Money laundering has become an insidious threat across the world. To demonstrate just how bad this threat has become, the United Nations estimates the cost of financial crime stands at 2 - 5% of global GDP, or $800 billion - $2 trillion US dollars. Germany, like other countries, has suffered at the hands of money launderers; Germany has recently been under scrutiny by the FATF. In response to this scrutiny and the growing tsunami of money laundering-related crimes, Germany will form a new and foremost AML authority known as the Federal Bureau of Financial Intelligence (FBFI).
Further details on the FBFI
The formation of the FBFI comes in response to the FATF's criticism of Germany's efforts in preventing money laundering. In August 2022, the FATF published a report on the country's efforts to combat money laundering and terrorism financing. The report states, "As the 4th largest economy in the world, the largest in the EU, and with a high number of global interconnections, Germany faces significant money laundering and terrorist financing risks." The report authors continue, advising, "While there is a robust and comprehensive framework in place for regulating and supervising the financial and non-financial sector for compliance with AML/CFT, more priority needs to be given to resourcing the over 300 supervisors and ensuring there is a consistent risk-based approach taken."
This report has driven the formation of the FBFI, which will employ 1700 staff and work in two of Germany's largest cities, Dresden and Cologne. The core remit of the FBFI will be to centralize monitoring and governance of money laundering and sanctions enforcement. Draft legislation outlining the duties of the FBFI will include a new investigative procedure to help clarify the origin of funds spent to acquire suspicious assets of high value.
Forming this potentially powerful authority by the German Finance Ministry will place Germany at the forefront of advanced AML regulatory control and governance. This will focus Germany on addressing the FATF criticisms, with the FBFI acting as an exemplar practice in regulatory authority to other countries.
The cross-border impact of financial crime
Germany is not alone in attempting to combat the intricate web of money laundering. An Eastnets report has found that 88% of executives in European financial institutions are experiencing issues handling and mitigating the more complex aspects of financial fraud. The outcome of this is a series of fines metered against several European banks in the last two years. Cross-border money laundering is where regulations can fall short, being caught out by differing processes and privacy requirements across jurisdictions.
As such, each country must dedicate resources to tackling financial crime. However, the complex intertwined nature of money laundering and other financial crimes means that cross-border collaboration is essential. The EU recognizes this and is in the process of establishing the Anti-Money-Laundering Authority (AMLA). The AMLA will coordinate collaborative efforts between EU state country financial intelligence units (FIUs), and in the case of Germany, the new super-agency, the FBFI, will work alongside the AMLA.
The AMLA is part of a broader European Commission legislation to strengthen the EU's anti-money laundering ("AML") and countering the financing of terrorism ("CFT") rules. The AML Package includes, along with the AMLA, "the EU single rulebook," AMLD6 (anti-money laundering directive), and the EU Transfer of Funds regulation. AMLA will likely enact its duties on 1 January 2024; which country will host AMLA is unknown.
Across the world, cross-border collaboration between regulatory authorities is gathering steam. Another FATF report looked at how divergent AML/CFT rules among jurisdictions can contribute to challenges for cross-border payments. The report points out that harmonization in CDD rules and high-risk Jurisdiction rules and increased collaboration among the FIUs were important suggestions. Cross-border technological approaches can provide a way to tackle these complex jurisdictional issues.
AI tech is the vanguard of cross-border AML
When Eastnets surveyed FI executives, asking why the fight against financial crime has become so complex, the top reason was "criminal innovation using new technology." Just as cybercriminals turn to AI to up their money laundering capability, banks and FIs are also turning to new technologies such as AI to fight financial crime. The regulators are supporting this move, with the UK Financial Conduct Authority (FCA) publishing a focus report in 2022 covering AI in financial services. The report concludes that regulators and financial institutions should "monitor and support the safe adoption of AI in financial services.”
The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) or BaFin helps to promote and enforce AML practices. The body published a report in 2018, "Big data meets artificial intelligence – Challenges and Implications for the supervision and regulation of financial services." The report identifies a core capability of AI in financial transactions, i.e., the notion of explainability within machine learning models. The topic of AI explainability was part of a webinar discussion between Eastnets and the Maltese Financial Intelligence Analysis Unit (FIAU), which recently issued a Guidance Note on transaction monitoring obligations. The webinar discussed issues that cause an FI to struggle with regulatory compliance and how AI can help to meet the complex nature of modern financial transactions and AML.
The new German AML authority is a welcome addition to the regulatory landscape. However, its remit must be one of cross-border collaboration as it is cross-border money laundering making AML measures more complex. AI helps alleviate the risk of cross-border payments, but the regulators must work together to share intelligence and push forward in using AI for AML.
How does AI, AML, and regulations impact your FI? Read the Eastnets report on "Cross-border collaboration: A game-changer in the fight against financial crime?"
For more information on how regulators are cooperating to combat financial crime,
sign up for a Finextra and Eastnets Webinar on 3 October 2023.
