The risk of financial market players being misused for money laundering and terrorist financing purposes is still high, also due to the geopolitical environment. Greater vigilance is required to prevent money laundering and terrorist financing. BaFin supervises over 9,400 entities in the German financial sector (see Table 1). They are obliged to take measures to prevent money laundering and to take appropriate and effective action against money laundering (see Risks in BaFin’s Focus 2024).

Table 1: Number of entities supervised by BaFin, by groups of obliged entities

Source: BaFin, as at November 2024

If there is suspicion of money laundering, obliged entities must inform the Financial Intelligence Unit (FIU). In 2023, the FIU received 310,956 such suspicious transaction reports from the financial sector (previous year: 326,123). A total of 322,590 suspected violations were reported to the FIU in 2023 from the financial and non-financial sectors and by other obliged entities (previous year: 337,186). This means that reports from the financial sector account for 96.39% of suspicious transaction reports. The percentage thus remains high.

Terrorist financing and illegal financial transfers

The risk of terrorist financing has again increased amid the world’s current crises. A major challenge in the prevention of terrorist financing is that funds often originate from legal sources and then flow into criminal networks. Obliged entities must take specific precautions to prevent this from happening. In these preventive measures, such as risk analysis and transaction monitoring, they must clearly differentiate between money laundering and terrorist financing.

In practice, it has been shown that companies that fail to differentiate in this respect either do not take the risks of terrorist financing into account at all or do not address them adequately. Among other things, it is important to carefully scrutinise transactions and the use of funds. Institutions should be particularly vigilant with regard to cash payments and if payments and transfers do not match the purpose of the account or the financial circumstances of the person making the payment.

Illegal financial transfers – the example of hawala banking

“Hawala” is an informal method of payment that has been used for many years. Its importance worldwide has increased in the wake of geopolitical conflicts. Hawala works on the basis of the “two-pot system” via intermediaries, called “hawaladars”, who operate without state authorisation or supervision (see Figure 10).

Figure 10: How hawala banking works

Source: BaFin diagram

The system does not involve any receipts, accounts or banks and is based on trust and confidentiality. The use of regulated money remitters is generally avoided, which makes it more difficult to expose the structures at work.
Hawaladars sometimes transfer large sums of money across national borders. For these reasons, hawala can easily be used to finance terrorists, human trafficking, illegal immigration networks and many other criminal activities.

Business models with particular vulnerabilities

There are also certain regulated business models that harbour a particularly high risk of money laundering and terrorist financing. One example of this is “loan fronting”, where a credit institution grants loans on behalf of third parties. In many cases, the money does not come from the bank itself, but from investors.

The risk of money laundering and terrorist financing is particularly high if the investors – and thus the origin of the funds or the origin of the loan collateral – are unknown.

Innovations with potential money laundering risks

Technological innovations in the financial market may increase the risk of money laundering. This is the case, for example, with cryptoassets: they are challenging to handle and can be structured in many ways, making transparency more difficult. As of 30 December 2024, obliged entities must meet specific obligations for cryptoasset transfers. These requirements are set out in the revised European Funds Transfer Regulation, which has replaced the German Crypto Asset Transfer Regulation (Kryptowertetransferverordnung).

Another factor that can make money laundering prevention more difficult is the intensified use of the virtual IBAN (vIBAN). In payment transactions with business customers, for example, it replaces the invoice number and payment reference and enables the automated processing of orders.

Depending on the business model, the use of vIBANs entails significant risk: vIBANs can make it more difficult to trace transactions because payment senders and recipients and their geographical location are more difficult to identify. For credit institutions that issue the vIBAN or for intermediary payment service providers, this can hinder the fulfilment of customer due diligence obligations and transaction monitoring.

It is also possible for a vIBAN to be given a country code different from the code that should actually be linked to the respective payment account. This would wrongly give the impression that the account is managed domestically and is therefore subject to the respective national regulation and control. As a consequence, customers could be misled.

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Risks in BaFin's Focus 2025
Foreword by the President

Main Risks in BaFin’s Focus

1. Risks arising from corrections on the real estate markets
2. Risks arising from significant corrections on the international financial markets
3. Risks arising from corporate loan defaults
4. Risks arising from cyber incidents with serious consequences
6. Risks arising from market concentration due to the outsourcing of IT services

Trends

1. Digitalisation
2. Sustainability
3. Geopolitical turmoil