Was Ari Onassis asked for a copy of his electricity bill when he called Kiel to have the "Stormont" converted? Probably not. If he called today, the question would certainly come up. Why actually? Many a yacht owner has certainly asked themselves this question when asked to provide a large number of certificates and documents such as an electricity bill or a utility bill when purchasing a yacht. It is not uncommon for the abundance of documents to be filled out and proof to be provided to lead to head-shaking and incomprehension on the part of those involved.
In the following, we would like to shed some light on the background to these obligations and provide an overview of the statutory documentation and verification obligations, which are neither insignificant nor insignificant today, especially in the area of yacht purchase and sale.
"KYC" - what does that actually mean?
The abbreviation "KYC" stands for "Know Your Customer". A KYC check describes the standardised process of identifying and checking new and existing customers based on the requirements of money laundering law. The legal basis for the KYC check in Germany is formed in particular by the EU Money Laundering Directives and the German Money Laundering Act (GwG). The obligation to carry out such a check in relation to new and existing customers applies to a group of persons precisely defined by law. These persons have to fulfil extensive obligations such as documentation and reporting obligations. The group of obligated persons includes, in particular, credit and financial services institutions, tax consultants, auditors, but also estate agents and, under certain conditions, lawyers.
What is the purpose of a "KYC" check?
All KYC requirements are aimed at preventing economic crime. Abuse of the financial system through money laundering and terrorist financing is particularly targeted. For example, the KYC process should make it possible to identify bogus companies and also prevent money of illegal origin from being channelled into the economy, or "laundered". In order to achieve this, control and ownership structures of companies must be disclosed and all parties involved must be identified as part of a KYC audit. This applies in particular to the beneficial owners of companies - the so-called "Ultimate Beneficial Owners" or simply "UBOs".
Why are KYC examinations particularly important in the buying and selling of yachts?
One principle that comes into play in the context of KYC audits is the principle of risk analysis. The more susceptible certain types of transactions are to money laundering, the higher the requirements placed on the obligated parties by the relevant laws. The fact that very high asset values are almost always involved in yacht transactions is just one reason why the industry could be of interest to criminals. Similar to property transactions, large sums of money can be injected into the economy in one fell swoop. In addition, the frequent use of owner and offshore structures organised under company law represents a gateway for concealing the actual parties involved. There are also other potential risk factors, such as the involvement of politically exposed persons or the possibility of carrying out several transactions in very quick succession and being able to move large assets quickly internationally. As the sector is therefore inherently a high-risk industry, increased requirements are placed on the KYC checks to be carried out in each case.
What information is usually requested?
The KYC check is intended to enable the identification of the persons involved and, in particular, the beneficial owners, and also to ensure that no funds of illegitimate origin are used. A copy of an official identity card (details of first name, surname, place of birth, date of birth and nationality) and proof of the person's place of residence are therefore generally requested to identify so-called "natural" - i.e. not legal - persons. In Germany, this is facilitated and made possible by the registration system. However, the German registration system is rather a special case internationally. In international legal transactions, it is therefore customary to provide proof of residence by submitting an electricity or water bill. This practice has now been adopted by the entire yachting industry. As the documents often cannot be submitted in the original, copies often have to be notarised, for example by a notary.
Tip
If documents are submitted as proof of residence, for example, these must generally only indicate this. If you prefer not to disclose the amount of your electricity bill, such information that is irrelevant for proof of residence can be made unrecognisable or blacked out in the document. The only important thing is that the document continues to fulfil its actual purpose of providing proof of residence.
With regard to legal entities, such as companies, the focus of a KYC audit is on the disclosure of the ownership structure and the identification of the persons managing the company (and benefiting from the company's earnings) or the authorised representatives acting on behalf of the company. For this purpose, extracts from the commercial register, founding documents and proof of the solvency of companies must be submitted. Ultimately, the individuals behind the company names must always be identified and the evidence mentioned in the previous paragraph must also be submitted for them. Depending on the jurisdiction, additional forms and declarations may also be required.
Identification of the parties involved can generally be waived if the obliged entity has already identified the person concerned on a previous occasion as part of a KYC check, the information collected at that time was recorded and there is no doubt about the information already provided. In addition, the source of the assets used must also be plausibly presented or proven. This can be done, for example, by providing proof of income or by submitting relevant documents such as auditor's reports. There is no general answer as to how much and which evidence must be provided in each individual case. Individual characteristics of individual jurisdictions and the specific risk analyses mean that, despite the aim of standardisation, there is still no completely uniform procedure.
Conclusion
Scandals such as the data leak known as the "Panama Papers" continue to impressively demonstrate how vulnerable the international financial system remains, particularly in terms of money laundering and tax evasion. Even if it can be understandably time-consuming, tedious and annoying to go through an extensive and complex KYC procedure, one should nevertheless be aware that this serves to protect all parties involved in the respective transaction and is a simple legal necessity for the participating financial service providers and many advisors.
The constantly changing and increasingly internationalised processes within the scope of know-your-customer checks serve to curb white-collar crime in the long term and represent an essential means of prevention today. The ongoing process of digitalisation is leading to new opportunities and new potential risks in this area - and will certainly also lead to new obligations in the future. An example? Gladly: Organisations such as the Financial Intelligence Unit (FIU) as the central office for financial transaction investigations will ensure greater digital uniformity and transparency in the future. From January 2024, all obliged entities within the meaning of the Money Laundering Act will be required to register with the FIU's electronic reporting portal. The aim is to standardise and intensify the processes involved in KYC checks.
There was no such reporting obligation in the case of Ari Onassis either. He literally lived in a different era - after all, his yacht has certainly become an expression of a timeless design and attitude to life.
Experts for all questions relating to yacht law
The yacht lawyers Dr Tim Schommer (tim.schommer@clydeco.com) and Dr Volker Lücke (volker.luecke@clydeco.com) have been advising yacht clients from Germany and abroad for over 18 years. They advise on the planning and construction phase, the purchase and sale, the owner structure, yacht operation including insurance, crewing and charter as well as the handling of damage and third-party claims.
