Muzzle on billion-dollar financial fraud under BaFin supervision

The Federal Financial Supervisory Authority (BaFin) celebrates a decision of the Administrative Court of Minden (decision of 17.12.2010, ref. 10 L 690/10) as a triumph – however, it is probably rather an admission of hopeless overstrain? Defrauded investors should not under any circumstances hope for financial supervision – it protects the existence of financial institutions, such as banks and insurance companies, but not the defrauded investors. No permission to testify for BaFin key witnesses


In the present case, an investor believed that the management board of a bank had confessed to BaFin its criminal conduct in issuing a false “ad hoc announcement”. BaFin remained firm – its employees are not given permission to testify. In numerous cases only laymen wonder why BaFin does not report criminal employees of banks and insurance companies. Does BaFin’s statutory duty of confidentiality protect criminal directors from prosecution?


BaFin acts only in the public interest

Numerous rulings have confirmed that BaFin only exercises its supervision in the public interest and does not have to act in the legal interest of individual consumers or even a large number of affected consumers in the event of violations of the law. Even in the case of mass ineffective conclusion or modification of insurance or financial contracts, the interest of the supervisor in their continued existence may be in the public interest, namely to protect financial houses and their other customers.

Thus, a complaint to BaFin is only a source of information for BaFin and a suggestion to take action – BaFin is not obliged to do so. Since BaFin is dependent on the “trustworthy” cooperation of the supervised companies and management boards, they can count on secrecy and the preservation of the “confessional secret” by BaFin in return.


Administrative court: refusal to allow testimony as an advantage for investors

In a recent publication, BaFin writes: “The Minden Administrative Court pointed out that it is conceivable, on the basis of the rules of presentation and burden of proof under civil law, that investors in civil proceedings could demand that the bank consent to the disclosure of the content of the conversation in dispute, with the consequence that BaFin could grant permission to make statements in this respect, because in any case violations of Section 9 of the German Banking Act would then be excluded.

According to the case-law of the Federal Court of Justice (Bundesgerichtshof, BGH), a defendant in civil proceedings must substantiately contest the plaintiff’s submissions on facts which are to be set out and proved by the plaintiff and which took place in the defendant’s sphere, and must set out the facts and circumstances which argue to the contrary, provided that the plaintiff can reasonably be expected to provide more detailed information. If the defendant refuses to make a witness known only to him accessible to the court without good reason, his conduct is to be assessed as obstruction of evidence and, pursuant to section 286(1) of the Code of Civil Procedure (Zivilprozessordnung – ZPO), to be taken into account to his detriment in the context of the assessment of evidence.”


Financial services supervision and special auditors: No liability towards investors!

In order to protect (also) the state, case law has clarified that even “renowned auditors with a mandate for special auditing” by BaFin are not liable to investors if they overlook triple-digit million amounts of freely invented returns or assets. If criminal activities then come to light, investors have little chance of finding out about them.

Those who feel they have been defrauded can then call BaFin as a witness to the alleged facts. If then the financial house does not grant an exemption from the official secrecy, he can hope for the fact that the civil court evaluates this as obstruction of evidence – thus in the doubt the deceived investor the payment of damages because of shifting of the burden of proof awards. Perhaps it is only due to the politically desired competition of the states that criminal executive boards only very hesitantly end up behind bars?

Perhaps in the future investors will go over to take the officials personally in recourse, because where for instance “obstruction of justice in the office” is in the room, the law knows no pardon. It will be difficult to invoke an “instruction” from the employer?


Criminal complaint also opens way to secret files

In the face of the BaFin’s imposed silence, criminal charges – e.g. for fraud and breach of trust – against the affected board members and employees of financial institutions can be helpful. BaFin cannot invoke secrecy vis-à-vis the prosecuting authorities, who are also acting in the public interest. The aggrieved consumer can then hope that the facts about the criminal investigation results that are important to him will become available.


Freedom of Information Act is cumbersome

The Freedom of Information Act should also open the way for everyone to obtain information from public authorities. But here, too, BaFin can invoke secrecy. Rulings are then often made in such a way that the BaFin must in principle hand over the information – e.g. 5,000 pages of file copies – but can first black out everything that needs to be kept secret. Whether such censored texts are then helpful, one will have to wait and see in the individual case. However, the information obtained in this way can be a first step towards more concrete statements or at least a reversal of the burden of proof through the naming of witnesses.


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


by courtesy of
(published 2011-06-14)

and (published 06/16/2011)

and (published in Computern im Handwerk 7/2011, pages 5-6 under the headline: Crown witness BaFin: Muzzle in billion-dollar financial fraud under BaFin supervision?)


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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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