It is not every day that one criminal law enforcement authority raids another. However, that is just what happened when, on 14 July 2020, state prosecutors entered the German Financial Intelligence Unit (FIU) armed with a search warrant.
The FIU is Germany‘s central federal authority for receiving, collecting and evaluating suspicious activity reports (SARs). Banks and many other corporations must file these reports under the German Anti Money Laundering Act when they suspect funds to stem from an illegal source. If the FIU confirms and further substantiates the suspicion of money laundering, it must forward the gathered intelligence to state prosecutors for them to take up criminal proceedings.
'Too little, too late,' the Osnabrück prosecution apparently found after the FIU had failed to (timely) forward eight SARs German banks had filed on suspicious transactions to Africa. The prosecutors instigated criminal proceedings against unknown FIU officers for obstruction of justice in public office – a serious crime that carries a six-month minimum prison term – and raided the FIU’s Cologne offices with the help of state police.
Backlog of 46,000 SARs
While unusual, the raid does not come as a complete surprise to German anti-money-laundering (AML) circles, as there has been mounting criticism of the FIU recently.
Since 2017, when the FIU was transferred from the Federal Criminal Police to Customs (under the authority of the Federal Ministry of Finance), media, politicians and some law enforcement authorities have voiced considerable criticism of the FIU’s effectiveness.
In August 2019, according to media reports, a backlog of more than 46,000 SARs had accumulated at the FIU. Unsurprisingly, cases were not assessed in time.
Under German AML law, financial institutions must halt suspicious transactions and file an SAR via an electronic interface with the FIU. The FIU then has three days to order the bank to stop the transaction for good. If this period passes without feedback from the FIU, banks may carry out the transaction. Obviously, a backlog of tens of thousands of SARs will lead to transactions going through unchecked against the FIU’s data banks.
Behind closed doors, the FIU was also criticised by some law enforcement authorities for allegedly not properly investigating cases. Some put this down to limited expertise of criminal matters. But more importantly the FIU seems to be considerably understaffed.
In a first attempt to enhance the FIU’s effectiveness, German lawmakers extended its data access rights, eg to the central public prosecutor's case register. The FIU also adapted its working procedures. SARs are now subject to a risk-based initial assessment, so that urgent cases, namely cases of suspected terrorist financing, are processed with priority.
Still, this week’s raid shows that much remains to be done at the FIU – and it comes at a bad time, as Germany will be subject to a periodic screening by the OECD‘s Financial Action Task Force (FATF) later this year. Many expect Germany to face criticism following the assessment.
SAR filing obligation
The FIU does not however bear all the blame for the backlog of SARs. Legislation and enforcement have led to a barely manageable flood in SAR filing. German AML law gives financial institutions little choice but to file low-threshold SARs even when there is merely a vague suspicion of money laundering or terrorist financing. When in doubt, it is usually better to file a SAR than not.
Under German AML law, a SAR must be filed with the FIU without undue delay if facts indicate the funds are derived from certain legally defined predicate offences for money laundering or could be related to terrorist financing.
The reporting obligation applies regardless of the value of the transaction and whether it has been rejected, is pending or has already been executed. The bank or other corporation obliged under German AML law has no discretion, but a strictly limited margin of judgement, whether to file a SAR.
Strict enforcement, including personal fines against financial institutions‘ AML officers for alleged late SAR filing (such as in a well-published 2018 case before the Frankfurt high court), has also contributed to more and more SAR filing.
Impacts for financial institutions in Germany
It will be seen in the coming months if the FUI raid brought up more cases and will lead to a peak in German AML investigations.
Financial institutions can watch this dispute between the FIU and the prosecution from the side-lines. However, in view of the far reaching and little differentiated reporting obligations and their harsh enforcement, banks can only protect themselves by continuing to submit low-threshold SARs.
This trend will likely be reinforced by a planned amendment to German AML law implementing EU directive 2018/1673 on minimum standards for the criminalisation of money laundering. The German lawmaker intends to dramatically extend the catalogue of predicate offences to money laundering to almost all conceivable white-collar crimes (see our February 2020 blog post for details). Then, even more transactions will be considered to constitute criminal money laundering and fall under the reporting obligation.
Going forward, further pressure on financial institutions is expected as a result of the European Commission’s action plan on AML, which aims to ensure more effective supervision and the enforcement of the statutory AML measures in all EU member states (see our May 2020 blog post for details).
Given these developments, financial institutions and other companies obliged under German AML law should review and (if necessary) adjust their AML procedures to mitigate the substantial sanction risks for both the company and the individuals responsible for the company's AML and compliance management system.
If there was ever any doubt that Germany is serious about AML enforcement, the picture of prosecutors and police raiding a fellow authority charged with investigating financial crimes should set the record straight. Corporations subject to AML reporting obligations must remember that it will not be the overburdened FIU, but the respective supervisory authorities or the state prosecutors who are responsible for sanctions once a corporation is suspected of alleged AML violations. No leniency should therefore be expected.