'Enormously expanding' criminal liability for money laundering: (second) update on Germany’s new draft law

A few weeks ago, the German government published its official draft bill reforming the crime of money laundering in Germany (section 261 of the German Criminal Code (StGB)). If the draft bill becomes law, as is widely expected, Germany will have one of the world's most extensive criminal statutes on money laundering.

The new bill has been harshly criticised by those in the anti-money laundering (AML) community, particularly changes targeting petty crimes. These are going to increase the burden on law enforcement agencies, which are already struggling to enforce today’s much narrower offence, and raise the level of risk for any company doing business in Germany.

How did we get here?

The latest proposed definition on criminal money laundering is the result of a legislative process in which the boundaries of criminal liability have been drawn wider with every new draft.

Starting point

Germany’s current money-laundering statute targets organised crime. It punishes not only intent but also being recklessly unaware of the illegal origin of the funds. However, the handling of illicit funds is only a crime if the money stems from a particularly serious predicate offence (the underlying crime that originally generated the incriminated funds). Fraud, for example, is only a suitable predicate offence if committed commercially or as part of a group whose purpose is the continued commission of crimes.

Handling proceeds from other crimes, such as tax evasion or capital market offences, is (in most cases) not a criminal offence in Germany at present.

The trigger: EU Directive 2018/1673

This EU directive, which needs to be transposed by member states by 3 December 2020, does not require Germany to implement big changes to its criminal statute. Rather, the main goal is to standardise criminal liability for money laundering in the EU, and act against organised and cross-border crime.

But the dilemma faced by the German legislator was that implementing the directive requires the inclusion of an additional list of predicate offences scattered widely across German criminal law that cannot be handled uniformly.

First attempt of a draft in January

The first attempt made in January to revise section 261 StGB resulted in a five-page behemoth. In a February blog post, we criticised how broad the suggested definition of the initial draft had been.

The new, vastly extended catalogue of predicate offences in section 261 StGB covered practically all conceivable white-collar (and other) crimes, and often just listed entire parts and chapters of the criminal code as qualifying predicate offences to money laundering.

Second (and first official) draft in August

In our August blog post, we were surprised to see that the first official version of the draft bill, published by the Federal Ministry of Justice, went even further by introducing the all-crimes approach, meaning all crimes may constitute a suitable predicate offence.

The explanatory memorandum hinted that the EU directive’s limited catalogue of predicate offences was based on limited EU competences, concealing the fact that the EU legislator explicitly leaves it to member states to delimit the range of listed offences.

One cannot help feeling that the legislator eventually had chosen the all-crimes approach out of practicality. However, it was to the draft's credit that it eliminated reckless money laundering due to the introduction of an all-crimes approach.

The government’s draft bill

The third (and likely final) draft bill has drawn the boundaries of criminal liability even wider by taking the all-crimes approach from the second bill and adding (today’s) criminalisation of mere reckless behaviour.

Handling money from even the pettiest of crimes shall be punishable under the government’s draft, even if the perpetrator (recklessly) does not know that the money stems from a crime or wrongfully trusts that it doesn’t. 

This extremely wide definition of money laundering is particularly surprising because, according to the explanatory memorandum of the second draft bill, the switch to an all-crimes approach would necessitate further specification and limitation of the provision’s remaining requirements to contain and balance the threat of punishment.

The August draft even explicitly states that if criminal liability for reckless money laundering were to be maintained (and therefore combined with the all-crimes approach), there would be an almost boundless range of criminal liability for money laundering. This will stress companies’ AML compliance systems and further burden an already overloaded Financial Intelligence Unit (Zentralstelle für Finanztransaktionsuntersuchungen – FIU).

Despite this, there is one bright spot: the possibility of gaining impunity by voluntary self-reporting will be maintained.

What to know about the new draft bill

As reported in our previous blog posts, the draft bill contains multiple amendments to Germany’s criminal code, criminal procedure (StPO) and the courts constitution act (GVG). The changes (in the bill’s own words) ‘enormously’ expand criminal liability for money laundering in Germany.

All-crimes approach

The most important change compared to the law in place today is – as stated above – the complete elimination of a catalogue of suitable predicate offences. Instead, in future, all crimes and criminal offences may constitute a suitable predicate offence.

The legislator is obviously aware of that the AML law is moving further and further away from its original purpose: to fight organised crime. This becomes particularly apparent in the legislator's own forecast: due to the inclusion of less serious criminal offences as suitable predicate offences for money laundering, the legislator expects an increase in money-laundering cases in lower courts. Hence, the reform will not necessarily reduce serious money laundering cases but will certainly lead to lesser cases being prosecuted more frequently.

Reckless behaviour

While the draft bill in August proposed the decriminalisation of reckless behaviour, according to the governmental draft reckless money laundering will continue to be punishable. According to our analysis, combining the all-crimes approach and the criminalisation of reckless behaviour will lead to an excessive extension of the statute’s scope.

Penalties

The draft bill lowers the minimum penalty for money laundering from three months’ imprisonment to a fine. However, there will still be a minimum penalty of three months’ imprisonment if the money-laundering violation is committed by someone obliged under German's AML act (GwG).

Defence lawyers

The German legislator recognises the dilemma criminal defence lawyers face when accepting money from their clients and therefore raises – in accordance with the opinion of the German constitutional court – the requirements regarding the necessary level of intent.

The possibility of voluntary self-reporting

The government draft retains the current possibility of gaining impunity by voluntary self-reporting and thus offers companies an incentive to establish a functioning compliance system. Internal whistleblowing systems are gaining further importance in this area as well.

Criminal procedure

To deal with the vastly extended scope of the new criminal statute, the draft bill proposes some changes to the StPO.

In money-laundering investigations, law enforcement will still be allowed to wiretap phones (section 100a StPO), remotely search computers (section 100b StPO) and gather traffic data (section 100g StPO) – but only if the predicate offence falls within a more limited catalogue of serious predicate offences.

Court jurisdiction

The draft stipulates that particularly serious cases requiring economic expertise should be dealt with by specialised white-collar crime divisions at the regional court (Wirtschaftsstrafkammer).

Practical implications for companies doing business in Germany

As we mentioned in our August blog post, the draft bill will significantly increase the overall number of money-laundering investigations in Germany and the number of 'successful' investigations leading to an indictment. Naturally, the number of criminal proceedings increases once the scope of a criminal provision is extended.

It seems appropriate to reassign the more complex money-laundering trials that currently fall under the jurisdiction of the regional courts to the specialised white-collar crime divisions. However, proceedings before these divisions are already taking a long time: in some cases it has taken years for a trial date to be set. Unless this part of the criminal justice system gets more resources, affected individuals and corporations should be prepared to wait a long time for their cases to be heard.

The draft bill’s explanatory memorandum furthermore states that the new law aims to 'bring money laundering more strongly into the focus of the criminal prosecution authorities and enable even more intense prosecution'. The German Association of Judges assumes that the number of preliminary proceedings will increase by 50 per cent. The legislator estimates an increase in court cases in the low four-digit range.

These figures reinforce the concerns already expressed in our August blog post that future proceedings will be initiated based only on vague suspicions and lead to potentially expensive settlements for the affected companies.

Businesses are therefore well advised to closely look at their AML-compliance systems, particularly their suspicious activity reporting (SAR) processes, which are mandatory for most corporations doing business in Germany.

It would also seem advisable to implement an anonymous whistleblower system – if such a system does not yet exist – in order to stay one step ahead of the state prosecution authorities and, if necessary, to be able to benefit from the possibility of a voluntary disclosure without penalty.

The new legal situation will also not leave the reporting obligations under the GwG unaffected.

Under section 43 GwG, obliged companies must notify the FIU of any suspicious transactions, ie transactions where there are indications an asset originates from a criminal offence that could constitute a predicate offence to money laundering.

Despite the enormous extension of criminal liability for money laundering, the legislator does not assume that there will be a compliance burden for the business community regarding the reporting obligations under the GwG. We disagree. More money laundering investigations will mean even more scrutiny from prosecutors on whether financial institutions and other corporations filed timely SARs. 

Already today, we see an exponential rise in the numbers of SAR filings in Germany. (In 2019 the number of SARs increased by nearly 50 per cent compared to 2018, amounting to nearly 115,000 reports.) Additionally, the FIU is already facing a severe backlog in investigating the tens of thousands of SARs filed by German banks and others (see our blog post on the raid of the FIU by the Osnabrück public prosecutor’s office). 

Still, in order to mitigate risks, German financial institutions will have little choice but to file even more SARs under the new law.

In this context, compliance officers and general counsel should know that there is already a very strict system of sanctions under the GwG for companies that fail to meet their AML obligations. For example, under section 56 GwG, a corporation can be fined up to 10 per cent of its previous fiscal year’s turnover for certain more serious AML infringements.

Outlook

As the EU directive requires member states to implement its requirements by 3 December 2020, we expect the government’s draft bill to be passed. It is to be hoped, however, that the now ongoing parliamentary process will still shape the draft positively.

Regardless of whether there are any further changes to the draft bill, corporations – especially those obliged under the GWG – should assess the official government draft and then check whether their current AML compliance systems are state of the art and up to what lies ahead.