Cablegate: Bafin Guidelines On Cross-Border Provision Of

This record is a partial extract of the original cable. The full text of the original cable is not available.




E.O. 12958: N/A
SUBJECT: BaFin guidelines on cross-border provision of
financial services


1. (SBU) Summary: In September 2003, the German Financial
Supervisory Authority (BaFin) issued interpretive guidelines
on how it will treat the cross-border provision of financial
services into Germany. According to the recent guidelines,
targeted offers of banking or other financial products to a
German customer by a provider located abroad require a
German banking license unless the provider has a "European
passport". Exemptions may be granted for interbank business
and institutional investors, if the entities in question are
effectively supervised in their home country. There seems
to be a considerable lack of clarity among market
participants on what the guidelines really mean for their
business. Nonetheless, the BaFin is in a dialogue with the
Association of Foreign Banks and has expressed its
willingness to take account of their concerns End summary.

BaFin's new guidelines
2. (SBU) In September 2003, the German Financial
Supervisory Authority (BaFin) issued interpretive guidelines
on how it will treat the cross-border provision of financial
services into Germany. These guidelines basically explain
how the BaFin intends to interpret the existing Banking Act,
which has not been changed. However, they do change
administrative practice as they are based on a new
definition of cross-border transactions.
3. (SBU) In the past, the BaFin only required a German
banking license if transactions were carried out or services
were provided on German soil. According to the recent
guidelines, targeted offers of banking or other financial
products to a German customer by a provider located abroad
that are made repeatedly and on a commercial basis require a
license unless the provider has a "European passport". The
BaFin will, however, only give licenses to banks with a
legal presence in Germany in the form of a branch or a
subsidiary. A representative office would not suffice. If
a foreign company has a branch in Germany, all the company's
transactions with German customers must be carried out
through and booked at this branch.
4. (SBU) The BaFin release exclusively refers to
"targeted" offers, e.g. actively soliciting business in
Germany. Providers of cross-border products and services
that German customers have requested on their own initiative
are excluded from the licensing requirement. No license is
required, for instance, for lending business with large
corporate customers or institutional investors, loan
syndicates or for maintaining an existing business
relationship. The guidelines do not distinguish between
activities targeted at retail customers and those targeted
at corporate customers or institutional investors.
5. (SBU) Under certain conditions, foreign entities may
be eligible for exemption from the licensing requirement.
This would be the case if "the entity does not require
supervision given the nature of the business it conducts".
Such an exemption will only be considered for interbank
business and institutional investors, if the BaFin can
assume that the entities in question will not require
additional supervision in the host country due to effective
supervision in their home country in accordance with
internationally recognized standards. Moreover, the
competent supervisor(s) in the home country must cooperate
with the BaFin, and the applicant is required to submit a
certificate from the competent authority/authorities of the
home country that confirms to the BaFin that
the foreign entity concerned was granted a license for
the banking operations and/or financial services that it
intends to provide on a cross-border basis in Germany,
the commencement of the intended cross-border services
in Germany raises no supervisory concerns and,
if such concerns should arise in the future, these will
be reported to the BaFin.

Practical implications
6. (SBU) The BaFin's new guidelines also give a number of
examples of practices of third country financial service
providers that would no longer be legal without a license of
German supervisors. For instance, if a foreign entity
targets the German market generally to offer loans or
underwriting services, a license is required. This is,
however, not the case if the offer occurs in the context of
maintaining existing customer relations or upon the
customer's own initiative. U.S. banks trying to sell their
products via the internet, if the site is specifically
targeted at the German market (e.g. in German language or
providing German contact details), direct mailings or faxes
would have to do so through a German branch and not directly
from the U.S. Similarly, it would be illegal to have
financial consultants fly into Germany for a specific bank
lending operation with a potential new customer.
Representative offices would only be permitted to watch
market developments, but not to market products and deal
with customers. Moreover OTC business for Germans in the
U.S. or the execution of German orders by brokerage firms in
the U.S. would be illegal, unless initiated at the request
of the German client. Even the foreign subsidiary of a
German bank would no longer be allowed to make offers to
clients in Germany.

The BaFin's motivation
7. (SBU) In its press release announcing the publication
of the guidelines the BaFin states that its objective is to
improve investor protection, in particular in the light of
increasing cross-border business and the use of new media
such as the internet. Moreover, it wants to submit third
country providers of financial services to the same
competitive conditions as entities from within the European
Economic Area (EEA).
8. (SBU) The responsible official at the BaFin told us
that the guidelines were driven by the concern to prevent
fraud vis--vis German investors, citing as a typical
example a Cayman Island firm providing banking services via
the internet. He stated that the BaFin's intention was by
no means to impede "honest" business activities.
9. (SBU) However, there is speculation whether the
BaFin's motivation is exclusively investor protection or
whether tax and reciprocity issues also play a role. The
Association of Foreign Banks (VAB) claims that the BaFin has
two reasons for this stricter interpretation: Its "official"
argument is that it wants to protect German investors from
dubious companies that offer their services in Germany but
do neither have a license to do so nor a physical presence
in Germany. A typical example would be letterbox companies
located in Nauru. Another reason, which is not officially
quoted, is that banks that make money in Germany should pay
taxes in Germany. Moreover, the guidelines might also help
to limit tax evasion of investors. According to the VAB,
the main target of the guidelines is Switzerland, which is
attracting a lot of investment from Germany, partly also
with the clear objective to evade taxes.
10. (SBU) The former managing director of the VAB told us
that a BaFin official had mentioned to him that reciprocity
considerations also play a role. This particularly concerns
the US, with the BaFin official claiming that German banks
cannot provide their services in the US without being
supervised there, either.

Matter of interpretation
11. (SBU) Currently there seems to be a considerable lack
of clarity among the banks concerned on what the guidelines
really mean for their business. Most US banks have
subsidiaries in Germany anyway, whose transactions would
largely not be concerned by the guidelines. However, the
general guidelines do not answer all questions with regard
to sophisticated business models. There are specific
business policies which may fall under the new rules, e.g.
if transactions of a German subsidiary of a US bank are
booked in an unregulated US entity. The chairman of the VAB
board, Peter Coym, deplored that the BaFin guidelines put
business models into question that have been used in Germany
for decades. He also criticized that the status of
representative offices was not sufficiently clarified so
that they continue to operate in a gray area that leaves
wide scope for interpretation.
12. (SBU) When we spoke with the responsible official at
the BaFin, he stressed that in case it should turn out that
the guidelines jeopardize legal transactions, the BaFin
would be willing to consider modifications and that the
wording of the guidelines may be considered as preliminary.
He pointed out that for cases that are not explicitly
mentioned in the guidelines, when in doubt foreign entities
should contact the BaFin and discuss the issue. The BaFin
would then be willing to work out a solution. For instance,
the BaFin official said that if the service is provided by
an entity that does not have a banking license in the US but
is indirectly supervised by the Fed or the SEC and US
regulators commit to informing BaFin in of any problems with
that entity immediately, the cross-border transactions could
qualify for an exemption. Moreover, the BaFin appears to be
inclined to regard US supervision as "effective".

13. (SBU) The BaFin, in discussions with the Ministry of
Finance, has already made many accommodations to VAB
suggestions. The VAB as well as individual banks will
proceed to report to BaFin any difficulties that may occur
with regard to the guidelines. Further clarification and
also adjustments to the rules can thus be expected.

14. (U) This cable coordinated with Embassy Berlin.

15. (U) POC: Claudia Ohly, Economic Specialist, e-mail; tel. 49-(69)-7535-222367, fax 49-(69)-7535-


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