German election: after past failures, what lies ahead for financial crime in new Merkel era?
25 Sep 2017

After a bruising campaign, Angela Merkel has emerged as winner of the election, with her Christian Democratic Union (CDU) and its Bavarian sister party the Christian Socialist Union (CSU) clinching 33% of the vote. The Social Democrats (SPD) came in second with 20.5% and in a surprise move, the far-right Alternative for Germany (AfD) garnered 12.6%.

With the results out, focus is now on the surge in support for anti-immigration party the AfD and Merkel’s dismal performance, with commentators highlighting it as the worst result for the CDU-CSU alliance since 1949. Her next move in setting up a new coalition government is also of strong interest.

On the financial crime front, although Merkel’s government has in previous years taken some important combative steps, it has missed some key opportunities to tackle corruption and more needs to be done.

Money laundering

Germany, like major Western states, is embattled with the issue of dirty cash being funnelled through its banks and firms.

According to a 2016 study conducted for its Ministry of Finance, the total volume of money laundering activities in Germany’s financial and non-financial sectors is estimated to be over 50 billion euros, a figure that goes up to over 100 billion euros when factoring in estimated figures for companies specifically created for laundering money in sectors such as gambling and hotels.

Under Merkel, Germany has made some steps to address the problem. In recent years, the Ministry of Finance published an action plan to tackle money laundering and tax evasion, which included measures such as cracking down on facilitators of financial crime like banks.

It also said its financial intelligence unit had been given new responsibilities and more staff. Germany, like other the EU states, has also implemented the EU Fourth Anti-Money Laundering Directive.

Looking ahead, there is some work to be done. One area of concern is its suspicious transaction regime (STRs), where there has been significant discrepancies in the number of STRs actually filed compared to the estimated number of cases, such as in the non-financial sector.

The same study conducted for the government highlights that only about 250 STRs were filed annually in this sector, whereas the number of unreported cases is likely to be somewhere between 15,000 to 28,000 (which is the range for the financial sector).

The financial volume of reportable but unreported cases is estimated to be between 20 and 30 billion euros in the non-financial sector alone.

The new Merkel coalition will also face growing pressure from anti-corruption campaigners and financial crime experts to tackle corporate secrecy by establishing publicly-accessible registers of the real or beneficial owners of firms.

A Berlin-based spokesperson for Transparency International said: “There are still too many opportunities for non-transparency. Instead of naming the beneficial owner, companies are allowed to name only the persons on the executive level in case that they state that they aren’t able to identify the real beneficial owners.

“Transparency Germany is looking forward to October when the fifth EU-anti-money-laundering guideline will be negotiated. Hopefully these loopholes will be closed,” the spokesperson said.

Tax evasion

Germany has made efforts to combat tax evasion at international level, which has seen it adopt global initiatives as well as participate in cross-border collaboration. It has also worked towards addressing the issue on the domestic front.

However, the incoming government will find it needs to do more to address the problem of corporate secrecy on the home front as well step up its prosecutions of tax evaders.

Following the publication of the Panama Papers data leak last year, Germany outlined a new plan to counter tax evasion, and went on to raise the issue of beneficial ownership registers.

“If the beneficial owners of corporate structures are not known, it is impossible to assess the tax implications or detect money laundering effectively enough,” said the Finance Ministry in 2016.

The Finance Ministry said it would address the issue.

However, financial crime experts point out that the problem with these proposed registers was that they would not be publicly accessible.

In fact, almost a year after announcing the registers, Germany published a revised draft law which struck off references to a public register after lobbying from the German Family Business Association.

Despite the upper house recommending returning to a fully public register, the key lower house finally approved the law without public access.

In addition, while Germany has been supportive of purchasing of CDs of data containing information about alleged tax evaders, it has failed to ensure the accountability of what happens to the people behind the crimes, said Marburg-based Markus Meinzer, a member of the European Commission Expert Group on automatic exchange of financial account information, and a senior analyst with Tax Justice Network.

Meinzer said that while it may be a bit early to comment on Germany’s handling of the Panama Papers, “we don’t know of any prosecutions involving the Swissleaks, which revealed the banking industry’s role in facilitating serious financial crime.”

“Regarding the Liechtenstein Bank scandal in 2009, Germany purchased a CD with information about tax evaders, and again there were very meager results: only seven prosecutions out of 1,000 cases, and none of the seven went to jail,” said Meinzer.

Sanctions risk

Merkel has been vocal on issues pertaining to sanctions. Her government played a decisive role in shaping the EU’s position, notably regarding sanctions against Russia for its violations in Ukraine, and also Iran over its nuclear programme.

On Russia, Merkel maintained that sanctions would not be lifted until Russia adhered to a ceasefire agreement; regarding Iran, Germany was a key player – along with states like the UK, China and US – in agreeing to a deal to lift its sanctions.

Generally, Merkel came across as tough on Russia, but less harsh on Iran, said Christian Kaunert, Professor of European Politics and Academic Director of the Institute of European Studies at the Free University of Brussels.

At home, her Christian Democratic Union of Germany (CDU) maintained that strong stance, even though its coalition partner the Christian Social Union in Bavaria (CSU) came across as ‘somewhat soft’ of Russia, especially when it emerged that some of its leading figures had paid Russian President Vladimir Putin a visit, Kaunert said.

Looking ahead, how she will deliver is likely to be depend on which party her CDU will be with in coalition, he added, generally, the Greens have taken a “much tougher” stance against Russia, whereas the Liberals have been “making a lot noise about how Germany needs to engage with Russia.”

-By Irene Madongo

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