Several recent money laundering scandals across the EU have damaged the reputation of the banks concerned. What's more, these incidents have raised doubts about the integrity of the entire European financial sector – and resulted in financial losses amounting to millions of euros.
For example, money from obscure Russian sources flowed through Danish bank Danske Bank, causing serious harm to Denmark’s reputation as a financial centre. ABLV, Latvia's third biggest bank, was even harder hit, with allegations of money laundering ultimately leading to its liquidation.

BaFin symposium with money laundering supervisors

Although each of these money laundering cases is different, lessons can be drawn from them – both for Germany’s credit institutions as well as for the national financial supervisor. During the BaFin symposium “Combating money laundering and terrorist financing”, representatives from financial institutions and money laundering supervisors discussed how to prevent financial institutions being used for money laundering, terrorist financing and other crimes.

Dr Thorsten Pötzsch - BaFin’s Chief Executive Director for bank resolution and the prevention of money laundering - hosted the event, held at the former German Bundestag plenary hall in Bonn, now the World Conference Centre. During a speech at the start of the day, Pötzsch stated that “we can only combat money laundering and terrorist financing effectively if supervisors, prosecutors and banks get better at exchanging information” and referred to the Anti Financial Crime Alliance (AFCA). The latter is a new public-private partnership between the German customs’ Financial Intelligence Unit (FIU), which takes the lead, BaFin, the Federal Office of Criminal Investigation and more than a dozen German banks. Its goal is to accelerate the national fight against money laundering and terrorist financing in the financial sector (see BaFinJournal October 2019 - only available in German).

Pötzsch praised the fact that, in recent years, Germany's financial institutions have responded and invested significant resources in preventing abuse of the financial system for money laundering and terrorist financing purposes. “But there's still room for improvement”, he warned.

Tougher measures

Word has spread in financial circles that Germany's most senior money laundering supervisor takes tough measures when the situation requires it. This was confirmed when – after just a few months in office – he sent a special commissioner to a large German bank to monitor its progress in preventing money laundering.

In the fully occupied plenary hall, around 500 participants took the opportunity to increase their knowledge and exchange views. The event was moderated by Bettina Volprecht, who heads a BaFin division which is also responsible for event management,and Dr Jens Fürhoff, Director-General of the Prevention of Money Laundering Directorate at BaFin. The focus was not only on BaFin's supervisory practices but also on the work of the Financial Intelligence Unit, empirical research on terrorist financing and the Europeanisation of money laundering prevention.

Risk-based approach

Of particular importance here was the first national risk assessment (NRA) for the purposes of combating money laundering and terrorist financing; this was prepared under the leadership of the Federal Ministry of Finance with the help of BaFin’s expertise(see BaFinJournal November 2019 - only available in German). It analysed strengths, weaknesses and risks. The core component is the risk-based approach taken in Germany to prevent and combat money laundering and terrorist financing. “It outlines a set of specifications for the institutions. We will monitor compliance with these obligations in our audits”, announced Pötzsch.

The money laundering supervisors provided insights into current practice. In 2019 alone, BaFin’s money laundering supervisors monitored around 100 institutions as part of its special inspections, which include ad hoc and routine inspections. This compares with 70 in the previous year. A new task performed by the Department for the Prevention of Money Laundering is the intensive monitoring of institutions. One division is responsible for supervising high-risk credit institutions, “man-marking” each institution, as it’s called.

As part of their monitoring of banks, BaFin's money laundering supervisors sometimes have to deal with fundamental problems. For example, if a credit institution is not able to provide auditors with IT access rights to the core banking system. The same applies, explained BaFin money laundering supervisor Christopher Haas, if the bank's money laundering officers submit incomplete documentation for the inspection plan. He referred to the BaFin homepage for more information, where it is possible to download BaFin’s interpretation and application guidance in relation to the German Money Laundering Act for companies in the financial sector that are subject to the Money Laundering Act.

Plans at European level

Recently, the plans of a few EU countries caused a stir. Namely, Germany, France, Italy, Spain, the Netherlands and Latvia have called for money laundering supervision at European level in the future. Some concrete steps have since followed this appeal: recently the EU finance ministers tasked the European Commission with exploring the possibility of establishing a European anti-money laundering authority. It is not yet clear whether and to what extent national supervisory authorities like BaFin would need to relinquish responsibilities as a result.

“I would like to keep our national supervisors”, explained Dr Birgit Roos, Chair of the Board of Sparkasse Krefeld. In Bonn, she argued in favour of dividing tasks, as is done for prudential banking supervision. For that, BaFin and the Bundesbank supervise mostly large banks, referred to as significant institutions, in cooperation with the European Central Bank (ECB).

BaFin Chief Executive Director Pötzsch explained that it is for politicians to decide whether a new EU body should be created or if European money laundering supervision should be given to an existing institution. It is currently being discussed whether this task could be given to the ECB or the European Banking Authority (EBA), which would then likely be granted additional powers such as sanctioning powers.

BaFin Chief Executive Director Pötzsch was of the view that it would make sense to create a new European anti-money laundering authority by 2021 or 2022. The possibility of centralising the current national Financial Intelligence Units (FIUs) at European level over the medium term was also considered. Currently, each national central body assesses suspicious transaction reports and forwards them on to the relevant prosecutor, if necessary. Pötzsch said that a feasible first step towards this would be to establish a shared data pool for all EU FIUs. However, this would require the relevant legal provisions to be created at EU level. Cross-border collaboration between national supervisory authorities in the EU could also still be improved, Pötzsch stated.

Europeanisation of preventing and combating money laundering

The experts present were of the view that in fact nothing could prevent the Europeanisation of preventing and combating money laundering and terrorist financing. Industry representatives were also convinced of this. The view was that current practice at European level in this area would have to come to an end, namely that of issuing guidelines that have only a minimum level of harmonisation so as to give the individual EU member states plenty of leeway to implement them into national law.

Klaus Kumpfmüller, member of the Executive Board of the Austrian Financial Market Authority (FMA), also criticised “the patchwork in the European Union” in that there are currently “28 different policies on the prevention of money laundering”. It would therefore be desirable to have a single set of rules for the future, he said. BaFin Chief Executive Director Pötzsch agreed. In addition, he said that weak national provisions for preventing money laundering and terrorist financing in some EU countries are currently posing a problem, particularly for institutions operating globally.

Soon-to-be Deutsche Bank board member Professor Stefan Simon concurred, highlighting the importance of a single jurisdiction for banks operating globally. This would give institutions greater legal certainty. The same applies for countries outside the EU, he said.

Dr Thora Funken from the Financial Intelligence Unit (FIU) used current data to demonstrate just how difficult and complex combating money laundering is. Reports from obliged entities under the Money Laundering Act are registered centrally at the FIU, where they are analysed, sorted according to importance and, where there is initial suspicion, forwarded to the investigating prosecutor. The workload is constantly increasing. The number of suspected cases reported in 2018 rose by around 30 per cent on the previous year to 77,252.

Nearly all reports continue to come from banks and insurers, and BaFin closely monitors their compliance with the money laundering provisions, sanctioning them where necessary. By contrast, estate agents, lawyers, notaries and non-financial sector merchants reported hardly any unusual activity in their transactions, with less than 600 suspicious cases. According to the FIU expert, the real estate sector and cash-heavy money transfers represent the biggest risk areas. These include trade in luxury goods such as cars, artwork, antiques and precious stones.

FATF evaluation: financial institutions on the spot

The head of risk management at the FIU was clear: providers who store, manage and safeguard crypto-assets like bitcoin will in future also be obliged to report suspicious cases. Those tasked with investigating money laundering are therefore also looking at their associated risks. The same applies to non-governmental and aid organisations that regularly transfer large amounts of money abroad.

The symposium participants from the financial industry not only heard interesting speeches from experts but also added their own topics to the agenda. In an interactive survey in advance of the symposium, many of them voted for a topic they wanted BaFin to address at the event. The winning topic: the evaluation of Germany by the Financial Action Task Force (FATF) coming up in autumn 2020. This international body is the global standard-setter in relation to combating money laundering and terrorist financing.

Stricter criteria

What the financial industry can expect: over the course of three weeks in 2020 the FATF inspectors will examine and grade the structures and rules of Germany’s anti-money laundering system. The criteria have been made stricter since the last test in 2010. Now the focus is on the practical application and efficiency of the measures for the financial sector and related sectors such as real estate and trade in luxury goods. The inspectors will speak with representatives of public institutions, but also with select associations and financial institutions. The Federal Ministry of Finance is responsible for the presentation of the German anti-money laundering system.

Even at this early stage, preparation for this very intensive evaluation requires a lot of work from all those involved. But it is worth the effort. After all, it is crucial that we pull the plug on money laundering and ensure the sources of terrorist financing run dry.