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6. Risks arising from inadequate money laundering prevention ⇧
The risk of financial market players being misused for money laundering and terrorist financing purposes is still generally high (see Table 1). Credit institutions and other companies of the financial sector must therefore take appropriate and effective precautionary measures – by ensuring that they know their customers, for example, and by notifying the Financial Intelligence Unit (FIU) if they have information about suspicious transactions.
Table 1: Suspicious transaction reports – a comparison
Source: FIU Annual Report 2022
* Reporting entity groups in accordance with the classification under the German Money Laundering Act.
In the German financial sector there are more than 8,700 companies and persons obliged to take measures to prevent money laundering (for an overview of the obliged entities, see Figure 1). They might be involved in money laundering – even unknowingly. This makes effective precautionary measures all the more important. However, there is still a need for improvement in matters of prevention, particularly among some companies of the non-banking sector. In a number of cases in this sector, the corresponding measures and structures have yet to be established.
Figure 1: Overview of obliged entities supervised by BaFin (excluding agents)
Source: BaFin, as at September 2023
Risks in international payments
The international financial systems are closely interlinked but most of them are differently regulated. This also applies to the prevention of money laundering and terrorist financing. Such differences create opportunities for circumvention that criminals use to their advantage. In Germany as an export nation, a very large number of high-volume transactions are carried out in the payments area, for example. This harbours the risk of funds from illegal sources being channelled into the legal economic system without attracting attention.
The current geopolitical environment is giving rise to further risks related to the prevention of money laundering and terrorist financing. Supervised companies, in particular account-servicing institutions, must keep an eye on such developments.
In order to meet the requirements under anti-money laundering law, many obliged entities work together with service providers.1 This can create cost advantages thanks to a greater labour division and scale effects. What is more, specialised providers are able to offer certain services more professionally than companies of the financial sector. But working together with such service providers also harbours risks. If they provide inadequate services or even systematically violate the German Money Laundering Act (Geldwäschegesetz), this will have negative consequences for all outsourcing entities. The risk increases if the service providers in question work for several companies of the financial sector.
Special money laundering risks of certain business models
Companies that are growing fast give rise to special money laundering risks. This is because their money laundering prevention systems often fail to grow at the same speed and are therefore insufficiently effective – a potential breeding ground for money laundering risks.
The use of cryptoassets also increases the risk of money laundering. For example, crypto custodians are obliged to fulfil a number of tighter due diligence requirements under the Crypto Asset Transfer Regulation. However, transaction monitoring systems based on traditional (i.e. fiat) money flows are unable to adequately ensure that these requirements are met. For this reason, new technologies specifically tailored to cryptoassets must be deployed in order to identify and monitor money laundering risks – e.g. blockchain analysis software.
Special weak spots for money laundering and terrorist financing can be found among some business models, such as payment agents2, third-party acquiring3, white labelling4, loan fronting5, and trade in cryptoassets6 .This is attributable, for example, to the intermediaries involved in these business models and the complex product and settlement structures, which make it difficult to retrace money flows and the origin of funds and identify the parties involved.
BaFin's line of approach
- BaFin is making preparations for the future European supervisory regime in which the Anti Money Laundering Authority (AMLA) will assume direct and indirect supervisory responsibilities in cooperation with national authorities such as the Federal Financial Crime Agency (Bundesamt zur Bekämpfung von Finanzkriminalität).
- BaFin examines whether supervised companies have implemented prevention systems such as risk analysis, customer identification measures and transaction monitoring. Only appropriate prevention systems ensure that obliged entities know their customers, identify suspicious transactions and submit the relevant suspicious transaction reports, if necessary. This also applies to multi-client service providers where deficiencies in prevention systems have repercussions for many obliged entities.
- BaFin is strengthening its supervisory and inspection activities in the banking and, in particular, in the non-banking sector. It works to ensure that the obliged companies implement effective and appropriate prevention systems to combat money laundering and terrorist financing. To achieve this, BaFin will conduct more special inspections (section 44 (1) of the German Banking Act (Kreditwesengesetz)) and risk-based surveys.
- In the non-banking area, the inspections will focus on, among others, investment firms, German asset managers, payment and e-money institutions, financial services institutions such as leasing and factoring companies, insurance companies, central counterparties and crypto custodians.
- Anti-money laundering supervision and prudential supervision are working closely together particularly in the area of fast-growing business models in order to identify risks early on.
- BaFin is making additions to its guidance on the Money Laundering Act for the obliged entities of the financial sector in order to promote awareness among these entities in the fight against money laundering.
- 1 See Risks arising from market concentration due to the outsourcing of IT services.
- 2 Transactions settled via (unlicensed) third companies; using this roundabout method makes it possible to circumvent certain sanctions or restrictions.
- 3 Involvement of a third party in the contractual relationship between buyer and trader that is concluded for the purpose of settling card-based transactions (in particular credit card transactions).
- 4 See Digitalisation.
- 5 Loans issued by a credit institution on behalf of credit intermediaries in which the financing is carried out by third-party investors. A special purpose company acts as intermediary between the credit institution and the investors.
- 6 See Risks arising from market concentration due to the outsourcing of IT services.
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