The Money Laundering Act fights against the rise in money laundering nationally in Germany and internationally. It exists to protect companies; however, businesses also need to meet certain obligations in order to operate in compliance with the law. Our article explains what money laundering is and what the Money Laundering Act consists of. We explain who is affected by it, what the latest changes look like, and what they mean for companies.
What’s in this article?
- What is money laundering?
- What is the Money Laundering Act?
- Who does the Money Laundering Act concern?
- What obligations do companies need to fulfill under the Money Laundering Act?
- What is new in the Money Laundering Act?
What is money laundering?
Money laundering (“ML” for short) is described as the illegal channeling of money into lawful financial and business cycles. By doing so, “dirty money” is generated through corruption, theft, extortion, illegal gambling, or the trade of drugs and weapons. The money is channeled through various accounts or companies until it is no longer possible to identify where it came from or who it belongs to.
The United Nations Office on Drugs and Crime (UNODC) estimates the global volume of money laundered each year to be between $800 billion and $2 trillion USD. It is estimated that around 100 billion euros are laundered in Germany each year. In 2022 alone, 22,614 cases of money laundering were recorded by the police there. In Germany, the number of cases of money laundering have risen continuously over recent years, in contrast to the general decrease in criminal activity.
Not only is money laundering an economic challenge to be taken seriously, but it is also a significant security risk, as it gives criminal organizations and terrorists the means to finance illegal activities. In order to fight money laundering and organized crime, many countries introduced strict legal requirements and monitoring mechanisms, which give authorities the power to identify, investigate, and prevent suspicious transactions. Money laundering is also illegal in Germany, and can be punished with a monetary penalty or a custodial sentence of up to five years, according to Section 261 StGB.
How does money laundering work?
The German Federal Office of Criminal Investigation divides the money laundering process into three phases. In phase one, the “placement phase,” illegal money is first introduced into the legal economic cycles with the deposit of large sums of money in credit institutes, the use of money transfer services, or the sale of expensive goods using cash. In phase two, the “cover-up phase,” complex transactions are introduced to conceal the origins of the money. This could be the transfer of money between various bank accounts, countries, and currencies, the performing of bogus transactions, or the use of letterbox companies. Concealment caps the link of illicit funds to their source. In phase three, the “integration phase,” the money arrives from an apparent legal source back into the economic cycle, ultimately reaching the criminals. The criminals can then use it like legally gained money to purchase property or other assets.
What is the Money Laundering Act?
The Money Laundering Act (GwG - Geldwäschegesetz) is a German law which turns money laundering into a criminal offense which can be traced by the authorities. It has a preventative focus and requires particular groups of people, as well as economic agents, to take particular care and surveillance so that money laundering can be detected as early as possible. The EU Anti-Money Laundering Directive (AMLD) forms the basis of the GwG, which must be implemented within the context of national laws. The first AMLD was launched in 1991. The directive has been updated many times since then to adapt it to changing international money laundering practices and techniques. The primary goal of the AMLD and the GwG is to prevent anonymous economic transactions and curtail money laundering. Furthermore, they aim to prevent the financing of terrorism as well as tax evasion.
Who does the Money Laundering Act concern?
The GwG concerns both private individuals and certain economic agents. For individuals, the GwG is mainly relevant for cash payments and transactions. In Germany, there is a personal allowance of 10,000 euros—if anyone would like to transfer more into their account, they must be able to prove where it originates from. For new customers, banks can already demand proof from a sum of 2,500 euros. In the case of private individuals, the personal allowance of 10,000 euros also applies to the purchase of goods. For example, if someone wants to pay 12,000 euros for a car in cash, they have to be prepared to provide their personal details. Dealers also need to keep a written record of the transaction using a form.
To prevent money laundering, the GwG applies particular requirements toward certain companies and people, which extends well beyond the financial sphere. The requirements are listed in Section 2.
GwG-obligated parties from the financial sector:
- Credit institutes
- Financial services institutes
- Payment institutes
- Electronic money (e-money) institutes
- Agents for payment services and e-money
- Independent commercial operators in the field of payment services or e-money
- Providers of digital wallets and cryptocurrencies
- Financial companies
- Financial and honorary investment intermediaries
- Insurance companies
GwG-obligated parties from the nonfinancial sector:
- Goods handlers (wholesale and retail trade)
- Art dealers
- Art stockists
- Estate agents
- Insurance brokers
- Auditors
- Bookkeepers
- Trustees
- Financial investment management companies
- Service providers for companies
- Auditors and tax agents
- Attorneys
- Legal counsels
- Chamber legal advisors
- Patent attorneys
- Notaries
- Gambling organizers and agents
Affected companies should address money laundering regulations in depth to check which obligations they must comply with in their business dealings with their customers. This is also for their own protection; not only do criminals misuse major international companies for money laundering, but they also abuse small and medium-sized companies. Industries in which goods are often purchased using larger sums of cash, such as jewelers, watch makers, traders in luxury goods, cars, entertainment electronics, and art and antiquities, are particularly targeted.
What obligations do companies need to fulfill under the Money Laundering Act?
According to the AMLA, companies are required to take a number of measures to prevent money laundering. On the one hand, these measures include effective risk management, which must be appropriate to the type and scope of the business activity. On the other hand, this includes a number of due diligence obligations that follow the Know your Customer (KYC) principle:
Required risk management measures:
- Carrying out, documenting, and regularly updating a careful, complete and appropriate risk analysis of sales partners
- Implementation of individual, company, or internal security measures that are derived from the risk analysis
- Establishment of an adequate control mechanism
- Regular information to the workforce on the subject of money laundering
- Possibly appointing a money laundering officer and deputies
- Compliance with the recording and retention requirements: identification documents must be copied or recorded digitally
Due diligence obligations for companies:
- Clear identification of the contractual partner or the person acting on their behalf
- Review of agency relationships
- Obtaining and evaluating information about the purpose and intended type of business relationship
- Clarification as to whether the money comes from a politically exposed person (PEP).
- Continuous monitoring of business relationships and transactions
- Reporting evidence of illegal activities to the Central Office for Financial Transaction Investigations (FIU) using the “goAML” software
- Cash deposits over 10,000 euros
- Transporting or storing large amounts of cash
- Quick consent to poor investment conditions
- Evidence of multiple accounts at the same bank or other banks
- Cash deposits over 10,000 euros
Companies that do not report suspicious activity or otherwise disregard money laundering regulations face high fines. According to Section 56 of the GwG, the legal framework provides for fines of up to 150,000 euros in many cases. For serious, repeated, and systematic violations, fines of up to 5 million euros (or 10% of the previous year's turnover) is possible. In addition, the responsible supervisory and administrative authorities are entitled to make final decisions on fines public on their own website (i.e., to publish the names of offenders).
What is different in the Money Laundering Act 2022?
Innovative technologies have opened up new opportunities for money laundering, which criminals are exploiting. It’s important to continuously adapt the legal position to the new requirements. This happens both at an EU level—as most recently with the sixth edition of the Money Laundering Directive (AMLD6) brought into force in 2020—and at a national level with the regularly updated and expanded GwG. The most recent additions include the Act to Improve the criminal law fight against money laundering, which is intended to simplify prosecution for the authorities. In addition to this, cryptocurrencies and the corresponding financial services companies are subject to the Money Laundering Act.
Another important addition to the GwG is the Transparency Register and Financial Information Act (TraFinG), which came into effect on August 1, 2021. It states that all companies, clubs, associations, foundations, and other players are obligated to transmit the details of their beneficial owners to the transparency register. The transparency register requires most German companies to report specific data such as the disclosure of beneficial owners for the purpose of exposing their company structure, ownership, cash flow, and oversight. This should make it possible to connect the register of EU member states and to simplify the Europe-wide prosecution based on the data of all notifiable companies. A disregard for the duty to report to the transparency register is subject to high fines from the Federal Administration Office. Sole traders, incorporated traders,and private partnerships are not obliged to enter these details. A full view of the transparency register is meanwhile only permitted for certain authorities: since November 2022, unrestricted access to the public has not been allowed. The European Court of Justice (ECJ) decided that inspection is only permitted if there is an entitled interest, and this can be verified on request.