A Guide to Anti-Money Laundering for Crypto Firms
It has been estimated that 100bn euros is laundered by criminals in Germany every year. Whatever the true scale, this figure doesn’t just include the well-publicized examples of large-scale transactions moving through international banks. It also refers to the proceeds of drug trafficking, human trafficking, illicit gambling and prostitution.
Importance of the non-financial sector
The perpetrators of these crimes know that they can bypass the banking sector and still effectively launder money. Cash-intensive businesses such as restaurants and betting shops, the purchase and export of luxury goods and the use of informal money mules are all common vehicles.
Money laundering at scale through financial institutions has been the primary focus of German legislators, with a view to preventing criminals from legalizing their illegitimate income, and assuming influential positions in the social and political life of Germany.
However, the importance of the non-financial sector for money laundering activities raises questions about the responsibilities of public authorities in this area and of the administrative structures in place outside the financial sector to combat money laundering.
Allocation of responsibilities under section 50 of the Money Laundering Act
Section 50 of the Money Laundering Act sets out which firms are covered by the regulation based on whether they belong to a financial or non-financial sector of the German economy.
However, these two categories are not defined in more detail in the Money Laundering Act. Instead, it is the responsibility of the Financial Intelligence Unit (FIU) set up at the border customs office to evaluate suspicious activity reports (SARs) and divide companies based on whether they belong to the financial or the non-financial sector.
Which firms are in the financial sector?
Accordingly, the entire banking industry, including financial services institutions and e-money companies, are classified as part of the financial sector. On the basis of the provisions set out in Section 50, money laundering supervision for the entire financial sector is in the hands of the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin).
Which firms are in the non-financial sector?
According to the classifications set by the FIU, the following companies subject to money laundering regulations (Section 2 AMLA) are to be assigned to the non-financial sector:
- Insurance intermediaries
- Lawyers, tax consultants, auditors and notaries public
- Real estate agents
- Gaming operators
- Freight traders
The fact that these companies belong to the non-financial sector initially means that money laundering supervision by BaFin is out of the question. As there are no other assigned federal authorities, money laundering supervision of these companies falls within the administrative competence of the states (Länder).
The supervision of the non-financial sector
Non-financial sector organizations typically belong to a chamber of commerce or other form of professional organization who will supervise their activities alongside local authorities.
As a general rule, this means the same authority that is responsible for ensuring compliance with hygiene regulations in the restaurant business or with food preservation regulations in supermarkets is also responsible for monitoring jewellers and car dealers.
The task of monitoring money laundering in the non-financial sector is therefore spread over hundreds of local authorities. Some of these may struggle with access to relevant expertise, staff and the wider industry awareness necessary to supervise firms effectively.
One measure of the disparity between financial and non-financial businesses can be seen in SAR filings. In 2020 104,325 SARs were filed by the financial sector. Just 2,854 SARs were filed by non-financial companies in the same period. Of these limited SAR filings, only around 400 were filed by goods traders nationwide (source: Bafin Annual Report 2020, page 17).
Focus on the banking sector
For years, the federal government has given high priority to the fight against money laundering. This has most recently been demonstrated by the tightening of Section 261 of the Criminal Code, which goes far beyond all European legal requirements in its definition of money laundering, including even petty offenses in the circle of predicate offences, as well as the increasingly far-reaching allocation of control tasks to banks.
A look at the non-financial sector, however, makes it clear that administrative structures have so far not been able to keep pace with political objectives. It has been known for years that the non-financial sector accounts for a significant proportion of criminal money laundering offenses. In this area, administrative tasks aren’t centralized, and the inadequate staffing and technical resources of local authorities mean that effective monitoring of money laundering may not always be guaranteed.
Originally published December 1, 2021, updated December 1, 2021
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