Germany’s Financial Sector Boasts Unparalleled Diversity, but Challenges Remain in AML/CFT Efforts

Germany’s Unique Financial Landscape

BERLIN, GERMANY - Germany’s financial sector is renowned for its diversity, with a wide range of financial institutions (FIs), Designated Non-Financial Businesses and Professions (DNFBPs), and Virtual Asset Service Providers (VASPs) operating within the country. This diversity presents both opportunities and challenges in ensuring effective anti-money laundering (AML) and counter-terrorist financing (CFT) efforts.

AML/CFT Requirements for Financial Institutions

According to a recent report, all FIs, DNFBPs, and VASPs in Germany are required to implement AML/CFT preventive measures. However, the sector’s size and diversity pose significant challenges in ensuring compliance.

• Larger FIs, including major banks and insurance providers, have a good understanding of ML/TF risks and obligations.
• Smaller FIs and some regional/niche banks and money service businesses showed less sophisticated awareness of risks and mitigation measures.

Designated Non-Financial Businesses and Professions

DNFBPs also present a mixed picture, with larger and better-supervised entities taking a risk-based approach to preventative measures. Smaller DNFBPs, particularly those in higher-risk sectors such as notaries and legal professionals, face challenges in implementing preventive measures due to factors like lack of supervisory resources and the changing status of certain obliged entities.

Suspicious Transaction Reporting

The report highlights that there are major shortcomings in Suspicious Transaction Report (STR) reporting. While FIs have seen a recent increase in STR reports, DNFBPs have struggled with reporting, citing lower awareness, uncertainty regarding reporting thresholds, and issues implementing preventative measures.

Challenges in AML/CFT Supervision

Germany’s financial sector is plagued by a lack of data, making it difficult to form a definitive conclusion on the effectiveness of AML/CFT supervision. 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.

• Concerns remain that BaFin could take a more proactive approach to unlicensed VASPs and money value transfer service (MVTS) providers, particularly hawala operators.
• The report also notes that the low level of independent supervisory activity in some higher-risk non-bank sectors is a concern.

Multiple Supervisors at the Länder Level

In addition, Germany has a large number of supervisors at the Länder or district-level to supervise DNFBPs and other FIs. While there has been a positive shift towards a risk-based approach by many of these supervisors, the critical lack of resources and the 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.

Conclusion

Despite these challenges, Germany’s financial sector is considered one of the most diverse and vibrant in the world. As the country continues to navigate the complexities of AML/CFT compliance, it is crucial that policymakers and regulators work together to address the sector’s unique challenges and ensure a robust and effective anti-money laundering regime.