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Germany’s finance minister has said that he wants "to follow the money", but can the country get its policy right to move on from a second-rate Financial Action Task Force (FATF) assessment and the Wirecard scandal?
This year, Germany’s government has made clear that it is keen to improve the country's approach to money laundering.
In July, the country’s Cabinet — a coalition of Social Democratic Party, the Green Party and the Free Democratic Party — approved a draft law to strengthen the risk-based operation of the Central Financial Transaction Investigation Unit (Zentralstelle für Finanztransaktionsuntersuchungen), Germany’s FIU.
A number of the changes that the draft law makes are to Germany’s AML law (Geldwäschegesetz - GwG), and reforms are expected to come into force by late 2023.
In addition, the country’s finance minister, Christian Lindner, wants to create a new agency that will be called the Federal Authority for Fighting Financial Crime.
Abbreviated to BBF in German, this will be guided by the principle of “follow the money" and it is reported that it will house the FIU, as well as enforcing areas such as sanctions.
The move comes after a critical evaluation by FATF in 2022 and, before that, the scandal of payments giant Wirecard.
The latter has recently been the subject of a widely streamed Netflix documentary, which was critical of both regulators and the government.
The FATF report was also critical of the FIU, complaining that it needed to improve its efficiency and resources.
Further, the international body said that the regulator relied too heavily on manual processes and needed to make more technology investments.
FATF complained that the country was failing in its approach to suspicious transaction reports (STRs), with guidance leading to overreporting.
A new coordinating authority
"The problem that we have in Germany is that there are many authorities who don't really communicate as well as they should, and this was called out by FATF," said Michael Huertas, partner and head of financial institutions regulatory at PwC.
Huertas explained improving this was Lindner’s motivation in establishing the new authority.
This will sit on top of existing regulators and, in theory, this new authority, based in Dresden and Cologne, is supposed to coordinate efforts of existing authorities and set the tone of financial crime management.
Sources expect the BBF to be established by way of its own draft law in 2024.
It should then become fully operational, with a budget of €711m and around 1,700 employees split between the two cities by 2025.
However, one source in Germany did warn that so far the Social Democrats appear to be sceptical about the success of the BBF.
In addition, Huertas warned that there could be obstacles to its success.
"The split between two cities opposite ends of Germany may not work," he said. "These are not the traditional places to set up an authority like this. It is like saying 'let's set up in Coventry and Liverpool in the UK'."
Huertas pointed out that, for example, Dresden is known for its university and engineering firms, and Cologne for its own university and the media industry, but not for their financial hubs.
"It may not be easy enticing financial crime professionals to work at an authority in these destinations as beautiful as both cities are," he said. "The proposal is great on paper, but could be difficult in practice."
Robert Henrici, partner at Covington & Burling, meanwhile said that the notion of following the money should not be anything new. “This is what AML legislation is all about.”
Henrici acknowledged that Germany’s current system is one that is not working perfectly, and this is due to a number of reasons.
“What we deem as money laundering has been broadened extremely due to EU and local developments as well.
“Money laundering is always a derivative of some other crime,” he explained. “Whereas in the early days, this other crime was from a rather confined universe of crimes, such as trafficking.
“This has broadened to today's system where basically any crime can qualify as such other crime for the purposes of money laundering."
Henrici pointed out that the reporting requirement has an extremely low hurdle in Germany. “It is a very broad regime and this results in hundreds of thousands of reports being filed with the regulators.
“The bar is very low, but the sanctions can be serious,” he said. “The failure to comply properly may result in drastic consequences for firms and banks and, therefore, large volumes of STRs are being filed with the regulators.”
Lindner wanted to show that action was being taken in Germany after the country received a mediocre rating from FATF; however, Henrici pointed out that the country is not alone here.
“If you have a big and complex economy, it is easier for money to be hidden.
“It is naive to look at Germany's FATF report and conclude from this that Germany is a ‘paradise’ for criminals who use Germany for money laundering purposes.”
What about AMLA?
Beyond BBF, there may be another authority in town in the form of the EU’s Anti-Money Laundering Authority (AMLA).
First proposed by the European Commission in 2021, the regulatory body has yet to receive full approval from the EU’s political institutions.
Here, the main sticking point appears to be where it should be established in the EU.
Currently, Germany is in the running to host the AMLA, with its headquarters potentially heading to the financial hub of Frankfurt.
Frankfurt is already home to the European Central Bank, the Deutsche Bundesbank and one of BaFin’s two offices.
It is also home to a host of the EU’s largest financial institutions, including Commerzbank and Deutsche Bank.
"Frankfurt could still host the EU's AMLA, and Germany will be keen to stress this,” said Huertas. “It is likely that AMLA will have much more of an impact than this new domestic super-authority due to the difficulty in getting people into roles and moving things forward.”
Like others, Frankfurt has pulled out all the stops in the bidding process.
Competing with other cities such as Milan, Vienna, Madrid and Vilnius (the latter of which has invested in swanky marketing outside the European Parliament’s Brussels base), Frankfurt has got ringing endorsements from Lindner and former German chancellor Angela Merkel.
"I'm aware that Lithuania has been proactive in their bid, but I think it is unlikely to end up being host to AMLA,” commented Huertas.
He also said that the AMLA is unlikely to be located in Paris or Luxembourg due to the amount of agencies already headquartered in these spots.
“It could be put in Vienna, or it could fit well into Frankfurt,” said Huertas. “At the end of the day, the EU needs to consider where they will be able to get the right people.”
The AMLA comes after changes were made to how cities get selected.
This, according to Huertas, follows the “kerfuffle invoked by the search for where to put the EU's Medicines Agency”, which had to depart London due to Brexit and ended up in Amsterdam.
“Milan complained that it had been cornered out of hosting that authority, but you have got to consider where you are likely to get the most people, where most people will want to stay longer term and where you have the right amount of connectivity,” said Huertas.
