In the interest of the integrity of Germany as a financial centre, legislators have mandated BaFin to rigorously enforce the authorisation requirement governed by the Banking Act, the Insurance Supervision Act, the Payment Services Supervision Act and the Investment Code for certain types of financial and insurance business (see info box "Illegal investment schemes"). The systematic fight against illegal investment schemes also serves to protect investors and consumers, who are to be prevented from entrusting their money to dubious profiteers, for example.

As a threat-prevention authority, BaFin is tasked with identifying and prohibiting unauthorised business activities at an early stage, ideally before customers suffer any irreversible losses. The law gives BaFin extensive powers of investigation and intervention that compare favourably by international standards. For example, BaFin can demand detailed information and the disclosure of documents on all business matters. If there is concrete evidence of unauthorised business activities, it can order on-site inspections, which are carried out by its employees.

BaFin can search business and private premises and confiscate incriminating evidence. However, searches require a court warrant, unless there is an imminent threat. If the suspected unauthorised business activity is confirmed, BaFin can order its cessation and force the provider to wind up the transactions entered into; it can appoint a liquidator to monitor and implement the liquidation process. In addition, BaFin can issue instructions, impose coercive fines and apply to the competent administrative court for an order of a mandatory prison term.

Under the respective supervisory laws, unauthorised business activities are liable to a prison term of up to five years or a fine. The appropriate criminal prosecution is the responsibility of the prosecuting authorities. BaFin supports the public prosecutors' offices by sharing its expertise, including on site. In 2016, the prosecuting authorities involved officials of BaFin as experts in five major searches at six locations in total.

New investigations

In 2016, BaFin initiated a total of 1,113 new investigations (previous year: 672); it concluded 962 proceedings (previous year: 669). As part of its investigations, BaFin issued formal requests for information and the submission of documents to companies or individuals in 34 cases (previous year: 58). It imposed coercive fines in 26 cases (previous year: 23).

In 2016, in its pursuit of unauthorised business activities, BaFin carried out one on-site inspection on the basis of formal orders for inspections. It obtained search warrants from the Local Courts (Amtsgerichte) against 17 operators and companies involved; on this basis, BaFin officials, with the support of the Bundesbank and the police, searched 30 properties at 15 locations.

Court proceedings

In 2016, the Administrative Court (Verwaltungsgericht) of Frankfurt am Main rejected 16 objections to notices issued by BaFin in summary proceedings; in 2 cases, it ordered that the legal remedies should have a suspensory effect. In the main proceedings, BaFin won a total of 13 cases before the Administrative Court of Frankfurt in 2016; in 1 case, the Administrative Court ruled in favour of the plaintiff in the year under review. In 2016, the Higher Administrative Court (Verwaltungsgerichtshof) of Hesse concluded 5 cases in interim relief proceedings and 3 appeal proceedings; it ruled in favour of BaFin in all these cases. In another case, it allowed an appeal against the decision of the previous instance; this case is still pending. 2 cases that had been brought before the Federal Administrative Court (Bundesverwaltungsgericht) for a decision were ruled in BaFin's favour.

BaFin's interpretation confirmed

In 2016, BaFin prohibited a Hamburg-based pawn shop from issuing loans against bearer land charge certificates and bearer shares and ordered it to unwind the funds raised. In BaFin's opinion, this type of transaction is not covered by the pawnbroker privilege. The official explanation for the Banking Act and the provisions under federal state law on handling pawned items make it sufficiently clear that only movable items are eligible as security in a pawn transaction. The security has to be stored in suitable premises and insured against theft, fire and water damage. Moreover, according to the legal provisions, the pawner is prevented from accessing the pawned item, because it is held by the pawnbroker. By contrast, bearer certificates are rights attached to certificates whose value is derived from another asset. The latter is, however, specifically not in the pawnbroker's possession. Accordingly, bearer certificates cannot be securities in a pawn transaction. This interpretation was also confirmed by the Administrative Court of Frankfurt am Main . The decision carries fundamental significance beyond this specific case in Hamburg: without this ruling, pawnshops could have turned into companies that transact bank-like business on an unregulated basis.

Another landmark decision

The Administrative Court of Frankfurt am Main also confirmed BaFin's interpretation in another landmark decision. Accordingly, a company is subject to the authorisation requirement in accordance with the Banking Act if its business model – when its lending and deposit-taking business is considered as a whole – is similar to the activities of a credit institution. In the case in question, the operator intended to raise capital by issuing profit participation rights with qualified subordination clauses and by issuing its own bearer bonds. In the lending business, the company was planning to lend the funds raised from others to wholesale customers in two different ways – either as loans with a qualified subordination clause or in exchange for the issuance of bearer bonds based on models that the operator intended to make available on its website. The Administrative Court confirmed BaFin's opinion that both lending variants met the criteria of the lending business in all cases where the operator refinanced itself by raising repayable funds from the general public. The judgement against the operator has since become final.