BaFin, FATF, FIU and others: Important institutions in the fight against money laundering

Money laundering This is one of the biggest challenges for financial regulators worldwide. Laying illicit funds into the legal economy is a multi-billion dollar business that criminal networks are constantly perfecting.

In Germany and internationally, numerous institutions play a crucial role in combating money laundering. They analyze suspicious activity reports, set international standards, monitor financial service providers, and coordinate cross-border investigations. But which institutions play the central role? And what exactly are their responsibilities?

This article introduces you to the key players – from the Financial Intelligence Unit (FIU), which collects and analyzes suspicious activity reports, to BaFin, the German supervisory authority responsible for ensuring compliance with anti-money laundering regulations, and the Financial Action Task Force (FATF), the global standard-setter. Europol, as the central investigative authority in the EU, also plays a crucial role in combating international money laundering networks.

Learn how these institutions work (together), what powers they have, and why their work is more important than ever in times of increasing regulation and global financial interconnectedness.

The FATF: The standard-setter in matters of money laundering

The FATF has now established itself as an indispensable part of the fight against money laundering. It collects, evaluates, and develops measures and standards not only for combating money laundering in general, but also, increasingly, for preventing terrorist financing and proliferation.

More than 200 jurisdictions are members, either of the FATF itself or of one of the nine so-called FSRBs (FATF-Style Regional Bodies), partner organizations that exist autonomously from the FATF but work closely together to develop the standards ultimately set by the FATF.6

The standards do not have direct legal effect (so-called "soft law"). However, the members have committed themselves to implementing the requirements of the standards. [6]

Mutual Evaluations

Whether this happens is also monitored by the FATF and the FSRBs. They regularly review the quality of a country's efforts to combat money laundering and terrorist financing.

Specifically, two components are examined. First, the conformity of the country's laws and regulations with FATF recommendations is assessed. Second, effectiveness is evaluated. This is measured using the so-called 11 Immediate Outcomes and how they interact. Effectiveness is assessed during an on-site visit to the country. A detailed description of the process can be found here.

Countries' money laundering measures under scrutiny

The evaluation typically results in recommendations for addressing identified shortcomings. Countries are responsible for rectifying these shortcomings, and this is monitored in a follow-up by the FATF.

Within this framework, Germany was also reviewed between 2020 and 2022. The final report highlighted that Germany had made progress in preventing money laundering and terrorist financing. However, there were still some areas with significant room for improvement, such as the real estate sector.

If a country exhibits serious strategic deficiencies, it is placed on the so-called blacklist or greylist, depending on the situation. Since the European Commission's list generally also incorporates the FATF's list, this can have direct consequences for entities obligated under the German Money Laundering Act (GwG). The increased workload due to the heightened due diligence obligations associated with such an entry under Section 15 Paragraph 3 No. 2 of the GwG is obvious. Reputational damage resulting from continued business relationships is also conceivable.

For the countries concerned, a listing can also have concrete economic consequences, as explored in an IMF working paper. According to the paper, a listing is expected to result in an average decline of -7.6% in GDP within the three quarters preceding and following the listing.

The FATF: The standard-setter in matters of money laundering

The FIU (Financial Transaction Investigation Unit) With its nearly 500 employees, it has numerous, comprehensive tasks. These include, for example, conducting strategic analyses, preparing reports based on these analyses, and participating in meetings of national and international working groups.

The most important and therefore central task of the FIU is to process suspicious activity reports relating to money laundering or Terrorist financing to receive, collect, assess, and ultimately prohibit transactions or order other immediate measures. Immediate action is a crucial tool in dealing with suspected money laundering cases – the FIU is thus on the front lines of the fight against money laundering.

To prevent assets from being removed from its jurisdiction, the FIU must act quickly and directly. If the FIU has reasonable grounds to suspect that, for example, a transaction is related to money laundering or terrorist financing, it can temporarily prohibit the transaction.

However, this measure also ends no later than one month after its issuance. Ultimately, the FIU must refer every case to the relevant law enforcement authorities if it determines that the case involves money laundering, terrorist financing, or other criminal offenses.

The increase in suspected cases

The FIU itself is therefore not a law enforcement agency, but can be seen as an intermediary between law enforcement agencies and those obligated under Section 2 of the Money Laundering Act (GwG). Time plays a crucial role in this process, and it is precisely here that various public prosecutors' offices have accused the FIU of being too slow in forwarding important suspected cases.

It is likely that the number of suspected cases will continue to increase regularly.

The FATF: The standard-setter in matters of money laundering

The stated goals of BaFin are to ensure the functionality, stability, and integrity of the German financial market. To achieve these goals, it is divided into various business areas. In addition to the areas for internal affairs, there are four further areas:

1. Banking supervision
2. Insurance supervision
3. Securities supervision
4. At sight

The latter also oversees, among other things, the department for money laundering prevention – Department GW.

Tasks of BaFin

BaFin is one of the competent supervisory authorities named in the German Money Laundering Act (GwG) that monitor compliance with anti-money laundering obligations. Pursuant to Section 51 Paragraph 1 in conjunction with Section 50 Nos. 1 and 2 of the GwG, it supervises various financial service providers and insurance companies.

This includes, for example, the electronic account retrieval system pursuant to Section 24c of the German Banking Act (KWG). Credit institutions are thus obligated to provide an automated retrieval system for account master data, which enables BaFin to fulfill its supervisory tasks under the KWG and the German Money Laundering Act (GwG).

As a supervisory authority, BaFin is also authorized to issue statutory instruments and other significant general administrative acts. In principle, it also adopts the guidelines of the European authorities EBA, ESMA, and EIOPA, as well as, in the future, those of AMLA.

BaFin can also order individuals to implement appropriate internal safeguards to prevent money laundering and, under certain circumstances, appoint a special representative to monitor implementation.

Furthermore, in accordance with Section 51 Paragraph 8 of the Money Laundering Act (GwG), it regularly publishes updated interpretation and application guidelines (AuAs) which apply to the respective obliged entities addressed.

Europol: Fighting money laundering on the front lines

A money mule is a person who is used by criminals to launder money, for example, by acting as an intermediary in a transaction. Money mules may not even be aware of their criminal activity.

During the coordinated operation, 18351 money mules were identified, 1803 people were arrested, and losses of €67,5 million were prevented. This was made possible in part by the fact that approximately 400 different banks reported a total of 7.000 fraudulent transactions.

Tasks of Europol

With this example, we would like to illustrate the importance of Europol. It serves as a hub for the exchange of information, among other things in the fight against cross-border organized crime and money laundering (see Recitals 12 and 6 of Regulation (EU) 2016/794).

Its purpose is not only to facilitate the exchange of information between EU member states, but also to conduct targeted analyses. These analyses are both operational in nature, i.e., to support concrete criminal investigations, and strategic in nature, i.e., to promote criminal policy.

Data transmission to Europol

Did you know that the Financial Intelligence Unit (FIU) is among those authorized to transmit data to Europol? (See Section 32a Paragraph 1 of the German Money Laundering Act (GwG)). The FIU can refuse transmission if grounds pursuant to Section 32a Paragraph 2 of the GwG preclude it. Such grounds would include, for example, disproportionate data transmission or jeopardizing ongoing investigations. However, the FIU must provide a justification for any refusal.

If data has been transmitted, Europol may only process it for specific purposes. According to Article 18 of Regulation (EU) 2016/794, the transmitted data may initially be stored for a maximum of six months to determine whether and which transmitted data are relevant. In this context, a large amount of data is collected and processed, including data from individuals against whom no criminal activity can be proven.

The EU Data Protection Supervisor intervened and clarified that Europol must categorize all collected personal data in accordance with Article 18(5) of Regulation (EU) 2016/794 (see “Decision on the retention by Europol of datasets lacking Data Subject Categorisation”, p. 13). If such categorization cannot be established, the corresponding data must be deleted after a maximum of six months.

Sources

[1] https://drugpolicy.org/issues/brief-history-drug-war (last accessed on: 02.03.2023)

[2] https://g7.utoronto.ca/summit/1989paris/communique/index.html , Nos. 52 % 53 (last accessed on: 02.03.2023)

[3] https://www.fatf-gafi.org/content/dam/fatf/documents/reports/1990%20ENG.pdf

[4] https://www.bmz.de/de/service/lexikon/98464-98464 (last accessed on: 02.03.2023)

Photo credit: Photo by Jeffrey Blum, Unsplash
Photo credit: Photo by Mika Baumeister Unsplash