Investment brokering as an unlawful act with subsequent criminal proceedings

Why mediators of dubious investment models cannot hope for residual debt discharge


Complicity and aiding and abetting in the unauthorised conduct of banking business, section 32 KWG

The Federal Court of Justice (BGH, judgement of 21.04.2005, ref. III ZR 280/03) decided that § 32 of the German Banking Act (KWG) also applies in favour of investors to whom an intermediary had brokered so-called bearer bonds of a company from the British Virgin Islands. The intermediary did not have a licence from the Federal Financial Supervisory Authority (BaFin) to provide such brokerage or advisory services, so that the breach of the requirement to obtain a licence from BaFin in accordance with section 32 of the German Banking Act (KWG) led directly to an unlawful act. This resulted in the personal liability of the managing directors and intermediaries, without any protection by acting through an intermediary limited liability company. In this way, a later discharge of residual debt had become almost hopeless.

Banking transactions from outside the EU lead to void contracts, section 32 KWG

Once upon a time there was a Swiss private bank with a BaFin-approved subsidiary in Germany. However, in the branches in Germany you could also get the contracts to open an account with a custody account in Switzerland, or just get a Swiss franc loan to finance an immediate annuity through a British life insurance policy. The Federal Administrative Court (BVerwG, judgement of 22.04.2009, ref. 8 C 2. 09) ruled that the operation of a banking business within the meaning of section 32 para. 1 sentence 1 of the German Banking Act (KWG) covers not only legal transactions but all essential steps leading to the conclusion of a contract. Those who obtain the commercial register extract of their foreign bank in Germany can sometimes observe an astonishing frequency in the change of employees, because the return to the parent company abroad is often due to personal liability reasons. It is not uncommon for them to be threatened with arrest upon re-entry and, due to the lack of a permanent place of residence in Germany, with pre-trial detention without the possibility of release on bail because of the risk of absconding.

Brokering of promissory note loans as a banking transaction requiring a licence, § 32 KWG

The Munich Higher Regional Court (OLG, judgement of 22.02.2006, Ref. 7 U 4657/05) also judged the brokering of promissory note loans to be banking transactions. Without authorisation, there is a risk of personal liability for intermediaries and initiators of such business models. As in the other cases mentioned, there is liability for all damages, even if everything has been done correctly except for the lack of approval and therefore there is no further error in advice.

Asset management in Germany with custody account and cash account abroad, Section 32 KWG

Foreign financial houses, especially banks and insurance companies, boast of their flexibility. Connections to the capital investment there including asset management are also gladly advertised, advised and mediated by domestic mediators of financial services as an insider tip. In most cases, neither the financial institutions nor their clients and intermediaries know which legal system actually applies and where a lawsuit would have to be settled in the event of a dispute. However, it is safe to say that domestic intermediaries will then have PINs and TANs issued to them from abroad in order to access accounts and securities accounts and to carry out asset management from there on behalf of customers without BaFin approval. However, insurance and banking transactions conducted on a cross-border basis are also subject to the licensing requirement under Section 32 of the German Banking Act (KWG), as the Administrative Court of Frankfurt (VG Frankfurt/Main, decision of 11.10.2004, Ref. 9 E 993/04 (V).

Collection order for investment losses and additional claims from life insurance companies

Very popular, and massively touted by advisors and brokers, are the sales of receivables from credit institutions, their subsidiaries, and insurance companies. The crux of the matter is that for many initiators these “sales” are in reality pure collection transactions, because the customer is supposed to participate in the success at the end, provided that the legal claims are collected before they become time-barred.

The Federal Court of Justice (BGH, judgement of 11.12.2013, file no. IV ZR 46/13) assesses the collection of claims in accordance with §§ 2 para. 2 S. 1, 3 RDG as a legal service requiring a licence, provided that the original holder of the claim also benefits from the economic result, he still retains the risk of the loss of the claim as a share in the success, even if the legal costs are borne by the buyer of such claims. If the initiator is not licensed as a collection agency, the contracts are null and void, § 134 BGB. Nevertheless, the debt buyer is liable for its faulty business model.

Brokering of employee shares with non-disclosure agreement, § 32 KWG

Every year, hundreds of brokers and thousands of customers fall for investment models that simply do not exist. The initiators then use fake letters of reference from banks and auditors to create a legend, and boast the best contacts, for example in the boardrooms of DAX companies. This creates a buoyant trade based on investment contracts with non-disclosure agreements to supposedly protect the discretion of existing holders of employee shares. The indictments then succinctly state that the money was used for private expenses of the initiator and high commissions. Of course, such business models are based on fake Internet portals and a statement printer to pretend investors and brokers a fabulous investment success – until the model collapses in the manner of a snowball system and the millions in damages are revealed. Intermediaries, tipsters and advisors are then accused of complicity or aiding and abetting – and quite formally of § 32 of the German Banking Act (KWG), which alone is already enough for liability for the rest of one’s life. This is because such financial instruments may only be brokered or advised on with a licence.

Used life insurance as a way out

It would be quite easy to market any financial product and other capital investments without any authorisation. This is because second-hand life insurance policies are in no way financial products, even if they are unit-linked and similar policies which can be based on any financial products as an investment. Anyone is therefore allowed to sell or broker used life insurance policies – without a licence. With the shell of a used life insurance policy – no matter whether only one euro is paid in one day before and any premiums can be paid afterwards or whether the capital invested in the policy already consists of a promissory note loan worth millions – any investments can be marketed completely free of admission.

The life insurance company can be based in the EU, Switzerland or anywhere else abroad and does not need a licence in Germany to sell and broker its policies as second-hand.

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

by courtesy of (Expert Report, Issue 10/2014)

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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

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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