Thomas B. runs a restaurant, but business is not exactly thriving. Five tables and only a handful of guests at the best of times. Yet astonishingly enough he is still able to pay in huge amounts of cash at his bank every Monday and Thursday. Not only friends and neighbours find this a little surprising. The bank employee is equally puzzled whenever B. turns up at the bank in a glamorous limousine.

He broaches the subject with the customer, curious to know how it is that B. regularly pays in such high amounts of money when he has hardly any guests. The bank steps into action in response to a kind of warning system set up by credit institutions in order to track down suspicious transactions.

By now, Thomas B. should be feeling nervous, because the money did not come from his restaurant’s culinary delights but from a thriving drug trade. For a long time, his main problem has been finding ways to dispose of all that cash and channel the illicit funds into the legal economic system without attracting attention.

This is where the restaurant comes into play. The only reason he is running it is to conceal the source of his income and make the dirty money look clean. There is just one thing he overlooked – huge earnings and a poorly frequented restaurant simply do not add up. The bank noted this discrepancy, and reported it to the Financial Intelligence Unit (FIU) of the German customs authorities.

This case is purely fictional, but things like this do happen, time and again. And the channels through which the funds flow are often far more convoluted and difficult to trace. e Fall ist frei erfunden. Ähnlich geschieht es in der Realität aber immer wieder. Und oft sind die Geldströme sehr viel verschlungener und schwerer zu durchschauen.

Al Capone and his laundromats

Al Capone was the first to launder money in this way, but not with restaurants. The legendary gangster invested the profits from criminal activities such as prostitution, racketeering, illegal gambling and alcohol trading in a whole chain of laundromats. Capone, who it is claimed never had a bank account, managed to conceal his proceeds by maintaining that they were earnings from the laundromats.

Whether this is fact or mere fiction is unclear. When asked about the source of his earnings at the trial in Chicago in 1931, Capone allegedly replied that he was “in the laundering business”. In any case, it is safe to say that he was probably the first to coin the term “money laundering”. Although this ploy failed to spare him a term in prison, he was not sentenced for murder or blackmail – none of which could be proved against him – but for tax evasion.

Nowadays, criminal investigators have more efficient tools for exposing tricks of this kind, thanks not least to BaFin and the FIU. Banks are obliged to notify the FIU if they regard customers or payments as suspicious. The FIU follows up on these suspicious transaction reports (STRs) and analyses them.

Money laundering prevention during the pandemic

BaFin for its part is responsible for monitoring whether the institutions of the financial sector under its supervision are adequately protecting themselves against being abused for money laundering purposes. Normally, teams from BaFin travel to the institutions in order to gain an impression on-site of the quality of the institutions’ anti-money laundering (AML) measures. This has become much more difficult since the outbreak of the coronavirus pandemic.

But cancelling the inspections because of the pandemic was out of the question. “From April 2020, we initially conducted our inspections by telephone and then very quickly developed remote solutions which could also be used when working from home“, explained Dr Thorsten Pötzsch, BaFin’s Chief Executive Director also responsible for money laundering prevention. Following a brief period in the summer, when it was possible to conduct on-site inspections at least subject to certain restrictions, remote inspections then became the norm. The usual difficulties with lines engaged or microphones and cameras not working properly had been overcome by then and the inspection priorities adapted to take account of a remote working environment. For example, the main focus was placed on risk analysis, questions regarding the AML officer functions and the STR procedure.

BaFin tracks down errors

The inspections were successful. BaFin detected errors, particularly in the institutions’ risk analyses, some of which were serious. The institutions had failed to correctly determine and evaluate AML risks. BaFin’s supervisors also identified shortcomings in the suspicious transactions reported by the institutions, although these were generally less serious. Moreover, many institutions had failed to document cases in accordance with the specifications under the German Money Laundering Act (Geldwäschegesetz – GwG), which made it difficult for BaFin to understand why certain decisions were taken.

At some institutions, BaFin examined the procedure for establishing and verifying the identity of customers, which is crucial in the prevention of money laundering. It transpired that the institutions had made errors here, too, albeit less when identifying the customers themselves than when establishing the identity of beneficial owners, or persons used by a customer as a representative or messenger for the bank. But errors had also been made in the identification procedure for politically exposed persons (PEPs). This group of persons includes heads of state, heads of government, ministers, members of the European Commission, members of parliament and constitutional judges to whom particularly strict AML provisions apply. The inspections also revealed that a number of institutions had failed to update their customer data in due time. A by-product of the inspections was the realisation that many institutions were saving money in the wrong places and should be investing more in IT and in staff.

“Not all institutions are where they should be“, said Pötzsch, but an awareness for money laundering has been developed. There has been a sharp rise in the number of suspicious transactions reported to the FIU in recent years, with more than 90 percent of these reports deriving from those sections of the financial sector under BaFin’s supervision. Pötzsch notes that institutions and authorities have become more vigilant. “All parties involved are now also far better networked within Germany“, he adds, referring to the Anti Financial Crime Alliance (AFCA). BaFin, the FIU and 14 banks have joined forces in this alliance to address the problem of money laundering (see expert article on the BaFin website dated 18 November 2019).

Plans for the times after the pandemic

When asked how BaFin expects the inspections to be conducted this year, Pötzsch gave a cautious response. “We don’t know how the pandemic will develop and when we will be able to conduct on-site inspections again. One thing is certain – in 2020, we were unable to inspect all the priority areas in the way we had intended. But nothing will be omitted.“ BaFin will also deal in-depth with a number of issues, in particular the crypto currency business of institutions, the money-remittance business and the procedure for reporting suspicious transactions.

BaFin is therefore still conducting its inspections off-site and is unlikely, as things currently stand, to return completely to the old system of inspections. On the one hand, the teams prefer to be present in the institutions’ offices as they find the personal contact with the employees important. On the other hand, the pandemic has shown that remote inspections are possible. There is one other positive aspect to consider – the teams do not need to travel anywhere and they have more time for the actual inspection. Pötzsch could therefore envisage combining the two forms of inspection in the future – depending on the risk of the institution and inspection priorities.

Money laundering prevention across the EU

The EU Commission plans to present several proposals for more effective joint action against money laundering in Europe. The proposals are expected to mainly concern the enforcement of standard rules applicable throughout the entire EU. There is also talk of setting up a central European anti-money laundering supervisor. “What we need is a truly harmonised European legal framework – a regulation that is directly applicable, not just directives that grant the member states too much leeway for implementation, as in the past”, said Pötzsch. A patchwork of supervisory practices will not adequately equip supervisors to combat money laundering effectively, much less prevent it. The Chief Executive Director is confident that the negotiations will be completed by the end of 2022 and that the regulation will be approved and the legal foundations thus laid for a European anti-money laundering authority.