only referred to Section 11 para. 4 No. 1 of the German Anti-Money Laundering Act (GwG) for the identification of a natural person who is an authorised person. This meant that, as is the case in anti-money laundering law, the relevant institution had to record details regarding the person, such as the name, address, date and place of birth, citizenship and home address. How these details were identified was left open in the law. The application decree merely stipulated that the identification had to be done “on the basis of an official photo ID”.
An institution could therefore also carry out the identification by sending a questionnaire requesting those details to the home address of a newly-authorised person (to verify the address), who then sent back the completed questionnaire together with a copy of their photo ID. Another possibility would have been an online process requesting authorised persons to upload copies of their photo IDs after they had been provided with an access code in the post.
What is new in Section 154 AO regarding authorised persons?
The amended Section 154 para. 2 AO now refers to Section 11 paras. 4 and 6, Section 12 paras. 1 and 2 and Section 13 para. 1 GwG as well as the legislative decrees in connection with Section 12 para. 3 and Section 13 para. 2.
This means: Only the methods listed in Section 12 GwG may be used for identification. In practice, this probably won’t result in many changes. However, by referring to Section 13 para. 1 GwG, the law now states that for natural persons the official document has to be viewed face to face (i.e. at the branch or via PostIdent) or via Videoident. (All other types of identification possibilities, such as the qualified electronic signature, the notified identification procedure or electronic ID cards do not really currently feature in practice as they are not widespread enough).
For institutions this now means that all authorised persons who are added by the account holder will lead to additional costs of around 7-10 EUR per authorised person.
Example: A father has four grown-up children and needs to go to hospital for an operation. For this reason, he issues each of his children with a power of attorney for his account so that they can look after his finances in his absence. This means that every child needs to go to the bank in person or identify via Videoident. The costs associated with this cannot be passed on by the bank as they are the result of the bank fulfilling its legal obligations.
Another example: A company holds a business account. Numerous employees from the accounting department are intended to have access to it. Every one of these employees needs to go through the required identification process. In the case of large companies, this can be a significant number of employees.
In light of this, the explanatory memorandum almost appears cynical when it states that the intention of the amendment was to ease the burden of credit institutions by only asking them to apply one identification procedure. This is because all additional costs resulting from identifying authorised persons in a bank branch or via Videoident are much higher than any alleged savings from only having to apply one type of procedure.
The additional costs are very difficult to estimate for institutions as customers are free to decide how many persons they would like to grant the power to use the account. This results in a locational disadvantage for German institutions. This is due to the fact that there are no EU rules and often no comparable rules in other EU countries so that they enjoy significant competition advantages, rendering Germany an unattractive location for Fintechs. This is very regrettable. And we have yet to see any arguments why this amendment is really necessary in order to prevent tax evasion, and even if, whether it is effective to such an extent that the additional administrative requirements for institutions can be justified. However, when looking at the explanatory memorandum, this does not appear to have been the aim of the amendment.
We remain hopeful that the German Federal Ministry of Finance will limit these consequences in the application decree to Section 154 AO by creating simplifications or exemptions that reduce the burden for institutions to an acceptable degree.
What is new in Section 154 AO regarding beneficial owners?
Pursuant to Section 11 para. 5 GwG, the details of any beneficial owner only need to be recorded and verified through appropriate measures.
For Section 154 AO the legislator now surprisingly goes beyond this. In accordance with the amendment of the law, Section 13 para. 1 GwG as well as the legislative decrees in connection with Section 13 para. 2 are to be applied with respect to beneficial owners. There have not been any legislative decrees in connection with Section 13 para. 2 GwG to date, so we can disregard this for now. However, the reference to Section 13 para. 1 GwG is surprising as this limits the procedure to verify the identity of natural persons to an on-site verification of a photo ID, Videoident or an electronic proof of identiy (eID function of an ID card etc.). Section 13 para. 1, which stipulates that photo IDs must be produced in person, so far did not apply to beneficial owners under applicable anti-money laundering provisions. Therefore, the requirements of the AO go further than the GwG.
Due to the fact that there is also no reference to Section 12 GwG, it can be concluded that beneficial owners have to be identified in person but they may produce a document other than those listed in Section GwG. This means that a rule has been set up that differs to the rules applicable under anti-money laundering provisions. Additionally, it requires a significant amount of effort, for which the justification is that the rules should be the same as those under anti-money laundering laws. Our only hope is that the German Federal Ministry of Finance will clarify a few points in their application decree.
Brief summary
Section 154 AO has been amended. Authorised persons as well as beneficial owners now have to be identified by producing documents on-site or via Videoident (or via another means such as electronic signature, which is not very common in practice). This results in significant additional costs for institutions and with respect to beneficial owners, this means a tightening of the rules compared to applicable anti-money laundering laws.
Addition
Section 154 AEAO contains some exceptions which limit the number of persons who need to be identified, e.g. in the case of company representatives, if at least five persons are already authorised persons, all of whom are entered on public registers and in respect of whom a legitimacy check has already been carried out. These exceptions continue to apply. However, they are not always effective which means that the effects described in the article continue to hold true for institutions.
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