Federal Court of Justice: Millions of German citizens are entitled to damages…

Banks “cashing in on the back end” by kick-backs in the billions: years of violating objective criminal law to protect bank customers’ assets?

The Federal Supreme Court (BGH) has put an end to the discussion of so-called experts for capital investment law by its decision (Ref. XI ZR 308/09) of 29 June 2010. Since two rulings in 1989 and 1990, banks have been prohibited from collecting hidden additional commissions behind the backs of their customers.

Criminal bank(st)ers: fraud or embezzlement through concealed commissions

The BGH points out in its current decision that it already ruled about 10 years ago that in the case of hidden commissions “claims for damages according to § 823 II BGB in conjunction with § 263 StGB are to be examined”. § 263 StGB are to be examined”. In other words, banks must have known for years that they were defrauding their customers with hidden commissions. Such “kickbacks or retrocessions” have occupied both the German Federal Supreme Court (Senate for Criminal Matters) and the Swiss Federal Supreme Court (decision BGE 132 III 460) – according to which, in addition to the accusation of fraud, the accusation of breach of trust may also come into question, particularly in the case of asset managers.

Mr. Customer, we want your best – your money !

In practice, banks regularly receive from the fund companies not only the full issue premium when brokering investment funds. Rather, around half of the management costs that the investment fund charges the customer for the money saved in the fund assets are regularly added. The bank client does not notice that the bank of his trust is receiving additional commissions “surreptitiously and concealed” in a conflict of interest. And even banks that claim to pass on all such objectively fraudulent or embezzling payments to the customer will, in case of doubt, fail to provide any proof of this by means of an unquestionable auditor’s certificate.

Major bank defrauds pensioner in Munich?

Rosa von Grundbauer (name changed), born 1918, retired civil servant, bet for years on mortgage bonds and federal bonds. As a widow, she has an income of around 4,500 euros from pension, widow’s pension and rent. Her trusted banker arranges a closed-end real estate fund for her at the tender age of 86: term around 20 years – surely the heirs will be able to wait this out?

The brokerage protocol then states that the investment is “for old-age provision” – it is not apparent that double commissions are collected in such cases. A few years later, a proactive Sicilian becomes the new account manager: quickly, he transforms less than 0.5 million deposit value almost completely into certificates and derivatives – around 8% commissions including kickbacks are the rule, but not visible to the customer. If Rosa von Grundbauer lives to see it, and the issuers have not gone bankrupt by then, she may get her money back at the age of 95 or 96 – then, of course, effectively without interest, because, after all, these are also “guarantee papers”.

Annual damage due to kick-backs in the billions of euros

In Switzerland alone, the illegal additional income of the banks is estimated at around two billion francs per year. The line of defence then ranges from the simple denial that “there were no kickbacks”, to the denial of an obligation to “invoice and deliver to the customer”, to the request that “you can sue us – but if we look at your age, we think that you will by no means live to see the end of this process”.

From experience – adds a “robber banker” – one knows that one will certainly “come to a pleasant agreement” with the heirs – but that is not yet the case. The customer at a “fun bank” did not fare much better – if he did not rest now, they would first sell his credit to “Moscow collection or a locust” – then he would have no war chest at his disposal anyway, and completely different problems in his life.

Such examples are, of course, as not only experienced bank customers know – completely fictitious, i.e. pure fiction. Bankers need a good reputation, the law says – and therefore the older generation, in habitual trust, still likes to speak of the “bank official” even to Sicilians behind the counter. Trust instead of control is certainly a lucrative business model, because one thing is certain, if not guaranteed: The bank always earns money on the allegedly “good deal for the customer”.

Decree of the Federal Supreme Court

The BGH has clarified that since 1990 banks can no longer take the position that they knew nothing and were in an “unavoidable legal error”. It is then up to the bank to prove that it has not been negligent to the slightest degree – despite being able to seek objective legal advice at any time.

The rulings of the Federal Court of Justice after 1990 are therefore not – as some banks like to put forward – a “retroactive change in case law”, but have for many years been evidence of the mass “deception of the customer” and the continuous ignoring of the higher court rulings of the Federal Court of Justice.

And what do the customers get out of it?

Bank customers will have to learn to check the accounts of their banks or have them checked, because the officials of financial supervision and tax inspection are unlikely to take up such property offences in the interest of bank customers. Has anyone ever heard of a bank executive being deposed just because his bank charged double the interest – compared to what was on the bank statement?

Client advisors must acquire new funds and pay tipsters and referral sources a customary 0.5% “finders fee” for bringing in clients. But how will the client know what his tax or investment advisor is pocketing behind the scenes?

A subcategory of damages is reversal, and thus a rehabilitation of custodial losses, particularly due to the subprime crisis. A perspective for clients who have been wrongly advised – but also for investors whose asset manager was wrong.

Confidence in honest behaviour of banks and insurers misplaced

In a lecture event to insurance lawyers, a former BGH judge complained that insurers should have known for years how the BGH would rule in comparable cases, at the latest after an oral hearing in which the BGH presented its opinion in a case, whereupon the insurer acknowledged the claim.

Only, for reasons of equality of arms, this information should also come to the attention of the clients, at the latest when they consult a well-informed lawyer. This is also regularly necessary, because not only banks, but also insurers deny the opinion of the BGH, which they are well aware of, and claim just the opposite vis-à-vis their customers.

Where many billions of customer claims are at stake, the legal situation known to banks and insurers even from legal opinions commissioned by them is simply ignored with pleasure and another expert opinion is produced to support their opinion?

by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm

by courtesy of

www.handwerke.de (published in Computern im Handwerk, issue 09/2010, page 5-6)

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About the author

Dr. Johannes Fiala
PhD, MBA, MM

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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