There are several dimensions to the fight against money laundering, and the parties involved come from completely different fields. Their task is to catch and prosecute the criminals or make it as difficult as possible for them to launder money obtained by illegal means. What role does BaFin play in this constellation? And what exactly is money laundering? This article provides answers to these questions.

I. What is money laundering?

Money laundering is the means by which illegally obtained funds are introduced into the legal economic system. Examples are profits from drug dealing, prostitution, arms trading and corruption. Money laundering is prohibited under section 261 of the German Criminal Code (Strafgesetzbuch – StGB).

Persons generating profits from illegal dealings need to find ways to give this dirty money the appearance of legality. They do this in several stages – a process often known as a three-phase model consisting of placement, layering and integration. The first phase, placement, is when criminals channel assets, usually cash, into the financial sector. They do this, for example, by dividing up larger amounts of money into smaller amounts and paying these in at the bank. These funds are then layered across various accounts by being transferred over and over again so that the criminal origins of the money are concealed. In the final phase, the funds are integrated back into the system by being reinvested as if they had been generated by legitimate means. In the end, it is no longer possible to ascertain where the money originally came from; an example could be real estate acquired using money obtained from drug dealing.

Criminals launder money in order to use the profits they have made from their activities and at the same time evade prosecution. The German Money Laundering Act (Geldwäschegesetz – GwG) aims to prevent this by ensuring more transparent financial transactions. The objective is to make it as difficult as possible for criminals to use these illicit funds while staying under the radar.

II. What measures are taken to fight money laundering?

There are two pillars in the fight against money laundering: prevention and repression.

The first pillar, prevention, aims to make money laundering unattractive from the very start by depriving criminals of the means to disguise their clandestine activities. Legislators have therefore placed a number of statutory obligations on the persons and companies regularly used by criminals for these purposes. This article focuses mainly on the banks and the role they play in the money laundering process. The GwG sets out a series of obligations which they must fulfil. These include establishing the correct identity of clients and periodically monitoring the business relationships. If banks have reasonable grounds to suspect money laundering, they must report their suspicions to the Financial Intelligence Unit (FIU). BaFin is part of this prevention process. As the name suggests, BaFin’s Directorate for the Prevention of Money Laundering monitors the precautions made by banks to avoid being abused for money laundering purposes.

The second pillar in the fight against money laundering is repression, which is aimed at capturing and prosecuting the money launderers. Repression also offers an opportunity to solve the predicate offences to money laundering, i.e. the crimes or offences with which the illicit funds were generated. The competent authorities here are the police, the public prosecutors and the courts. They are also regularly supplied with information from the FIU if the unit identifies a suspected case of money laundering after evaluating the reports it receives.

Chart 1: The two pillars of anti-money laundering

@ BaFin

III. What are the specific responsibilities of BaFin?

BaFin monitors whether banks have the right tools to avoid being abused for money laundering purposes. Banks are obliged, for example, to implement the safeguards set out in the GwG, which aim to prevent illegally obtained money from being laundered at their institutions. BaFin’s Directorate for the Prevention of Money Laundering examines how effective the institutions are at implementing these requirements. To do this, it needs to know the risks that exist for financial institutions.

To remain constantly up to date on the money laundering risks in the financial sector, the Directorate has for years been analysing the money laundering and terrorist financing (AML/CFT) risks to which banks are exposed. Its analyses are based on national and international data and insights derived from a number of sources. The key source in Germany is the National Risk Assessment (NRA) of the Federal Ministry of Finance (Bundesfinanzministerium – BMF). Over a two-year period, 35 authorities with the participation of the private sector identified the risk areas for money laundering. The results were included in BaFin’s Subnational Risk Analysis 2019/2020 (SRA). This analysis revealed a particularly high risk for large banks in connection with cash, money remittance business and correspondent banking transactions and innovative business models.

However, the risk specific to an institution also plays a role. BaFin prepares individual risk profiles for all institutions of the banking sector. These are regularly updated to include the findings of the auditors, which also focus on the efficacy of institutions’ AML/CTF measures in their audits.

The insight derived by BaFin from analysing the two risk areas is then consolidated in the supervisory programme, which BaFin prepares each year and which constitutes the basis for monitoring the institutions’ prevention measures. In this programme, BaFin defines its supervisory priorities, and applies a risk-based approach when doing so. In short, higher-risk institutions are placed under more intensive supervision, while lower risk institutions are subject to less supervision. This approach is also reflected in the division portfolios, with one BaFin division acting as an “intensive care unit” responsible for institutions under intensified supervision.

IV. How does BaFin fulfil its responsibilities?

BaFin has two ways to fulfil its responsibilities. It can either acquire its findings on-site or collect and evaluate information off-site.

Besides the supervisory visits and inspections carried out by BaFin’s own employees, the on-site measures also encompass the audits conducted by the auditing firms. These include the audits of the annual financial statements, special audits and priority cases in which BaFin orders a more in-depth examination to be made of specific issues. BaFin employees are often present when the audits are carried out by the auditing firms on-site.

The off-site measures include the annual risk classification, requests for information, questionnaires, supervisory discussions held by telephone and notifications of shortcomings. However, information is obtained from other places too. For example, BaFin’s Directorate for the Prevention of Money Laundering also communicates regularly with the supervisors from BaFin’s Banking Supervision Sector. In addition, it requests information from the FIU about suspicious transaction reports sent to the unit by the institutions. Finally, the Directorate also analyses media reports and liaises with other supervisory authorities, which are often able to provide information on institutions. The supervisors of institutions domiciled in other countries regularly share information and views at so-called supervisory colleges.

If BaFin finds that an institution has failed to take adequate AML/CFT measures, it sends a notification of shortcomings to this institution with a request to remedy the shortcomings. If no action is taken, BaFin can issue a wide range of orders or impose administrative fines.