Anti-Money Laundering

Key Takeaways:

1. Money laundering refers to the process by which illegally acquired money is smuggled into the legal financial system in order to conceal the true origin of the money. Money laundering is punishable under § 261 StGB.
2. In order to prevent money laundering, companies are subject to many obligations under the Money Laundering Act (GwG). it is very important for companies to comply with these regulations, otherwise they could face fines of over 1 million euros.
3. Money laundering consists of three steps, first the money is introduced into the financial cycle, then the origin is concealed, as soon as this is the case, the money is used for legal economic activities.

What is money laundering?

Money laundering is the process by which criminally obtained money is smuggled into the legal financial system in order to conceal the illegal origin of the money. The aim of money laundering is to conceal the true origin of the money and make it appear to be legally acquired money so that the money can be spent and is protected from state access.

Money laundering is a criminal offense under Section 261 of the German Criminal Code (StGB) and can be punished with a sentence of up to five years in prison.

Example: A criminal uses the proceeds from an illegal transaction to buy real estate. The income from renting out the house then appears to be legitimate rental income, meaning that illegal money has been converted into legal money.

What are the requirements for money laundering under Section 261 StGB?

The offense of money laundering under Section 261 StGB has four requirements:

• Object of the offense: money laundering requires that the money originates from an unlawful act. Money laundering therefore includes not only money, but also other items and assets, e.g. bitcoins or receivables.
• Criminal offense: One of the criminal offenses of Section 261 (1), (2) StGB must also be present; this includes, for example, hiding or exchanging money.
• No restriction: There are several exceptions to money laundering, such as the acceptance of fees by defense lawyers.
• Intent or recklessness: Money laundering requires intent or recklessness. In the context of money laundering, intent means in particular that the perpetrator accepts that the money comes from an illegal predicate offense, or even knows this. Recklessness exists if the perpetrator grossly fails to realize that the three above-mentioned conditions are met.

How does money laundering work?

Money laundering usually takes place in three stages:

• Placement: at this stage, the illegally acquired money is introduced into the financial circuit. This can happen in various ways, e.g. through deposits in bank accounts, the purchase of luxury goods such as cars, jewelry or art, or through the use of cash in betting shops.
• Concealment: In the second step, the origin of the money is concealed. The aim of concealment is to transfer the money so frequently and opaquely that it is no longer possible to trace where the money originally came from. One way of doing this is to use letterbox companies, but fictitious transactions, e.g. share transactions, can also be used to disguise the origin of the money.
• Integration: Ultimately, the aim is to integrate the money into the legal economic cycle. In this way, the “laundered” money can be presented as income from apparently legitimate transactions and used to buy real estate, companies or luxury items, for example.

How is money laundering punished?

Preventing money laundering is punishable by up to 5 years' imprisonment under Section 261 of the German Criminal Code (StGB). In addition, the Money Laundering Act imposes a number of obligations on companies. Violations of the GWG can also be punished.

The following penalties are therefore possible:

• Imprisonment: Anyone who violates Section 261 of the Criminal Code must expect a prison sentence of up to five years. In particularly serious cases, for example if a gang launders money, a sentence of up to 10 years is possible. In less serious cases, a fine is also possible.
• Company fine: If someone representing a company has committed a criminal offense under Section 261 of the German Criminal Code (StGB), a fine of millions of euros can be imposed on the company under Section 30 OWiG.
• Fines: In the event of breaches of money laundering obligations, a fine of over one million euros is possible in accordance with Section 56 (3) GWG.
• Personal liability of the management / board members: Depending on the circumstances of the individual case, it is possible that the management or board members may be liable to pay compensation for the loss incurred.

What is money laundering prevention and what obligations do companies have?

In order to make money laundering as difficult as possible, companies are subject to a number of obligations, in particular from the German Money Laundering Act (GwG). Compliance with these obligations is also referred to as money laundering compliance or money laundering prevention.

The following obligations exist for companies and professionals to prevent money laundering:

• Customer identification and verification: the identity of the contractual partner must be established before a business relationship is established or for certain transactions. In the case of natural persons, this includes recording the name, date of birth, nationality, address and the type and number of an official identification document. In the case of legal entities, the name (company name), legal form, registered office and identification number (e.g. entry in the commercial register) must be collected. The information must be verified by means of a valid, official document (e.g. identity card, passport). The beneficial owner must be identified. Customer information must be kept up to date throughout the entire business relationship. The customer's transactions must be compared with their profile. Suspicious or unusual transactions must be analyzed and reported if necessary. In the case of higher risk (e.g. politically exposed persons, offshore companies), the origin of funds must be examined in greater detail, additional documentation must be requested and transactions must be monitored more closely.
• Money laundering officer: In many sectors, the appointment of a money laundering officer is mandatory, for example for banks, insurance companies or gambling operators.
• Risk analysis & management: Companies affected by the AMLA, e.g. banks and insurance companies, are obliged to analyze and continuously monitor their own business with regard to potential money laundering risks. To this end, contractual partners must also be identified and checked. There is also an obligation to check their own employees with regard to their own security and to train them on money laundering and the corresponding obligations.
• Obligation to register in the transparency register: Legal entities, e.g. GmbHs, AGs, KGs, etc., are obliged to register themselves and their beneficial owners in the transparency register.
• Reporting obligations & suspicious activity reports: If there is a suspicion of money laundering, there is an obligation to report suspected cases.
• Retention obligation: Companies are obliged to retain documents relevant to money laundering for 5 years.

Which companies are subject to the Money Laundering Act?

The Anti-Money Laundering Act does not apply to all companies and, in some cases, also applies to other professionals, such as lawyers and tax consultants. Rather, the AMLA places particular obligations on those companies and professionals that are active in areas that are particularly suitable for money laundering.

The obliged entities under the AMLA include the following in particular:

• Financial sector: In particular, banks, financial service providers, insurance companies and capital management agencies are covered.
• Lawyers: However, only lawyers who advise clients on certain transactions, e.g. real estate transactions, money management or company formation, are covered.
• Auditors, tax consultants, trustees
• Real estate agents & art dealers
• Gambling operators and intermediaries

What are the requirements of the Money Laundering Act regarding cash payments?

Cash payments are a particularly suitable way of integrating illegally earned money into the economic cycle. Accordingly, the AMLA contains several obligations relating to cash payments. However, there is currently no limit for cash payments. One is to be introduced in 2027 and will be set at €10,000.

The following requirements apply to companies for cash payments:

• Cash deposits: For cash deposits that exceed € 2,500 outside of business relationships and € 10,000 within business relationships, the depositors are obliged to prove the origin of the money. This obligation follows from Section 15 (2) GwG and the BaFin's interpretation and application notes.
• Purchase of precious metals: From a cash payment of at least € 2,000, there is an obligation to fulfill the general due diligence obligations of the GwG, this includes, for example, the obligation to identify the business partner. These
• Cash payments: When selling goods, there is an obligation to fulfill the general due diligence obligations of the AMLA for cash payments of €10,000 or more.

Overall, it is important to note that the obligations outlined above do not exempt you from taking action if there are concrete indications of money laundering and, for example, submitting a suspicious activity report.

What is the 6th EU-Anti-Money Laundering Package and what changes does it bring?

The 6th EU-Anti-Money Laundering Package aims to strengthen and harmonize the fight against money laundering and terrorist financing within the European Union. It consists of four legislative measures that are intended to create a uniform legal framework:

Core components of the package:

Money Laundering Regulation (AMLR):

The Anti-Money Laundering Regulation EU 2024/1624 provides for the expansion of the group of obliged entities: Crypto service providers, crowdfunding platforms, intermediaries of mortgages and consumer credit as well as dealers of luxury goods such as jewelers and art dealers agencies are to be included for transactions above certain thresholds.

Further changes concern the risk classification, the scope of data collection and updating, the identification of the beneficial owner, the review of financial sanctions and much more.

Finally, the Money Laundering Regulation to be applied from July 9, 2027 introduces The single cash limit is to apply across Europe and includes a cap of €10,000 for cash payments. However, member states can set lower limits.

6th Money Laundering Directive:

The AML Directive (EU) 2024/1640 is to be transposed into national law by July 10, 2027. The directive provides for an improved organization of national systems: strengthening cooperation between the Financial Intelligence Units (FIUs) and the supervisory authorities to combat money laundering and terrorist financing more effectively.

Funds Transfer Regulation

The Transfer of Funds Regulation (EU) 2023/1113 Transparency of transfers of funds: recast of the Regulation on transfers of funds to increase the transparency and traceability of financial transactions within the EU.

Significant changes and innovations:

Uniform regulations: The introduction of the Money Laundering Regulation means that, for the first time, the substantive rules for the private sector on due diligence obligations under money laundering law are governed by one regulation, leading to full harmonization within the EU.

Sanctions: Introduction of new sanctions, including fines with an upper limit of at least €10 million or 10% of the total annual turnover of credit and financial institutions, as well as other administrative measures.