Transparency about all business relationships and financial transactions: the German Money Laundering Act (Geldwäschegesetz – GwG) requires many players in the financial sector to ensure this. This also applies to registered asset management companies under section 17 (1) of the German Investment Code (Kapitalanlagegesetzbuch – KAGB).

Only in 2021 an obligation for an audit of the annual financial statements as well as an AML audit was introduced in the KAGB for registered asset management companies. Based on the audit reports, it is clear that many registered asset management companies still face difficulties here: they have not yet adequately adapted their AML processes. Since registered asset management companies often manage specialised investment funds for a small group of investors, they often have direct contact with them. Therefore, proper KYC processes are very important.

More on-site inspections

For some time now, BaFin has been conducting more on-site inspections of registered asset management companies. These inspections are conducted by auditors or BaFin itself. Selected topics are reviewed in depth and subjected to critical review. Performing on-site inspections means that there are stronger checks on whether the registered asset management companies are complying with AML regulation.

Among other things, BaFin also conducts “supervisory visits”, allowing it to better identify possible problems and shortcomings in AML prevention in joint discussions with the companies. During these supervisory visits, BaFin has repeatedly identified shortcomings in risk analysis and in the KYC process, for example.

By means of more on-site inspections and supervisory visits, BaFin aims to heighten awareness of the regulatory requirements for AML prevention at the companies concerned.

Supervisory requirements

The starting point for AML prevention is a risk analysis that is documented in writing that the obliged entities – including registered asset management companies – must prepare (section 5 of the GwG). It must be reviewed regularly (i.e. at least once a year), updated and revised as necessary. In this risk analysis, the obliged entity must assess the money laundering and terrorist financing risks resulting from its transactions and clients.

The obliged entities must also establish KYC processes. They must obtain transparency about their investors. In addition, they also have to clarify the source of wealth and funds, if applicable, meaning that they have to clarify where the investors’ funds and the amount invested come from. As a rule, a certified copy of an identification document is not sufficient to identify a person resident abroad.

The obligations under the GwG also include the appointment of a money laundering officer and a deputy at the level of the company’s management. The money laundering officer must carry out their function in Germany. Because they are the contact person for BaFin, the law enforcement agencies and for the Financial Intelligence Unit, they should be able to communicate with the competent authorities in German (see BaFin’s interpretation and application guidance on the GwG) – English is not sufficient.

Consequences in the event of violations

BaFin has a range of tools at its disposal if registered asset management companies fail to comply with their obligations under AML law. If an asset management company seriously, repeatedly or systematically violates the provisions of the GwG, BaFin can issue a warning to the responsible managers. It can even require their dismissal and ban the asset management company from any further activity. In such cases, BaFin may also cancel the company’s registration.These measures may be imposed in the event of serious violations of the provisions of AML law even if they have not been systematic or repeated.

Moreover, BaFin may levy a fine in the case of violations of AML requirements. Depending on the severity of the violation and the nature of the offence, the law provides for fines of up to EUR 5 million or ten per cent of annual turnover.

All of this serves to underline that registered asset management companies are at risk of being misused for money laundering.