In brief
On 11 October 2023 the German Federal Government approved the Financial Crime Prevention Act (Finanzkriminalitätsbekämpfungsgesetz (FKBG)), which shall come into force on 1 January 2024. The law will establish a new federal authority – the Federal Office to Combat Financial Crime (Bundesamt zur Bekämpfung von Finanzkriminalität (BBF)). This new institution will have competences with respect to the fight of money laundering, sanctions and illicit financial flows. Along with the enactment of the law, the Central Office for Sanctions Enforcement (Zentralstelle für Sanktionsdurchsetzung (ZfS)), the newly established German sanctions enforcement authority created only less than a year ago, will be incorporated under the BBF.
We use the opportunity to provide an overview over the competent authorities in Germany for the enforcement of EU sanctions and will shed light in particular on the role of the ZfS, the Central Office for Sanctions enforcement, and the BFF, the Federal Office to Combat Financial Crime in which the ZfS will be integrated.
Contents
Competencies of the ZfS in accordance with the Sanctions Enforcement Act
Obligation to notify assets to the ZfS (as of 1 January 2024 the BFF)
EU sanctions cover a wide range of activities. Sectoral financial sanctions, as implemented in the context of the EU-Russia-Sanctions for example, restrict the Russian state’s access to its financial reserves in the EU and restrict the Russian financial sector’s ability to obtain funds on the international capital markets. Restrictions on sales and exports effectively limit Russia’s abilities to obtain access to sensitive and highly sophisticated goods and technologies. Similar types of restrictions, albeit not as comprehensive, apply under the EU sanctions regimes against other countries. Most EU sanctions regimes feature a component of individualized designations of persons or entities, the assets of which in the EU must be frozen, and to whom no funds or economic resources may be made available to – so called EU Designated Parties (EUDPs). In the context of the EU-Russia-Sanctions, these types of restrictions apply to roughly 1,800 persons or entities from politics, the military, business and media.
The efficiency of EU sanctions hinges on their effective enforcement. In the EU, the responsibility for enforcement of EU sanctions lies with the EU Member States. While the EU has broad competencies to enact sanctions, it has no competencies to enforce these. The Council of the EU has decided on 28 November 2022 to add sanctions violations to the list of EU crimes in accordance with Art. 83 TFEU, which allows for the enactment of minimum sanctions enforcement standards, including penalties, by the EU. The investigation of and the punishment of EU sanctions violations however remains the competence of the EU Member States. Due to the addition of sanctions violations to the EU crimes, the European Public Prosecutor’s Office (EPPO) could become competent to conduct part of the investigation in the future. In practice, they would however still instruct a competent national authority to undertake the investigative measures and sanctions violations would be enforced before EU Member State courts.
Germany had identified a lack in its sanctions enforcement capabilities and found that it was oftentimes not possible to enforce EU sanctions adequately in light of a lack of respective investigation and enforcement powers of the national authorities, which traditionally were the customs authorities and the police, in addition of course to the judiciary in the form of public prosecutors and courts.
This deficiency was addressed through the enactment of the Sanctions Enforcement Act (Sanktionsdurchsetzungsgesetz (“SanktDG“)) enacted in December 2022, which also led to the creation of the ZfS, which now will be integrated into the BFF. The SanktDG sets out the competencies of the Central Office for Sanctions Enforcement (ZfS), i.e., is the legal basis for its operations.
The ZfS only has powers and competences with respect to the enforcement of sanctions targeting individuals in the form of the prohibition to make funds or economic resources available to these and the obligation to freeze their assets subject to German jurisdiction. The ZfS has no enforcement powers and competences regarding sanctions in relation to controlled items, goods, data or technologies, subject to sales or purchase restrictions.
The ZfS’s enforcement powers remain further limited in that they are restricted to specific preventive and investigative measures, which we will address further below. It has no power or competences for the criminal prosecution of alleged sanctions violations. It is an administrative authority intended to streamline and centralize some of the authorities’ investigative efforts to prevent and detect potential sanctions violations.
The Sanctions Enforcement Act clearly spells out the ZfS enforcement powers as follows: The ZfS has different possibilities to enforce financial sanctions. It can investigate to identify sanctioned funds and economic resources using common investigative methods. Investigation methods can include demanding information or documents, the interrogation of persons or entering businesses and conducting searches (Section 2 SanktDG). It can also preventively seize funds and economic resources of sanctioned persons and entities if there is a risk that such funds will be moved or used in violation of the asset freeze (Sections 3, 4 SanktDG). In accordance with the SanktDG, the ZfS has to pass on any findings suggesting a potential sanctions violation to the competent law enforcement authorities, that is the public prosecutor’s office. The ZfS is further responsible for the coordination of sanctions enforcement among the several authorities in Germany (Section 1 sentence 1 no. 5 SanktDG) with competencies in the domain of sanctions violation prevention and enforcement, which are in particular the Federal Office of Economics and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle – BAFA) and the German Federal Bank (Deutsche Bundesbank). It is to be expected that the authorities will cooperate in an even more coordinated manner in the future. In addition, the ZfS is also in charge of running a register of frozen assets, which will be created for the use by all authorities (Section 14 SanktDG). Prior to the establishment of the ZfS, these tasks were distributed among several federal and state authorities. The concentration of competencies at the ZfS are intended to result in more effective enforcement of EU sanctions. The ZfS’s role in that endeavor remains in practice however limited.
It is important to note that the responsibilities of the authorities that were already entrusted with the enforcement of EU sanctions continue to remain in place despite of the creation of the ZfS. The BAFA is competent for the enforcement of sanctions regarding goods and technology-specific transactions. It is responsible for the issuance of respective licenses. The German Federal Bank in turn also remains the primary authority for the EU financial sanctions and is in particular competent for issuances of licenses under the exemptions applying to the prohibition to make funds or economic resources available or to provide financing or financial assistance. The German Federal Bank also remains the competent authority for the release of frozen funds, whereas the customs authorities continue to remain competent for the monitoring of the compliance with the import, export and transit as well as the transfer of goods and supports the persecution of sanction violations along with the BAFA.
In accordance with Section 10 SanktDG – which had been in force in similar form since May 2022 as Section 23a German Foreign Trade and Payments Act (Außenwirtschaftsgesetz (AWG)), EUDPs are under the obligation to disclose their assets, including funds and economic resources, subject to the jurisdiction of Germany to the ZfS. The reporting obligation pursuant to Sec. 10 SanktDG is intended to counteract the risk of a circumvention of EU sanctions through for example a concealment of assets and has served as the prototype for a similar type of obligation incorporated in the EU-Russia-Sanctions pursuant to Article 9 (2) of Regulation (EU) 269/2014 as part of the EU sanctions against Russia.
To summarize the above, the Financial Crime Prevention Act (Finanzkriminalitätsbekämpfungsgesetz (FKBG)) creates the Federal Office to Combat Financial Crime, the BBF, which will be established in 2024 and operational in 2025. The Central Office for Sanctions Enforcement (ZfS) will be integrated into the BBF. The ZfS will be transferred from the General Directorate of Customs (Generalzolldirektion (GZD)) to the BBF on 1 June 2025 to create synergy effects between sanctions enforcement and anti-money laundering enforcement measures, and to sustainably improve the coordination between the preventive and investigative enforcement powers and the prosecution of sanctions violations. In practice, the integration of the ZfS into the BBF will entail a closer alignment between anti-money-laundering and financial sanctions investigations.
That said, the ZfS only has certain limited competencies with respect to the enforcement of sanctions. It has in its current form only specific enforcement powers concerning targeted financial sanctions, the prohibition to provide funds and economic resources and the freezing of assets more specifically. Its specific enforcement powers furthermore relate to the investigation and prevention of sanctions violations, not however to their prosecution. Despite of the limited competencies and powers the ZfS has been vested in upon its creation less than a year ago, its establishment is nonetheless a clear signal that Germany takes sanctions enforcement seriously. The creation of the ZfS marks the beginning of a more coordinated and centralized effort to monitor and detect EU sanctions violations, the enforcement of which largely impacts on their efficiency and the impact they can have.
