Germany considered ‘paradise’ for money laundering
By Sara Seddon Kilbinger, Senior Reporter, REFIRE
Lindner to crack down on financial crime
Finance minister Christian Lindner is on a mission to ban cash purchases of real estate in a bid to put paid to Germany’s reputation, in his words, ‘as a money laundering paradise’.
‘We have the courage for great success,’ Lindner said in a recent statement. ‘With our powerful and effective structures, we will make sure that honest business people will be protected from those who don't stick to the rules.’
The Ministry of Finance has published a new paper detailing initiatives to stamp out financial crime, which include: the creation of a new federal authority to fight financial crime, a pledge to train more experts, and an additional pledge to accelerate the digitization and interconnection of the relevant property registers and records.
The new federal financial crime agency will bundle and develop expertise and focus on what the ministry calls a ‘follow-the-money approach’. The agency will work in close co-operation with the Financial Intelligence Unit, to which suspicious transactions are first reported.
Given the size of the German economy, it is a natural investment haven for both legal – and illegal investors. Michael Findeisen, who spent several years running the Finance Ministry's money laundering division, has cited illegal Italian capital channelled into Germany’s finance sector as one problem to tackle and illegal Russian money has also found its way in.
One of the key issues is that cash still plays a big role in Germany business, particularly in the real estate sector, an issue that the government has pledged to tackle. And despite EU efforts, the central bank was initially against abolishing the €500 note, which was eventually discontinued two years ago. Germany has also consistently resisted international regulations imposing a €5,000 limit on cash business transactions.
Crackdown is long overdue
For many in the industry, Lindner’s crackdown is long overdue. In August, Germany was criticized by the Financial Action Task Force (FATF), a global watchdog that tackles financial crime. It singled out Europe’s biggest economy for failing to do enough to tackle money laundering, despite being one of the biggest cash centres globally.
The FATF highlighted a series of failings, including the lack of control of those who handle large sums of money, such as estate agents, adding that while Germany understood the risks, it had not done enough to tackle them. The FATF also flagged money laundering risks from hawala payments, which means ‘transfer’ in Arabic. The system is widely used in the Middle East, moving payments through a trusted network of agents who operate outside banks.
In addition, the FATF criticized the disjointed nature of supervision, with more than 300 regional authorities responsible for monitoring such players, as well as a shortage of personnel. As such, Germany’s score lags far behind France, which the FATF also recently assessed. The poor ranking means Germany will now have to report annually to the FATF about its progress in tackling shortcomings. Lindner responded by acknowledging the problem and pledged to centralize control, employ additional staff and modernize existing technology.
Germany prosecuted around 1,000 people for money laundering in 2020, according to the FATF, despite launching than 37,000 inquiries, a level of convictions it deemed ‘very small’. Germany has more banks than another other country in the EU while many Germans prefer using cash, which the FATF said made up three quarters of transactions. There is no upper limit on the size of cash transactions.
With more than 200 countries and jurisdictions committed to implementing them, the FATF has developed the FATF Standards, which are designed to ensure a coordinated global response to prevent organized crime, corruption and terrorism. They help authorities go after the money of criminals dealing in illegal drugs, human trafficking and other crimes. The FATF also works to stop funding for weapons of mass destruction.
In May, the German government announced that it was ‘in close consultation with the states…to create the legal basis by the end of the year for centralized access by public agencies to all data on real estate holdings in Germany in accordance with their respective tasks’, noting that all registers and databases, including tax administration, land registry offices and notaries would be included in this. The aim is to create a unified, transparent, database for land registers, according to the Ministry of Finance.
Opaque nature of real estate deals makes it easy to conceal ownership
Another problem is that it is very easy to conceal who owns a property in Germany. While property owners are listed in the land register, oligarchs holding a property through a company are able to hide their identity, something that many in the industry would like to change. Essentially, one effective measure could be to reverse the burden of proof, as Italy has done in the fight against the Mafia. This means that if no owner of a suspicious asset comes forward, it is put into the hands of the state.
Speaking at a European police conference in Berlin in May, Hans-Georg Engelke, Secretary of State for the Interior said that ‘there is really still room for improvement in the cooperation between the authorities’ and that it is ‘simply intolerable’ that it is possible in Germany to conceal property relationships in various ways, including via complex company networks and straw man deals, which obscure who is really behind them. The federal anti-money laundering unit, the Financial Intelligence Unit (FIU) has identified legal entities which, in some cases, have no discernible business activities.
However, identifying the so-called ‘beneficial owner’ of a property can be virtually impossible for the authorities. One example of that is a site in Charlottenburg-Wilmersdorf in Berlin. Lisa Paus, a financial expert for the Green Party in the Bundestag has tried to identify the owner of the planned Ku’damm-Karee ‘Fürst’ project, which changed hands for the seventh time last year at a cost of €1.02 billion. Paus suspected that a Russian oligarch was behind the acquisition but the more she dug, the deeper the web of camouflage appeared to be and it proved impossible to identify the person or people behind it in a way that would stand up in court. In addition, if the owner of a property is unknown, it is impossible to freeze or confiscate their assets, something that Paus has openly criticized.
Others have found themselves on sanctions’ lists. The U.S. has placed 279 individuals and 637 companies on its sanctions list, according to OFAC, the Treasury Department's watchdog agency. The EU has 56 companies and 696 individuals on its list, which has been in place since the annexation of Crimea and is now being continually expanded. President Vladimir Putin and his Foreign Minister Sergei Lavrov are also on the list.