By Hans Seidenstuecker and John O’Donnell

BERLIN/FRANKFURT (Reuters) -German prosecutors raided the finance and justice ministries on Thursday as part of an investigation into the government’s anti-money laundering agency, putting a spotlight on Germany’s failings in tackling financial crime.

The probe into the Financial Intelligence Unit, an agency of the finance ministry under Social Democrat chancellor candidate Olaf Scholz, is looking at whether it was told to ignore warnings of suspect payments to Africa.

The raids come at a pivotal moment for Scholz, who opinion polls suggest has a good chance of becoming German chancellor in national elections on Sept 26.

Scholz rebuffed criticism from lawmakers following the raids, but the episode casts a cloud because it refocuses attention on the ministry he runs. The FIU and BaFin, the financial regulator, which also answers to Scholz have been under scrutiny for failing to spot problems at payments firm Wirecard, which collapsed last year in Germany’s biggest corporate fraud.

“This is a security risk for Germany,” said lawmaker Fabio De Masi. “We need a financial police with criminal expertise. Germany is a paradise for criminals.”

Scholz, speaking on a campaign stop in Potsdam, said he had had bolstered staff at the FIU agency to almost 500 from 165 and invested heavily in better equipping it.

He signalled his frustration with the raids, saying that prosecutors with questions “could have put them in writing”.

The FIU declined to comment.

The probe comes as the country’s anti-money laundering efforts are under review by the Financial Action Task Force (FATF), a global body that groups countries from the United States to China, to tackle financial crime.

SUSPECT TRANSACTIONS

The FIU has long struggled to keep up with the tens of thousands of warnings it receives about suspect money transfers, according to people familiar with its work. It only stopped using fax machines to receive such reports from banks in the past few years, one German official has told Reuters.

A spokesman for the public prosecutors said they launched the enquiry after receiving complaints that the FIU had not acted on millions of euros of suspect transactions, including to Africa, between 2018 and 2020.

He said they had searched the ministries to see whether the agency had been told to ignore the suspect money flows.

Prosecutors said the agency was alerted by banks because of concerns the money was linked to trafficking of arms and drugs and terrorism financing, saying that the FIU took note of the report but did not forward it to law enforcement agencies.

The prosecutors said they were also looking into the fact that since the FIU took over control of money laundering in 2017, reports of suspicious activity have dropped drastically.

They said that previous searches of the FIU had revealed that there had been extensive communication with the ministries that were searched on Thursday.

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(Additional reporting by Hans Seidenstuecker, Christian Kraemer and Holger Hansen in Berlin and Tom Sims in Frankfurt; Editing by Jane Merriman and Carmel Crimmins)