Financial crime remains a key challenge in Germany, as both money laundering and the evasion of sanctions undermine the effect of these laws and cause severe financial and reputational damage. Regarding sanctions, Germany started to embrace a tougher stance against the bypassing of sanctions (see our previous report here). More recently, German police, public prosecutors and customs authorities conducted another dawn raid and searched the properties of Russian oligarch Alisher Usmanov in Bavaria to seize assets. It was probably the most spectacular dawn raid so far under the umbrella of the newly formed Central Sanctions Enforcement Office (Zentralstelle für Sanktionsdurchsetzung – ZfS).
These measures are now complemented by increased efforts in tackling money laundering (see press release here). The Mutual Evaluation Report- Germany 2022 by the Financial Action Task Force (FATF) identified various money laundering and terrorist financing risks. The FATF recommended a better resourcing of the 300 anti-money laundering supervisors and a risk-based approach to investigate and prosecute money laundering activities more effectively. The Combating Financial Crimes Act can be seen as response/follow-up to these recommendations.
The current reforms revolve around the Combating Financial Crimes Act (Finanzkriminalitätsbekämpfungsgesetz – FKBG) which, among other measures, aims to bundle key competencies in the new Federal Financial Crime Agency (Bundesamt zur Bekämpfung von Finanzkriminalität – BBF). The Combating Financial Crimes Act is part of a broader reform of German authorities aiming to strengthen the fight against financial crime, in particular, money laundering and circumvention of sanctions. Since the invasion of Ukraine, Germany has adopted two Sanctions Enforcement Acts (Sanktionsdurchsetzungsgesetze – SDG), introducing new asset tracing and freezing powers, as well as structural improvements in both the operational implementation of sanctions and the fight against money laundering. One of the first measures stemming from the SDG Acts was the establishment of the Central Sanctions Enforcement Office which enforces sanctions at federal level – as in the recent case described above. In parallel, authorities kicked off the project for the Design and Establishment of a Higher Federal Authority for Combating Financial Crime (BBF Project) in December 2022 with the aim to establishing a main authority to fight financial crime. After a first agreement on such Federal Office was reached in April, the Federal Cabinet has just passed a proposal of the Combating Financial Crimes Act, which entails the set-up of the BBF and other fundamental reforms.
Key reforms of the Combating Financial Crimes Act
- The BBF will be set up in 2024 and take up its work in 2025. The new agency will first combine the workstreams of investigating, analysing and supervising money laundering cases, including assets investigations. Initially, the BBF will be complemented by the work of the ZfS, which is concerned with the implementation of sanctions. In the long run, the ZfS will be integrated into the BBF, turning the agency into the sole main authority on fighting financial crime. It will have the following units:
- The Money Laundering Investigative Centre (Ermittlungszentrum Geldwäsche – EZG) will investigate international money laundering, implementing a “follow the money” approach. This means that the investigation can be initiated based on financial flows without relying on predicate offences. Thus, Germany aims to target big-scale offences using a risk-based approach. To that end, the Federal Cabinet passed a proposal of a Bill to Strengthen the Risk-Based Operation of the Financial Intelligence Unit (FIU) in July 2023, stipulating such risk-based approach. Once the EZG initiates the investigation, the Financial Intelligence Unit (FIU) will carry out the analytical work.
- The Central Office for AML Supervision (Zentralstelle für Geldwäscheaufsicht – ZfG, ) which will ensure a coordinated approach by the decentralised supervisory authorities of the Federal States (Länder) to also pursue a uniform risk-based strategy.
- The Combating Financial Crimes Act also stipulates a set of other reforms, such as the use of state-of-art-technologies for the investigative and analytical units of the BBF, better transparency registers with additional access authorisations, more incentives for companies to disclose their ownership and control structures in the transparency register, and, in the future, a new real estate transaction register. Lastly, a new procedure for investigations into suspicious assets will be created for the BBF, but in a separate legislative proposal.
Preparing for new developments
The German regulatory and institutional framework regarding sanctions enforcement and anti-money laundering measures is changing rapidly. Therefore, companies are well advised to stay ahead of this development and adjust their internal control systems in accordance with the new requirements. This could be achieved by conducting a risk assessment to identify and evaluate sanctions and money laundering sensitive issues, trainings to employees to raise awareness of sanctions and AML requirements and how to recognize suspicious activities, as well as the creation of a procedure for reporting any suspicious transactions to the BBF.
Preparing for dawn raids
As shown by the latest events, export control and sanctions are developing very fast, especially in case of sanctions against Russia. Therefore, companies are well advised to adjust their export control system according to these new requirements. Specifically, concerning potential dawn raids, it should be emphasized that authorities usually take advantage of the element of surprise. Hence, it is of utmost importance that companies are prepared at all times. Only if relevant employees know how to handle such situations can the company maximize the likelihood that its legal rights are respected and minimize the possible reputational harm and negative effects on daily operations.
The five golden rules for company representatives present at a dawn raid are:
- Only exert influence verbally.
- Accompany and document the actions of the inspectors.
- Reserve rights over documents that may be subject to legal privilege or outside the scope of the warrant.
- Request sealing of documents that may be subject to legal privilege or outside the scope of the warrant.
Dawn raids can trigger discussions with the customs or public prosecution authorities on the amount of potential fines. In these cases it is of particular importance to demonstrate that the company has sound compliance measures in place that are bespoke to the respective German laws.
The Hogan Lovells Investigations and Compliance team and the Export Controls and Sanctions team closely cooperate to assist companies facing an inspection or investigation on the grounds of alleged sanctions or anti-money laundering rules breached. We also help companies with anti-money laundering and sanctions trainings. If you have any questions on any of these topics, please reach out to any of the Hogan Lovells contacts listed above.
Caroline Jesche and Samuel Ehlers, trainees in our Brussels office, contributed to this article.
Authored by Stefan Kirwitzke and Michael Jahn.