Last verified on Tuesday 15th November 2016
There is no single regulator in charge of the supervision of securities and derivatives markets and the activities and conduct of market participants in those markets, but a network of authorities on state, federal and European level with distinct and in some cases overlapping supervisory, regulatory and enforcement tasks.
The Federal Financial Supervisory Authority (BaFin) is the primary regulator for the securities and derivatives markets, particularly as it relates to market conduct. With respect to financial accounting matters, it is assisted by the Financial Reporting Enforcement Panel, a private association charged with the review of financial statements published by public companies for compliance with applicable accounting standards. To the extent BaFin applies European securities law, it takes into account guidelines and other acts issued by the European Securities and Markets Authority (ESMA) which is tasked, among other things, with fostering supervisory convergence across Europe (see chapter on European Union).
The various German stock exchanges, including the Frankfurt Stock Exchange, Germany’s biggest exchange, operate what are known as “regulated markets”. They are organised as public law institutions and as such themselves have supervisory powers over exchange participants. At each stock exchange, there is a special surveillance taskforce that monitors the trading activities of stock exchange members and reports suspicious trading activities to the board of the exchange and BaFin. The stock exchanges themselves are not supervised by BaFin but at state level by the respective ministry of economic affairs for their compliance with the legal provisions and administrative standards and guidelines applicable to them. The relevant state ministries of economic affairs also supervise multilateral trading facilities (MTFs), ie certain trading venues that do not qualify as regulated markets, operated by exchanges, whereas BaFin, as part of its banking supervision (see below), supervises MTFs operated by credit or financial services institutions.
Furthermore, and in addition to the securities and derivatives markets, BaFin regulates insurance companies, financial services providers and, most importantly, banks – the latter in close cooperation with the German Central Bank and the European Central Bank (ECB). Market conduct by these institutions is subject to either BaFin’s securities market or bank (or insurance) regulatory authority, or both.
As a relatively recent phenomenon, competition authorities, such as the Federal Cartel Office or the European Commission, have become key regulators in the securities or financial markets in which conduct of market participants involves elements of anticompetitive behaviour, as was the case, for example, in the LIBOR and other FX fixing cases.
Relevant securities and related laws
The institutional diversity in securities and derivatives markets regulation and supervision is due to, and corresponds to, the broad range of laws applicable to market participants and their activities. There is no single statute on securities and derivatives markets regulation and supervision, but a large number of laws regulating particular aspects of them. For example, the Securities Trading Act primarily governs the trading of securities, market conduct (in particular the obligation to disclose significant holdings of voting rights) and MTFs; the Securities Prospectus Act governs public offerings and listings of securities and related prospectus publication requirements; the Takeover Act provides the legal framework applicable to public tender offers for listed equity and equity-linked securities and takeovers of listed companies; the Capital Investment Act primarily governs mutual funds and other collective investment vehicles; and the Stock Exchange Act regulates stock exchanges (public law institutions) and the listing of securities on these regulated markets. The Stock Corporation Act and the Commercial Code also play an important role in this context, as these laws, among other things, establish general duties of corporate officers and board members and address aspects relevant to accounting. Given that banks and other financial institutions are key participants in the securities and derivatives markets, as underwriters, intermediaries or proprietary traders, the Banking Act is of particular significance in the supervision and enforcement context. Overall, the regulation of securities and derivatives markets is heavily influenced by European legislation, such as the Markets in Financial Instruments Directive (MiFID) and the corresponding secondary legislation, the new Markets in Financial Instruments Directive (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR) (due to be implemented by mid-2017 and applied as from January 2018) as well as the European Market Infrastructure Regulation (EMIR) on securities and derivatives markets; the Market Abuse Regulation (MAR) and the Directive on Criminal Sanctions for Market Abuse, the Prospectus Directive, the Transparency Directive and the Takeover Directive, as well as the UCITS and the AIFM Directives.
Banking supervision is harmonised with European legislation, including the Capital Requirements Directive IV, the Capital Requirements Regulation and the corresponding secondary legislation, the Bank Recovery and Resolution Directive as well as the Single Supervisory Mechanism Regulations, empowering the ECB as banking supervisor.
Criminal prosecution in the securities and derivatives market
While BaFin and the other authorities mentioned above are administrative bodies and, as such, are charged with regulation, supervision and enforcement to the extent these tasks are administrative in nature, criminal law enforcement is exclusively vested in the public prosecutor’s office at the state level. This is due to the distinction between (substantive and procedural) administrative law and criminal law in Germany. Hence, whenever an offence is classified as criminal in nature, whether in one of the supervisory statutes (including the ones mentioned above), the Criminal Code or any other statute, only the competent public prosecutor is empowered to initiate and conduct a criminal investigation.
Given the distinction between administrative law and criminal law and the corresponding allocation of authority and responsibility under German law, principal violations in the area of capital markets and securities law fall in either of these two categories. Administrative offences are, as a general rule, investigated and sanctioned by BaFin and other competent regulators while criminal offences are exclusively investigated and prosecuted by the public prosecutor and ultimately sanctioned by a criminal court. In practice, most violations constitute administrative, not criminal offences.
Notwithstanding the above-mentioned distinction and the corresponding allocation of authority and responsibility, under certain conditions, administrative offences can be investigated by the public prosecutor’s office and can ultimately be sanctioned by a criminal court. The public prosecutor may take over the prosecution of administrative offences in cases in which such administrative offence is connected to a criminal offence. That is the case, for example, when a board member is prosecuted for a criminal offence in the context of his or her corporate responsibilities and such conduct is attributable to the company, which in turn qualifies as an administrative offence by the company. In these cases, the public prosecutor will usually investigate both the criminal and the administrative offence.
Typical administrative offences, generally investigated by BaFin, relate to disclosure requirements (such as non-compliance with ad hoc disclosure obligations relating to price-sensitive facts, directors’ dealings and significant holdings of voting rights or periodic financial reporting obligations), market conduct, prospectus publication requirements and other matters. In the area of banking supervision, BaFin investigates non-compliance with certain requirements applicable to financial institutions such as, inter alia, risk management requirements. The required culpability of the offender varies, ranging from negligence, recklessness to intent, depending on the administrative offence in question.
Competition authorities investigate cases of market conduct amounting to price fixing or other violations of German or European competition laws including for securities, foreign exchange, commodities, derivatives or other financial markets, as in the LIBOR and other FX fixing cases.
The most prominent criminal offences investigated by the public prosecutor are market manipulation, and insider trading (by primary insiders) and accounting fraud, all requiring intentional misconduct, as well as, in the area of banking supervision, the illegal provision of banking or financial services, which can be committed both intentionally or negligently. Money laundering and tax related criminal offenses also play an important role in criminal investigations.
Authority is generally allocated by subject matter, with BaFin as the principal regulator conducting most securities-related investigations. To the extent the subject matter concerns banks or other financial institutions and their compliance with the Banking Act or respective European legal acts, BaFin shares its supervisory authority with the German Central Bank and, particularly in respect of the largest German banks and financial institutions, the ECB.
Any investigation involving potentially criminal conduct is the sole responsibility of the public prosecutor. If BaFin (or any other competent regulator), in the course of its investigation, learns of facts suggesting criminal conduct, it will report the facts to the public prosecutor for further investigation and initiation of criminal proceedings. The same applies vice versa. Between 2012 and March 2015, BaFin referred around 500 incidents to the public prosecutor for further criminal investigation. Throughout the whole of 2015, 160 suspected cases of market manipulation and 26 cases of insider trading were referred by BaFin to the public prosecutor.
Apart from these formal mechanisms of referral and cooperation, there are informal contacts and meetings between BaFin and the federal and state criminal police offices and public prosecutors’ offices both on a regular basis and ad hoc.
The German securities regulators and enforcement authorities generally have broad investigatory powers. BaFin, for example, may request any information or document it considers necessary to fulfil its supervisory mandate. BaFin is authorised to summon and question individuals such as employees, service providers or customers (see question No. 23 et seq). Under its banking supervisory mandate, BaFin may conduct special audits without a particular cause. In case of non-compliance, BaFin may enforce its requests and orders by way of execution by substitution, penalty payments and direct coercion.
These proceedings are – and remain – administrative in nature. It is important to note that, in contrast to criminal proceedings, administrative proceedings, including investigations, are generally not dealt with in court, unless the investigated party or any other concerned party challenges investigatory measures. In practice, however, administrative enforcement measures or judicial proceedings are rarely relevant as companies usually comply with BaFin orders.
In criminal investigations, the public prosecutor may, based on a judicial order, request and seize any given object (including documents) if such object could be of importance as evidence for the investigation. It may further summon and question witnesses and request documents from other public authorities (see question No. 23 et seq). Public prosecutors frequently request specific information and documents or entire case files from BaFin. Once the public prosecutor has gathered enough evidence, it will bring charges before a (criminal) court.
Given the distinction between administrative and criminal law in Germany, regulators such as BaFin may only initiate administrative proceedings, whereas the public prosecutor, subject to the exceptions laid out above, is limited to criminal law enforcement. As both administrative and criminal proceedings serve the public interest, they do not specifically satisfy the claims or interests of private third parties, which is why neither the regulatory and supervisory authorities, nor the public prosecutor can bring civil proceedings. Civil proceedings can only be brought by individuals or companies, for example, if they suffered a loss as a result of market misconduct (although some market conduct rules do not specifically protect third parties’ rights and interests, and hence provide no basis for damages claims).
Investigations conducted by regulators and criminal law enforcement authorities are generally not public. Only in exceptional cases, state press statutes and state and federal freedom of information acts may grant third parties a right to request specific information on such investigations from these authorities. Administrative fines may be registered with the central business register. In addition, fines imposed by regulators such as BaFin may or must be published, generally even where such fines can still be appealed. Recent European legal instruments, such as MiFID II and the Market Abuse Regulation, as well as acts in the area of banking supervision, also increasingly mandate such "naming and shaming".
In criminal proceedings, investigations conducted by the public prosecutor are non-public. Pursuant to the principle of publicity, however, the indictment and the subsequent main proceedings in court are necessarily public.
Investigations that are administrative in nature (ie, regulatory and supervisory investigations) may be targeted at both individuals and companies and, correspondingly, fines and sanctions may be imposed on both individuals and companies (see question No. 37).
German criminal law is based on the principle of culpability and the assumption that only natural persons can be guilty within the meaning of criminal law. Hence, under German criminal law, only natural persons can incur criminal liability, which is why criminal investigations can only be targeted at individuals (see question No. 40).
BaFin receives vast amounts of corporate and market information, such as regulatory filings, ad hoc and regular financial disclosure, and collects data on trading and price movements. BaFin, as a matter of routine and, in part, through software tools, analyses, compares, contrasts and evaluates this information and, where it identifies cases of potential non-compliance or wrongdoing, initiates an investigation. In such cases, BaFin will usually request information or documents from companies and individuals and has broad discretion in this respect.
The public prosecutor’s office initiates criminal proceedings when it becomes aware, through any means, of conduct that may amount to a criminal offence. BaFin often reports suspicious incidents to the public prosecutor. Between 2012 and March 2015, BaFin referred around 500 incidents to the public prosecutor for further criminal investigation.
Throughout the whole of 2015, 160 suspected cases of market manipulation and 26 cases of insider trading were referred by BaFin to the public prosecutor.
BaFin may generally apply its investigatory powers if there are indications that suggest further investigation for purposes of supervision. Even more broadly, based on the Securities Trading Act, it may investigate financial services providers without particular cause. Similarly, in the area of banking supervision, BaFin is authorised to initiate investigations at any time as part of its regular supervisory activities.
Somewhat stricter, the public prosecutor may initiate a criminal investigation if there is an initial suspicion. This requires factual indications that a criminal offence was committed.
While the decision about whether to investigate an administrative offence is generally at the discretion of a competent regulator such as BaFin, criminal offences generally must be prosecuted if the threshold of an initial suspicion is met.
The inviolability of private premises of both companies and individuals is constitutionally protected. Nevertheless, BaFin and, in the area of banking supervision, German Central Bank officers may enter private premises during regular business hours if necessary to fulfil their supervisory tasks. In 2013, BaFin conducted more than 500 such onsite visits. Outside regular business hours, both BaFin and German Central Bank officers may enter private premises if necessary to prevent imminent danger to public safety and order, and if facts exist that indicate violations of the Securities Trading Act, the Banking Act or other relevant statutes.
The public prosecutor may, in the course of a criminal investigation, conduct a dawn raid subject to certain requirements. In the case of company premises, as the company cannot be the target of criminal proceedings, this requires that the search be necessary either to follow the traces of a criminal offence or to seize objects of potential importance for the investigation. Certain facts must support the conclusion that the trace or object sought is located on the premises. Also, absent imminent danger, a court order is necessary.
As part of their general compliance obligation, companies are generally well advised to investigate cases of actual or potential wrongdoing in close cooperation with BaFin. There is, however, no specific legal requirement for a company to hand over the report of an internal investigation to BaFin or any other regulator. If the findings are of some significance, BaFin should nevertheless be informed proactively. Banks and other financial institutions are required to report to BaFin, without undue delay, any facts coming to their attention that cause them to suspect that certain provisions of the Market Abuse Regulation relating to insider trading and market manipulation, as well as prohibitions of uncovered short sales, have been violated or, pursuant to the Money Laundering Act, in cases of suspected money laundering.
While German companies, in particular listed companies and financial institutions, have long been under general statutory obligations to establish adequate risk management systems, including with respect to risks associated with legal non-compliance, statutory rules on whistleblowing have only recently been introduced. Banks and other financial institutions are required to establish a process allowing employees to report misconduct to a competent body of the company while keeping their identity confidential. These formal whistleblowing channels, at least to date, are not frequently used and, hence, are not the primary source of information for securities and related investigations.
While German law does not prescribe to reward whistleblowers as is the case in the US, companies in Germany are generally free to offer bonuses or other rewards for whistleblowing.
Regulators such as BaFin usually initiate investigations. Once BaFin has identified indications of potential wrongdoing or non-compliance, it usually submits a formal information request to the company or individual concerned and may summon and question individuals and request information from third parties including other public authorities. BaFin will grant the company or individual concerned an opportunity to be heard. If BaFin considers the investigated conduct a criminal offence, it will refer the case to the public prosecutor and, going forward, focus on those aspects of the case that could constitute administrative offences. BaFin generally closely coordinates its activities with the public prosecutor.
Criminal proceedings are conducted more formally in three phases. In preliminary proceedings, the public prosecutor investigates the facts of an alleged criminal offence; such preliminary proceedings may be closed under certain circumstances, for example, if no sufficient evidence is found. If the public prosecutor has found enough evidence, it will bring charges to the competent criminal court. The criminal court decides in intermediate proceedings whether to admit the charges and open the main proceedings (which include the public trial hearings). The main proceedings may eventually be closed, or result in an acquittal or conviction.
As a result of the continuous strengthening of mutual legal and administrative assistance on the European and international level, BaFin, as well as other German regulators, have become increasingly interconnected with their European and international counterparts.
Beyond informal cooperation, there are several formal channels for the cooperation and the exchange of information between regulators within the EU. Under MiFiD, for example, the competent national regulators are obliged to provide each other with information required for their supervisory mandates. The Securities Trading Act goes further and allows BaFin to use its powers on behalf of a foreign authority subject to a corresponding request by such authority. Also, foreign regulators may participate in securities and related investigations carried out by BaFin.
With respect to police and judicial cooperation in criminal matters within Europe, the public prosecutor can avail itself of the instruments provided by the mutual legal assistance framework. These legal instruments enable mutual information exchange between criminal law enforcement authorities. While cooperation or exchange of information between criminal law enforcement authorities is usually initiated by a formal request, these legal acts also provide for a spontaneous information exchange by which the competent criminal law enforcement authorities of the member states may exchange information, without a request to that effect, relating to criminal matters.
Both administrative cooperation as well as police and judicial cooperation in criminal matters with public authorities outside the EU and Europe are governed by bilateral or multilateral international agreements or treaties. Between Germany and the United States, for example, bilateral agreements on mutual legal assistance in criminal matters are in place, allowing, among other things, for the search and seizure of objects, including documents by German criminal law enforcement authorities on behalf of US authorities, as well as the cross-border transfer of certain items, including documents. Such international cooperation between criminal law enforcement authorities is usually triggered by a formal request on the part of the requesting authority. Against this background, and given the sometimes complex nature and the potential openness to political influence of the available formal procedures, US and other foreign law enforcement authorities often prefer to gather information through informal channels or voluntary cooperation in the course of investigations (as to the limits, see, however, question 20).
The cooperation and, more specifically, the mutual sharing of information between regulators within and outside the EU is permissible under MiFiD and other legal instruments of European and public international law. The findings by a foreign regulator may generally be taken into account and used by BaFin and other domestic regulators. The findings, however, may only be used for purposes within BaFin’s supervisory mandate and corresponding administrative and court proceedings.
Similarly, the public prosecutor may generally use information received from foreign law enforcement authorities. To the extent such data is personal data, however, the receipt and processing of such data must be adequate, relevant and not excessive in relation to the purposes for which it is collected. Also, information received may not be taken into account by the public prosecutor if the information gathering by the foreign authority or the subsequent use by the public prosecutor results in a breach of public international law or otherwise violates fundamental principles of German law.
BaFin’s authority and powers are broad. BaFin is generally empowered to require production of any document from any individual or company if such document appears ‘necessary’ for the purpose of the investigation. BaFin has specific powers to request production of information with respect to certain providers of financial services. From financial services providers, for example, BaFin may request information on their algorithmic trades and trading systems, if necessary to ensure compliance with the Securities Trading Act. In case of non-compliance, BaFin may force the release of the requested documents. In practice, however, companies under BaFin supervision typically comply at first request (see question No. 26).
Similarly, the public prosecutor may impound or otherwise secure any object, including documents. Absent imminent danger, however, the public prosecutor needs a court order.
There are no specific rules requiring a litigation hold, although in practice, companies routinely issue such document preservation instructions in the context of enforcement matters. Companies are subject to general rules on document preservation under the Commercial Act for certain time periods depending on the nature of the document. Financial services providers, under the Securities Trading Act, are subject to additional document preservation requirements. BaFin may also issue a document preservation order for documents potentially relevant to a specific investigation. Individuals who destroy evidence run the risk of committing a criminal offence if their conduct impedes criminal investigations, and litigation hold instructions can effectively address these concerns.
The protection of the attorney-client relationship in Germany is more limited as compared to the US or other common law jurisdictions. The attorney is subject to – and benefits from – a strict professional confidentiality obligation. External legal advisers can therefore neither be forced to testify nor to produce documents relating to the client, and documents in their possession cannot be seized. Depending on the facts and circumstances, that protection does not necessarily extend to the client or its in-house counsel. As a consequence, regulators and criminal law enforcement authorities may be able to request from companies and individuals the production of documents, including those that are the product of an attorney-client relationship.
Public officials at both federal and state level, including BaFin officials as well as public prosecutors, are subject to a strict confidentiality obligation. The Securities Trading Act, for example, stipulates that BaFin employees shall treat any information confidential that they obtain in the course of their supervisory activities, including, but not limited to trade secrets and other commercially sensitive information as well as personal information. Also, unauthorised disclosure of trade secrets generally qualifies as a criminal offence.
Individuals may refuse to provide information in case of self-incrimination, although documents can nevertheless be seized. Legal advisers, given their professional duties, generally cannot be forced to testify or produce documents relating to the client, and documents in their possession cannot be seized (see question 17).
German data privacy laws generally prohibit the data controller from processing personal data, including transfer of personal data to a third party, absent specific statutory authorisation. Similarly, bank secrecy principles subject German banks to strict confidentiality relating to customer data. Both data privacy laws and bank secrecy principles, however, are not absolute. A formal request or order by a competent German regulator, including BaFin or the public prosecutor, overrides data privacy and bank secrecy. Requests or orders from foreign public authorities, in contrast, are not considered sufficient to override such limitations. Foreign public authorities have to rely on formal mechanisms of mutual legal and administrative assistance. German companies generally may not, including on a voluntary basis, directly produce personal or customer information to foreign public authorities outside such formal channels of administrative cooperation (see question No. 22).
The collection and review by companies of personal data in the context of investigations often raise difficult data privacy and, where applicable, bank secrecy issues, and hence must be carefully planned and executed. Once the relevant data sets are collected (which typically happens in various stages and expanding in scope), the review itself, often by outside providers such as law firms and forensic accounting firms, must also comply with applicable data protection requirements. As a general rule, the data sets should be stored on platforms hosted in Germany or any other member state of the European Economic Area, and particular care should be taken to avoid, or to properly structure, data transfers to countries that provide no adequate level of data protection, including the US.
BaFin may request documents from foreign branches of domestic financial services providers, subject only to a notification of the competent foreign regulator. Otherwise, BaFin requires the approval of such regulator to conduct an investigation abroad. BaFin may also request foreign competent authorities to make use of their respective regulatory and supervisory powers on its behalf. This also applies to document production requests.
The public prosecutor may obtain documents from foreign authorities through instruments of mutual legal assistance in criminal matters. Within Europe, these are the European Convention on Mutual Assistance in Criminal Matters developed within the framework of the Council of Europe and, within the EU, the corresponding EU Convention, inter alia, the Framework Decision 2006/960/JHA. With respect to other countries such as the United States, the public prosecutor can usually rely on existing international agreements on legal assistance in criminal matters such as the 2003 Agreement on Mutual Legal Assistance in Criminal Matters between the US and Germany, as amended in 2006.
BaFin may conduct witness interviews. Under the Securities Trading Act, for example, BaFin is authorised to summon and question any person – whether alleged offenders or witnesses – if necessary to ensure compliance with the Securities Trading Act. BaFin may tape, prepare minutes or otherwise record a witness interview and will usually do so. The corresponding tapes or documents are not made public unless so required in subsequent court proceedings (see question 5).
The public prosecutor may also summon and question witnesses. Such witness interviews necessarily have to be on the record. These records are generally not public but may be made public in the course of subsequent court proceedings (see question 5).
Witnesses have a right not to testify based on personal or professional grounds, such as a close family relationship between the witness and the alleged offender or statutory confidentiality obligations of attorneys, auditors or tax consultants. Contractual confidentiality obligations such as bank secrecy, however, are no basis to refuse to testify. Also, witnesses may refuse to answer any questions if, by doing so, they would incriminate themselves. No adverse inferences may be drawn from the alleged offender’s decision to invoke his right not to testify.
Typically, at least in high-profile cases, corporate executives and employees called to testify receive separate counsel. In practice, the company will often make suggestions as to suitable counsel but the executive or employee is free to choose. The company pays or reimburses the legal fees, unless the executive or employee is eventually found liable.
Individual investigatory measures such as orders, requests or summons by BaFin or any other regulator are generally subject to court review and may be challenged before the competent administrative court, although that rarely happens, if ever. As measures taken in the course of an investigation are typically immediately enforceable, it will often be necessary, in addition to filing a formal objection with BaFin itself, to apply for an interim judicial order.
Similarly, individual investigatory measures taken by the public prosecutor in criminal proceedings are subject to judicial review and can be challenged before the competent criminal court.
In the course of an investigation, a company or individual may, at any time, present its case informally to BaFin. Also, before BaFin imposes a fine or sanction or otherwise takes a final decision with regard to a company or an individual, such company or individual has a right to be heard. It is important to note that, in contrast to criminal proceedings, administrative proceedings, including investigations, are generally not dealt with in court unless the public prosecutor has taken over the investigation and applied to a criminal court to issue a sanction or unless the investigated or any other concerned party challenges investigatory measures.
Likewise, in criminal proceedings, the alleged individual may present his or her case informally to the public prosecutor at any time. The individual has a right to be heard before the public prosecutor or the criminal court takes any measure that could potentially be detrimental to his or her rights and interests (unless this would frustrate the goal of the measure). In particular, the alleged offender may respond to the theories and allegations of the public prosecutor before the opening of main proceedings and, in court, before a verdict is issued.
Advocacy with BaFin or the public prosecutor in the context of securities investigations typically takes the form of letters, submissions and presentations.
Depending on the contents and the wording of statements or advocacy positions taken by an investigated party during an investigation, such statement or position may be considered an admission. While they may not be binding in future court proceedings, they may be used as evidence in such future court proceedings. Statements or advocacy positions taken by an investigated party are not public but may be made public in subsequent court proceedings (see question 5).
The limitation period for the most important criminal offences in the area of securities and derivatives markets (ie, market manipulation and insider trading by primary insiders), is five years. The typical administrative offences in the area of securities and derivatives markets are subject to a limitation period of three years.
With respect to both administrative and criminal offences, the limitation period begins to run as soon as the offence is committed. While this may generally be easy to determine, in some cases (eg, breach of supervisory obligations by a company director or officer) it can be difficult to determine the relevant point in time. Similarly, pursuant to settled case law, a criminal offence is considered committed when the criminal act has come to a conclusion, which is when all the statutory elements of the crime are fulfilled.
In both administrative and criminal proceedings, including investigations, the limitation period is suspended on a number of grounds, such as the first interrogation of the investigated party, an order by the prosecuting authority or a court for seizure or search, and by judicial decisions upholding such order, and any request by the prosecuting authority or a court to undertake an investigatory measure in a foreign country. As a general rule, the statute of limitations period is reset after each interruption.
Contractual agreements and other arrangements regarding tolling, suspension or interruption of the statute of limitations are not found in administrative or criminal proceedings in Germany.
Depending on the nature, importance and complexity of the matter, a securities or related investigation can take anywhere from several months to several years to complete. At times, investigations fall dormant and never come back to life.
There are no specific rules on how to close an (administrative) securities investigation if no violations of securities or related laws have been identified. To the extent the investigation was based on allegations of an administrative offence and involves a fine or other administrative sanction, however, the investigated party will be informed of the respective decision upon request or if it has a legitimate interest in being notified. At times, investigations fall dormant and never come back to life and the company subject to the investigation has no interest in drawing renewed attention to the matter.
Preliminary criminal proceedings will be closed if the investigation did not reveal sufficient indicia of a criminal offence. The public prosecutor will formally inform the accused individual about the decision if he was questioned in this capacity, if a warrant of arrest was issued, if he explicitly requested such notice or if he has a particular interest in the notification. If the accused individual is found not guilty in the course of the intermediate proceedings or the main proceedings, the court will provisionally close the proceedings or discharge the accused individual.
While in theory a settlement process can be initiated by the regulator, public prosecutor or the investigated party, in practice it is usually the investigated party who initiates settlement discussions or, in criminal proceedings, a closure of proceedings following the payment of a fine or acceptance of other conditions.
The regulator in charge of the investigation decides, at its discretion, whether to proceed with charges and what charges to select. Of course, BaFin is subject to the applicable laws and regulations and the respective decision can be challenged in court by the investigated party (see question 26).
In preliminary criminal proceedings, the public prosecutor, based on the findings obtained during the investigation, selects the charges it considers applicable and submits an indictment to the competent court. In the course of the intermediate proceedings, the court may decide to open the main proceedings based on different charges if the facts support other charges. Similarly, if the facts so suggest, the court may modify the charges in the course of the main proceedings.
Both regulators and the public prosecutor may select the charges provided for by law and substantiated by the facts established as a result of their investigations. In most cases, the sanctions, as well as the maximum and, sometimes, the minimum fine, are prescribed by law. Within these parameters, a variety of factors will be considered to arrive at the sanction, such as the severity of the offence, degree of guilt, motives and aims, the modus operandi and the consequences of the offence as well as the offender’s prior history and personal and financial circumstances.
Administrative sanctions under the Market Abuse Regulation, for example, may amount to up to €5 million (individuals) and up to €15 million or 15 percent of the total annual sales or at least three times the amount of the profits gained because of the infringement for companies). In addition to monetary fines, the regulator may also impose other restrictions, such as temporary or permanent disqualification from carrying out commercial activities or may impose any other measure within the limits of proportionality to protect the public interest.
With regard to criminal sanctions, the maximum fines for typical offences related to securities and derivatives markets are five years of imprisonment (in addition to disgorgement of profits), exceeding the requirements under the EU Directive on Criminal Sanctions for Market Abuse that establishes a maximum term of imprisonment of at least four years.
BaFin, as the primary regulator, only has the powers to sanction misconduct, but also to ensure future compliance. Therefore, beyond monetary sanctions and disgorgement of profits, BaFin has broad powers to ensure that the offender does not continue to engage in illegal conduct. For these purposes, BaFin may take any measure it considers suitable to ensure future compliance. The measures range from informal measures, such as warnings or reprimands to the withdrawal of relevant licences or disbarment. Similarly, in the area of banking supervision, BaFin’s available measures include the withdrawal of a bank’s licence to conduct banking business in Germany and the closure of their business premises.
Administrative penalties imposed by BaFin are calculated based on sentencing guidelines. Pursuant to these guidelines, a ‘base amount’ will be determined based on the size of the offender’s business and the severity of the circumstances of the offence. Such base amount will be adjusted downwards by mitigating factors such as confession or cooperation and upwards by aggravating factors such as intransigence and repeat offences. The financial means of the offender will also be taken into account.
Criminal sanctions are either a primarily monetary penalty or imprisonment and are prescribed by the law applicable to the case. There are no formal sentencing guidelines on criminal penalties. However, with a view to determining the sanction, a variety of factors will be considered to arrive at the sanction (see question No. 37).
Both BaFin and criminal courts are authorised to order disgorgement of profits that the offender has generated from the illegal conduct. To the extent such profits cannot – or only with great difficulty – be determined, BaFin and criminal courts may estimate the respective amount.
German criminal law is based on the principle of culpability; only natural persons can be guilty of a crime and hence criminal investigations can only be targeted at individuals. Corporate criminal liability and, more specifically, the introduction of a corporate criminal code has been a topic of discussion for years, but has not been introduced to date. Under certain circumstances, however, a criminal act of an individual can be attributed to a company and an administrative sanction can be levied on that company. As a consequence, a company may be fined if its officers neglect the legal compliance of the company.
BaFin will consider the behaviour of the offender in the course of the investigation as a mitigating factor, as per the sentencing guidelines. Generally, companies should have a keen self-interest in cooperating with BaFin, other regulators or the public prosecutor. If members of senior management of the company have themselves committed an offence or crime, the interests of the company and the self-interest of the executives should be clearly distinguished and possible conflicts of interests properly addressed or resolved.
Similarly in criminal investigations, real remorse or cooperative behaviour will be considered in the defendant’s favour.
Deferred or non-prosecution agreements are not known under German law. Administrative proceedings may, however, be terminated or closed based on a negotiated resolution.
In criminal proceedings, the public prosecutor may, in certain cases and subject to the consent of the competent criminal court, close the criminal proceedings upon payment of a sum of money or other conditions. If public charges have already been brought, the criminal court, the prosecutor and the defendant may enter into a plea agreement. Such plea agreement involves an admission on the part of the defendant and, in return, a concession on the part of the criminal court regarding the verdict. While plea agreements have long been standard practice at German criminal courts, the corresponding statutory basis was enacted – and approved by the Federal Constitutional Court – only in the recent past.
In administrative proceedings, there is no statutory requirement for a court to approve any form of settlement arrangement.
In criminal proceedings, any closure of proceedings by the public prosecutor following the payment of a fine or other conditions, whether negotiated or not, is subject to court approval. With respect to plea agreements, the court is a "party" to such agreement, and its consent is required.
In administrative proceedings, when the resolution involves a sanction order (with negotiated content), the facts must support the sanction and therefore will need to describe the wrongdoing.
If criminal proceedings are closed by the public prosecutor upon payment of a sum of money or other conditions, no admission on the part of the alleged offender is necessary. In case of a plea agreement, the offender will have to admit certain facts or wrongdoing.
Findings and decisions of regulators are subject to administrative and judicial review. Individual investigatory measures by BaFin or other regulators may be challenged by filing a formal objection. If not redressed, the measure can be challenged before the competent administrative court, although that rarely happens, if ever (see question 26). As measures taken in the course of an investigation are typically immediately enforceable, it will often be necessary, in addition to filing the formal objection, to apply for an interim judicial order. Administrative fines, in turn, must be challenged by filing a formal objection upon which, unless remedied, the case will be referred to the public prosecutor and, ultimately, to a criminal court.
Individual investigatory measures taken by the public prosecutor in criminal proceedings are subject to judicial review and can be immediately challenged before the competent criminal court.
The decision reached on administrative appeal replaces the challenged decision of the regulator. This is true whether the decision is adverse or positive.
If an individual investigatory measure is unsuccessfully challenged before administrative or criminal courts, the courts will uphold the measure. Otherwise, they will either revoke the measure or declare it illegal, and, to the extent actually possible, order to reverse it. Slightly differently, if an administrative fine is referred to a criminal court after a formal objection was filed, the court may issue a new decision, including imposing a fine, although this cannot be heavier than the original fine.
If a sanctions order is issued against a company and can no longer be appealed, under the "naming and shaming" regime, BaFin will publish a notice on its website identifying the offender and describing the sanctioned conduct. Administrative sanctions are also registered with the central business register. Sanctions relating to activities in the securities markets typically do not trigger debarment from government contracts or the prohibition of trading in certain securities. Depending on the nature and severity of the misconduct, BaFin may, however, take administrative measures. In particularly egregious offences, BaFin could, for example, revoke a bank’s or financial services provider’s licence to operate, in whole or in part, or impose other measures available under the Banking Act to safeguard the public interest (see question 38).
If a board member or a senior manager of a bank or financial institution is convicted by a criminal court, he or she may become ‘unfit’ to lead the institution and will hence have to resign.
Private plaintiffs may use the findings and decisions of foreign authorities in civil proceedings to the extent they are public or the plaintiffs otherwise have access to them. Such findings and decisions, however, do not have any binding effect on civil courts.
Private plaintiffs may use the findings and decisions of foreign authorities in civil proceedings to the extent they are public or the plaintiffs otherwise have access to them. Such findings and decisions, however, do not have any binding effect on civil courts.
Third parties, including private plaintiffs, generally cannot obtain access to files or documents a regulator collected during its investigation. Only in exceptional cases, state press statutes and state and federal freedom of information acts may grant third parties a right to request specific information on such investigations from these authorities.
Similarly, documents from criminal proceedings are generally not open to third parties unless they participate in the proceedings.
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