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FATF Evaluation Spotlights Germany’s AML Shortcomings

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Germany has made strides toward combatting money laundering and terrorist financing, but still has serious shortcomings to address, according to the Financial Action Task Force’s (FATF) 2022 Mutual Evaluation Report (MER).

The report highlights specific money laundering and terrorist financing risks driven by Germany’s status as the fourth largest economic power in the world, alongside factors such as the continued importance of cash to its economy.  

Key Improvements 

The FATF is by no means dismissive of the significant advances Germany has made – and is still making – since its 2010 MER. The country’s AML/CFT framework is measurably stronger than it was 12 years ago. Milestones noted by the FATF include: 

  • An effective National Risk Assessment (NRA) conducted in 2019 that improved the country’s understanding of ML/TF risks, and improved coordination between federal and state governments 
  • The inauguration of a public-private partnership Anti-Financial Crime Alliance (AFCA)

These initiatives have allowed Germany to understand the risks inherent in banking, real estate, virtual assets, cash and cross-border smuggling. Germany has also:

  • Improved its confiscation laws 
  • Overhauled its Financial Intelligence Unit (FIU) in 2017 to focus on analysis and research
  • Committed to prioritizing the prosecution of money laundering
  • Effectively intervened in, and prosecuted, terrorist financing cases

Areas For Development

Despite these significant steps, work remains to be done. The report highlights critical areas that are still works-in-progress. 

FIU Shortcomings

Despite its major overhaul in 2017, the Financial Intelligence Unit has experienced persistent issues. The FATF mentions the need to improve the agency’s efficiency and resources, most notably in terms of access to data and cutting-edge analytical technology to mitigate a reliance on heavy manual processes. German authorities even raided the FIU in 2020 – and again in 2021 – for falling behind in reviewing Suspicious Transaction Reports (STRs).

Also at issue are the low rates of FIU intelligence usage among law enforcement agencies.

STR Reporting and Guidance Issues

The FATF stated that the rate of STRs filed does not match Germany’s risk profile for money laundering. While the number of reports had risen significantly in the financial sector (primarily among banks) in 2020, they were seriously underrepresented in other high-risk sectors such as non-bank financial institutions and Designated Non-Financial Businesses and Professions (DNFBPs).

The FATF estimates that the non-financial sector accounts for between 20 and 30% of money laundering operations in Germany. Yet 97% of German STRs filed come from the financial sector – 90% from banks. Worse, the FIU’s recent backlogs indicate that financial institutions file indiscriminately, without prioritizing more serious suspicious activities over minor ones. In the past, German law’s overly-broad STR requirements seem to have encouraged this “defensive reporting.” 

The remaining industries may be under-reporting due to inadequate guidance on which transactions institutions should report. For example, the MER suggests that legal sectors might not file unless they can essentially prove that money laundering or terrorist financing had occurred.

Gaps: Money Laundering Awareness & Prosecution

Although the 2019 NRA demonstrated a good overall understanding of the country’s ML/TF risks, the report highlights that Germany lacks an adequate awareness of money laundering risks posed by:

  • Complex money laundering typologies
  • Professional networks
  • Use of legal entities to launder money
  • Unaccompanied cross-border cash movements (smuggling)
  • Hawala services
  • Foreign predicate offenses (the focus is nearly exclusively on domestic ones)

In theory, German policy commits law enforcement to intervene in money laundering activity. When it comes to actual prosecutions, however, the country falls short. While the prosecutions that occur cover a range of typologies, they fail to detect others deemed crucial (such as some listed above).

Transparency Register: Data Commpehensiveness and Reliability

The FATF states that the development of a Transparency Register is a potentially powerful tool for competent authorities and citizens seeking information regarding an entity’s beneficial ownership. At present, however, the review found that it has significant problems in scope and reliability. The available information is incomplete, unverified, and not correctly updated. It is unlikely to be an effective tool in money laundering and financial crime investigations without addressing these issues. It will certainly not be able to replace the heavily-used (but domestic only) Electronic Account Retrieval system without addressing this problem. As the database is still under construction, these issues may be addressed by the end of 2022.

Priority Actions

How can Germany effectively address the shortcomings highlighted in its Mutual Evaluation? The FATF has made several recommendations – some of which Germany has already begun to take action on.

Distinguish ML from Predicate Offenses

In the past, German law has made money laundering’s definition excessively dependent on predicate offenses. This subordination artificially prevented many money laundering cases from being prosecuted in their own right. 

The 2022 FATF MER recommends that the law consider money laundering a separate offense so that it can be more effectively investigated and prosecuted. Germany has already moved in this direction with its March 2021 Money Laundering Act. Though it came into effect before Germany’s evaluation, this change will need more time before its effects can be measured.

Improve DNFBP Supervision

The limited STR reporting from DNFBP sectors coincides with a chaotic lack of adequate supervision – the industry currently has no less than 300 distinct supervisors. Given the high rate of money laundering outside the financial sector, it is no surprise that the FATF recommendations include a call for a more centralized supervisory mechanism.

In the summer of 2022, Germany announced plans for a centralized money laundering regulatory body – with a special unit dedicated to coordinating DNFBP supervision.

Improved STR Reporting 

The FATF urges Germany to provide clear guidance to the financial and non-financial sectors on the right reasons to file an STR. Vague obligations and laws have likely prompted the financial industry to over-report – with painful consequences to the FIU in recent years. Meanwhile, it has probably led other sectors to under-report.

Reforms in the 2021 Money Laundering Act may improve the STR situation. But without good guidance on how to correctly identify money laundering, financial institutions might think these changes indiscriminately broaden the scenarios they should report.

More Proactive Sanctions Listings and Designation

Despite Germany’s strong track record in fighting terrorist financing, the task force urges it to be more proactive in its use of targeted financial sanctions (TFS). The report also recommends that Germany take more initiative by proposing designated entities and individuals rather than merely endorsing those listed by the United Nations. It may be beneficial for the country to develop its own domestic lists, as well.

Improved FIU Data and Analysis

The FIU raids exposed clear gaps in the agency’s resources, especially data access and the tools it uses to analyze data. The FATF recommends actively improving the FIU’s resources, including data access. But it also advises that the unit leverage the latest technologies, using advanced analytics or artificial intelligence to efficiently analyze data. Manual systems are not sufficient. The report also suggests tailoring the FIU’s analysis to law enforcement needs to encourage them to use FIU intelligence more often.

Next Steps

Although the FATF 2022 MER included significant criticisms of the German system, overall the report and related actions from Germany reveal how seriously the country is taking its responsibilities. Coordinating a complex framework to combat money laundering and terrorism is no small feat. It requires many iterations and constant adjustment. Germany has proven that it continuously takes this task seriously, responding to calls for change and, at times, preempting them.

Firms operating in Germany should review the report in detail, particularly the executive summary and priority actions, as these may form the basis of future changes to Germany’s AML legislation, as well as efforts to improve the effectiveness of existing regulations.  

 

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Germany has made strides toward combatting money laundering and terrorist financing, but still has serious shortcomings to address, according to the Financial Action Task Force’s (FATF) 2022 Mutual Evaluation Report (MER). The report highlights specific money laundering and terrorist financing risks driven by Germany’s status as the fourth largest economic power in the world, alongside factors such as the continued importance of cash to its economy.  

Key Improvements 

The FATF is by no means dismissive of the significant advances Germany has made – and is still making – since its 2010 MER. The country’s AML/CFT framework is measurably stronger than it was 12 years ago. Milestones noted by the FATF include: 
  • An effective National Risk Assessment (NRA) conducted in 2019 that improved the country’s understanding of ML/TF risks, and improved coordination between federal and state governments 
  • The inauguration of a public-private partnership Anti-Financial Crime Alliance (AFCA)
These initiatives have allowed Germany to understand the risks inherent in banking, real estate, virtual assets, cash and cross-border smuggling. Germany has also:
  • Improved its confiscation laws 
  • Overhauled its Financial Intelligence Unit (FIU) in 2017 to focus on analysis and research
  • Committed to prioritizing the prosecution of money laundering
  • Effectively intervened in, and prosecuted, terrorist financing cases

Areas For Development

Despite these significant steps, work remains to be done. The report highlights critical areas that are still works-in-progress. 

FIU Shortcomings

Despite its major overhaul in 2017, the Financial Intelligence Unit has experienced persistent issues. The FATF mentions the need to improve the agency’s efficiency and resources, most notably in terms of access to data and cutting-edge analytical technology to mitigate a reliance on heavy manual processes. German authorities even raided the FIU in 2020 – and again in 2021 – for falling behind in reviewing Suspicious Transaction Reports (STRs). Also at issue are the low rates of FIU intelligence usage among law enforcement agencies.

STR Reporting and Guidance Issues

The FATF stated that the rate of STRs filed does not match Germany’s risk profile for money laundering. While the number of reports had risen significantly in the financial sector (primarily among banks) in 2020, they were seriously underrepresented in other high-risk sectors such as non-bank financial institutions and Designated Non-Financial Businesses and Professions (DNFBPs). The FATF estimates that the non-financial sector accounts for between 20 and 30% of money laundering operations in Germany. Yet 97% of German STRs filed come from the financial sector – 90% from banks. Worse, the FIU’s recent backlogs indicate that financial institutions file indiscriminately, without prioritizing more serious suspicious activities over minor ones. In the past, German law’s overly-broad STR requirements seem to have encouraged this “defensive reporting.”  The remaining industries may be under-reporting due to inadequate guidance on which transactions institutions should report. For example, the MER suggests that legal sectors might not file unless they can essentially prove that money laundering or terrorist financing had occurred.

Gaps: Money Laundering Awareness & Prosecution

Although the 2019 NRA demonstrated a good overall understanding of the country’s ML/TF risks, the report highlights that Germany lacks an adequate awareness of money laundering risks posed by:
  • Complex money laundering typologies
  • Professional networks
  • Use of legal entities to launder money
  • Unaccompanied cross-border cash movements (smuggling)
  • Hawala services
  • Foreign predicate offenses (the focus is nearly exclusively on domestic ones)
In theory, German policy commits law enforcement to intervene in money laundering activity. When it comes to actual prosecutions, however, the country falls short. While the prosecutions that occur cover a range of typologies, they fail to detect others deemed crucial (such as some listed above).

Transparency Register: Data Commpehensiveness and Reliability

The FATF states that the development of a Transparency Register is a potentially powerful tool for competent authorities and citizens seeking information regarding an entity’s beneficial ownership. At present, however, the review found that it has significant problems in scope and reliability. The available information is incomplete, unverified, and not correctly updated. It is unlikely to be an effective tool in money laundering and financial crime investigations without addressing these issues. It will certainly not be able to replace the heavily-used (but domestic only) Electronic Account Retrieval system without addressing this problem. As the database is still under construction, these issues may be addressed by the end of 2022.

Priority Actions

How can Germany effectively address the shortcomings highlighted in its Mutual Evaluation? The FATF has made several recommendations – some of which Germany has already begun to take action on.

Distinguish ML from Predicate Offenses

In the past, German law has made money laundering’s definition excessively dependent on predicate offenses. This subordination artificially prevented many money laundering cases from being prosecuted in their own right.  The 2022 FATF MER recommends that the law consider money laundering a separate offense so that it can be more effectively investigated and prosecuted. Germany has already moved in this direction with its March 2021 Money Laundering Act. Though it came into effect before Germany’s evaluation, this change will need more time before its effects can be measured.

Improve DNFBP Supervision

The limited STR reporting from DNFBP sectors coincides with a chaotic lack of adequate supervision – the industry currently has no less than 300 distinct supervisors. Given the high rate of money laundering outside the financial sector, it is no surprise that the FATF recommendations include a call for a more centralized supervisory mechanism. In the summer of 2022, Germany announced plans for a centralized money laundering regulatory body – with a special unit dedicated to coordinating DNFBP supervision.

Improved STR Reporting 

The FATF urges Germany to provide clear guidance to the financial and non-financial sectors on the right reasons to file an STR. Vague obligations and laws have likely prompted the financial industry to over-report – with painful consequences to the FIU in recent years. Meanwhile, it has probably led other sectors to under-report. Reforms in the 2021 Money Laundering Act may improve the STR situation. But without good guidance on how to correctly identify money laundering, financial institutions might think these changes indiscriminately broaden the scenarios they should report.

More Proactive Sanctions Listings and Designation

Despite Germany’s strong track record in fighting terrorist financing, the task force urges it to be more proactive in its use of targeted financial sanctions (TFS). The report also recommends that Germany take more initiative by proposing designated entities and individuals rather than merely endorsing those listed by the United Nations. It may be beneficial for the country to develop its own domestic lists, as well.

Improved FIU Data and Analysis

The FIU raids exposed clear gaps in the agency’s resources, especially data access and the tools it uses to analyze data. The FATF recommends actively improving the FIU’s resources, including data access. But it also advises that the unit leverage the latest technologies, using advanced analytics or artificial intelligence to efficiently analyze data. Manual systems are not sufficient. The report also suggests tailoring the FIU’s analysis to law enforcement needs to encourage them to use FIU intelligence more often.

Next Steps

Although the FATF 2022 MER included significant criticisms of the German system, overall the report and related actions from Germany reveal how seriously the country is taking its responsibilities. Coordinating a complex framework to combat money laundering and terrorism is no small feat. It requires many iterations and constant adjustment. Germany has proven that it continuously takes this task seriously, responding to calls for change and, at times, preempting them. Firms operating in Germany should review the report in detail, particularly the executive summary and priority actions, as these may form the basis of future changes to Germany’s AML legislation, as well as efforts to improve the effectiveness of existing regulations.     [cta_card title="A Guide to the European Union’s new AML/CFT Framework" cta_img="" category="" bodytext="Explore the evolving AML landscape in Europe in our guide, which details key planned reforms coming to the continent in 2023" cta_text="Download now" cta_url="https://complyadvantage.com/insights/a-guide-to-the-european-unions-new-aml-cft-framework/"]

Originally published September 2, 2022, updated September 2, 2022

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