BaFin request for information

Key Takeaways:

1. Through a request for information, BaFin seeks details about a business activity to determine if authorization—which has not yet been obtained—is required for that activity.
2. It is essential to respond to a BaFin request for information in a timely, complete, and truthful manner.
3. If you are conducting an activity that requires authorization, you have two options: obtain authorization from BaFin or adjust your business activity so that no authorization is required.

What is a BaFin request for information?

A BaFin request for information is a demand issued by BaFin to an entity or individual to provide information about its business activities. Such a request is typically issued when BaFin assumes that the activity in question may require its authorization. Many business activities may only be carried out if the operator holds authorization issued by BaFin.

When BaFin suspects that one or more such activities are being conducted, the following categories are often relevant:

• Credit Business: According to section 1(1), sentence 2, no. 2 of the German Banking Act (KWG), granting money loans or acceptance credits constitutes a creditbusiness.
• Deposit Business: Accepting funds from others as deposits or other repayable funds constitutes deposit business under section 1(1), sentence 2, no. 1 of the German Banking Act (KWG), provided that the repayment claim is not securitized.
• Acquiring: Accepting and settling payment transactions constitutes acquiring under section 1, sentence 2, no. 5 of the German Payment Services Oversight Act (ZAG).
• Money Remittance: Money remittance covers services in which funds are received from a payer or made available to a payee without opening a payment account in either party's name, pursuant to section 1, sentence 2, no. 6 of the German Payment Services Oversight Act (ZAG). Its scope is very broad. For example, a delivery service forwarding a purchase price from a buyer to a restaurant may constitute money remittance.
• Electronic Money Business: The electronic money business refers to the issuance of electronically stored monetary value that represents a claim against the issuer. This value is issued upon receipt of funds for the purpose of executing payment transactions, and it is accepted by persons other than the issuer. This definition is found in section 1(2), sentence 2 of the German Payment Services Oversight Act (ZAG).

Generally, anyone who carries out these activities on a commercial basis or on a scale requiring a commercially organized business operation requires authorization from BaFin. BaFin requests information to determine whether a business requiring authorization is in fact being conducted.

What is the best way to respond to a BaFin request for information?

In general, it is important to cooperate constructively with BaFin. Failure to cooperate can quickly result in reputational risks, including a public warning of suspected unauthorized business activities.

Short-Term Measures:

• Assessment of the facts: First, determine if any activities requiring authorization are conducted and, if so, which ones. It is possible that BaFin’s assumption is unfounded or that additional authorizations, which were previously unrecognized by BaFin, may be required. A swift, complete, and thorough assessment is crucial to obtain a comprehensive understanding of the matter.
• Preparation and submission of a response: It is important to truthfully and comprehensively respond to BaFin’s request for information within the deadline. All information and documents required for BaFin’s assessment must be provided. In practice, providing a graphical illustration of the business model may facilitate BaFin’s review. Omitting relevant information or documents will prevent BaFin from fully assessing the matter, which will likely prolong and increase the cost of the procedure.

Long-term Measures:

The question whether or not a BaFin authorization is required is crucial for determining the long-term measures to be taken. If an authorization is not necessary, no further action is required.

However, if the activity is subject to authorization, there are two options:

• BaFin authorization: One option is to apply for a BaFin license. Please note that the authorization process is resource intensive. Furthermore, authorized entities are subject to extensive ongoing obligations that can be administratively burdensome. For many companies, these factors make applying for a license unattractive.

• Adjustment of the business model: Alternatively, the business can be restructured so that authorization is not required. For example, if the activity constitutes a money remittance business, it is often possible to adapt the setup so that one of the area exemptions under Section 2 of the Payment Services Act (ZAG) applies, or so that the criteria for a money remittance business no longer apply.

What happens if a request for information from BaFin is ignored?

If a BaFin information request is ignored, BaFin will issue a second request. Unlike the initial request, the second request typically includes the threat of coercive fines. BaFin may also issue a prohibition order under section 37 KWG or section 7 ZAG as a last resort if it suspects the unauthorized provision of banking or payment services. BaFin may simultaneously order the immediate winding down of the relevant business activities. These measures are generally immediately enforceable.

Ignoring requests for information significantly increases the likelihood of such prohibitions and further measures, which may severely impact the operational and reputational position. Moreover, full cooperation with BaFin is strongly advisable. Cooperation generally leads to a quicker resolution of the matter. A swift and completel response to requests may also reduce potential criminal liability risks for managing directors. Operating regulated activities without the necessary authorization can result in severe penalties. Criminal proceedings are typically costly and time-consuming, and can lead to sanctions of up to five years’ imprisonment (e.g., under section 54 KWG or section 63 ZAG Criminal proceedings are best avoided by working together constructively and transparently with BaFin.