AML Financial intermediaries

Financial war: Germany’s evolving approach to Anti-Money- Laundering

3 min read

Aug 2, 2023 5:36:00 AM

Global Money Laundering: An Omnipresent Threat. In a global battle against illicit financial practices, money laundering — the covert practice of funneling illicit funds through ostensibly legitimate financial conduits — poses an insidious threat to the world’s economies. An estimated $800 billion to $2 trillion is laundered annually, representing a staggering 2-5% of the global GDP. This issue also looms over Germany, a nation that traditionally touts its regulatory robustness.

Regulation

Critique and Ranking: FATF’s Report

In its 2022 evaluation, the Financial Action Task Force (FATF) delivered a pointed assessment of Germany’s approach towards mitigating money laundering, underlining profound systemic shortcomings. The FATF flagged the fragmented supervision of entities involved in high-value transactions, notably real estate agents, as a critical area of concern. According to the FATF’s analysis, Germany’s anti-money laundering efforts lagged behind those of its close European ally, France. This lacklustre performance has compelled the FATF to require Germany to furnish annual progress reports, offering transparency into its initiatives to bolster its anti-money laundering policies and practices.

A Dilemma: Small Fish versus Big Fish

German Finance Minister, Christian Lindner, acknowledging these shortcomings, suggested that while Germany’s system effectively dealt with minor offenders or ‘small fish’, it struggled to apprehend the more substantial culprits. However, an examination of the data from 2020 invites questions about the effectiveness of this strategy, as it shows that out of over 37,000 investigations, only around 1,000 individuals were prosecuted for money laundering. This not only suggests a troublingly low success rate in converting investigations into convictions, but also an alarmingly low absolute number of prosecutions when considered in an international context.

Corporate Collateral Damage

Deutsche Bank, Germany’s flagship financial institution, has not been immune to international regulatory scrutiny. The US Federal Reserve levied a hefty penalty of $186 million (approximately €166 million) against the bank, citing its “insufficient progress” in rectifying issues related to money laundering and sanction infringements that were identified in consent orders from 2015 and 2017. Furthermore, the Federal Reserve took action against Deutsche Bank for its “unsafe and unsound” connections with the Estonian branch of Danske Bank, another financial entity mired in scandal. In the wake of such incidences, it is hardly surprising that the FATF has urged Germany, with marked intensity, to enhance its strategies in battling money laundering.

The Path Forward: Modernisation and Centralisation

In response, Lindner pledges significant regulatory technology modernization, staff investment expansion, and centralization of regulatory control. Plans are underway to establish the Federal Office for Combating Financial Crime (BBF), a novel agency projected to employ around 1,700 individuals with offices in Cologne and Dresden. The BBF, set to take shape between 2024 to 2027, has one clear aim: intensify the battle against money laundering.

Germany’s amplified commitment to combating money laundering suggests that businesses within its confines are likely to face amplified regulatory scrutiny. This issue, attracting unparalleled focus within the nation, will result in a marked uptick in corporate compliance requirements and standards.

Rising to the Challenge: Enhanced Compliance

Amid these escalating regulatory demands, it has become imperative for German corporations to bolster their compliance frameworks significantly. These indispensable changes are unfolding against a backdrop already charged with geopolitical complexity. Factors such as the recent Russian incursion into Ukraine and escalating sanctions against countries like Iran, Myanmar, and Belarus require businesses to deftly navigate an ever-evolving regulatory labyrinth.

Looking Ahead: Risk Management and Business Survival

Amid evolving global benchmarks against financial crimes and the increasing sophistication of threats, effective compliance is integral to risk management, business resilience, and survival. Therefore, due to the heightened regulations spurred by international sanctions and the escalating standards instituted by the FATF, pressures on German businesses are markedly intensifying. Consequently, considerable investments in compliance teams are not just desirable, but essential. In this fluctuating and challenging regulatory context, German entities must place compliance at the forefront, not just to fulfil their legal mandates, but to safeguard their ongoing operations and competitive edge.