Despite several recent improvements in legislation, Germany remains a target destination for money launderers. However, German businesses also have a legal obligation to play an active role in combatting this type of crime. Below, we'll explore what money laundering is, as well as how money is laundered in Germany through cash and property transactions. In addition, learn what the state does to combat money laundering, which criminal sanctions are eligible and how Germany compares with other countries.
What's in this article?
- What is money laundering?
- Where and how is money laundered in Germany?
- How is cash used in money laundering?
- How is property used for money laundering?
- How does Germany combat money laundering?
- How severe are the sanctions for money laundering?
- How does Germany compare with other countries?
What is money laundering?
Money laundering is described as the channelling of illegally acquired monies into lawful financial and economic circulation. Because criminals cannot simply deposit their unlawful gains into a bank account (as banks would become suspicious), they instead try to conceal the origin of their funds. They do this by moving the money through various accounts or companies to remove all traces of criminal activity. In this way, "dirty money" – generated through theft, corruption, extortion, illegal gambling, or the trading of drugs and weapons – is "cleaned". It also means that money is kept out of the state's control. Money laundering often takes place in connection with organised criminality and mafia organisations.
The United Nations Office on Drugs and Crime (UNODC) estimates that the amount of money laundered globally is between US$800 billion and US$2 trillion per year. This is problematic because state treasuries lose billions in tax that should be used for the common good. Additionally, money laundering creates a competitive disadvantage for honest companies when their competitors use illegal money. But in addition to the economic challenges, money laundering causes one other massive problem for society: every laundered dollar or euro strengthens the grip of organised crime and creates a security risk for everyone. Ultimately, money laundering provides criminals and terrorists with the funds to finance their illegal activities.
Where and how is money laundered in Germany?
The German Federal Criminal Police Office divides the money laundering process into three phases. Phase one is the placement phase, where illegal money is first introduced into legal circulation – for example, by depositing large sums of cash in credit institutions, using money transfer services or buying expensive goods with cash. The primary aim is usually to funnel large sums of cash into an account with no signs of its origin. Various establishments, including restaurants, casinos, betting shops and gambling houses, are used to do this both in Germany and in other countries. In principle, it is possible to launder money through any business that uses cash. To conceal large sums, criminals prioritise cash-intensive sectors. However, money can also be laundered through import-export businesses. To do so, perpetrators use false import and export figures to infiltrate their ill-gotten gains. Large networks and structures are often used for this purpose.
The second phase of the money-laundering process is called the concealment phase. This is when complex transactions are conducted to hide the origin of the funds. Money transfers between various bank accounts, countries and currencies, plus shell companies and sham transactions, are all used to conceal the link between the illegally gained funds and their source.
In phase three, the integration phase, the money arrives from an apparently legal source back into economic circulation. It then returns to the hands of the criminals who can subsequently use it as lawfully generated money.
How is cash used in money laundering?
Restaurants are a common location for laundering money. In this scenario, the owner books more diners in their system than actually come to eat. The illegal cash paid for the fictitious meals is booked into the accounts, despite no dishes ever actually leaving the kitchen. The illegal cash becomes real income instantly, and even though it is subject to tax, the dirty money is washed clean.
Casinos are another example of places that criminals use to launder money, given that they are establishments where proprietors handle large volumes of cash. Gamblers exchange their illegal money for chips, only play with a small number and then exchange their chips back for clean money. There are hitches, however. Often, gamblers are not given a receipt, which means that there is no record that the money comes from a legal source. In addition, it is not usually possible for funds to be paid out into an account. However, the situation is different with online casinos. When gambling online, winnings are paid out into a bank account. Of course, cash cannot be used for online gambling. But it can be changed into a more-or-less anonymous means of payment, such as payment cards, or by paying using digital wallets and cryptocurrencies.
It is particularly easy for criminals to launder money through fixed-rate sports betting. By adopting an arbitrage method, unlawfully acquired money can be bet in such a way that the gambler can guarantee a return of 90% – or sometimes more. For example, by placing three different bets on a football match with three different bookmakers – one on a home win, one on a draw and one on an away win – the gambler will only end up with a minimal loss at most. Despite losing two bets, the third will result in a substantial win. The gambler will end up with more or less the same sum as they started with and, moreover, will receive a receipt indicating that the money was lawfully won.
How is property used for money laundering?
Up until 1 April 2023, buying property in Germany was a particularly popular method for criminals to launder money. This was because, until then, it was possible to pay in cash. According to the estimates of the anti-corruption organisation Transparency International, 15% to 30% of all criminal assets in Germany used to be invested in property. As a result, the German property market was, for a long time, a stomping ground for wealthy criminals. Even today, there is still a lack of transparency with regard to who owns which property. Germany does not have a comprehensive property register.
At the end of 2022, the Sanctions Enforcement Act II (SDG II) entered into force. One outcome of this is that since April 2023, it has no longer been possible to purchase property using cash. This new legislation is thus an important milestone in combatting money laundering in the property sector. It is also good news for all legal property buyers, as the deals paid for using illegal funds were increasing demand in the market and pushing prices up.
How does Germany combat money laundering?
In Germany, the primary state aid for combatting money laundering is the Money Laundering Act (GwG). The GwG makes money laundering an illegal act that can be prosecuted by the authorities. German legislation is based primarily on the EU Anti-Money Laundering Directive (AMLD), which has to be implemented within the context of national laws. The GwG applies both to private individuals and a whole range of economic actors. For starters, cash payments and transactions are subject to an allowance of €10,000. Anyone wishing to deposit more than that into their bank account needs to provide evidence of the origin of the funds. For new customers, banks can demand proof for amounts as little as €2,500. In the case of private individuals, the personal allowance of €10,000 also applies to the purchase of goods. For example, if someone wants to pay €12,000 in cash for a car, they have to be prepared for their personal situation to be reviewed. Dealers also need to keep a written record of the transaction using a form.
Economic actors are compelled by the GwG to apply particular care and diligence to enable money laundering to be detected as early as possible. Among other things, their duties include effective risk management. For example, this means undertaking a risk assessment on the counterparty and implementing individual, corporate or internal security measures as a result. In addition, companies also have to undertake due diligence under the terms of the GwG. As a result, they need to be able to identify contracting parties unequivocally and obtain information on the purpose of the transaction. In addition, any signs of illegal activity must be reported to the German central Financial Intelligence Unit (FIU). These signs may include cash payments of more than €10,000, and the transportation or storage of cash amounts.
Learn more about the other obligations that businesses need to comply with and which businesses the Money Laundering Act applies to.
How severe are the sanctions for money laundering?
Anyone engaging in money laundering in Germany, or flouting money-laundering rules, will find themselves facing significant sanctions. Money laundering can be punished with a monetary penalty or a custodial sentence of up to five years, according to Section 261 of the StGB (German Criminal Code). However, it is not only the act itself that is subject to sanctions. Businesses also have an obligation to report any suspicious activity that might indicate money laundering. Under Section 56 of the GwG, infringements may be sanctioned by fines of up to €150,000. Severe, repeated and systematic breaches are subject to fines of up to €5 million or 10% of a company's sales from the previous year. In addition to this, the responsible supervisory and administrative authorities are entitled to publicise decisions made regarding uncontestable fines on their own website. As a result, the perpetrators' names become known to the public.
How does Germany compare with other countries?
Money laundering in Germany is prevalent in comparison to other European countries. In 2022, the country with the highest risk of money laundering and the financing of terrorism was the Democratic Republic of the Congo. It received an Anti-Money Laundering Index score of 8.3. This index ranges from 0 to 10. Conversely, Finland had the lowest risk, with a score of just 2.88, while Germany was graded with a score of 4.21.
This was partly due to the fact there are a large number of banks in the country, including many smaller institutions, and a preference in Germany for using cash. Moreover, Germany is also an attractive destination for money launderers due to its political stability and economic power. Last but not least, prosecuting perpetrators took a long time in the past and sanctions were relatively light.
This was frequently criticised by the Financial Action Task Force (FATF), a body of the Organisation for Economic Cooperation and Development (OECD), among others. According to the FATF, only around 1,000 people in Germany were prosecuted for money laundering offences in 2020, despite over 37,000 investigations being launched. This is one of the reasons why Germany has often found itself almost being placed on the FATF's greylist, or even its blacklist. The greylist is used for countries with an increased risk of money laundering and the financing of terrorism, while the blacklist indicates high-risk countries.
In contrast to the general trend of falling criminal activity, the number of money laundering cases in Germany has risen continuously over recent years. It is estimated that around €100 billion are laundered in Germany each year. Although 22,614 cases of money laundering were recorded by the police in 2022 alone, the estimated number of actual cases is considerably higher. In the same year, the German Federal Criminal Police Office (BKA) recorded 203 cases involving organised crime that contained signs of money laundering. This is nearly a third of all recorded cases of investigations into organised crime. Learn more about how the situation has changed in the past ten years.