Despite several recent improvements in legislation, Germany remains a target destination for money launderers. However, businesses also have a legal obligation to play an active role in combating this crime. Below, explore what money laundering is and 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 to 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 to other countries?
What is money laundering?
Money laundering (ML for short) is described as the channeling 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—for example, through theft, corruption, extortion, illegal gambling, or the trading of drugs and weapons—becomes “cleaned.” It also means that money is kept out of the state’s control. Money laundering often takes place in connection with organized criminality and mafia organizations.
The United Nations Office on Drugs and Crime (UNODC) estimates that the amount of money laundered globally is between $800 billion to $2 trillion in US dollars 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 organized 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 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, or 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 prioritize 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, and it’s 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 who actually come to eat. The illegal cash paid for the fictitious meals is booked into the accounts, despite no dishes actually ever leaving the kitchen. The illegal cash instantly becomes real income, and even though it is subject to tax, the dirty money is washed clean.
Casinos are another example of places criminals use to launder money, since 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. Gamblers are often not given a receipt, which means that there is no record that the money comes from a legal source. It is also 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, at most, a minimal loss. 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 April 1, 2023, buying property in Germany was a particularly popular method among criminals for laundering money. This was because, until then, it was possible to pay in cash. According to the estimates of the anticorruption organization Transparency International, 15% to 30% of all criminal assets in Germany were 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 in regard to who owns what 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 was that since April 2023, it has no longer been possible to purchase property in cash. This new legislation is an important milestone in combating money laundering in the property sector. It is also good news for all legal property buyers, as deals paid for by illegal funds were increasing demand on the market and pushing prices up.
How does Germany combat money laundering?
In Germany, the primary state aid for combating money laundering is the Money Laundering Act (GwG). The GwG makes money laundering an illegal act that can be prosecuted by the authorities. The 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 euros. Anyone wishing to deposit more into their bank account needs to provide evidence of such funds’ origin. For new customers, banks can demand proof from as little as 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 in cash for a car, they have to be prepared to undergo a review of their personal situation. 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. Their duties include, among other things, effective risk management. For example, this means undertaking a risk assessment on the counterparty and implementing individual, corporate, or internal security measures derived from such assessment. 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 central Financial Intelligence Unit (FIU). These signs may include cash payments of more than 10,000 euros and the transportation, or storage, of cash amounts.
Learn more about the other obligations businesses need to comply with, and to which businesses the Money Laundering Act applies.
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 (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 euros. Severe, repeated, and systematic breaches are subject to fines of up to 5 million euros or 10% of a company’s sales from the previous year. In addition to this, the responsible supervisory and administrative authorities are entitled to publicize uncontestable fine decisions on their own website. As a result, the perpetrators’ names become known to the public.
How does Germany compare to other countries?
Money laundering in Germany is prevalent compared 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, and Germany was graded 4.21.
This was partly due to the fact there are a large number of banks in the country, including many smaller institutions, and Germans’ preference 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 term in the past, and sanctions were relatively light.
This was frequently criticized by the Financial Action Task Force (FATF), a body of the Organisation for Economic Co-operation and Development (OECD), among others. According to the FATF, only around 1,000 people in Germany were prosecuted for money laundering offenses 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; the blacklist indicates high-risk countries.
In contrast to the general trend of falling criminal activity, the number of money laundering cases in Germany have risen continuously over recent years. It is estimated that around 100 billion euros 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 Federal Criminal Police Office (BKA) recorded 203 cases involving organized crime that contained signs of money laundering. This is nearly a third of all recorded cases of investigations into organized crime. Learn more about how the situation has changed in the past 10 years.