I. The FATF’s final report on Germany
On 25 August 2022, the Financial Action Task Force (“FATF”) published its report on anti-money laundering in Germany (Mutual Evaluation Report Germany).
The FATF is an international body that sets standards for preventing and combating money laundering and terrorist financing. Over 200 jurisdictions have committed to these standards. Every ten years a group of FATF experts conducts a review on the individual member states, thus ensuring that state action in this area is regularly monitored.
In line with this requirement, the FATF has been reviewing the fight against money laundering and terrorist financing in Germany since September 2020. In their review, the experts first examined implementation of FATF standards in Germany, i.e. the degree to which the requisite national statutes, regulations and measures ensure compliance with the 40 FATF recommendations. They also checked whether and to what extent the formal requirements have in fact been effectively applied. Steps the FATF took to this end included on-site visits to interview key institutional and private stakeholders in sectors with money laundering relevance. Following further discussions, the FATF submitted its final report in late August.
II. Key findings
In their report, the FATF reviewers found that Germany has made considerable progress in combating money laundering and terrorist financing over the last five years. According to the reviewers, Germany has reached a satisfactory level in technical compliance in particular (technical compliance is the degree to which FATF standards have been implemented in national law). Important steps that Germany has taken here include changing the criteria for money laundering in the German Criminal Code and making it easier to confiscate incriminated assets. The FATF also praised the establishment of a Beneficial Ownership Register, increased staffing for Germany’s Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht “BaFin”) and Financial Intelligence Unit (“FIU”), and the generally good understanding of money laundering and terrorist financing risks in the banking sector. Efforts to improve international and national cooperation in anti-money laundering were also singled out by the FATF as positive developments.
The FATF identified a need for further substantial action against money laundering and terrorism, however. In some cases, this need is in key areas.
Specifically:
1. More efficient use of the FIU’s information
The FATF views Germany’s efforts to restructure the FIU as a step in the right direction, but access to and use of the FIU’s financial information still needs to be improved, it reports. In addition, FIU analyses should be better tailored to the operational needs of law enforcement authorities. The information available must be used and evaluated more efficiently by employing up-to-date strategies such as artificial intelligence.
2. Coordination between Germany’s federal government and the regional states; regulation outside of the financial sector
The BaFin is the main regulator in the financial sector, but there are also numerous regulators at federal, regional state and municipal level tasked with monitoring other areas under anti-money laundering law. The reviewers found that although these regulators’ responsibilities are adequately defined, their staffing and efficiency require major improvements. One key point for action is coordination of the regulators among themselves and with law enforcement authorities. To put the matter in perspective: over 300 regulatory authorities at federal, regional state and municipal level are responsible for monitoring obliged entities under anti-money laundering law. Efficiently coordinating all public authorities is the only way to pursue an effective common approach to anti-money laundering.
Financial institutions tend to be aware of their anti-money laundering obligations, but outside of the financial sector, risk awareness remains weak, the report’s authors found. According to the FATF, obliged entities (in particular small enterprises) outside of the financial sector face major challenges in duly implementing preventive measures.
3. Developing the Transparency register
The FATF’s assessment of the Tranparency Register’s introduction is generally positive. But the reviewers criticized the fact that precise and up-to-date information was not always available in the register during their review. Such deficits need to be remedied on an ongoing basis, they stated. In particular, Germany needs to ensure that the register has sufficient resources, since this is the prerequisite for using the register to its full potential in combating money laundering.
4. Prevention and prosecution
With regard to law enforcement, one particular point the reviewers criticized is that very few instances of money laundering are actually prosecuted, given Germany’s size, economic power and risk profile.
Overall, there is room for improvement in how complex money laundering structures are uncovered. German law enforcement generally follows a cautious approach, and overly so in the report’s view. One possible consequence of this is that professional money laundering networks, cash smuggling and misuse of legal entities can go undetected. Germany also fails to take adequate action against non-registered providers of money value transfer services, in particular those that operate hawala networks.
III. Impact
FATF standards are not legally binding, and neither the review nor the final report will have a direct legal impact. Nevertheless, FATF findings are widely noted internationally, for two reasons. Firstly, the results of the study send a political signal and may impact Germany’s reputation as a place for business. Secondly, deficits in implementing anti-money laundering provisions can affect business itself, such as when foreign companies undertake stricter anti-money laundering checks on international transactions or business with German companies.
In the light of this, we expect that Germany will try to implement the FATF recommendations and address the deficits found. Even before the FATF report was published, the Federal Minister of Finance had announced that a new federal-level authority is to be set up to more effectively combat money laundering (the Higher Federal Authority for Combating Financial Crime). The new authority will bundle competencies and strengthen law enforcement. Following on from these measures, a new Federal Police Office for Financial Crime will also be established, which will report to the Higher Federal Authority for Combating Financial Crime. Its staff will have their own responsibilities and powers to investigate financial offenses. The Federal Ministry of Finance has presented a paper setting out the key points in this regard.
IV. Practical relevance to business
As a place for global business without restrictions on cash, Germany continues to have a strong appeal for money launderers, whether they act nationally or internationally. The FATF has explicitly confirmed this again for Germany. The current finance minister has vowed to tackle the outstanding issues in the fight against money laundering and terrorist financing that the report identified. But the FATF’s recommendations confirm the continuing potential risk for companies in Germany under anti-money laundering law, at least at the current time.
Obliged entities under anti-money laundering law should therefore view the FATF recommendations as an opportunity to take adequate measures to prevent money laundering and avert the associated risks under criminal and regulatory law. Although the action recommended by the FATF has no binding effect on companies, it is likely to exert a considerable influence on legislators and regulators. Given the FATF’s numerous recommendations for companies outside the financial sector, we assume that regulators will be taking a closer interest in the anti-money laundering requirements for obliged entities in this area.
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