This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 FRANKFURT 009271 
 
SIPDIS 
 
STATE FOR EUR PDAS RIES, EB, EUR/AGS, AND EUR/ERA 
STATE PASS FEDERAL RESERVE BOARD 
STATE PASS NSC 
TREASURY FOR DAS SOBEL 
TREASURY ALSO FOR ICN COX, STUART 
PARIS ALSO FOR OECD 
TREASURY FOR OCC RUTLEDGE, MCMAHON 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EUN
SUBJECT: BaFin guidelines on cross-border provision of 
financial services 
 
 
T-IA-F-03-0058 
 
  ¶1.   (SBU) Summary:  In September 2003, the German Financial 
     Supervisory Authority (BaFin) issued interpretive guidelines 
     on how it will treat the cross-border provision of financial 
     services into Germany.  According to the recent guidelines, 
     targeted offers of banking or other financial products to a 
     German customer by a provider located abroad require a 
     German banking license unless the provider has a "European 
     passport".  Exemptions may be granted for interbank business 
     and institutional investors, if the entities in question are 
     effectively supervised in their home country.  There seems 
     to be a considerable lack of clarity among market 
     participants on what the guidelines really mean for their 
     business.  Nonetheless, the BaFin is in a dialogue with the 
     Association of Foreign Banks and has expressed its 
     willingness to take account of their concerns  End summary. 
 
  BaFin's new guidelines 
  ---------------------- 
  ¶2.   (SBU)  In September 2003, the German Financial 
     Supervisory Authority (BaFin) issued interpretive guidelines 
     on how it will treat the cross-border provision of financial 
     services into Germany.  These guidelines basically explain 
     how the BaFin intends to interpret the existing Banking Act, 
     which has not been changed.  However, they do change 
     administrative practice as they are based on a new 
     definition of cross-border transactions. 
¶3.   (SBU)  In the past, the BaFin only required a German 
banking license if transactions were carried out or services 
were provided on German soil.  According to the recent 
guidelines, targeted offers of banking or other financial 
products to a German customer by a provider located abroad 
that are made repeatedly and on a commercial basis require a 
license unless the provider has a "European passport".  The 
BaFin will, however, only give licenses to banks with a 
legal presence in Germany in the form of a branch or a 
subsidiary.  A representative office would not suffice.  If 
a foreign company has a branch in Germany, all the company's 
transactions with German customers must be carried out 
through and booked at this branch. 
¶4.   (SBU)  The BaFin release exclusively refers to 
"targeted" offers, e.g. actively soliciting business in 
Germany. Providers of cross-border products and services 
that German customers have requested on their own initiative 
are excluded from the licensing requirement.  No license is 
required, for instance, for lending business with large 
corporate customers or institutional investors, loan 
syndicates or for maintaining an existing business 
relationship.  The guidelines do not distinguish between 
activities targeted at retail customers and those targeted 
at corporate customers or institutional investors. 
¶5.   (SBU)  Under certain conditions, foreign entities may 
be eligible for exemption from the licensing requirement. 
This would be the case if "the entity does not require 
supervision given the nature of the business it conducts". 
Such an exemption will only be considered for interbank 
business and institutional investors, if the BaFin can 
assume that the entities in question will not require 
additional supervision in the host country due to effective 
supervision in their home country in accordance with 
internationally recognized standards.  Moreover, the 
competent supervisor(s) in the home country must cooperate 
with the BaFin, and the applicant is required to submit a 
certificate from the competent authority/authorities of the 
home country that confirms to the BaFin that 
              the foreign entity concerned was 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 the BaFin. 
 
  Practical implications 
  ---------------------- 
  ¶6.   (SBU)  The BaFin's new guidelines also give a number of 
     examples of practices of third country financial service 
     providers that would no longer be legal without a license of 
     German supervisors.  For instance, if a foreign entity 
     targets the German market generally to offer loans or 
or 
     underwriting services, a license is required.  This is, 
     however, not the case if the offer occurs in the context of 
     maintaining existing customer relations or upon the 
     customer's own initiative.  U.S. banks trying to sell their 
     products via the internet, if the site is specifically 
     targeted at the German market (e.g. in German language or 
     providing German contact details), direct mailings or faxes 
     would have to do so through a German branch and not directly 
     from the U.S.  Similarly, it would be illegal to have 
     financial consultants fly into Germany for a specific bank 
     lending operation with a potential new customer. 
     Representative offices would only be permitted to watch 
     market developments, but not to market products and deal 
     with customers.  Moreover OTC business for Germans in the 
     U.S. or the execution of German orders by brokerage firms in 
     the U.S. would be illegal, unless initiated at the request 
     of the German client.  Even the foreign subsidiary of a 
     German bank would no longer be allowed to make offers to 
     clients in Germany. 
 
  The BaFin's motivation 
  ---------------------- 
  ¶7.   (SBU)  In its press release announcing the publication 
     of the guidelines the BaFin states that its objective is to 
     improve investor protection, in particular in the light of 
     increasing cross-border business and the use of new media 
     such as the internet.  Moreover, it wants to submit third 
     country providers of financial services to the same 
     competitive conditions as entities from within the European 
     Economic Area (EEA). 
¶8.   (SBU)  The responsible official at the BaFin told us 
that the guidelines were driven by the concern to prevent 
fraud vis--vis German investors, citing as a typical 
example a Cayman Island firm providing banking services via 
the internet.  He stated that the BaFin's intention was by 
no means to impede "honest" business activities. 
  ¶9.   (SBU)  However, there is speculation whether the 
     BaFin's motivation is exclusively investor protection or 
     whether tax and reciprocity issues also play a role.  The 
     Association of Foreign Banks (VAB) claims that the BaFin has 
     two reasons for this stricter interpretation: Its "official" 
     argument is that it wants to protect German investors from 
     dubious companies that offer their services in Germany but 
     do neither have a license to do so nor a physical presence 
     in Germany.  A typical example would be letterbox companies 
     located in Nauru.  Another reason, which is not officially 
     quoted, is that banks that make money in Germany should pay 
     taxes in Germany.  Moreover, the guidelines might also help 
     to limit tax evasion of investors.  According to the VAB, 
     the main target of the guidelines is Switzerland, which is 
     attracting a lot of investment from Germany, partly also 
     with the clear objective to evade taxes. 
  ¶10.  (SBU)  The former managing director of the VAB told us 
     that a BaFin official had mentioned to him that reciprocity 
     considerations also play a role.  This particularly concerns 
     the US, with the BaFin official claiming that German banks 
     cannot provide their services in the US without being 
     supervised there, either. 
 
  Matter of interpretation 
  ------------------------ 
  ¶11.  (SBU)  Currently there seems to be a considerable lack 
     of clarity among the banks concerned on what the guidelines 
     really mean for their business.  Most US banks have 
     subsidiaries in Germany anyway, whose transactions would 
     largely not be concerned by the guidelines.  However, the 
     general guidelines do not answer all questions with regard 
     to sophisticated business models.  There are specific 
     business policies which may fall under the new rules, e.g. 
     if transactions of a German subsidiary of a US bank are 
     booked in an unregulated US entity.  The chairman of the VAB 
     board, Peter Coym, deplored that the BaFin guidelines put 
     business models into question that have been used in Germany 
     for decades.  He also criticized that the status of 
     representative offices was not sufficiently clarified so 
     that they continue to operate in a gray area that leaves 
     wide scope for interpretation. 
¶12.  (SBU)  When we spoke with the responsible official at 
the BaFin, he stressed that in case it should turn out that 
the guidelines jeopardize legal transactions, the BaFin 
would be willing to consider modifications and that the 
wording of the guidelines may be considered as preliminary. 
He pointed out that for cases that are not explicitly 
mentioned in the guidelines, when in doubt foreign entities 
should contact the BaFin and discuss the issue.  The BaFin 
would then be willing to work out a solution.  For instance, 
the BaFin official said that if the service is provided by 
an entity that does not have a banking license in the US but 
is indirectly supervised by the Fed or the SEC and US 
regulators commit to informing BaFin in of any problems with 
that entity immediately, the cross-border transactions could 
qualify for an exemption.  Moreover, the BaFin appears to be 
inclined to regard US supervision as "effective". 
 
Outlook 
  ------- 
  ¶13.  (SBU)  The BaFin, in discussions with the Ministry of 
     Finance, has already made many accommodations to VAB 
     suggestions.  The VAB as well as individual banks will 
     proceed to report to BaFin any difficulties that may occur 
     with regard to the guidelines.  Further clarification and 
     also adjustments to the rules can thus be expected. 
 
  ¶14.  (U)  This cable coordinated with Embassy Berlin. 
 
  ¶15.  (U) POC: Claudia Ohly, Economic Specialist, e-mail 
     OhlyC@state.gov; tel. 49-(69)-7535-222367, fax 49-(69)-7535- 
     ¶2238. 
 
BODDE