German lawmakers unveiled plans Tuesday to breathe new life into their country’s financial intelligence unit and repair the agency’s relationship with law enforcement following multiple backlogs of suspicious transaction reports and a raid on the agency’s headquarters.
The perpetual rise in annual volumes of suspicious transaction reports, or STRs, in Germany makes clarifying the FIU’s mission and use of the risk-based approach to fulfill it necessary, German officials stated in a 20-page proposal, which, if passed, would amend the country’s primary legislative framework against financial crime, the Anti-Money Laundering Act.
“The FIU can only live up to its legal mandate by consistently gearing its processes to combating money laundering and terrorist financing and designing them in a risk-based manner in line with international and European recommendations,” according to the proposal, which the Bundestag, the country’s legislature, published Tuesday.
Long the global standard, the risk-based approach towards combating illicit finance consists of financial institutions identifying their particular vulnerabilities to money launderers, terrorist financiers, sanctions evaders and other criminals and adjusting their due-diligence and transaction-monitoring processes accordingly.
Germany’s FIU began using the approach in early 2020 to find and forward the most urgent and promising STRs to law enforcement. But the new strategy failed to gain traction with investigators and prosecutors, some of whom still criticize the agency for taking too long to share high-value STRs, and for sometimes never sharing or even identifying them.
The discord culminated in July 2020 when a judge in Osnabruck authorized an unprecedented raid of the FIU’s headquarters in Cologne amid accusations that agency staff withheld essential financial intelligence from investigators.
Tuesday’s package of reforms primarily aims to clarify how the risk-based approach works in practice and what investigators and prosecutors can expect from the FIU going forward.
“A too far-reaching view of the FIU’s role against money laundering and terrorist financing and the extension of analysis to reports relating to other crimes impedes … its core mission, and can hinder the effective performance of its tasks,” officials explained in the proposal.
Consequently, the government wants to establish, definitively, that the risk-based approach lies at the heart of the FIU’s mission, and justify the agency’s focus on suspected instances of money laundering and terrorist financing at the expense of treating all STRs equally.
Roughly 63,000 of the 337,000 STRs the FIU received last year had little or nothing to do with money laundering and terrorist financing, according to the proposal.
Filter and reduce
The proposal also explains the role algorithms and artificial intelligence now play in FIU’s processing and categorizing of STRs, and thereby in giving the agency more time to pinpoint and review higher-stakes submissions.
Atop the FIU’s fraught relationship with law enforcement, the agency has accumulated multiple backlogs of tens of thousands of unprocessed STRs despite employing more staff than its counterparts across Europe.
Only a year ago, Christof Schulte, the FIU’s previous director, stepped down after concealing the agency’s latest backlog from the Financial Action Task Force during an evaluation of Germany’s laws, regulations and enforcement against illicit finance.
Tuesday’s package of reforms would authorize the FIU to consult with law enforcement agencies and AML supervisors to explain to the financial services industry when they should refrain from filing STRs.
Such a step would reduce STR volumes by at least 100,000 reports a year, according to German officials, who published an initial round of guidance on the issue in June.
Reconciliation with law enforcement may take longer, however.
“From a police perspective, this [risk-based] approach is extremely questionable and also entails more risks than benefits when it comes to effectively combating money laundering, police representatives argued in July. “At best, it protects employees at the central office from accusations of possible thwarting of punishment.”
Pacify and repair
The proposed reform of Germany’s Anti-Money Laundering Act aims to end the turmoil not only by clarifying what police should expect of the FIU, but also by making several adjustments.
One reform would require any AML-regulated company that has filed both a criminal complaint to the police and a suspicious transaction report to the FIU on the same activity would have to indicate as much on the STR to avoid triggering parallel investigations.
Each year, around 4,200 STRs flag suspected violations that were also the subject of criminal complaints, but only half of them indicated so.
The proposal would also set up a new data-retrieval system to allow investigators to consult financial intelligence-related records during an investigation without having to send individual requests to the FIU for each document.
Holger Pauco-Dirscherl, an AML consultant in Frankfurt, characterized the proposed changes, especially the strengthening and clarification of the risk-based approach, as urgently needed.
“This has to be followed by an evolution of the regulatory framework and new, more detailed guidance,” said Pauco-Dirscherl. “The private sector has been pushing for a risk-based approach for a long time but current rules preclude using the strategy except at great legal risk.”
Financial institutions often mitigate the threat by discarding the risk-based approach and filing low-value STRs for defensive purposes.
Germany’s FIU began hammering home the importance of prioritizing comparatively higher-value STRs months before the agency’s new director, Daniel Thelesklaf, took office in August.
Thelesklaf set the tone for his coming tenure by meeting with the directors of the Swiss, Austrian, Luxembourg and Liechtenstein FIUs in August.
“The head of FIU Austria emphasized that not every suspicious activity report can be processed in the same way,” the agency stated in a post on LinkedIn after the meeting. “The task of an FIU is to focus on the cases that are actually relevant.”
The reforms could cost as much as €1 million to implement and must come into force before the FIU moves from Germany’s customs agency to the new Federal Authority for Combating Financial Crime.
Contact Gabriel Vedrenne at firstname.lastname@example.org
|Topics :||Anti-money laundering|
|Document Date:||September 13, 2023|