BaFin: Germany’s Federal Financial Supervisory Authority

28, January 2021

Financial Services Identity Verification Fraud Protection

What is BaFin?

BaFin is the acronym of the Bundesanstalt für Finanzdienstleistungsaufsicht in Germany, which translates to the Federal Financial Supervisory Authority. Similar to the Securities and Exchange Commission (SEC) in the US, or the Financial Conduct Authority (FCA) in the UK, BaFin regulates and supervises Germany’s financial sector.

BaFin was created by the Financial Services and Integration Act of 2002, which merged three existing Federal agencies: the Banking Supervisory Office, the Supervisory Office for Securities Trading and the Insurance Supervisory Office. It is one of the largest financial supervisory authorities in Europe, with around 2500 employees.

BaFin has two headquarters – both in cities located along a historically important river system – and about a 2-hour drive from one another. The first office is in Bonn, which is also the former capital of West Germany, and is situated along the Rhine. BaFin’s second office is in Frankfurt am Main, which is located on the Main river, the longest tributary of the Rhine.

BaFin’s decision to headquarter themselves in Frankfurt am Main is no coincidence as the city is considered one of the financial capitals of the world and is also home to the European Central Bank. What better way to keep an eye on the country’s financiers then by locating the financial supervisory offices in the same city?

Frankfurt-am-Main-Bafins-Headquarters-1
The skyline of downtown Frankfurt am Main, Germany

However, in an interest to be or at least to be seen as humble, BaFin’s Frankfurt headquarters are located far from the city’s impressive, skyscraper-laden downtown. Instead, they are located in the not so remarkable far-North of the city, in a subdivision of Frankfurt proper[1]. BaFin’s less than stunning locations are likely chosen on purpose, given that the authority funds itself by taxing the financial institutions that it supervises.

[1] The location of Bonn’s headquarters is not anymore impressive.

What does BaFin do?

BaFin is responsible for ensuring the stability and integrity of the German financial system, which is the largest financial market in Europe. It is an independent institution and reports directly to the German Federal Ministry of Finance. BaFin exercises its authority over Germany’s financial system across all of its different financial intermediaries: banks, financial services companies, insurance companies, stock exchanges, and other obligated entities.

financial-compliance-and-AML-1

One particularly important role of BaFin is the identification and elimination of financial crime in order to prevent the financing of terrorism. BaFin accomplishes this through its anti-money laundering (AML) framework under the authority of Section 50 of the Money Laundering Act – known in Germany as the Geldwäschegesetz (GwG). In order to comply with BaFin’s AML rules, banks and other financial institutions must develop and implement a risk-based AML program with strong KYC and other customer due diligence measures.

According to BaFin’s website, the organisation follows an industry-appropriate approach which they base on recognised European supervisory standards. BaFin’s duties and responsibilities include but are not limited to: the licensing of new banks and financial institutions and the supervision of existing institutions in order to ensure their compliance. Furthermore, BaFin collects financial statements and reports in order to evaluate them under the auspices of Germany’s central bank.

BaFin has the authority to initiate legal action against financial institutions that violate its rules and regulations and they also have the power to impose financial penalties, remove personnel from their positions in banks and, if necessary, appoint external supervisors to take over the management. However, BaFin prefers to work with offending institutions in order to resolve any issues with as little interference as possible.

Why is BaFin important?

As mentioned, a sizeable charge of BaFin’s regulatory work revolves around anti-money laundering (AML) and the prevention of terrorism financing. The latter of which entered rather forcefully into effect after the 9/11 World Trade Centre attacks on New York City.

The overarching goal of AML is to verify with a high degree of assurance that customers are who they say they are and that they are not likely to be engaged in criminal activity. Exact numbers on how much money is laundered around the world are difficult to come by given that it is an illicit activity that goes unreported. Various agencies, however, have estimated that money laundering accounts for approximately 2-5 percent of global GDP.

BaFin and the Wirecard scandal

At this point in time it would be remiss to write an article on BaFin and not mention the Wirecard scandal. Wirecard AG, a German payment processor, entered into insolvency in the summer of 2020 after revelations that €1.9 billion was missing from its accounts. While many of the case’s finer details are still being investigated, a documentary by RTL, a German broadcaster, is set to be released in early 2021, which will likely be a very engaging watch.

BaFin-Wirecard-scandal-1

In short, the Wirecard scandal falls under the auspices of BaFin and the organisation has been heavily criticised for its poor handling of the situation. As the regulator for one of the world’s most influential economic powers, BaFin is tasked with representing Germany on the global stage. It is BaFin’s responsibility to ensure the stability and integrity of the German financial system and it clearly failed on all accounts with regards to the Wirecard scandal.

An article published in Forbes at the end of 2020 is a little less hard on the financial regulator, reasoning that “the regulatory structure for fintechs requires improvements in order to encompass the next generation of finance”.

How PXL Vision helps businesses maneuver through BaFin’s regulatory framework

Among other regulations, BaFin requires German-based banks and other financial service providers to perform online identification and verification through a compliance professional for new account openings. This process will be complicated and tedious for many companies, especially for ones that aren’t used to working with BaFin.

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