Financial Crime World

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Germany’s Financial and DNFBP Sectors: A Complex Landscape of Anti-Money Laundering and Counter-Terrorist Financing Measures

In a country with a vast and diverse financial and Designated Non-Financial Businesses and Professions (DNFBP) sector, Germany has implemented a range of anti-money laundering (AML) and counter-terrorist financing (CFT) measures to combat illicit activities. According to a recent assessment, the financial sector, including major banks and online banks, insurance providers, and Virtual Asset Service Providers (VASPs), has a good understanding of ML/TF risks and obligations.

AML/CFT Reporting: A Mixed Bag

Suspicious Transaction Report (STR) reporting from non-bank FIs and DNFBPs is low, with only 3% coming from these sectors. The majority of STRs (97% in 2020) come from the financial sector, with banks filing 90% of reports. While there has been an exponential increase in STR reporting from FIs in recent years, this may be due to defensive reporting rather than a genuine improvement in awareness.

Challenges Faced by DNFBPs

DNFBPs face unique challenges in STR reporting, including:

  • Lower awareness
  • Uncertainty regarding reporting thresholds
  • Confusion surrounding professional secrecy obligations

The adoption of mandatory rules-based reporting in real estate transactions has had a positive effect on reporting from notaries, but there is still insufficient understanding and ongoing confusion among obliged entities.

Supervision: A Complex Web

Germany has multiple supervisors at the Länder or district-level responsible for supervising DNFBPs and other FIs. While some supervisors have implemented a risk-based approach to supervision, others do not consider all relevant risk factors and variables in fully actualizing a risk-based approach.

  • BaFin, the main supervisor of FIs, has seen an evolution in its approach to AML/CFT supervision and has implemented regular reforms in response to changing risks and instances of non-compliance.
  • However, there are concerns about BaFin’s approach to unlicensed VASPs and Money Value Transfer Service (MVTS) providers, particularly hawala operators.

Challenges Facing Supervisors

The large number of supervisors, critical lack of resources, and vast size of the supervised population create major difficulties in ensuring all supervisors have a consistent risk understanding and take an effective risk-based approach to supervision. Risk-based supervision varies considerably, and coordinating the multiple supervisors poses challenges, resulting in an overlap in supervisory responsibilities and activities.

A Call for Improvement

In conclusion, Germany’s financial and DNFBP sectors present a complex landscape of AML/CFT measures. While there are areas of improvement, such as the adoption of mandatory rules-based reporting in real estate transactions, there is still much work to be done to ensure effective supervision and compliance.

To address these challenges, BaFin and other supervisors should consider implementing more practical and consistent guidance for obliged DNFBP entities. Additionally, there is a need for increased resources and support to help smaller FIs and DNFBPs comply with AML/CFT regulations. By working together to improve supervision and compliance, Germany can better combat illicit activities and protect its financial system.