Financial Crime World

German Financial Regulation Enforcement Agencies Crack Down on Compliance Breaches

Maintaining Stability in the German Financial Sector

Regulatory authorities in Germany are increasing their scrutiny of institutions’ compliance with regulatory provisions to maintain stability in the financial sector. The German Federal Financial Supervisory Authority (BaFin) has been granted far-reaching investigative powers, allowing it to conduct special audits and inspections at regulated entities.

Compliance Obligations for Regulated Institutions

According to section 24 of the KWG, regulated institutions are required to:

  • Constantly self-monitor compliance
  • Report specific situations to BaFin, including:
    • Changes to management
    • Losses above a certain threshold
    • Changes to the capital ratio
  • Commission an annual audit that includes an assessment of compliance with regulatory obligations

BaFin’s Investigative Powers and Sanctions

BaFin’s investigative powers enable it to:

  • Order special audits and inspections on regulated entities
  • Access business information from institutions and their employees
  • Impose administrative fines on institutions found in breach of regulatory provisions
  • Issue general orders to institutions and senior managers to prevent or stop violations of regulatory provisions

Criminal Sanctions for Compliance Breaches

Criminal sanctions for compliance breaches are typically reserved for severe cases such as:

  • Market abuse
  • Insider trading
  • Conducting banking business without a licence

However, BaFin can impose administrative fines on legal entities found guilty of lesser breaches.

Recent Enforcement Actions by BaFin

BaFin has imposed significant fines on institutions found in breach of regulatory provisions. Sanctions have included:

  • Administrative fines
  • Additional own-fund requirements
  • Revocation of financial services firm licences

German Courts and Financial Regulatory Enforcement

German courts adjudicate criminal and civil financial services infractions. Criminal proceedings are initiated by the public prosecutor’s office, which closely cooperates with BaFin during investigations. Civil litigation is brought forward by individuals or entities seeking compensation for damages caused by wrongful behaviour.

Typical Sanctions Imposed on Firms and Individuals

Typical sanctions imposed on firms and individuals for violations include:

  • Administrative fines (ranging from €20 million to 10% of an institution’s annual turnover)
  • Violations of anti-money laundering provisions or market transparency rules are often met with strict penalties

Conclusion

While settlements are not uncommon in German financial regulatory enforcement, the exact nature and scope of sanctions depend on a case-by-case assessment by BaFin. The authority has not yet used its full powers to impose fines, but it is clear that Germany’s financial regulation enforcement agencies are committed to maintaining stability and preventing compliance breaches.