Anti-Money Laundering: What You Need to Know

Money laundering is any act that serves to legalise (actually or apparently) unlawfully acquired assets. The prevention of money laundering has become increasingly important in recent years. Anti-money laundering compliance refers to all rules and measures that serve to prevent money laundering. Numerous rules on the prevention of money laundering have been adopted, above all at European level. For companies, this means additional protection against coming into conflict with the law. However, implementing the prescribed requirements sometimes involves considerable additional effort.

The current legal requirements are intended to create more transparency and to prevent criminal actors from hiding behind ostensibly legal constructs (such as so-called "letterbox companies"). The disclosure of the "Panama Papers", among other things, contributed to recent new rules at European Union level. The monitoring of "high-risk" third countries is of particular importance; one aim is to prevent funds of illegal origin from dictatorially governed countries from entering the European Economic Area unchecked.

The strategies and instruments for preventing money laundering are also used to prevent terrorist financing.

In the following article, we have compiled answers to the most important questions on money laundering and terrorist financing:

Contents

• What is meant by anti-money laundering?
• Why is it important to prevent money laundering and terrorist financing?
• What is the purpose of anti-money laundering and which obligations must be fulfilled?
• Who is subject to anti-money laundering rules?
• How anti-money laundering works
• Which due diligence obligations are distinguished?
• What is meant by the "Know Your Customer" principle?
• What is the purpose of reviewing anti-money laundering in third countries?
• What sanctions apply in the case of insufficient anti-money laundering measures?

What is meant by anti-money laundering?

The aim of anti-money laundering is to stop or contain the spread of illegally obtained assets. The relevant legislation is intended to prevent money obtained, for example, through drug trafficking, illegal prostitution, human trafficking or similar activities from entering the legal economic cycle and thus being "laundered".

Most of the rules are based on European Union requirements, which are subject to constant change. Besides technological innovation (e.g. cryptocurrencies), the many adjustments are driven by the increasing interconnection of financial flows in the internal market and by the ingenuity of some criminals who find and exploit loopholes in the system.

Why is it important to prevent money laundering and terrorist financing?

Anti-money laundering serves to protect the financial system and thus ultimately the security of citizens in the EU: it is intended to ensure that criminal "institutions" cannot do business with entrepreneurs and private individuals. This is meant to create more reliability while at the same time respecting fundamental rights and economic freedoms.

The measures also help to improve cooperation between the national financial intelligence units responsible for suspicious transaction reports, as well as cooperation and the exchange of information between the competent supervisory authorities and the European Central Bank (ECB).

What is the purpose of anti-money laundering and which obligations must be fulfilled?

The primary aim of the compliance obligations is to prevent funds or other assets obtained illegally from being integrated into the legal economic cycle. In other, simpler words, the aim is to stop "dirty money" from being "laundered".

The focus lies on finding out which "natural persons" (individuals) are behind companies and complex corporate structures.

To this end, the European Union and its member states have committed themselves to defining a comprehensive set of rules and taking measures to prevent money laundering.

In particular, traders in goods of all kinds, i.e. all persons who sell goods commercially, are bound by these measures: for cash transactions above certain thresholds, they are obliged to subject their contractual partners to close scrutiny. In addition to a comprehensive risk analysis, internal safeguards must also be put in place. Furthermore, the data must be transmitted to the competent supervisory authority and always kept up to date.

These internal safeguards include, among other things:

• Policies, procedures and controls for managing risks
• Customer due diligence (so-called "Know Your Customer" processes)
• Extensive documentation
• Reporting of suspicious cases
• Obligation to record and archive data
• Anti-money laundering officers (above a certain company size)

Failure to comply with these obligations can result in severe sanctions, such as substantial fines and public disclosure of the breach and of the person responsible.

Who is subject to anti-money laundering rules?

The following "obliged entities" in particular are subject to anti-money laundering compliance:

• Banks and credit institutions
• Financial service providers
• Auditors and tax advisers
• Real estate agents
• Lawyers and notaries
• Certain insurance companies and insurance intermediaries
• Traders carrying out cash transactions above certain thresholds
• Art dealers or art intermediaries for non-cash transactions above certain thresholds

How anti-money laundering works

At the heart of compliance is the comprehensive and careful review of the obliged entities' customers.

With the so-called "Know Your Customer" check ("KYC"), for example, ownership structures must be clarified, beneficial owners verified and the economic background of a transaction examined. This requires a risk classification, a risk analysis and corresponding risk-based measures within the company, all of which are carried out in an internal due diligence procedure. The basic principle is: the higher the risk identified, the greater the care required.

To reduce money laundering risks, obliged entities must put internal due diligence measures in place. These include, among other things:

• Drawing up a set of rules (policies, procedures, controls) for compliance with anti-money laundering rules
• Appointing an anti-money laundering officer
• Reviewing and further developing anti-money laundering measures
• Reliability checks of the employees responsible
• Employee training
• Appointing a contact person for the authorities and a whistleblowing channel
• Comprehensive obligation to retain the relevant documents

Which due diligence obligations are distinguished?

In anti-money laundering, different due diligence obligations apply depending on the risk level of the contractual partners concerned: general, simplified and enhanced due diligence obligations.

1. General due diligence obligations:

These include, among other things, the obligation to identify the contractual partner, to establish the beneficial owner, to identify politically exposed persons (PEPs), to clarify the purpose of the business relationship and to monitor the business relationship and the resulting transactions on an ongoing basis.

2. Simplified due diligence obligations:

These apply where a low risk has been established for the business relationship. In this case, simplifications are provided above all in the identity check.

3. Enhanced due diligence obligations:

If the risk analysis identifies an increased risk of money laundering, the business partners concerned must be examined more closely. This category includes, for example, so-called "politically exposed persons" or transactions of large volume and increased complexity.

What is meant by the "Know Your Customer" principle?

The "Know Your Customer" check (KYC process) provides for the precise identification of potential customers. This mandatory check helps to obtain exact information about the business partner.

The following information is essentially requested:

• Who is the contractual partner (legal form, registered office, sector, company size, number of employees, etc.)?
• Who represents the legal entity (managing directors, authorised signatories, etc.)?
• Which ownership and control structures prevail in the company?
• Are there beneficial owners who own or control the business partner?
• Are there further risks that could affect the business relationship (sanctions against the managing director, PEPs)?

If particular risks come to light during the KYC check, there may be an obligation to report to the competent authority. The data must be stored securely.

What is the purpose of reviewing anti-money laundering in third countries?

To improve the enforcement, monitoring and control of the European Union's requirements on anti-money laundering and the prevention of terrorist financing, the European Commission presented an action plan in 2020. The guidelines set out in it also contain rules on the review of particularly "high-risk" third countries. Accordingly, there are lists of countries whose anti-money laundering rules are deficient, and financial transactions with these countries are subject to additional due diligence obligations.

The international "Financial Action Task Force (on Money Laundering)" ("FATF") has defined standards for preventing money laundering and terrorist financing and regularly reviews compliance with them. The list of high-risk third countries is evaluated on an ongoing basis.

What sanctions apply in the case of insufficient anti-money laundering measures?

Obliged entities that fail to comply, or fail to comply sufficiently, with anti-money laundering rules face serious sanctions. In the European Union, fines of up to EUR 150,000 are possible, and for particularly serious offences up to EUR 5 million or even 10% of total annual turnover. Regulatory sanctions are also possible. In addition, breaches that come to light are made public, which can cause considerable damage to a company's reputation ("naming and shaming").

On top of this, anyone found guilty of aiding money laundering or terrorist financing faces the risk of criminal conviction.

In Türkiye, anti-money laundering obligations are governed by Law No. 5549 on the Prevention of Laundering Proceeds of Crime and the regulations of the Turkish Financial Crimes Investigation Board MASAK. Under Article 282 of the Turkish Criminal Code, money laundering is punishable by imprisonment of three to seven years; Law No. 5549 also provides for imprisonment for certain breaches of duty. Breaches of identification, reporting, training and control obligations are subject to administrative fines and may lead to reputational damage, revocation of licences or restrictions on business activity. Türkiye was removed from the FATF "grey list" in June 2024.

Legal advice on anti-money laundering in Türkiye

For questions on anti-money laundering and the prevention of terrorist financing under Turkish law, our team is available to you.

Do you have another question in the area of white-collar crime and compliance? Find out more about our advice on white-collar crime and compliance.