Businesses in Germany must comply with a variety of legal requirements when establishing and managing commercial relationships. The screening of customers and business partners, in particular, is subject to clear regulations intended to create clarity and visibility. A key issue is who the real people are behind a business or business relationship.

In this article, you'll learn who a beneficial owner is according to the Money Laundering Act (GwG), why equity investments in Germany have to be transparent, and what role the Transparency Register plays. We'll also explain how financial service providers can verify the identities of these individuals and new customers.

Key takeaways

• Beneficial owners are natural persons who exercise actual control over a business or who derive a financial benefit from a transaction.
  
• The GwG requires certain businesses to identify beneficial owners during Know Your Customer (KYC) checks.
  
• The Transparency Register provides a clear overview of the ownership and control structures of companies and associations.
  
• Financial service providers must review and document information on beneficial owners and update this information any time changes occur.
  
• Digital KYC solutions can help businesses with identity screening and documentation.
  

Who is a beneficial owner?

A beneficial owner is the natural person behind a business, company, or transaction who exercises actual control over, or derives a monetary benefit from, that business, company, or transaction. This is not always the same individual as the public-facing owner or contract partner. Frequently, a person acts on behalf of a company or other individuals who make decisions behind the scenes. They are known as beneficial owners.

Beneficial owners according to the GwG

Beneficial owners are legally defined by Section 3 of the GwG, which states that they are natural persons. One type of beneficial owner is a person to whom a legal entity ultimately belongs or who exercises actual control over that entity. Another is someone who initiates a transaction or who establishes a business relationship.

For companies—and most partnerships—the beneficial owner is anyone who directly or indirectly holds more than 25% of the equity, controls more than 25% of the voting rights, or exercises significant influence over the entity in a comparable way. Control over the business could also be exercised indirectly via additional companies or shareholdings. A business might have multiple beneficial owners, for instance, if multiple natural persons each hold above 25% of the equity or voting rights in a GmbH (limited liability company). In the case of multilevel ownership structures, the deciding factor is whether a natural person actually exercises control through intermediary legal entities. An individual is typically considered to have a controlling influence if they hold above 50% of the share or voting rights in the intermediary.

If no such individual is found, despite a comprehensive review, then the legal representative of the company, such as a CEO or managing partner, might instead be considered a so-called fictitious beneficial owner.

Foundations with legal capacity and certain arrangements used to manage or distribute trust assets are subject to special statutory regulations under Section 3(3) of the GwG. In such cases, the GwG determines the beneficial owner based on special rules that differ from the standard rules for companies.

Why must equity investments be transparent?

The primary purpose of disclosing beneficial owners is to counter money-laundering, the financing of terrorism, and other forms of economic crime. It is intended to prevent persons from hiding their identity or influence behind complex corporate or control structures to conceal assets or financial flows. The GwG treats the identification of beneficial owners as a key part of so-called KYC checks that businesses conduct to verify commercial partners.

Pursuant to Sections 10 and 11 of the GwG, obligated entities must identify contracting parties and (fictitious) beneficial owners before establishing a business relationship or executing a transaction. This constitutes one of the general due diligence requirements under the GwG.

Section 2 of the GwG defines which businesses and groups of professional groups are required to fulfill these requirements. Obliged entities include:

• Financial companies
  
• Credit institutes
  
• Financial services institutes
  
• Payment and e-money institutes
  
• Financial investment management companies
  
• Certain insurance companies and insurance brokers
  
• Attorneys
  
• Notaries
  
• Financial auditors
  
• Tax advisors
  

Estate agents and traders in goods are also subject to the due diligence requirements of the GwG in specific cases mandated by law. They must determine the beneficial owners of contracting parties.

What is the role of the Transparency Register regarding beneficial owners?

The Transparency Register is the central register of beneficial owners in Germany. It provides visibility into the equity and governance structures of companies and additional associations. Public authorities and other obligated entities subject to the GwG are able to use these records to determine beneficial owners faster.

Mandatory registration

In principle, legal entities under private law and registered partnerships must report their beneficial owners to the Transparency Register. This notification contains information on the identity of the beneficial owner and the nature and scope of the associated economic interest.

Until 31 July 2021, Section 20(2) of the GwG (previous version) allowed a so-called notification fiction, under which it was not necessary to notify the Transparency Register separately when details about the beneficial owners were already available from other public, electronically accessible registers. These included the Commercial Register, the Register of Partnerships, the Register of Cooperatives, the Register of Associations, and the Register of Civil Law Partnerships.

This exemption was repealed on 1 August 2021, with the entry into force of the Transparency Register and Financial Information Act (TraFinG). Since then, the Transparency Register has been maintained as a "full register." Therefore, notifiable associations are generally required to disclose their beneficial owners to the Transparency Register separately, regardless of whether the corresponding details are already filed with additional registers.

Registering a fictitious beneficial owner

If no natural person is found as the beneficial owner based on the provisions of the GwG, the fictitious beneficial owner shall be registered in the Transparency Register instead. Typically, a fictitious beneficial owner must be reported to the Transparency Register if no beneficial owners are entered in the electronically accessible registers stipulated by Section 22(1) of the GwG. Notifiable entities are responsible for fulfilling this obligation themselves.

How can financial service providers verify equity investments?

Financial service providers must reliably identify and verify beneficial owners as part of their Anti-Money Laundering (AML) due diligence requirements. In practice, they do so by analysing various documents and sources, including information provided by the contracting party, register entries, and records from the Transparency Register. Complex ownership structures could also necessitate tracing ownership and control across multiple levels.

Since equity investments can change over time, a one-off screening is often insufficient. Businesses are required to keep records up to date and monitor their business relationships for risks. If ownership or control changes, or if there is evidence of discrepancies, they must conduct a new assessment.

Here, many financial service providers turn to digital KYC and compliance solutions. These offerings help providers determine beneficial owners, cross-reference information against relevant registers, and detect early changes in equity structures. This allows them to standardise their screening processes, reduce their manual workload, and fulfil their AML requirements more efficiently.

What do businesses need to consider when verifying new customers’ identities?

AML regulations require businesses in Germany to clearly establish the identity of commercial partners and customers. As a rule, they must screen both groups before establishing a business relationship or executing a transaction with them.

What information must be collected?

For natural persons, Section 11(4) of the GwG requires entities to collect a name, place of birth, date of birth, citizenship, and address. These details must be fully cross-referenced with a valid ID document. Section 12 of the GwG lists the documents and procedures that are permitted for this purpose, including official forms of identification, such as a government ID card or passport.

If the customer is a legal entity or another type of company, their name or trading name must be ascertained, along with their legal form, registration number, the address of their headquarters or main office, and the names of the members of the representative body. Businesses are also required to determine the natural person behind the organisation and its beneficial owner.

Documenting and updating customer data

Section 8 of the GwG requires the information and documentation collected during identity verification to be recorded and archived. This creates a paper trail, showing what checks have been conducted and on what basis identification was performed.

Additionally, customer data must not be left in its initial state permanently. Obligated entities have to keep these records current throughout the business relationship and reassess whenever changes occur or when grounds for review arise.

Electronic identification

The GwG provides for both traditional identification using ID documents and certain electronic systems. For example, service providers can use electronic ID systems that meet the security level recognised under the Trust Services Act or the eIDAS Regulation.

Using digital ID systems help financial service providers improve verification efficiency while ensuring they meet statutory requirements for customer onboarding.

How Stripe Identity helps businesses in Germany with KYC checks

Stripe Identity verifies people digitally using their ID documents. With Stripe Identity, businesses can automatically capture ID documents, read specified details, such as name and date of birth, and verify document authenticity. Biometric screening can also be employed depending on the application. In addition, digital platforms can integrate verification processes for connected accounts and users into their onboarding flows via Stripe Connect.

In the context of verifying beneficial owners, digital KYC processes help businesses identify relevant persons and document the details of their corporate structures more systematically. By automating individual parts of the verification workflow, businesses and platforms can reduce manual processes, capture data with greater consistency, and onboard customers more efficiently.

However, the ownership and control of a business must still be reviewed to identify the actual beneficial owner. Identity verification alone does not replace comprehensive KYC checks.

FAQs about beneficial owners