The watchdogs in the Hessian city were vigilant. When a transaction struck them as suspicious, they duly reported it to the appropriate authorities. However, her colleagues then carried out the business anyway – without having received any positive feedback beforehand. They should have left it alone. Because the Kreissparkasse Groß-Gerau received a fine of 10,000 euros, as the financial supervisory authority BaFin announced a few days ago.
With the sanction, the Hessian institute is in larger company. Because German and international supervisors are increasingly complaining about blatant failures by banks to prevent money laundering, and there are also more and more penalties. The institutes have been upgrading their staff and technology for years in order to be able to better identify and prevent dubious transactions. However, the success seems manageable.
In the fight against illegal financial transactions, Germany has not been a pioneer for a long time – and still has some catching up to do. In its most recent country report, the Financial Action Taskforce set up by the G-7 states praised “considerable progress”. In detail, however, it rates German anti-money laundering activities in seven out of eleven categories with the second worst grade of “moderate”.
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Finance Minister Christian Lindner (FDP) apparently no longer wants to accept the mixed verdict. At the beginning of 2024, a new federal office to combat financial crime is to start work, and a “money laundering investigation center” will bundle the prosecution of illegal financial flows in the authority.
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This is also a reaction to the shortcomings of the Financial Intelligence Unit, which is currently still part of customs. The authority entrusted with money laundering cases has shown itself to be overwhelmed by the significantly increased number of suspicious transaction reports. Around 60 percent of these receipts come from banks. Together with other financial companies, it is even 97 percent.
Despite diligent reporting activities, BaFin sees “sometimes still serious deficits in this area” at banks. The focus of the authority is currently primarily on “payment and crypto value service providers”, which are considered particularly risky because of their often numerous customers “from industries or countries with a high susceptibility to money laundering”. However, big banks should also remain in the spotlight.
“Human resources and know-how are often lacking”
BaFin has currently installed seven so-called special officers. The experts should point the way to companies that cannot or do not want to find it themselves. “When institutions have such serious deficits, there is often a lack of human resources and know-how,” says Birgit Rodolphe, Executive Director of BaFin who is responsible for the issue. Building them takes time. “Only then can careful processes and appropriate controls be put into practice effectively.”
The financial supervisory authority installed the first expert at Deutsche Bank in autumn 2018 and extended the mandate in 2021. At the end of 2022, she threatened fines due to the still insufficient progress. The US Federal Reserve recently also complained that there were still shortcomings. The institute must now explain in detail how it intends to stop this as quickly as possible.
Germany’s largest bank promised improvements more than ten years ago and has since invested enormous amounts of money in systems and employees. When the half-year figures were presented a few days ago, she stated that she had increased her staff again.
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Ulrich Göres knows from his own experience how difficult the fight for better controls is. Before the Frankfurt lawyer became self-employed, he was money laundering officer at Deutsche Bank and the German branch of the British bank HSBC. “With an increase in transactions, the requirements for money laundering prevention increase,” he says.
If the processing is still largely manual, this leads to ever higher costs. The institutes could break this cycle, for example, through the increased use of artificial intelligence, which leads to a better pre-selection of suspected cases.
But such optimizations are not easy. Because the IT structure in financial institutions is often confusing. “For example, a large number of customer acceptance systems can coexist,” says Göres.
Regulation for banks often challenging
This also makes it difficult to implement new legal and regulatory requirements, especially since these differ even within Europe. “It is a central challenge to establish uniform systems and standards across borders,” explains the lawyer.
Matthias Rode also knows the problems of the banks. “Regulation has increased significantly and is very challenging in some aspects,” says Deloitte’s partner, who specializes in financial crime.
In some cases, the implementation is hardly feasible in the given period of time. The fact that the framework continues to change is primarily a problem for banks, some of which are not yet able to collect data of the appropriate quality on a uniform and stable platform.
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“Effective prevention is not only a technical and organizational question, but also a question of corporate culture,” emphasizes Rode. It must be clear to everyone involved that compliance with the rules has top priority. There is sometimes a lack of experience, especially in younger companies. In fact, BaFin also used external monitors for the digital banks N26 and Solaris.
Detecting money laundering with the help of filters and algorithms is very challenging, if only because of the large number of customers, says Peter Christian Felst of the Mazars auditing firm. For example, the banks would have to identify who is behind a possibly widely ramified society economically.
“In the past, financial companies were certainly too lean on this topic and still have some catching up to do,” says Felst. But they have also invested a lot, so that the quality has increased. For him, however, an unsolved problem is what he considers to be a backward-looking approach to prevention and prosecution: “Familiar business models can be identified,” says Felst. “But organized crime is usually a step or two further.”
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