Law & Financial Order

BaFin President Felix Hufeld and his team of financial regulators are looking a lot like CSI investigators.
  • Why it matters

    Why it matters

    Germany’s financial regulator BaFin was traditionally concerned with systemic stability. But now it is cracking down hard on bad behavior by banks.

  • Facts


    • BaFin is Germany’s official financial regulatory body, with offices in Bonn and Frankfurt that employ about 2,500 people.
    • It has a database of the accounts and account-holders for every German bank.
    • Effectively a law enforcement agency, it has powers to initiate legal action and to intervene in the governance of individual banks.
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There’s a telling photograph in the annual report of BaFin, Germany’s top financial regulator. It shows BaFin President Felix Hufeld and his four executive directors in a pose straight out of the American TV series CSI, a show about hardcore forensic investigators.

Indeed, these days BaFin’s work does look increasingly like police work as it energetically tackles a whole series of scandals in the banking industry, from offshore shell companies to dubious dividend-stripping deals.

First and foremost, BaFin, the Federal Financial Supervisory Authority, is probing the revelations of the Panama Papers, the name given to recent leaks about dubious offshore deals published by an international network of journalists. They named 13 German banks that have dealings with Mossack Fonseca, the now notorious Panamanian legal firm at the heart of the revelations. Nine of the banks have admitted to BaFin that they had business dealings in Panama.

“The increased importance of behavior regulation is something not everyone has fully grasped yet. ”

Felix Hufeld, president, Bafin

The Panama leaks have led the regulator to start an unusually painstaking investigation. “We are taking an entirely new approach here. We’re making the banks send us all of their original documents, and evaluating them ourselves,” said Raimund Röseler, the BaFin executive director who oversees banks.

Normally, BaFin relies on outside auditors who visit the banks to examine their documents. But in the light of the Panama investigations, Mr. Röseler said the new approach could be extended to other cases. “We are assessing whether our investigative methods on money-laundering have been appropriate,” he said.

He now wants banks to compare their client files with a list of 200,000 individuals and firms named in the Panama Papers that was published last month by British newspaper the Sunday Times.

WTB Bafin
WTB Bafin

These tougher methods mark a more general change in approach among the regulators. From now on, bank violations will be dealt with faster and more harshly than before. “The increased importance of behavior regulation is something not everyone has fully grasped yet,” said BaFin president Mr. Hufeld. That is a mistake, he added, since financial regulation is no longer just about the bank stability, but also about how they do their business.

Dubious share-dealing is another key area for the regulator. Over the last 15 years, many banks and investors managed to obtain multiple refunds of capital gains tax, using highly controversial “dividend stripping” tricks, now declared illegal.

BaFin has questioned all German banks on these practices. Eleven banks and investment houses admitted dividend stripping deals, and seven have denied it, though Bafin knows that dividend stripping indeed took place there. “We are going to be working through these companies in detail,” said Mr. Röseler. In one case, BaFin is even considering dismissing a bank director.

Pension funds have promised their members life-long payouts, but these may simply be impossible in the current monetary climate.

The regulator is also taking a far more active role on insider trading, although convictions are not always easy to come by. In 2015, 41 cases of insider trading were investigated, with just one conviction in court. Eight further cases were settled in return for cash penalties.

In terms of the broader financial system, the key issue for BaFin are the ongoing ultra-low interest rates. The regulator feels that the consequences for pension funds have not at all been fully explored. Pension funds have promised their members life-long payouts, but these may simply be impossible in the current monetary climate, said Frank Grund, BaFin’s senior insurance regulator. “It may be that some funds find it impossible to make full payments,” he said.

Talks are ongoing with insurance providers on the subject. Initial responsibility for any shortfall will likely fall on employers. But to pay out more, the employer has to still exist and have some extra money to give. Many pension funds are also covered by Protektor, the insurance companies’ emergency fund.

“Of course, we want to avoid cutting payments to people entitled to pensions,” said Mr. Grund. But that might be the last resort, he added.


Yasmin Osman is a financial editor with Handelsblatt’s banking team in Frankfurt. To contact the author:

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