On August 25, 2022 the Financial Action Task Force (FATF) published the final report ("Mutual Evaluation Report (MER)") on the audit of Germany. As a result, it should be noted that Germany has implemented considerable reforms over the past five years to better detect and combat money laundering activities and terrorism financing. These reforms are bearing fruits. However, further efforts are needed to optimize the effectiveness of prevention measures.
Poor domestic agency coordination and use of financial intelligence
The problems are not new but have long been known and discussed across agencies for many years. They include national coordination between the law enforcement agencies of the individual federal German states. While in the past the respective state criminal investigation offices sometimes conducted parallel investigations in an uncoordinated manner due to a lack of information flows, the creation of the financial intelligence unit (FIU) has already improved effectiveness in recent years. Nevertheless, the FATF has detected optimization potential here in the scope of its audits. It expects proactive risk prevention and improved availability and use of financial intelligence by the FIU. This includes, for example, access to bulk data and analytical tools to increase the effectiveness and efficiency of the FIU analyses and to enable more intensive coordination and collaboration of FIU and law enforcement agencies. These findings need to be analyzed, not as a theoretical exercise but in cooperation with specialists and practitioners. Thereafter, implementation should take place as soon as possible, ideally with the involvement of the planned new German federal anti-money laundering authority.
Germany's cash intensity as a risk
In principle, the FATF has addressed cash intensity and unlicensed money transfer service providers as a particular risk. The fact that Germany is considered a cash-intensive country and that organized crime has taken advantage of this in the past to place incriminated money is not a new finding. Economic developments, especially the European interest rate policy, have led to a flight into tangible assets in recent years. The real estate sector is a case in point. One of the FATF's main criticisms is that real estate transactions in Germany can still be conducted in cash. For the banking industry, this means that there must be an even stronger focus on cash transactions than in the past. However, as a result of cost pressure and falling margins, institutions have increasingly switched to processing their services in connection with cash transactions via ATMs. Certainly, the regulation of the proof of origin for cash deposits above €10,000 has led to a sensitivity among obligated parties. However, the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin - Federal Supervisory Authority for Financial Services) communicated in its journal of August 2021 that the institutions can take into account the specifics of their respective business relationship in order to achieve a risk-oriented and practical procedure. This naturally leaves plenty of scope for design and interpretation for the banking industry. This leaves the obligated parties free to decide by which customers and in which form the proof of origin needs to be provided. Countries such as Spain, with an upper limit of €2,500, and Italy, with a maximum amount of €1,000, have already shown that such problems can also be addressed differently. Cash deposits above this amount are rejected in principle.
Problem area money value transfer services
Informal money value transfer services (see also MVTS in the #AML glossary) represent a particular problem area. While registered and established MVTS providers observe the legal requirements and are sensitized by the FIU to conspicuous facts or indicators, the informal MVTS are the focus of the FATF. Cases such as the large-scale raid by the North Rhine-Westphalian State Criminal Police Office (LKA NRW) on November 12, 2019, in which large amounts of cash and gold bars were seized from a jeweler’s in the Duisburg area, are seemingly just the tip of the iceberg. In total, more than 200 million euros were smuggled abroad without any name or sanction check. This way, the FATF addresses one of Germany's main problems: The prevention and control of Designated Non-Financial Business and Professions (see also DNFBPs in the #AML glossary) (FATF recommendations 18 and 23). The result of the audit of this group of obligated parties was one of the main points of criticism. It attested that Germany needs to make considerable efforts in a timely manner to meet the requirements of the FATF.
With this finding, Germany is in good company because countries such as Great Britain, Switzerland or the United States of America were attested as having the same deficit level. Even The Netherlands, which was highly praised on the day of the publication of the German report, is facing the same challenge. A first beneficial step would be to centralize the more than 300 supervisory authorities in Germany for this area. This should be accompanied by the establishment of uniform standards and appropriate, risk-oriented audits − similar to those which are known from the banking sector. Coordination with the above-stated countries would also be beneficial to achieve synergy effects and to define objectives and measures jointly, ideally in coordination with FATF.
Implementing asset recovery effectively
The topic of asset recovery was also addressed. The objective is to confiscate the illegally acquired asset values from the offenders. Germany evidences massive progress here. However, Germany still has a long way to go before it can match the effectiveness of other countries in this area. While in Germany the burden of proof still lies with the state, other countries have long since demonstrated how asset recovery can be implemented effectively. Even if there are initial moves in Germany to abolish the system of shifting the burden of proof, it remains to be seen to what extent such cases will be decided positively by the courts.
In Italy, defendants must prove that they are not involved in illegal business. There, a villa can be confiscated unless the owner can prove that it was purchased with legal funds. The situation is similar in Great Britain. British courts can force suspects to disclose the origin of their assets. They have the option of confiscating assets until the beneficial owner explains where the funds came from.
FIU problems
There has been considerable criticism of the effectiveness of the FIU, the anti-money laundering unit based at customs. This also comes as no real surprise because the media have already repeatedly and emphatically pointed out in recent years that there are obviously problems with the processing or follow-up of cases. Issues such as the pending suspicious activity reports (SAR) in the Wirecard scandal, the search of the FIU's premises due to investigations by the Osnabrück public prosecutor's office, and the large number of generally unprocessed cases at the FIU in the past have not been explicitly addressed. However, they lead to a negative perception among the population, the obligated parties and ultimately by the FATF. Despite all the scolding, the FIU must also be credited for its dependence on the information provided by the reporters and its quality. If the FIU receives SARs that are incomplete or contain incorrect data, the FIU's possibilities are limited, also in terms of international cooperation. You can find out which impact poor data quality can have on compliance in the #rethinkcompliance blog.
Challenges
That Germany is willing to meet the FATF's requirements is demonstrated by the paradigm shift anti-money laundering announced by Finance Minister Christian Lindner, including the creation of a new federal authority. However, this alone will not solve existing problems. It will require enormous efforts and cooperation with the different public authorities and sectors to make the work effective. This applies not only to the financial sector, but to a large extent also to the non-financial sector and DNFBPs already mentioned above.
Germany must report to the FATF within one year on the measures taken and progress made. Therefore, there is no time to wait for things to come. The BaFin, other obligated parties and the financial sector are facing major challenges in order to even begin to meet the FATF's expectations.
