The Financial Action Task Force (FATF) has released its latest Mutual Evaluation Report (MER) on Germany. As a intergovernmental anti-money laundering (AML) and counter-financing of terrorism (CFT) regulator, the FATF conducts mutual evaluation reports on its members in order to gauge their compliance with the regulatory standards that it sets – specifically its 40 Recommendations. The MER process is in-depth and, when published, sets out details of the country’s AML/CFT compliance performance along with recommendations for regulatory improvements to help combat financial criminal threats.
The FATF released its Germany MER in August 2022. As a prominent regional and global economy, Germany’s response to the MER will have consequences both for the businesses that operate within its borders and those beyond. Given that significance, it is important that firms in Germany understand the contents of the latest MER and what consequences it may have for Germany’s regulatory landscape.
German AML/CFT Progress
The FATF found that while Germany continues to face significant financial criminal threats, its regulatory response is generally well-suited to managing risks, and its financial institutions are generally well supervised by the Federal Financial Services Authority (BaFin) and the Financial Intelligence Unit (FIU). Similarly, Germany’s authorities are effective at detecting and prosecuting terrorism financing threats within its financial system.
The FATF also found that Germany made “significant improvements” to its AML/CFT framework in the five years since its last assessment. Notable AML/CFT advances included:
- Use of the National Risk Assessment (NRA) process as a way to enhance the national understanding of money laundering risks.
- Introduction of cooperation and coordination mechanisms between federal and state governments.
- Boosting human resources for state financial regulator BaFin and the FIU.
- Removing asset recovery limitations for money laundering offences.
- Introduction of a Transparency Register to allow improved access to beneficial ownership information.
FATF AML/CFT Recommendations
While the FATF praised positive developments in Germany’s approach to AML/CFT regulation, it also stressed a need to address a range of regulatory deficiencies. The key areas for regulatory attention included:
Sources of Risk
Although Germany had demonstrated a strong response to domestic money laundering and terrorist financing risks, its perspective of the wider risk landscape was limited.
The FATF found that the regulatory focus on money laundering risks from real estate and cash was causing German authorities to “overlook other important risks” such as those created by complex corporate structures including shell companies and foreign companies. This kind of threat was attributed to Germany’s status as a global financial hub, which made it a target for international financial criminals. The FATF noted that German law enforcement authorities “tend to focus on natural persons” rather than foreign criminals and professional enablers, an approach which ends up “limiting the information available for assessing risks”.
The FATF noted that, as an international destination for financial services, Germany faces a significant money laundering threat from the higher risk correspondent banking sector. The MER found that German correspondent banking institutions had problems with the scope and accuracy of the data that they were accessing to address and verify those types of banking threats.
In order to improve the way that correspondent banks access and utilise their AML/CFT data, the FATF noted that Germany should accelerate the integration of advanced analytics technologies within public and private sector compliance frameworks. In particular, larger correspondent banks should seek to integrate bespoke technology solutions to address the increased AML/CFT risk that they face.
While the FATF found that Germany’s larger financial institutions tended to address their risk exposure with suitable customer due diligence (CDD) measures, smaller institutions, institutions outside the financial sector, and designated non-financial businesses and professions (DNFBP) were not matching that response. In particular, the FATF found that the weaker level of risk understanding from these institutions was negatively impacting “their ability to develop and implement preventative measures aligned to their ML/TF risks”.
The FATF characterised this deficiency as a “reactive rather than proactive” approach to risk based anti-money laundering with the implication that regulators need to take a unified, strategic approach to the problem, strengthened by coordinated AML initiatives such as data-sharing between financial and non-financial organisations.
The FATF identified failings in the implementation of global economic sanctions amongst firms in Germany’s financial sector. In particular, the FATF criticised Germany for not proactively designating individuals listed on international sanctions lists (such as the UNSC list) in its domestic legislation in line with its AML/CFT strategy.
Similarly, the FATF noted that German regulatory supervision of sanctions compliance was “not fully effective”, with the problem again particularly notable “in the DNFBP sectors”. It also criticised the impact of German financial sanctions on their targets, suggesting that, for example, the amounts of assets frozen in sanctions actions were low “compared to total amounts raised in Germany”.
German FATF Compliance
Germany has committed to addressing the AML/CFT issues raised by its 2022 MER, which placed a strong focus on risk management and customer data. With that in mind, German regulators are likely to emphasise a need for accurate and agile risk management, with a need for firms to integrate software solutions tailored to their specific compliance needs.
With that challenge in mind, Ripjar’s Labyrinth Screening platform is a powerful compliance tool that enables firms to screen against thousands of global risk data sources in real time, including sanctions lists, PEP lists, and adverse media sources in 21 languages. Integrating cutting edge machine learning technology, Labyrinth seamlessly blends structured and unstructured data enabling firms in Germany to stay in control of their risk environments. As the German government responds to the FATFs findings, Labyrinth will also help firms adjust quickly and efficiently to new legislation with tailored risk management solutions – ensuring you stay compliant even as customer risk profiles change.