On October 14, 2020, the German Federal Government proposed the Draft Act for the Effective Prosecution of Money Laundering (Gesetz zur Verbesserung der strafrechtlichen Bekämpfung der Geldwäsche – the Draft Act) to implement the EU’s Sixth Anti-Money-Laundering Directive (AMLD6) into German law. The AMLD6 aims to improve the harmonization of the criminal liability of money laundering and terrorist financing across the EU-27. In doing so, it significantly differs from its predecessors and their implementation in previous German anti-money laundering legislation which mainly dealt with regulatory issues such as the obligation to conduct know your customer (KYC) checks and to report suspicious transactions. This Client Alert summarizes the key proposals in the Draft Act including, highlights the gold plating approach taken by the German government and takes a closer look at its regulatory implications on financial services firms and insurance undertakings.
Over and above implementing the EU’s AMLD6 regime into German law, the Draft Act sets out to achieve a “paradigm shift” (grundlegende Reform) in the prosecution of money laundering in Germany by abandoning the concept of a catalogue of predicate offenses, i.e. underlying criminal activity. In other words, the proposed money laundering offense, as a matter of German law, will be able to capture profits derived from any criminal activity. This aims to make prosecution easier and more effective, notably where multiple actors and activities are involved. This approach gold plates the EU’s current regime considerably, as the latter, not at least due to limited EU legislative competences in criminal matters, is based on a minimum catalogue of predicate offenses.
Financial services firms, insurance undertakings and other “obliged entities” (Verpflichtete) are not the primary focus of the AMLD6 or the Draft Act. In fact, the Draft Act does not propose any changes to the German Anti-Money-Laundering Act (Geldwäschegesetz – GwG), which implements the requirements of the EU’s existing money laundering regime i.e. AMLD1-5. This being said, the GwG defines money laundering by reference to the definition in the German Criminal Code (Strafgesetzbuch – StGB). Therefore, financial services firms as well as other obliged entities that are within the scope of the GwG may wish to revisit their AML processes and documentation to ensure such processes are aligned with the changes proposed by the Draft Act when the new Draft Act comes into effect.
The Draft Act is not expected to affect the regulatory burden of obliged entities severely, but it will change processes and procedures. In respect of the duty to report suspicious behavior, the German Federal Government highlighted in its explanatory notes accompanying the Draft Act that the reporting obligation does not require obliged entities to determine a particular predicate offense – which is the job of the prosecutor – but rather to report suspicious transactions without assessing whether a predicative offense is given. Therefore, changes in the predicate offense would, in the opinion of the German Federal Government, not affect existing reporting practices. The same applies to KYC checks.
Finally, it is worth noticing that the German regime’s proposed criminal offense of money laundering now contains a penalty framework specifically referring to those persons listed in the GwG as “obliged entities”. While the general punishment for money laundering is up to five years of imprisonment (with minimum term), an intentional offense by an obliged person under the GWG carries a minimum sanction of 3 months.
Prosecuting money laundering will become considerably easier in Germany. In fact, one of the main challenges of such a prosecution in the past was to prove beyond reasonable doubt that actus reus and mens rea of a predicate offense had been satisfied. Under the Draft Act, prosecutors will only have to prove beyond reasonable doubt that the profit was derived from criminal activity. Furthermore, the Draft Act extends the investigative power of prosecutors, by making greater use of online searches as well as surveillance of electronic and telephone communications in the investigation of money laundering. It also assigns the prosecution of money laundering to the criminal court divisions for business offenses (Wirtschaftsstrafkammer) at the regional court (Landgericht), where judges are specialized in financial crime cases.
To sum up the rationale and key changes of the Draft Act, we refer to the statement by German Federal Minister of Justice Christine Lambrecht in August 2020 as part of the announcement of the proposed Draft Act (our emphasis in bold):
“We need to make law enforcement much more effective in this area [money laundering] to better combat organized crime and serious financial crimes. Proof of money laundering shall be much easier in future. That is why we want to replace the complex old offence of money laundering with a clear new criminal charge and extend it considerably. It will no longer be necessary to prove that assets originate from specific offences.
The only decisive factor will then be that assets have been obtained through criminal activity, whether through drug trafficking, protection racketing, trafficking in human beings, fraud or infidelity. If the perpetrator accepts the criminal origin and hides or disguises the asset, the new offence of money laundering should take effect. This will make it much easier for public prosecutors and courts to prove money laundering and to hold perpetrators consistently accountable".
If you would like to discuss strategic options, in particular, how the changes to Germany’s AML regime will impact financial crime prevention systems and controls (including non-documented arrangements) that obliged entities will need to maintain please contact our Eurozone Hub key contacts.
- Reg-E, BT-Drucks. 620/20; Draft available here.↩
- Directive (EU) 2018/1673 on combating money laundering by criminal law (AMLD6).↩
- German Federal Finance Minister Olaf Scholz. The full quote is as follows (our emphasis in bold and explanations in square brackets): Money laundering is a serious problem because it harms the state and therefore all honest citizens. Criminal profits must not find their way into the legal system. But it is often complicated to combat money laundering effectively. The paradigm shift [grundlegende Reform] of the money laundering offence now is an important step in the fight against money laundering because it simplifies the procedure. The reform is a centerpiece of the Federal Government's strategy to combat money laundering and terrorist financing, which we adopted last autumn.” Statement available here.↩
- See page 1 et seq. of the Draft Act.↩
- However, in order not to allow the offence to become too extensive, the Draft Act narrows the scope of grossly negligent money laundering insofar that criminal defense attorneys are exempt from punishment if they fail to recognize in a grossly negligent way that the fees they accept originate from a criminal activity, see the Draft Act’s proposal for section 261 para 6 sent. 2 German Criminal Code. ↩
- It remains to be seen how the EU, which is itself reviewing the efficacy and design of the current EU AML regime, may take a similar action, possibly in the form of an EU regulation. ↩
- Art. 1 para 1 and Art. 2 et seqq. AMLD6. ↩
- Reg-E BT-Drucks. 620/20, p. 2 re compliance costs for the economy (Erfüllungsaufwand für die Wirtschaft); see Section 43 para 1 GwG.↩
- Section 261 para 4 StGB-Draft. ↩
- Art. 3 of the Draft Act amending Sections 53, 100a, 100b, 100g of the Criminal Procedure Act (Strafprozessordnung – StPO) . ↩
- Art. 4 of the Draft Act amending Section 74c of the German Judicature Act (Gerichtsverfassungsgesetz – GVG).↩
- Statement available here.↩