Second Sanctions Enforcement Act: draft law increases pressure on companies

On Friday, 11 November 2022, the Bundestag factions of the traffic light coalition introduced a draft for a so-called second Sanctions Enforcement Act (Sanktionsdurchsetzungsgesetz II; SDG II) into the Bundestag. The new regulations are to supplement the Sanctions Enforcement Act I (SDG I) already passed by the Bundestag in May 2022. If the legislative process proceeds swiftly, the legislative package could still enter into force this year. For companies, the new Act primarily means that public pressure to comply with sanctions is increasing further. Sanctions and business partner screenings therefore remain indispensable tools for avoiding legal violations and official investigations.

SDG II provides a clear allocation of competencies to the federal government

Imposing sanctions is one thing - enforcing them is another. With SDG I and now SDG II, the federal government intends to replenish the legal toolbox for enforcing sanctions. Effective structures are also being created for the prosecution of violations. To this end, in particular the investigative powers of the authorities to locate sanctioned assets were expanded in SDG I. For example, investigators can now search homes and offices if they believe sanctioned assets are hidden there.

In practice, however, not a great deal has happened since then, as the responsibility for investigations has rested with the federal states and their numerous investigative authorities to date. There was therefore a lack of clear responsibilities and pooled know-how. The SDG II aims to change this through a clear allocation of competencies to the federal government. In addition, investigative powers for prosecuting money laundering and enforcing sanctions are to be pooled.  

Important contents of SDG II

The current draft of SDG II essentially provides for the following innovations:

• A so-called Central Office for Sanctions Enforcement [Zentralstelle für Sanktionsdurchsetzung, ZfSD] is to be established within the operations of the German Federal Ministry of Finance. The ZfSD will initially be located at the General Customs Directorate [Generalzolldirektion] with headquarters in Bonn. Among other things, it will be responsible for conducting investigations with regard to assets frozen by EU sanctions measures and for seizing sanctioned assets. To this end, the ZfSD is to be given extensive powers. These include, for example, rights to information and access, as well as the authority to appoint a special representative to monitor compliance with sanctions. In addition, a system is to be set up at the ZfSD through which notices of potential or actual violations of sanction regulations can be submitted.
• Numerous changes are also planned within the framework of the Transparency Register:
• The ownership and control structure overviews produced by the Transparency Register are to be made available for use by public authorities. In addition, certain information on corporate real estate is to be made available in the Transparency Register.
• In future, foreign companies with real estate property in Germany will have to report not only new acquisitions, but also their existing properties.
• In the future, when companies do not declare their beneficial owner, they will have to justify this to the Transparency Register. This is intended to prevent cases of circumvention and improve transparency regarding ownership and control structures.
• For real estate transactions, payment with cash, cryptocurrencies and commodities are to be prohibited. 
• Sanction measures of the UN Security Council are to be directly applicable in the future, i.e. without prior implementation by national law.
• Finally, the reliability regulations in the financial supervision laws are to be adjusted. For example, under the revised version of the German Banking Act [Kreditwesengesetz, KWG], individuals and companies will be deemed unreliable in future if financial sanctions have been imposed on them. In addition, managing directors, supervisory board members or comparable executives will be considered unreliable if they work for a sanctioned company. Individuals and companies can defend themselves against this unreliability fiction by presenting grounds for their exemption.

What should companies do now?

• Companies should urgently check, if they have not already done so, whether their compliance measures for money laundering prevention and sanctions checks meet the current standards. 
• In the future, the register maintained by the ZfSD will provide another source of information for conducting sanctions checks. Companies should use this register to verify the results of their own sanctions check.
• Foreign companies that own real estate in Germany have to report their existing real estate property to the Transparency Register by 31 December 2023.
• Financial service providers should take precautions in case the new unreliability fiction under the German Banking Act applies. To this end, a possible preventative measure is the development of a defence strategy against the unreliability fiction.
• In the future, companies with foreign business dealings will also have to pay particular attention to the sanctions policy of the UN Security Council, as its sanctions measures will be directly applicable in the future.
   

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