Each of the 11 supervisory priorities set by BaFin’s Resolution Sector in 2019 has a specific purpose. These priorities include enforcement relating to unauthorised business and the supervision of money laundering prevention. The first 4 priorities focus on safeguarding the integrity of the financial system, while priorities 5 to 8 are aimed at enhancing the resolvability of German credit institutions. The last three measures (9 to 11) serve to prevent money laundering.
Authorisation requirement for initial coin offerings
From a supervisory law perspective, there are many questions associated with initial coin offerings (ICOs for short). One of them is how the authorisation requirements are to be applied. In 2019, BaFin took a closer look at security tokens in this respect. These are crypto tokens that entitle the holder to the payment of interest and the repayment of the principal by the issuer. Unlike genuine utility tokens, security tokens are to be categorised as debt securities under supervisory law and thus as financial instruments under the German Banking Act (Kreditwesengesetz – KWG). Although a separate authorisation from BaFin is not required for companies issuing such tokens, the companies which broker these tokens or offer similar services on the secondary market generally require authorisation from BaFin to operate as a credit or financial services institution for this purpose. In order to provide a transparent picture of how crypto tokens are dealt with from a supervisory point of view, BaFin published a second advisory letter in mid-2019. The first advisory letter was released in 2018.
In 2019, BaFin responded to a large number of questions concerning the authorisation requirement under the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz – ZAG). The Act was comprehensively revised in 2018 – particularly in relation to the newly introduced payment initiation and account information services. Some of the planned business activities in question involved cooperation models and outsourcing models. In addition, BaFin received enquiries concerning the authorisation requirement for the acquiring of payment transactions. Another issue which was relevant for a large number of service providers, particularly in the “Mittelstand” segment, was the exemption for membership cards, petrol cards and the like. Under section 2 (1) no. 10 of the ZAG, limited networks for a very limited range of goods or services are not classified as payment services.
Enforcement relating to unauthorised direct investments and money-remittance business
In 2019, BaFin focused on its enforcement activities relating to unauthorised deposit business which criminals disguise as direct investments by purporting to sell and repurchase physical assets. In such cases, the qualified subordination clause included in the investment contracts is generally invalid. This clause is aimed at ensuring that these transactions do not qualify as deposit business and thus do not require authorisation from BaFin. At any rate, it runs counter to the transparency requirement under section 307 (1) and section 307 (2) no. 1 and no. 2 of the German Civil Code (Bürgerliches Gesetzbuch – BGB).
Money-remittance business – including hawala banking in particular – was another priority area for BaFin. In this case, funds leave the country without any paper trail – i.e. in entirely virtual form – which in turn increases the risk of criminals using this system to transfer funds of unclear origin. In its enforcement activities regarding this type of business, BaFin particularly relies on cooperation with law enforcement agencies. In late 2019, BaFin employees took part in an extensive search conducted by the Criminal Investigation Office of the State of North Rhine-Westphalia (Landeskriminalamt Nordrhein-Westfalen). More than 850 officers from various authorities executed a total of 62 search warrants throughout Germany.
Enforcement relating to unauthorised trading of binary options and financial instruments via online platforms
In 2019, BaFin issued 40 orders against the operators of foreign online trading platforms and their German money transfer companies to cease their illegal activities in Germany. It also stepped up its efforts against German money transfer companies which merely serve the purpose of enabling the customers of these trading platforms to transfer their trading capital to a German account. In reality, these funds almost always end up on foreign accounts, and the depositors lose all of their money in most cases. In 2019, 42 of these accounts were blocked after BaFin issued instructions to the institutions where these accounts were held. Moreover, BaFin continued to enhance its cooperation with law enforcement agencies and placed an even greater emphasis on raising public awareness.
Eliminating potential impediments to resolution and improving institutions’ technical and operational resources for reporting data
Last year, BaFin focused on ongoing resolution planning for systemically important institutions, including financial market infrastructure providers, and enhanced its cooperation with other national and supranational authorities. In addition, BaFin worked to ensure that the institutions improve their technical and operational resources, allowing them to provide BaFin with the relevant data more rapidly and to eliminate a potential impediment to resolution.
Workshops and test runs helped to deliver a significant improvement in the level of quality and the amount of time it takes for institutions to provide data to BaFin. An intensive dialogue was also maintained with other German and foreign authorities. While the level of progress for the provision of data for the bail-in process is satisfactory, these activities are merely a first step. Over the next few years, the institutions will be required to have the necessary technical and operational resources in place not only for the provision of data for resolution planning but also for bail-in execution as well as the valuation of assets and liabilities.
Publication of minimum requirements for the bail-in of creditors (MaBail-in)
Last year, BaFin published a circular on the minimum requirements for implementing a bail-in (Mindestanforderungen zur Umsetzbarkeit des Bail-in – MaBail-in). This was aimed at the institutions for which BaFin is directly responsible. The circular outlines the information to be provided and the technical and organisational resources that are required (see expert article on the BaFin website dated 20 September 2019). The institutions for which the Single Resolution Board (SRB) has direct responsibility must comply with similar requirements to be published by the SRB. These were developed in cooperation with BaFin. In addition, BaFin published a guidance notice on external bail-in implementation which describes the technical and organisational resources which BaFin expects all institutions based in Germany to have.
Further development of crisis processes and crisis infrastructure
In 2019, BaFin continued to develop the crisis processes through which it prepares and implements resolution measures. Time, complexity and interfaces are among the greatest challenges which BaFin encounters in its preparations for and within the context of implementing a resolution measure. In this area, BaFin particularly relies on an efficient system of crisis governance, precise road maps and the standardisation of key decision proposals. Significant progress was made here in 2019. However, in view of the dynamic nature of the financial sector, BaFin will continue to critically analyse and continuously improve the areas in question.
Customer due diligence (CDD)
BaFin made customer due diligence a supervisory priority for 2019 after finding during on-site inspections in 2018 that obliged entities had not properly identified beneficial owners in some cases. In order to establish whether there were systematic problems with the identification methods used, BaFin conducted multiple on-site inspections, focusing on how obliged entities identify the beneficial owner and whether this person’s identity is determined in line with the requirements. In some cases, BaFin found specific shortcomings which the obliged entities in question remedied in the course of follow-up processes. In these follow-up processes, BaFin also ensured that the obliged entities improved their CDD organisational structures and processes.
Review of the position and powers of money laundering officers
In 2019, BaFin verified whether the key position of the money laundering officer was given the necessary weight at several individual institutions. The on-site inspections that were conducted showed that these institutions’ management boards perceive money laundering prevention with the necessary degree of seriousness and allow the money laundering officer to play a key role. In some cases, the institutions increased their staff and financial resources for money laundering prevention after the on-site inspections. BaFin also worked towards ensuring that the institutions improve the organisation of their money laundering prevention systems. In the non–banking financial sector, BaFin conducted a targeted analysis which established that there are still frequently formal shortcomings in relation to the position and powers of the money laundering officer in certain sectors. Given the many different business models and the various risks these entail, BaFin, the Financial Intelligence Unit (FIU) and law enforcement agencies require a contact who fulfils the fit-and-proper requirements: this is the role of the money laundering officer. As the relevant supervisory authority, BaFin therefore launched a campaign in order to raise awareness among market participants on a case-by-case basis and also at a cross-sector level regarding the considerable importance of the money laundering officer’s position. BaFin also examined cases where managing directors likewise served as the money laundering officer, which is subject to certain conditions. In order to avoid conflicts of interest, this is only permitted for institutions with less than 15 full-time equivalents and in which there are no suitable employees below management level available to perform this role.
Review of correspondent banking relationships
International money laundering scandals have highlighted the particular potential risks associated with correspondent banking relationships. For this reason, BaFin also focused on this area as a supervisory priority for 2019. It initially took stock of the correspondent banking relationships in the German banking landscape and then formally ordered that this be a key area to be examined in the audits of the 2019 annual financial statements of all of the banks concerned. On account of the particular concentration of correspondent banking business among some institutions, BaFin took specific and immediate inspection measures as well. This resulted in new country risk ratings and de-risking measures as well as additional safeguard and payment transaction monitoring measures for existing correspondent banking relationships. In one case, BaFin formally ordered prevention measures and appointed a special representative.
In 2020, the Resolution Sector will continue to focus on specific supervisory priorities, which it will adjust as and where necessary.
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