Proof of Source of Funds in Germany
As recently as August 2021, German lawmakers once again tightened existing regulations to combat money laundering and terrorist financing. The impetus for this was once again provided by increasingly strict regulations at EU level. The member states must implement these in their national law, otherwise they face severe penalties. The most prominent example in Germany is now the new cash limits for a proof of source of funds for various assets.
The previous legal situation already caused enough hassle for our economic operators. Now, however, the new regulations on proof of source of funds in Germany are creating further challenges. This is because the jungle of paragraphs is also becoming denser as a result of the now stricter obligation to provide proof, and companies are becoming increasingly concerned about inadvertently violating money laundering regulations. This has consequences that are not likely to please cash advocates.
Legal Situation in Germany on Proof of Source of Funds
The requirement of proof of source of funds by banks, brokers, payment service providers or exchanges for cryptocurrencies like Bitcoin is not an exclusively German phenomenon. Rather, the obligation to provide proof of assets now affects all citizens from EU member states. Austria, for example, also recently tightened the corresponding legislation. This is because the initiative for corresponding legislative changes within the EU member states came from the European Union itself.
The EU can set a legal framework for EU member states in certain areas of law by issuing so-called directives, among other things. The member states must then reproduce this legal framework in their national law within a specified period.
In other words, the laws in the member states must be adapted so that they correspond to the framework set by the EU. The national laws of the member states may then deviate from each other in individual details. This means that not every EU member state must have the same national law translated into its own national language. However, the most important regulatory content is prescribed by the EU legislator. Otherwise, the legislative sovereignty of the EU member states for their own national law would counteract the desired unification of the legal situation within the EU countries.
And this standardization makes sense, especially in the area of money laundering. After all, the freedom of travel and establishment within the EU, which is valued by all, would nullify any anti-money laundering efforts by member states “going it alone.” Traveling to a neighboring country with less stringent regulations would make evasion child’s play.
EU Directives as the Starting Point for Proof of Source of Funds
The anchor point of the EU’s fight against money laundering and terrorist financing is the so-called Anti-Money Laundering (AML) Directives of the EU.
So far, the EU legislator has issued a total of six directives, each of which amends or supplements the other and thus adapts to the current challenges. We have compiled links to the texts of the directives for you in our FAQ under the question of basic legal charges.
Based on these directive amendments, the German legislator steadily tightened the Money Laundering Act (“Geldwäschegesetz“, GwG). The last extensive amendments to the GwG were made on January 1, 2020 as a result of the implementation of the AML5 Directive. This was followed most recently by further minor amendments in 2021.
However, if you read the GwG, you will not find there all the cash limits for the presentation of proof of origin of funds for assets that were known to the media and introduced on August 9, 2021. In particular, the limit of EUR 2,500 for the cash purchase or sale of precious metals at a bank as an occasional customer without having to provide a proof of source of funds for the cash is not explicitly found.
BaFin’s Guidance Specifies Obligation for Proof of Source of Funds in Germany
The requirements in this regard are instead derived from the latest so-called interpretative notes and application notes on the GwG (“Auslegungshinweise- und Anwendungshinweisen“, AuA). The GwG requires that the Federal Financial Supervisory Authority (“Bundesanstalt für Finanzdienstleistungsaufsicht“, BaFin) provide the entities obligated by the GwG.
In this regard, the GwG states:
“The supervisory authority shall provide obligated entities with regularly updated interpretation and application notes for the implementation of due diligence requirements and internal safeguards in accordance with the statutory provisions for the prevention of money laundering and terrorist financing.”
The interpretation and application notes are binding for the obligated parties under the GwG. The AuAs also provide explicit deadlines by which obligated parties must implement the requirements. EU directives, the Money Laundering Act and the interpretative and application notes to the Money Laundering Act thus represent the legal hub of the fight against money laundering and terrorist financing in Germany.
Obligation to Provide Evidence of the Legitimate Source of Cash
The legal situation that now applies in Germany brings the way citizens handle cash in their everyday lives even more into focus in the fight against money laundering. Up to now, Germans have at most been accustomed to having to present an identification document when making cash purchases of a certain amount (cash payments of EUR 10,000 or more). Incidentally, this obligation on the part of merchants to establish their identity also stems from the GwG.
However, this changed drastically with the implementation of the new legal situation on August 9, 2021. Since that date, citizens have had to prove the legitimate source of the cash in certain cases for cash transactions above EUR 10,000. Legitimate source means that the cash must not originate from crimes committed.
This so-called proof of source of funds will mostly have to be provided by presenting certain documents. However, there are also other possible means of proof that are little known but are likely to be equally valid, such as witness statements.
BaFin Suspects Higher Money Laundering Risk for Cash Deposits of EUR 10,000 or More
In Germany, the best-known example of the obligation to provide proof of source of wealth for cash is probably the newly introduced obligation to provide proof when depositing cash into one’s checking account. Since the beginning of August 2021, anyone wishing to deposit more than EUR 10,000 in cash into their checking account must provide the bank with proof of the legitimate source of the money.
The obligation in this regard does not arise explicitly from the GwG itself. The GwG stipulates the obligation to prove the source of assets as an instrument within the framework of the so-called enhanced due diligence obligations. According to the text of the law, the entities bound by the GwG must fulfill these enhanced due diligence obligations,
“(…) if they determine, as part of the risk analysis or in individual cases, taking into account the risk factors set out in Annexes 1 and 2, that there may be a higher risk of money laundering or terrorist financing.”
However, the GwG itself does not become more specific with regard to cash deposits. This concrete obligation to provide evidence only arises in connection with BaFin’s interpretation and application notes on the GwG for credit institutions.
In the most recent version, BaFin now establishes a presumption for existing customers of banks that there is an increased risk of money laundering in the case of cash deposits of more than EUR 10,000. As a result, BaFin at the same time obliges the bank to fulfill the above-mentioned increased due diligence obligations, including the requirement of a proof of source of funds.
For more detailed information on proof of source of funds for cash deposits, please refer to our page on cash.
Obligation to Provide Evidence of the Legitimate Origin of Precious Metals
In Germany, however, the obligation to provide proof of source of funds does not only extend to financial resources in the form of cash. Since the beginning of August 2021, it has also applied to trading in gold, silver and other precious metals.
Detailed information on the legal situation applicable here, the cash limits applicable to precious metals, case studies and the different treatment of existing and occasional customers can be found on our page on precious metals.
Nevertheless, it should be clarified here once again that the proof of origin of funds does not only have to be provided if precious metals are purchased by cash payment above the respective applicable limits. This clearly follows from the wording of the GwG. According to this wording, in cases where there is an increased risk of money laundering, the GwG obligors must, among other things
“(…) to fulfill at least the following enhanced due diligence obligations:
- the establishment or continuation of a business relationship requires the approval of a member of the management level,
- appropriate measures shall be taken to determine the source of the assets used in the business relationship or transaction; and
- the business relationship shall be subject to enhanced continuous monitoring.
So any assets are affected by the proof of source of funds, and not just cash. So, should you want to sell precious metals at your bank, you will also have to prove the legitimate source of these precious metals.