Regulation Focus Series | Article 11: Germany and BaFin

Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations have long been a hot topic in the financial industry — for good reason. AML regulations — designed to prevent criminal activities such as money laundering, terrorist financing, and fraud — require financial institutions to verify and monitor their customers' identities and transactions. Failure to do so can result in stiff fines and other penalties, with regulators increasingly taking a tough approach to compliance failures.

In this installment of our regulatory focus series, we focus on Germany’s KYC/AML regulations and its Federal Financial Supervisory Authority better known as BaFin. 

Overview of KYC/AML Regulations in Germany

Germany is one of Europe's largest financial centers, making it a prime target for illicit activities.

Only recently in 2020, Deutsche Bank was penalized $150 million USD for illicit transactions. Regulators found that Deutsche Bank had failed to properly monitor his accounts, and punished the lender harshly in response

To combat compliance lapses and strengthen the country’s AML defenses, the German government has implemented strict regulations to ensure that financial institutions are not being used as a tool for criminal activities. These regulations are outlined in the Money Laundering Act (Geldwäschegesetz or GwG) and are enforced by BaFin.

The GwG & Bafin

The Money Laundering Act (Geldwäschegesetz – GwG) is a German law that was first introduced in 1993 as part of the country’s efforts to combat money laundering and terrorist financing. It applies to all individuals and businesses operating in Germany, including banks, insurance companies, real estate agents, and other financial institutions.

The act sets out strict rules and regulations for the prevention of money laundering activities. It requires businesses to implement customer due diligence measures, maintain records of transactions, and report any suspicious activities to the authorities.

BaFin is the German Federal Financial Supervisory Authority, which is known as Bundesanstalt für Finanzdienstleistungsaufsicht in German. It was founded in 2002 and is headquartered in Bonn and Frankfurt, Germany.

The purpose of BaFin is to enforce the Money laundering Act and supervise banks, financial services providers, insurance companies and securities trading. Its goal is to ensure stability, integrity and transparency in the financial market while protecting consumers.

All BaFin AML requirements, as well as administrative fines for non-compliance are derived from the Money Laundering Act, which in turn is aligned with the EU’s 4th, 5th and 6th Anti-Money Laundering Directives. 

Key Requirements of KYC/AML Regulations in Germany

Under the GwG, financial institutions in Germany are required to follow specific guidelines to comply with KYC/AML regulations. 

Some of the key requirements include:

• Customer Identification: Financial institutions must verify the identity of their customers using reliable and independent sources, such as government-issued IDs or official documents.
• Enhanced Due Diligence: For high-risk customers or transactions, financial institutions are required to conduct enhanced due diligence measures, such as ongoing monitoring and additional verification.
• Customer Risk Assessment: By conducting a risk assessment, financial institutions must determine the level of risk associated with each customer and tailor their due diligence measures accordingly.
• Appointing an AML officer: BaFin requires businesses to appoint an AML officer and a deputy as contact persons for the regulator. In short, the officer is responsible for a company’s compliance with BaFin. They are also responsible for carrying out ongoing monitoring and compliance reporting. 
• Employee training: Companies under BaFin have to instruct all their employees about financial crimes and their prevention. This can be done through classrooms, computer-based programs, or other learning materials (for instance, the FATF’s publications). Companies can decide on the form and timing of such training, but it is always recommended that the instructions be provided whenever there are any changes in BaFin’s practices or a new form of money laundering emerges.
• Record Keeping: To ensure transparency and accountability, financial institutions are required to keep detailed records of customer transactions and due diligence measures taken.

To ensure compliance with its AML policies, Germany follows the guidelines set by the Financial Action Task Force (FATF), an inter-governmental body that sets international standards for combating money laundering and terrorist financing.

Financial institutions are required to thoroughly verify the identities of their customers and ensure that they are not involved in any illegal activities. This includes detailed customer due diligence, ongoing monitoring of transactions, and reporting suspicious activity.

Reporting Requirements

Under BaFin & the GwG, The German Financial Inteligence Unit (FIU) has the function of collecting and analyzing information related to money laundering or terrorist financing and passing this information on to the competent domestic public authorities for the purpose of the investigation, prevention or prosecution of such offenses.

Once a case is found,  BaFin is to report it to the public prosecutor's office for further investigation and potential legal action. This is because BaFin does not have the authority to prosecute cases themselves.

The public prosecutor's office acts independently from BaFin and has the power to enforce criminal law.

Additional Measures

Germany — as one of the leading political powers in the EU — not only ensures heavy scrutiny on internal money laundering but also as a member of the FATF, actively participates in international initiatives, enforcing global AML standards.

KYC compliance in Germany also has certain unique requirements that businesses operating in the country need to be aware of for. For instance, Video Identification — or videoident — is a distinctive feature of ID verification in Germany and requires special attention. BaFin sets strict requirements on how video identification has to take place.

German also implements a Qualified Electronic Signature or eSignature system. When a person conducts a digital transaction, a qualified eSignature can be used for identity verification purposes. 

Conclusion

The strict KYC/AML regulations in Germany are crucial for maintaining the integrity of the financial sector and preventing criminal activities. While they may present challenges for businesses, compliance with these regulations also brings significant benefits, such as increased trust and a more secure business environment essential for any business to thrive.

Overall, the strict KYC/AML regulations in Germany demonstrate the country's commitment to combating financial crimes and maintaining a strong and stable economy.  As technology continues to advance, it is expected that these regulations will evolve to keep up with the ever-changing landscape of criminal activities. Therefore, businesses must stay informed and adaptable to remain compliant and contribute to the fight against financial crimes in Germany.

Whether you are a business owner or a consumer, knowing and understanding KYC/AML regulations is crucial for a transparent, secure and successful financial system. Are you looking for an automated KYC solution to help you meet Germany and BaFin’s regulatory requirements? Get in touch and we’ll be happy to discuss how KYC-Chain can help.