Code of conduct as a guiding principle

The image problem that the financial sector has had to struggle with since the start of the financial crisis has not gone away. According to a survey by the business consultants EY during the past year, more than one in three bank customers in Germany (37%) reported that their confidence in the banking industry had fallen in the previous 12 months.¹ The reasons for this are likely to include the activities of some banks which have come to public attention in the past that were questionable, at the least from a moral point of view. Cum/ex trades and the use of letterbox companies, as in the Panama Papers case, are noteworthy examples. These examples also demonstrate the importance of the supervision of conduct alongside prudential supervision. The aims of the supervision of conduct include ensuring that the risk behaviour of employees and managers conforms to the bank's ethical principles.

Border between legality and legitimacy

Banks frequently operate in the border zone between legality and legitimacy. Not everything which is legal is also legitimate. The cases in the contributions below make it clear that even behaviour which may be (just about) legal can involve substantial reputational and legal risks. Misconduct destroys confidence, while fair and responsible behaviour creates confidence – independently of the question of legality. In order to restore confidence in the risk-aware and responsible behaviour of bank employees, BaFin has included an appropriate risk culture as a requirement for an appropriate risk management system in the amended MaRisk.² The objective of this requirement is to ensure that banks – or rather: the management boards and senior management levels of banks – make clear to their employees which types of conduct are desirable and which are undesirable, so that they can conduct themselves accordingly and minimise risks.

A code of conduct, as in future required by AT 5 of the MaRisk, is a sensible and helpful tool for this purpose as a moral compass. This is because if people are reminded of their moral compass, they will also behave accordingly, as the experiment conducted by a behavioural economist has shown.³ A code of conduct allows senior managers to set out clear rules of the game for themselves and their employees, although they must accept that they will also be judged by those rules themselves. BaFin will do so rigorously.

For the banks, legitimate behaviour ultimately pays off in economic terms as well. Not only do they achieve a substantial reduction in their legal and reputational risks, they can win back their customers’ confidence, which is after all essential for a customer relationship to be successful in the long term.

Investigations into cum/ex trades

On 19 February 2016, the Bundestag appointed a parliamentary committee of inquiry with the objective, among other things, of clarifying the practice of German banks relating to cum/ex transactions in the period from 1999 to 2012 (see info box). In particular, the committee is charged with investigating the reasons for these cum/ex trades and how they evolved over time. It is also intended to clarify whether federal government bodies took measures in good time to counteract transactions of this type. The committee of inquiry has issued five requests for evidence requiring BaFin to submit documentation.

BaFin assisted the committee of inquiry with written submissions and BaFin employees were available to the committee to answer questions and provide additional details in keeping with BaFin's obligations. Raimund Röseler, Chief Executive Director of Banking Supervision, and Elisabeth Roegele, Chief Executive Director of Securities Supervision/Asset Management, also testified before the committee.

New legal situation since November 2015

The investigation of tax planning structures or tax offences does not fall within BaFin's immediate areas of responsibility. Until November 2015, the duty of confidentiality of BaFin employees with respect to the tax authorities set out in section 9 of the Banking Act was relieved only in the case of tax offences where there was a pressing public interest to prosecute. In the absence of a legal basis, however, this did not cover cum/ex transactions. With the adoption of the German Resolution Mechanism Act (Abwicklungsmechanismusgesetz), the wording of section 9 (5) of the Banking Act was amended to the effect that BaFin employees are relieved of their duty of confidentiality with respect to the tax authorities, if they have information which the latter require for proceedings relating to a tax offence and the associated tax assessment proceedings.

In cases where there is involvement in tax evasion transactions, however, BaFin examines whether this has implications for the personal reliability of an institution's senior managers, independently of the prosecution of such activities by the tax authorities. It also reviews the effects of any additional payments of tax or fines on the relevant institution's solvency and liquidity position.

Following the publication of the Panama Papers, for example, BaFin also required the German credit institutions mentioned in them to hand over documentation. It used the latter to investigate whether the institutions had demonstrated the care required throughout their groups in identifying their customers and complying with the other provisions of anti-money laundering legislation.

Investigations into the Panama Papers

In response to the Panama Papers case, BaFin tightened its controls in 2016 with the aim of identifying possible criminal transactions using letterbox companies. According to an international research association of journalists, more than 500 banks together with their subsidiaries and branches registered approximately 15,600 letterbox companies using the Panamanian legal firm Mossack Fonseca. This firm specialises in setting up offshore companies. 14 German banks also made use of letterbox companies in Panama, according to the Panama Papers.

In the past, BaFin appointed auditors to carry out controls of this nature and sent them into the banks to examine the papers on site and report to it subsequently. But on this occasion BaFin chose a different route.

In April 2016, the Department for the Prevention of Money Laundering required the 14 credit institutions to provide information on their transactions in Panama over the previous five years and to produce original documents, such as account statements. 10 banks stated that they had conducted transactions there on behalf of customers and submitted the original documentation. BaFin also required one further bank – not named in the Panama Papers – to provide similar information. The total amount of data submitted was just under 1.5 terabyte. In view of the large volume, the data will be evaluated by external experts once it has been reviewed by BaFin.

Footnotes: