AML update: Germany needs to pick up speed

It is said to have been one of the hottest summers in Germany since weather records were kept - the heated atmosphere in the money laundering sector is unlikely to have helped ease the situation. There has been a lot going on in recent weeks during which the Financial Action Task Force (FATF) has been less than positive about the effectiveness of Germany’s anti-money laundering (AML) regime. Germany was therefore compelled to pick up speed and provide an outlook on structural changes of its AML organisation. This was followed by the annual report of the German Financial Intelligence Unit (FIU), which also had a few surprises in store.

But let’s take it one step at a time:

I. FATF gives Germany poor marks 

When the FATF Report was published on 25 August 2022, it became obvious: Germany must urgently catch up to combat money laundering (ML) and terrorist financing (TF) more effectively.

As expected, the FATF report was a mixed bag.

Some progress was made in Germany, which has traditionally enjoyed a reputation as a "paradise for money launderers". This is despite Germany having some of the world's strictest anti-money laundering laws and regulations. The report highlights that German authorities cooperate well with their counterparts in other jurisdictions and generally have a good understanding of ML and TF risks. 

At the national level, however, the organizational patchwork remains a major problem. In Germany, financial institutions are subject to AML supervision by the Federal Financial Supervisory Authority (BaFin). In addition, there are more than 300 local supervisors at the level of the 16 federal states and districts that deal with businesses and professions outside the financial sector (e.g., gambling, real estate transactions, or lawyers).

In addition, the FIU, which is responsible for receiving and processing Suspicious Activity Reports (SARs), remains a problem child. After the highly unusual raid in which the FIU itself became the target of a criminal investigation (see our blog), the agency is struggling with an avalanche of SARs. 

II. New Federal Authority for combating financial crime announced 

In light of this, Christian Lindner, Germany's finance minister,  promised a lot when he stepped in front of the microphones - wisely one day before the FATF report was published:

His ministry was now making "the big move," a "paradigm shift" in the fight against money laundering. He said his ministry would create a new federal agency, the Higher Federal Authority for Combating Financial Crime (Bundesoberbehörde zur Bekämpfung der Finanzkriminalität). His speech was followed by a key note paper, which was generally received positively, and which covered the following points:

1. Bundling core competencies under the roof of a new authority 

To effectively combat ML and TL risks, the most important functions and responsibilities should be centralized at the new authority. Under its umbrella, all key functions will be consolidated into three independent divisions:

- a new Federal Financial Criminal Investigation Office (Bundesfinanzkriminalamt, BKFA) is to become responsible for investigating large and complex cases of financial crimes. It will adopt a “follow the money” approach, which will be the central method of fighting corporate crime in Germany in future. The BKFA should also wear the hat in sanction enforcement.

-  The FIU will be integrated into the structure as an important partner of the BKFA and continue its work to receive SARs and act as an independent analysis unit in accordance with European and international requirements.

 - Furthermore, a new coordinating central body (Zentralstelle) will be established to reduce the number of supervisory authorities in the non-financial sector on state level. In addition, it will coordinate the state supervisory authorities and to develop guidelines and standards to serve as the contact for the future European money laundering supervisory authority (see our blog).

2. Training of qualified staff 

Mr Lindner also announced that he aims to further build up expertise by offering specific trainings for staff and bringing together experts to enhance and develop existing concepts to train the best financial investigators. The specific plans however were not specified in more detail yet.

3. Enhancing the digitalisation and connection of registers

In the FATF Report it was noted, among other things, that in Germany a significant amount of information is available to investigators through many different registers (e.g., Transparency Register, Commercial Register, registers of associations, real estate registers, etc.). However, the patchwork of registers across the different states and missing, incomplete, or unverified information on them limits their usefulness, the FATF found. In order to be able to efficiently check ownership structures, the relevant registers should be linked digitally.

III. New peak in incoming SARs

That Germany must hurry up to combat financial crime more effectively became also obvious when the FIU announced its annual report for the year 2021, which was published on 12 September 2022. It declares a total of 298,507 SARs, more than double that of the years before and an increase by factor twenty compared to ten years ago.

As in previous years, the increase in the volume of reports can be seen in both the financial and non-financial sectors. However, the vast majority of reports - around 97 percent - still come from the financial sector.

This was partly rationalised by the revision of the criminal offence of money laundering in section 261 of the German Criminal Code in March 2021, which now follows an all-crimes approach, new statutes on reportable issues in the real estate sector as well as a rising dynamic in the sector of cryptocurrencies. Here, too, the first effects of the changed legal framework, according to which the crypto custody business is to be classified as a financial service and corresponding service companies require regulatory approval, were noticeable. Therefore, the proportion of notifications from financial services institutions rose compared with the previous year.

In the FIU’s annual report it was furthermore stated that significant changes will be implemented in the next years - on an organisational level of the agency given the fact that the number of FIU employees significantly increased to handle the steady rise of SARs as well as on an operational level. The aim is to establish a “two—level-model” which shall differentiate between standardised processing of simple AML cases and a more in-depth handling of complex cases – thus making the overall process more efficient.

IV. Take away

The introduction of the BKFA will certainly cause further discussion. There is some consensus in German AML circles, that the current distribution of responsibilities is impractical and confusing. However, the details of implementation, especially the role of BaFin in the new structure as well as the shared responsibilities with other federal and state authorities, are (also) still unclear. Besides, the key note paper does not explain the staffing question, especially who should build up the expertise and train the future “investigators”. The coming months will show whether the vision of having a single agency that combines state and federal money laundering powers is politically feasible – or whether Germany just tried to provide a (too) quick answer to the FATF Report.

One thing is certain, in any case: the pressure to prosecute money laundering offences will further increase in Germany.