Financial Crime World

Germany’s Financial Regulation Enforcement Agencies Get Boost in Powers and Authority

As of January 1, 2022, Germany’s Federal Financial Supervisory Authority (BaFin) has taken sole responsibility for examining the financial statements of publicly traded companies. This change marks a significant shift from the previous two-stage process, which involved the German Financial Reporting Enforcement Panel (FREP).

New Powers and Authority

The Financial Instruments Services Act (FISG) has granted BaFin more comprehensive powers with respect to investigations and supervisory measures. The agency’s new directorate for financial reporting enforcement, established on September 1, 2021, reports directly to the Chief Executive Director of Securities Supervision.

Strengthened Enforcement Capabilities

BaFin can now conduct ad hoc examinations of financial statements and reports not only for the last financial year but also for the two financial years preceding that. Examinations are conducted based on the home Member State principle, with BaFin monitoring financial statements prepared by issuers of securities admitted to trading on an organised market whose home Member State is Germany.

Key Changes

  • The agency can take action directly in cases where there are concrete indications of a breach of accounting requirements.
  • BaFin has sovereign powers in relation to examinations, including the ability to:
    • Order compulsory examinations
    • Obtain information from anyone
    • Summon obliged parties
    • Conduct searches and seizures
  • The agency publishes examination orders and key steps in the procedure to increase transparency.
  • BaFin discloses any errors found during examinations alongside significant parts of the reasons for this.

Enhanced Transparency

BaFin also publishes its areas of emphasis for examinations on its website to ensure stakeholders are informed. This includes announcing measures of financial reporting enforcement regularly.

Staff Expansion

Most staff members from FREP have transferred to BaFin, resulting in an increase in auditors at the agency. External recruitment has also brought additional staff on board.

Scope of Examinations

The German Transparency Directive Implementing Act (TUG) and the German Act Implementing the Transparency Directive Amending Directive (Gesetz zur Umsetzung der EU-Transparenzrichtlinie-Änderungsrichtlinie) have extended the scope of examinations to include ad hoc checks on consolidated reports on payments to governments.

Future Developments

The agency will publish an updated list of companies whose securities were admitted to trading on an organised market and whose home Member State according to section 2 (13) of the WpHG was Germany on the reference date July 1, 2023. The next update will take place on July 1, 2024, and will be available on BaFin’s website during the fourth quarter 2024.

Conclusion

The enhanced powers and authority of BaFin are aimed at ensuring the integrity of financial markets in Germany. The agency’s strengthened enforcement capabilities and increased transparency will help to protect investors and maintain public trust in the financial sector.