In 2020, more than EUR 5 billion changed hands over counters in kiosks, call shops and travel agencies. Its primary destination: accounts in other countries. Origins of the money: in some cases criminal. It is no surprise that BaFin is interested in these enterprises. Experts in the field refer to them as “agents” – agents in the money remittance business. For BaFin’s purposes, they fall into a category of enterprises outside the banking sector – enterprises often utilised by criminals to launder profits from drug trafficking, prostitution and the like.

Large and heterogeneous, this group of non-banks comprises about 5,200 enterprises. In addition to the agents, the group includes leasing companies – but also insurers, payment institutions, investment firms, securities trading banks, crypto custody providers, asset management companies and bureaux de change. BaFin’s anti-money laundering unit has them all on its radar. The large number of such enterprises calls for a risk-based approach to supervision. Of BaFin’s two divisions dedicated to the matter, one keeps an eye on the agents and leasing companies in particular: the Division for Money Laundering 7 Non-Banking Financial Sector II.

How BaFin inspects companies outside the banking sector

he division does not prosecute the money launderers themselves – that is the job of the police, the public prosecutors and the courts. BaFin’s task is to check whether the agents and leasing institutions are adequately arming themselves against the risk of being abused for money laundering purposes. They can do that, for example, by collecting and documenting their customers’ personal data (see info box “How agents and leasing companies must protect themselves against money laundering” ).

“When it comes to the agents, leasing institutions and other non-banks, we basically have the same courses of action available that we have when we deal with banks”, explains Dr Jens Fürhoff, Director-General of BaFin’s Directorate for the Prevention of Money Laundering . BaFin can conduct inspections on site but also from its offices. While the inspection teams are generally not being sent out during the Covid-19 pandemic, “if there’s information we absolutely want, we will get it no matter what”, Fürhoff affirms. Even if special inspections are called for, they can be conducted remotely. Or, if it is reasonable to do so, BaFin postpones them.

Risk assessment difficult

Nevertheless, the supervisor concedes, the job of assessing money laundering risks in the non-banking sector is significantly more difficult than in the case of banks. One reason for this is the heterogeneity described above. From the kiosks and leasing companies to insurers and other large companies in the financial sector: the range of customers, products and services is extensive. What makes things more difficult is the fact that not all undertakings have an auditor review their compliance with anti-money laundering requirements in the context of the annual financial statements. The opinions issued by such auditors are important sources of information for the supervisors. In its dealings with agents, for example, BaFin spent many years having to rely solely on its own findings.

With a view to assessing the situation as accurately as possible, the supervisory authority comprehensively analysed the market. Using this analysis as its basis, it divided the group of non-banks into ten sectors, which it then divided into subsectors (see table “Non-banks: sectors and their money laundering risks” , illustrated with the additional example of the subsector “Leasing of luxury goods”). BaFin uses these sectors to decide where to focus its supervisory activities: the (sub)sectors with greater money laundering risks are supervised more closely than those with low risk.

Non-banks: sectors and their money laundering risks

(c) BaFin

Greatest risk in the case of agents: money laundering involving small amounts

The risk of being misused for money laundering purposes is highest particularly in the case of the agents. Totalling about 3,000, they constitute the largest percentage of the non-banking group.

Agents are usually individual businesses or microenterprises such as kiosks, call shops, mobile phone shops, travel agencies or grocery shops that offer international money remittance services on the side. They receive cash from customers and send it to recipients abroad. While they themselves are not authorised by BaFin, they work with foreign payment service providers such as Western Union – as can be seen by the stickers on the shop window.

One scenario: a customer enters a kiosk in Frankfurt am Main and lays EUR 1,000 in cash on the counter. The money, intended for a relative in a country outside Europe, then embarks on a journey, starting at the kiosk. The kiosk owner pays it onto a Western Union account in Germany. From there, it travels to a Western Union account in the country where the relative lives. The relative accepts the money – also at a kiosk. The kiosk owner in Frankfurt receives a commission for the transaction. For business owners like him, money remittance services are a lucrative source of extra income: in 2020, about 14.3 million transactions of this kind were carried out by agents – microenterprises as well as large master agents.

This is not to say that only money launderers were at work in these transactions. Agents are also used by people who do not have a bank account – or in cases where the recipient does not have one. But agents are also popular among money launderers. Golo Trauzettel, head of BaFin’s Division for Money Laundering 7 Non-Banking Financial Sector II, gives the following reason: “Agents accept cash, and the amount is transferred without a traceable bank account connection between payer and recipient.” Another point is that things are often hectic in kiosks; there are constantly customers coming and going. A kiosk is thus an ideal place for laundering illegal money in smaller amounts without raising any suspicion.

Agents subject to BaFin inspection since 2011

It is therefore particularly important for agents to arm themselves against money laundering and, for example, have their customers present identification documents and make note of information such as name, date of birth and address in order to be able to trace the money (see info box “How agents and leasing companies must protect themselves against money laundering”).

The job of checking whether the agents actually do so, also in adherence to the requirements of the German Money Laundering Act (Geldwäschegesetz), has been BaFin’s responsibility since 2011. At first, the examiners sometimes showed up at a shop without notifying the owner first, but this type of surprise visit has become a thing of the past. The supervisors now announce their visit beforehand. “At some point, we noticed that there was a greater willingness to cooperate and we were more likely to find out what we wanted to know”, Fürhoff explains. One thing has not changed, however: once BaFin is on site, kiosk owners and call shop operators must give an account of themselves. “How do you identify your customers?” “What documents do you ask to see?” These are typical questions heard in the course of a BaFin inspection. During the pandemic, however, BaFin has been asking these questions in writing.

The supervisors also ask to see transaction records: “We compare these to the customer information that has been documented”, Trauzettel explains. If this comparison points to inconsistencies, they check whether the agent also suspects money laundering and has notified the FIU, which is responsible for analysing such suspicious transaction reports. But sometimes even the agents themselves are the ones choosing to break the law – i.e. by transferring the money, not via a payment service provider, but via their own bank account.

Supervision of agents proves successful

“The inspections we have been conducting since 2011 have been bearing fruit”, Fürhoff summarises. Many agents are now implementing the anti-money laundering standards better than before. This is also the conclusion drawn by the First National Risk Assessment 2018/2019 (Erste Nationale Risikoanalyse 2018/2019), which was conducted under the leadership of the Federal Ministry of Finance (Bundesfinanzministerium) and involved several authorities, including BaFin. According to the study, the inspections have given rise to positive effects on two fronts: “BaFin’s supervisory activities have resulted in a certain degree of market consolidation beneficial to the quality of the preventive measures”. In other words, there are now fewer agents, and their preventive measures have improved. By way of comparison: when BaFin began supervising the agents’ efforts to prevent money laundering, there were still about 8,600 agents in Germany. Today, as mentioned above, there are about 3,000.

For a long time, the task of supervising agents was particularly difficult, though – simply because there were so many of them. By tailoring its supervisory activities to the different sectors, BaFin has made the work easier. Another helpful development is the fact that, since 2018, payment service providers with a registered office in another EU member state and that employ more than ten agents have been required to designate a central contact person. This contact person must be available to BaFin, but also to the prosecuting authorities and the FIU, for communication.

BaFin coordinates agent supervision via contact persons

Since 2019, these contact persons have been required to report to BaFin on how many transactions individual agents carried out, for example, and how much money these transactions involved. “These reports are an important new source of information for us”, Division Head Trauzettel explains.
For some time now, BaFin has been stepping up its involvement of contact persons in the coordination of agent supervision. “Our plan is to conduct supervisory interviews with all the contact persons in 2021”, says Trauzettel. But there are also plans to assess contact persons. BaFin wants them to be well equipped in terms of personnel and financial resources. This is why in 2020 a foreign payment institution with a large agent network was formally called on to make improvements.

But not only contact persons: this year BaFin also intends to conduct spot checks to inspect multiple agents, agents with a particularly large quantity of transactions and agents with transactions involving especially high amounts. In addition, the supervisors will again be sending out numerous requests for information.

Fast cars and jewellery for organised crime

While kiosks and call shops tend to be points of contact for criminals dealing in smaller amounts, some organised lawbreakers seem to have found a more glamourous way of laundering their money: by leasing expensive luxury goods. Items especially popular with criminals of this calibre are apparently fast cars and jewellery; the idea of actually buying these goods no longer seems attractive. The authors of the First National Risk Assessment 2018/2019 suspect this is due to the fact that since July 2017, it has been easier for prosecutors to recover profits from illegal acts. Organised criminals, apparently intending to evade such law enforcement, are therefore increasingly turning to leasing. The simple logic: while a purchased sports car can be confiscated, a leased sports car belongs to the lessor and not to the criminal, who is only a lessee.

Diligently combating money laundering

BaFin has been alerted of the situation. Though it estimates the risk of money laundering in the leasing sector to be medium-low on the whole, “we see things differently in the subsector ‘leasing of luxury goods’”, Director-General Fürhoff comments. The risk there, he says, is at least medium-high. “Logically, the focus of anti-money laundering supervision has shifted to the companies in this subsector”, Trauzettel adds. Of the nearly 300 leasing institutions in Germany, only a small number offer luxury leasing. Like all leasing institutions, these need authorisation from BaFin to conduct leasing business and are not only subject to anti-money laundering supervision but also to ongoing supervision under the German Banking Act (Kreditwesengesetz).

The annual financial statements of leasing institutions are audited and certified by an auditor. “These audit opinions naturally make it somewhat easier to maintain an overview of the money laundering risks inherent in this subsector”, Trauzettel explains. When he and his division inspect a luxury leasing provider, they are particularly interested in how the provider complies with the due diligence requirements (see info box “How agents and leasing companies must protect themselves from money laundering”). The supervisors are currently focusing in particular on the assets that are the most popular: expensive cars and jewellery. “But we also have an especially close look when it comes to private jets and luxury yachts”, says Trauzettel.