The fight against Money Laundering and Terrorism Financing: Rhetoric and Reality

The United Nations Office on Drugs and Crime sets the estimated amount of money laundered globally in one year at 2 – 5% of global GDP, or up to $2 trillion in US dollars. The FATF as a leading organization in the fight against financial crime has been criticized of not doing enough. Now the Germans take the helm and come with a long story of issues of their own.

Taking the lead

Only the other week, Germany took on the Presidency of the Financial Action Task Force (FATF) for the first time in its history.

FATF President Marcus Pleyer presented ambitious objectives for the two-year term as the German Presidency aims to „strengthen the FATF’s governance, enhance its strategic focus, increase its public visibility and reinforce its fight against money laundering, terrorist financing and the financing of weapons of mass destruction“.

In fact, the FATF needs to address a number of issues in the global fight against money laundering and terrorism financing. The digital transformation is the first point of the key areas Pleyer highlighted as the international watchdog has been slow to respond to the changes brought by new asset classes like virtual currencies or solutions from RegTech firms.

The list of priorities the FATF named also included financing of ethnically or racially motivated terrorism; money laundering and migrant smuggling, environmental crime, and illicit arms trafficking – ambitious but also raising concerns how realistic these objectives are.

But it isn’t only the sheer amount of work that needs to be done to address these areas properly.

A Regulator’s Nightmare

It is also questionable how fit the German presidency is to guide the organization to reach these goals, especially since its own recent track record has been less than impressive.

To begin with there was the implosion of former FinTech darling Wirecard, an absolute nightmare for a regulator, in June. As the fallout increases, German prosecutors are looking into possible money laundering by the company’s executives, adding to ongoing probes related to potential fraud and fake accounting at the insolvent payments firm that BaFin, the German regulator did not seem to spot.

Real Estate and the Italian Mafia

Then there was the scandal about money laundering of vast sums in the country’s booming real estate market. Last year, the German government finally published a new law aimed at combating money laundering in the real estate sectorafter billions in illegal earnings were funneled into the German property market each year. One of the key elements of the bill was that the German Financial Intelligence Unit (FIU) would get greater powers and access to the data of other investigative authorities.

The Root of the Problem

And then there is the FIU itself. As part of the changes brought in by the 4th AML Directive and after years of malfunction in the regulatory oversight of the fight against money laundering, a new Central Office for Financial Transaction Investigations was set up at the General Directorate of Customs in 2017 transferring the responsibilities from the Federal Criminal Police Office (Bundeskriminalamt). Unfortunately, that did not solve the problem of Germany’s notorious lack of control and enforcement in respect of suspicious transactions.

Yet, in 2018 the financial newspaper Handelsblatt wrote that Germany’s new anti-money-laundering agency is being revamped just a year after its launch, after under-staffing and poor equipment led to a massive backlog of untackled cases.

German Finance Minister Olaf Scholz promised a “fresh start in the fight against money laundering and terrorism finance” at the so-far ineffective Financial Intelligence Unit (FIU), but only a few months later as part of a parliamentary discussion in the European Parliament in October 2018, it was even demanded that the Commission would take measures to sort out the disastrous state of the German FIU, which would pose a significant risk to European and national security.

Yesterday saw a new climax in the appalling history of the German FIU: first reported by the periodical Der Spiegel, prosecutors from the office of Osnabrück raiding on the FIU headquarter. It follows an investigation that goes back to February into the suspicion of fraud as according the search warrant, the FIU had not properly forwarded eight suspected money laundering reports to law enforcement agencies between mid-2018 and early 2020.

Subject of the investigation are over a dozen dubious accounts at three different German banks that were used to pass a total of 1.7 million euros to African countries – money that is suspected to come from illegal business. The FIU stands accused that law enforcement agencies could not intervene because they did not learn about the delicate transactions in time with fears that the investigation will bring up thousands of suspected money laundering cases that included criminal offenses.

Bad Omens?

Rich material for a crime movie, but hardly a letter of recommendation for the new FATF presidency. It clearly is a case that shows the difference between political rhetoric and the regulatory reality and that does not bode well for the necessary changes to tackle financial crime efficiently and efficiency always used to be a particular German feature. Well, hope springs eternal, doesn’t it?

Lavanya Rathnam

Lavanya Rathnam is an experienced technology, finance, and compliance writer. She combines her keen understanding of regulatory frameworks and industry best practices with exemplary writing skills to communicate complex concepts of Governance, Risk, and Compliance (GRC) in clear and accessible language. Lavanya specializes in creating informative and engaging content that educates and empowers readers to make informed decisions. She also works with different companies in the Web 3.0, blockchain, fintech, and EV industries to assess their products’ compliance with evolving regulations and standards.

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