FATF’s mutual evaluation of Germany

Recently the report for FATF’s mutual evaluation of Germany was released and many experts gave a mixed review on the same. Germany is currently the largest economy in Europe and the fourth largest economy in the world, behind the US, China, and Japan.

The German city Frankfurt is currently one of Europe’s most happening and important financial hubs, which makes it all the more important for Germany to keep their AML regulations tight enough to prevent the misuse of funds flowing in and out of the country. So prior to going into detail let us first understand what exactly is the Mutual Evaluation.

What is the FATF’s mutual evaluation?

The Financial Action Task Force, the inter-governmental organization that acts as a money-laundering watchdog, regularly conducts mutual evaluations of countries through peer reviews. A mutual evaluation of a country is usually a long procedure, with experts from other countries coming together to conduct rigorous assessments of the country’s ability to recognize and tackle financial crime. The country under scrutiny is required to prove to the committee that its framework for fighting financial crime can stand up to ongoing challenges.

The committee usually arranges an on-site visit to the country under evaluation, where they will monitor the working of their financial system and review its effectiveness as per a carefully developed assessment methodology. The country is also required to present how its existing laws and AML/CFT measures stand up to instances of financial terrorism and money laundering.

One of the main goals of this evaluation is to assess if the countries are capable of detecting terrorist threats and organizations and how their plan of action for dealing with potential terrorist funding and attacks stands up.

The results of the FATF’s mutual evaluation of Germany

After months of review, the FATF released its Report on Germany’s mutual evaluation on 25th August 2022. In its report, the FATF recognized the country’s efforts to bring positive changes to its AML/CFT framework, especially during the previous five years. It also appreciated the changes the country bought to its Financial Intelligence Unit (FIU), increasing its standard of financial intelligence.

However, acknowledging the size of Germany’s economy and its importance to the European Union, the FATF deemed that the country was not making enough efforts to prevent possible instances of money laundering in proportion to the country’s risk profile.

After a thorough evaluation of Germany’s economic standing and the strength of its various sectors, the FATF pointed out the following challenges in the country’s existing AML regime-

1. Though most of the world has gone virtual with money (a good example being the introduction of cryptocurrency, or India’s implementation of UPI (Unified Payments Interface, which helped take great strides in one day making the country truly cashless), Germany is still heavily reliant on the usage of money, with three-quarters of all transactions being done with cash. This can spell trouble, as physical notes are easy to make counterfeits of and can make keeping track of transactions extremely difficult. On the other hand, whenever online transactions take place, they are immediately recorded and can be referred to whenever needed.
2. Germany is also extremely dependent on Money or Value Transfer Services (MVTSs), which are usually informal services that ensure the transfer of money without any actual money movement, making them difficult to track. These transactions are usually done between people of the same geographical or ethnic background, with the main principle behind the system being trust.
3. Unlike banks, these systems often go unsupervised by the country’s regulatory entity and do not require formal training to implement. Being home to more than 11 million international migrants, Germany contains a very heterogenous population, many of whom have brought in their own local remittance methods like the hawala, fei-chun, and hundi systems. Unfortunately, many money-launderers and terrorist groups may also make use of these methods to move illicit money without being detected.
4. The FATF also found insufficient levels of coordination between regulatory entities across Germany’s 16 states. For the country’s AML measures to be the most effective, all of the 300 regulatory entities must work like a well-oiled machine and ensure that all important information is passed between them at timely intervals.
5. Though Germany has made substantial improvements to its FIU, it was recommended that they make use of more tools and the latest technology to streamline their processes further and make them more efficient. Suggested additions were the use of Artificial Intelligence and advanced data analytic programs to comb through and detect suspicious transaction data
6. Though Germany is extremely efficient when it comes to finding and investigating AML risks at the policy level- it seems that these findings do not translate well when it comes to the operational level. The  FATF found the disparity between the findings on paper and their actual implementation to be quite concerning.
7. The FATF also pointed out concerns regarding potential terrorist funding in Germany’s non-profit organization sector. Though such organizations are regularly made aware of their obligations to monitor transactions and implement anti-TF measures, actually monitoring whether the required changes are being made can be difficult at the grass-root level. Most of the measures developed also have certain limitations. Due to this, it was found that the rate of freezing illicit money was much lower than the amount actually detected to come from unconstitutional means.
8. The Federal government was also found to be lacking when it came to the possession of and access to relevant data that could enhance their AML/CFT technologies. The Federal authorities must make more efforts to work hand-in-hand with the Data Protection and Privacy sectors in order to strengthen their procedures.

Conclusion

The FATF recently conducted a mutual evaluation, which is a peer-reviewed evaluation, of Germany’s AML/CFT framework and its effectiveness when it came to combating money laundering and terrorist funding in the country’s various sectors. Though Germany was found to be mostly compliant with all of FATF’s guidelines and had even made efforts to strengthen its FIU, it was still found to be lacking in many areas.

Being a country of such high economic importance, Germany is held in much higher regard when it comes to developing a productive AML regime, as even the smallest holes in the system could lead to losses of devastating proportions. Hence, the FATF concluded that Germany is lacking in the implementation of an AML regime proportional to its current economic standing and subsequent risk portfolio.