A Speedboat for AML enforcement

In August 2022, Germany’s finance minister, Christian Lindner, announced a new federal agency, the Higher Federal Authority for Combating Financial Crime (Bundesoberbehörde zur Bekämpfung der Finanzkriminalität) (see our blog). Now the first federal state of Germany is following suit. North Rhine-Westphalia (NRW) is launching a “speedboat” in its fleet for the fight against money laundering: “customised, strong engine, nimble and agile” – as state officials framed it in a press release. In future, major cases of tax crime, money laundering and cybercrime will be taken over and coordinated centrally by the new State Financial Criminal Police Office (Landesfinanzkriminalamt, LFK).

Enforcement and new authorities on the rise

Bundling competences and resources is deemed essential in the fight against money laundering and financial crime. In its “Mutual Evaluation Report Germany-22”, the Financial Action Task Force (FATF) criticised the domestic coordination across Germany’s 16 federal states and suggested to enhance coordination between Germany‘s many supervisory and law enforcement agencies.

Against this background, NRW created the LFK to bundle state-wide know-how and resources for complex, supra-regional investigations.

Shorter communication channels and efficient coordination processes are to improve the investigators‘ work. Also, cross-border cooperation with the European Public Prosecutor's Office and Europol shall be fostered.

On a local level, the separate, individual tax departments will still be competent for criminal tax cases and tax investigations in NRW. However, the LFK will take on major cases of tax crime, money laundering and cybercrime.  

Rising compliance costs for financial institutions

While the authorities are increasing the pressure to combat money laundering, the costs for anti-money laundering compliance for financial institutions in Germany are rising at the same time.

LexisNexis Risk Solutions published a study based on the feedback of 428 decision-makers who oversee Know Your Customer (KYC) remediation, sanctions monitoring, financial crime transaction monitoring and compliance operations across 14 EMEA markets.

According to this study, the expected total costs of financial crime compliance for financial institutions in Germany has risen by 30% between 2019 and 2021. Increasing anti-money laundering regulations and regulatory requirements are cited as one of the main reasons for the cost increase.

Further investments may become necessary giving tightening regulations, especially on EU level (see our blogpost on the EU AML action package).

The study also found that there has been a shift in costs from preventive measures (e.g. KYC-program and compliance management) to more repressive measures (e.g. transaction monitoring and investigations). This finding may indicate that preventive AML measures are effective, leading to more AML cases to be avoided in the first place.

Take away

EU-wide the fight against money laundering intensifies. After the Commission’s proposal for a new EU-wide anti-money laundering authority (AMLA, see our blog) and the proposal of Germany’s finance minister for a new federal agency, NRW has now suggested the first initiative on local level. It remains to be seen whether other federal states will follow NRW’s example.

New authorities tend to make much use of their competences to prove their raison d'être. Hence, companies obliged under the German AML regime are well-advised to review and potentially adjust their AML compliance management system. While such adjustments could require increasing the respective budget, the financial downsides of non-compliance are often much harsher – especially in case of a government investigation.

The German Federal Financial Supervisory Authority (BaFin) has significantly increased its enforcement in cases of (alleged) non-compliance with German AML requirements – and new record fines are set. In 2021, the BaFin imposed 96 fines, including a fine of EUR 4.25 million against a financial institution for delayed suspicious activity reports. 

Financial institutions are thus well-advised to keep up with this trend and review – and , if necessary reinforce – their AML compliance measures.

If you would like to discuss the developments in more detail, feel free to reach out to Daniel Travers and Marcel Michaelis.