Notes on Licensing for Cross-Border Banking Business and Financial Services in Germany

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Pursuant to section 32 (1) sentence 1 of the
KWG
, anyone wishing to conduct banking business or to provide financial services in Germany commercially or on a scale that requires a commercially organised business undertaking requires a written license.

05.04.2005

Explanation of administrative practice relating to section 32 (1) sentence 1 of the KWG

Pursuant to section 32 (1) sentence 1 of the
KWG
, anyone wishing to conduct banking business or to provide financial services in Germany commercially or on a scale that requires a commercially organised business undertaking requires a written license. I assume that "banking business is conducted or financial services are provided in Germany" not only if the provider of the service has its registered office or ordinary residence in Germany but also if the provider of the service has its registered office or ordinary residence outside of Germany and targets the German market in order to offer banking products or financial services repeatedly and on a commercial basis to companies and/or persons having their registered office or ordinary residence in Germany.

Providers from non-
EEA states that wish to market their banking and financial services products specifically in Germany must therefore establish a subsidiary (section 32 (1) in conjunction with section 33 (1) sentence 1 no. 6 KWG ) or a branch (section 32 (1) in conjunction with section 53 KWG ) in Germany in order to obtain the required license. As a general rule, this also applies to entities from EEA states that are unable to make use of the so-called EU Passport for banking and/or financial services they offer in Germany. The transactions conducted under the license must be booked to the German entity; the banking and securities accounts opened in connection with the business relationship must be held by this entity.

Companies from
EEA states may conduct business requiring a license not only by establishing a branch (section 53b (2) of the KWG ) but also on a cross-border basis - without having a presence in Germany - (section 53b (2a) of the KWG ), subject to the requirements of section 53b of the KWG (so-called notification procedure/EU Passport).

There is no restriction on the so-called freedom to provide requested services (passive Dienstleistungssfreiheit [1] ), i.e. the right of persons and entities domiciled in Germany to request the services of a foreign entity on their own initiative. Transactions requested on the client's own initiative are therefore not subject to the licensing requirements under section 32 (1) of the KWG .

The regulation of cross-border banking transactions and financial services relates mainly to the private client sector as well as the (retail) corporate client sector since foreign companies from non- EEA states often want to develop new client bases in these sectors by launching specific campaigns in Germany. It should be noted in particular that the foreign entities concerned have a wide range of alternatives to structure the business activities, resulting from the provisions of section 25a (2) of the KWG and the fact that it is now permissible to outsource distribution activities and the settlement of banking transactions and financial services. On the basis of an agency contract concluded with the German parent/subsidiary/affiliated company, the banking products may therefore continue to be provided by the foreign subsidiary/affiliated/parent company, which then conducts the business for the client on behalf and for the account of the German parent/subsidiary/affiliated company.

The interpretation here has no further impact on the permissible business that may be conducted by representative offices within the meaning of section 53a of the KWG . Since they are not licensed by BaFin

• not subject to licensing requirements as banks - these representative offices were not permitted, even under past legislation, to provide any banking and/or financial services; in particular, they were not permitted to participate in the initiation, execution or settlement of banking or financial services transactions. Such physical establishments in Germany must restrict themselves to representative functions.

As well, the foreign entity knows whether it intends to enter a foreign market in order to offer specific banking and financial services products in Germany. It must therefore expect to become subject to regulation and supervision in Germany. The criteria developed in the past to prove this intention still apply. In the context, not only the criteria for interpreting the freedom to provide cross-border services specified by the European Commission must be taken into account, but also the standards developed by the competent supervisory offices (before BaFin was created) for Internet sales of foreign investment units and for security offerings via the Internet (letter of Federal Banking Supervisory Office (" BAKred ") of 2 June 1998, as well as the announcement of the Federal Securities Trading Supervisory Office (BAWe) of 6 September 1999, relating to the Act on the Prospectus for Securities Offered for Sale, both of which can be found on the Internet under www.bafin.de).

In response to the need for legal certainty, I will now give examples of typical scenarios where entities provide cross-border banking and financial services that I assume require a license pursuant to section 32 (1) of the KWG . I will then list each of the standard requirements that have to be met before I grant individual exemption pursuant to section 2 (4) of the KWG for certain business operations.

The criteria detailed here are those which I generally apply; they may also be applied accordingly in other similar cases. However, in view of the diversity of the contractual and actual forms of business operations, I reserve the right to examine each case on an individual basis, and I will assess the licensing requirements taking into account all facts and circumstances.

1. Relevant scenarios giving rise to licensing requirements pursuant to section 32 (1) of the
   KWG

It must generally be assumed that a license is required pursuant to section 32 (1) of the KWG if a foreign company intends to target the market in Germany for the purpose of repeatedly offering the banking transactions listed in section 1 (1) sentence 2 of the KWG and/or the financial services listed in section 1 (1a) sentence 2 of the KWG on a commercial basis to companies and/or persons that have their registered offices or ordinary residence in Germany.

Lending business/Lending syndicate
The decisive factor for assessing the licensing requirements pursuant to section 32 (1) of the KWG is generally the manner in which the negotiations relating to the loan have been initiated.

If the foreign entity specifically targets the market in Germany for the purpose of offering loan agreements repeatedly on a commercial basis to companies and/or persons that have registered offices or ordinary residence in Germany, I generally deem this to constitute lending activities requiring a license (section 1 (1) sentence 2 no. 1 KWG ).

By contrast, simply maintaining existing client relationships or concluding loan agreements at a client's own initiative, which is typically the case with large corporate clients or institutional investors, do not require a license ( freedom to provide requested services ).

In principle, these criteria also apply to the granting of loans by lending syndicates. In practice, however, the establishment of a syndicate is frequently preceded by a so-called "beauty contest" initiated by the borrower, where several banks compete for the mandate and tailor their concepts to the borrower's requirements. A syndicate is often only established once a borrower's demands have been specified in more detail. A lending syndicate is then formed to meet the borrower's individual requirements, and grants a loan tailored for such borrower. Such a procedure falls under the category of freedom to provide requested services , which is not restricted by my administrative practice.

Underwriting
Also in the case of transactions based on an underwriting agreement, it is important to know how the underwriting agreement was concluded, i.e. whether the foreign entity had previously targeted the German market for the purpose of offering its services in Germany. The decisive factor here is whether the initiative was taken by the foreign entity or by the German issuer. If the foreign entity specifically targets the German market with its range of services, which is not a common occurrence in respect of institutional investors and large corporate clients, the underwriting of financial instruments at the foreign entity's own risk would constitute underwriting activities requiring a license (section 1 (1) sentence 2 no. 10 KWG ), the so-called issuing syndicate would constitute principal broking activities requiring a license (section 1 (1) sentence 2 no. 4 KWG ) or the "best efforts underwriting"/so-called agency syndicate would constitute contract broking activities requiring a license (section 1 (1a) sentence 2 no. 2 KWG ).

Client visits by employees or agents of foreign institutions

I deem the foreign entity to require a license in cases in which a foreign entity acquires new clients in Germany for the banking and/or financial services it offers by making targeted visits to potential clients.

If, on the other hand, such visits are made at the client's request, which is often the case, particularly with institutional investors, they would be covered by the freedom to provide requested services .

Brokering by German institutions/employees or agents If a foreign entity acquires new clients through German institutions/employees or agents by setting up and using a distribution network, it can be assumed that the foreign entity will require a license for the banking and/or financial services offered to the client. This is also the case if the entity operating in Germany or the employee or agent working in Germany itself has a license for such brokerage activity.

Foreign entities are considered to be targeting the German market if the contractual arrangements ( e.g. framework or cooperation agreements) or the actual structure of the business relationship between the foreign entity and the German institutions ( e.g. credit institutions, portfolio managers or investment/contract brokers) or the employees or agents indicate that the foreign entity is using the German institutions/employees or agents as a distribution network for the services offered. This is generally assumed to be the case where a number of agents are active exclusively for the foreign entity. This may also be the case if a commission is paid for the acquisition of clients or if advertisement of the bank and/or financial services is made to clients on behalf of the foreign entity.

Non-
EEA deposit broking
If the client approaches a non-
EEA deposit broker under the freedom to provide requested services and the broker is not bound to specific non- EEA deposit institutions through framework or cooperation agreements, I see no reason to assume that the foreign entity requires a license. The German broker, however, provides non- EEA deposit brokerage and, therefore, requires a license (section 1 (1a) sentence 2 no. 5 KWG ).

By contrast, if the contractual arrangements ( e.g. framework or cooperation agreements) or the actual structure of the business relationship between the foreign entity and the German broker lead one to conclude that the foreign entity is using the German broker as a distribution network, it can be assumed that the foreign (non- EEA ) deposit institution requires a license .

Money transmission business
Foreign entities conducting money transmission business frequently open accounts with German credit institutions in order to process the money transmission business with German clients through these accounts. The decisive factor for the licensing requirements is that by using the German account, the German principals and final beneficiaries are able to issue payment orders or receive payments in connection with money transmission business. Orders are placed or payments are notified to the final beneficiary by telephone, fax, email, or letter. It is generally irrelevant to the parties concerned whether drawings on the account are made from within Germany or from abroad. This type of business is consequently viewed as the operation of money transmission business requiring a license in Germany pursuant to section 32 (1) of the KWG .

Mail/fax/email

If potential clients domiciled in Germany are approached by foreign entities by direct mail, fax or email for the purpose of offering banking and/or financial services, I assume that the foreign entity requires a license.

If, however, a foreign entity continues to inform its clients about its range of products within the scope of existing business relationships (which is often agreed upon in the basic contract), such business falls under the scope of the freedom to provide requested services and does not require a license. This also applies to cases in which clients approach the foreign company on their own initiative and receive various offers for examination. This is often the case with institutional investors.

Internet offers

The decisive factor relating to offers of banking and/or financial services products via the Internet is whether it is clear from the content of the website that these products are targeted to the German market. If an entity specifically targets the German market by providing special information or by actively conducting advertising campaigns through the Internet for the purpose of offering its banking and/or financial services, it can be assumed that the entity requires a license .

The aim of a website is not to be determined on the basis of its technical accessibility on the Internet but on the content of the homepage or the online activities in light of all facts and circumstances. In this context, the criteria may be applied that have already been developed for sales of foreign investment units through the Internet or for securities offerings through the Internet (letter of BAKred of 2 June 1998 and the announcement of BAWe of 6 September 1999 relating to the Act on the Prospectus for Securities Offered for Sale, both of which can on found on the Internet at www.bafin.de). A so-called disclaimer is only one of many different indications of this. Further evidence of whether an Internet offer is targeted specifically at residents is, for example , the domain name, language, product description, financial or other country-specific client information and legal framework, prices and methods of payment as well as the provision of German contact details. In particular, the fact that the banking and/or financial services offered are actually being sold to clients domiciled in Germany is an indication that the products are being offered specifically on the German market.

Advertising

The content of the advertising measures in question is the decisive factor for assessing whether they give rise to licensing requirements, and not the manner or form of their distribution. Advertisements that already contain statements on a specific service should no longer be placed without a license to conduct such business pursuant to section 32 (1) of the KWG . This does not apply, however, to advertisements of a general nature.

For instance, I do not immediately assume that a general advertisement of an entity, which, for example, merely advertises a name or brand image such as "XY-Bank beste Bank", is targeting the market for the purpose of offering potential clients specific banking and financial services. On the other hand, if an advertisement itself refers to the conclusion of agreements on specific products or if the advertisement names individual services offered by the foreign entity such as "XY-Bank Spitzen Konditionen für Termingelder", I assume that the bank is conducting business subject to licensing requirements in Germany.

A clear distinction is not always evident in individual cases, but the foreign entity often follows up the advertising campaign with further steps to actually provide advertised services to the potential clients who have been "won over" by the advertising. When assessing whether a license is required, I therefore take all the facts and circumstances into account to establish whether it can still be assumed that the clients approached the foreign entity on their own initiative, i.e. within the scope of the freedom to provide requested services.

2. Exemption pursuant to section 2 (4) of the
   KWG

Pursuant to section 2 (4) of the
KWG
, foreign entities may be eligible for exemption from the licensing requirements pursuant to section 32 (1) of the KWG and other provisions of the KWG for certain types of business.

a. Requirements for an exemption pursuant to section 2 (4) of the KWG

The legal requirement for an exemption is that "the entity does not require supervision, given the nature of the business it conducts". An exemption from the licensing requirements pursuant to section 2 (4) of the KWG can thus only be considered for cases in which BaFin deems that no need for supervision exists in connection with the conducting of banking and financial services business generally subject to supervision.

In general, this only applies if the company is effectively supervised in its home country by the competent authority/authorities in accordance with internationally recognised standards and the competent home country authority/authorities cooperates/cooperate satisfactorily with BaFin .

Additionally, the applicant company must submit a certificate from the competent authority/authorities of the home country confirming to BaFin that,

the foreign entity concerned has been granted a license for the banking operations and/or financial services that it intends to provide on a cross-border basis in Germany,

the commencement of the intended cross-border services in Germany raises no supervisory concerns and

if such concerns should arise in the future, these will be reported to BaFin .

To the extent that the non-
EEA company intends to conduct cross-border business in Germany via branch offices in other non- EEA states, the certificate shall also include confirmation that,

there have been no problems in terms of cooperation with the competent authorities of the countries in which the branch offices are located, that no supervisory findings of fault have occurred with regard to the activities of the branches (to be listed individually) and that any subsequent problems or findings of fault will be communicated to BaFin . A detailed account must also be given of the extent to which sufficient supervision is maintained with respect, in particular, to company insolvency and money laundering prevention in the countries in which the branch offices are located.

The applicant company must also appoint a
German receiving agent
.

b. Cross-border banking transactions and financial services eligible for exemption pursuant to section 2 (4) KWG

Taking into account the requirements listed above, this section will specify in more detail the transactions and services deemed eligible for exemption by BaFin pursuant to section 2 (4) of the KWG . However, the exemptions are granted case by case, based on the circumstances of the individual transaction procedure. Given the different contractual and actual structures of transaction procedures, each individual case is to be considered with respect to the conditions under which an exemption can be granted pursuant to section 2 (4) of the KWG . In addition to the prerequisites described here, supplementary requirements may be added in individual cases for supervisory reasons and, in particular, for reasons relating to the prevention of money laundering.

Institutional investors/interbank transactions

As a rule, all banking transactions and financial services requiring a license pursuant to sections 32 and 1 (1) and (1a) of the KWG with institutional investors and between banks (with the exception of money transmission business) are eligible for the exemption.

In this regard,
BaFin deems the following to constitute institutional investors:

the federal government, federal states, local authorities and their institutions

credit and financial services institutions within the meaning of section 1 (1) and (1a) of the KWG , including investment companies within the meaning of section 2 (6) of the Investment Act (Investmentgesetz - InvG )

private and public insurance companies

incorporated enterprises within the meaning of section 267 (2) and (3) of the German Commercial Code (Handelsgesetzbuch

Private clients

As a rule, all banking transactions and financial services requiring a licence pursuant to sections 32 and 1 (1) and (1a) of the KWG with private clients (with the exception of money transmission business) are eligible for the exemption, provided the transactions are brokered through a credit institution within Germany . The same also generally applies if the transactions are brokered through an EEA institution , provided its licence is comparable to that of a German credit institution and the activities of the EEA institution are covered by the so-called European Passport (section 53 KWG ).

Following the initiation of the client relationship through a German credit institution or EEA institution, the company active in cross-border business can conduct (individual) future transactions directly with the client as part of the existing business relationship.

c. Exemption process pursuant to section 2 (4)
KWG

The application for an exemption pursuant to section 2 (4) of the KWG is to be submitted in writing by the company to BaFin . If no alternative procedure has been agreed with individual foreign supervisory authorites [2] , the application is normally to be accompanied by the following documentation:

copy of partnership agreement/articles of association;

proof of company registration, to the extent that such registration is required;

the most recent annual financial statements, including all related documentation ( i.e. management report, auditor's report), to the extent that preparation of such documentation is required;

personal information about the applicant or about each manager of the applicant company (board member/manager): surname, all given names, maiden name, date and place of birth, current address, nationality and family names of both parents

as well as

a declaration by the applicant or by each manager of the applicant company (board member/manager) as to whether or not criminal proceedings are pending against him/her, whether he/she has been subjected to criminal proceedings due to a crime or offence, as well as whether or not he/she or any company under his/her management is or has ever been involved as debtor in insolvency proceedings or proceedings surrounding the filing of an affidavit of insolvency or other comparable proceedings ("declaration of criminal record");

a form for such a declaration is available on the http://www.bafin.de website.

a detailed description of the intended business activity, in particular to include an account of the specific transaction procedures and the intended market presence in Germany, depicting the client groups targeted; additionally - to the extent that it is relevant based on the intended business activity - an explanation must be given as to how the money and securities transfer is to be accomplished;

(sample) contract forms and (sample) agreements to be used for the intended business activities within Germany;

appointment of a German receiving agent;

certification from the competent authority/authorities of the home country fulfilling the requirements set forth in item 2a of this fact sheet.

3. Conditions and required fees

Conditions may be imposed for granting of the exemption pursuant to section 2 (4) of the KWG , which is also subject to fees pursuant to section 14 of the Act Establishing the Federal Financial Supervisory Authority (Finanzdienstleistungsaufsichtsgesetz - FinDAG ) in conjunction with section 2 (1) no. 1 of the Ordinance on the Imposition of Fees and Allocation of Costs Pursuant to the FinDAG (Verordnung über die Erhebung von Gebühren und die Umlegung von Kosten nach dem Finanzdienstleistungsaufsichtsgesetz - FinDAGKostV ). As a rule, the fee charged for the exemption pursuant to section 2 (2) no. 1a of the FinDAGKostV and for the refusal to grant an exemption pursuant to section 3 (2) sentence 1 of the FinDAGKostV is € 5,000. Similarly, the rescinding of an application pursuant to section 2 (4) of the KWG after processing has begun pursuant to section 14 of the FinDAG in conjunction with section 3 (1) of the FinDAGKostV is subject to a fee, usually in the range of €50 to €2,500 (section 3 (2) sentences 2 and 3 FinDAGKostV ).

4. Other

Please note the provisions of the Money Laundering Act (Geldwäschegesetz - GWG), whereby all credit and financial services institutions - including those to which certain provisions of the KWG do not apply pursuant to section 2(4) of the KWG

• must meet specific due diligence requirements with regard to the prevention of money laundering and terrorism financing (identification, record keeping, record retention, reporting of suspicious transactions and installation of adequate measures to protect against money laundering and terrorism financing). Further details in this regard can be taken from the publications available on the http://www.bafin.de website.

[1]

This refers to cases in which the service is requested by the service recipient, i.e. provided by the service provider on the recipient's initiative. The freedom to provide requested services is a result of the general freedom of action set forth in section 2 (1) of the German Basic Law (Grundgesetz), which with regard to the service recipient - and not the service provider - is not restricted by any economic regulatory framework ( e.g. the KWG ).

[2]

With the Swiss Federal Banking Commission (Eidgenössichen Bankenkommission - EBK ) an agreement has been made as part of ongoing cooperation that Swiss companies under the supervision of the EBK are not required to submit company documents ( i.e. copy of the articles of association/partnership agreement, proof of registration, annual financial statements and declaration of criminal record) to BaFin .

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