Financial Companies, often referred to as financial undertakings, play a pivotal role in the German financial sector. These entities engage in a wide array of activities, from trading financial instruments to advising businesses on capital structure and facilitating loans between credit institutions.
Under Section 1 (3) of the KWG, financial undertakings are defined as entities whose principal activities encompass various financial functions, including acquiring and holding ownership interests, acquiring pecuniary claims through payment transactions, trading in financial instruments for their own account, advising on investments, offering corporate advisory services, and arranging loans between credit institutions, among others. These multifaceted entities are distinct from traditional banks and investment firms.
Financial Companies in Germany are categorized as „obliged entities“ under the GwG. This designation imposes strict anti-money laundering (AML) and counter-terrorist financing (CTF) obligations on them. These obligations include conducting customer due diligence, implementing enhanced due diligence when necessary, reporting suspicious activities, and maintaining comprehensive records of customer data and transactions. By complying with these AML and CTF regulations, financial undertakings contribute to the prevention of money laundering and the financing of terrorism within the financial sector.
Financial Companies or financial undertakings in Germany are dynamic entities that perform diverse financial functions. Their activities are governed by the KWG, which defines their role and responsibilities, and the GwG, which places stringent AML and CTF obligations on them. By adhering to these regulations, financial undertakings contribute to the integrity and security of the German financial sector, fostering trust and stability in the country’s economy.
Definition of Terms
Section 1 (3) of the German KWG provides a definition for „financial undertakings,“ which are entities distinct from institutions, investment management companies, and externally managed investment companies. Financial undertakings are characterized by their primary activities, which include the following:
- Acquiring and Holding Ownership Interests: Financial undertakings engage in the acquisition and ownership of equity interests.
- Acquiring Pecuniary Claims Against Payment: They are involved in acquiring monetary claims through payment transactions.
- Asset-Leasing Vehicles: Financial undertakings can function as asset-leasing vehicles as defined in section 2 (6) sentence 1 number 17 of the KWG.
- Trading in Financial Instruments for Own Account: They participate in the trading of financial instruments for their own account.
- Advising on Investments: These entities offer advisory services to others on investing in financial instruments.
- Advising on Capital Structure: Financial undertakings provide advice to businesses on matters related to capital structure, industrial strategy, and associated issues.
- Mergers and Acquisitions Advisory: In cases of corporate mergers and acquisitions, financial undertakings offer advisory services to the involved businesses.
- Arranging Loans Between Credit Institutions: They facilitate the arrangement of loans between credit institutions, a role commonly referred to as „money broking.“
The Federal Ministry of Finance (Bundesministerium der Finanzen), in consultation with the Deutsche Bundesbank, has the authority to designate additional entities as financial undertakings through statutory orders (Rechtsverordnung). These additional entities should primarily engage in activities that align with those listed in Annex I to Directive 2013/36/EU of the European Parliament and of the Council, dated 26 June 2013, pertaining to access to the activity of credit institutions and prudential supervision.
In essence, financial undertakings encompass a diverse range of entities engaged in various financial activities, from investment advice to facilitating corporate transactions and trading in financial instruments. Their classification and regulatory oversight play a critical role in maintaining the integrity and stability of the financial sector in Germany.
Section 1 (24) of the German GwG defines what constitutes a „financial company“ under the Act. The criteria include a range of activities such as:
- The acquisition, holding, or disposal of equity investments.
- The purchase of monetary receivables with a financing function.
- Trading in financial instruments for the company’s own account.
- Acting as investment intermediaries or fee-based investment advisers, as specified in sections 34f and 34h of the Industrial Code, except when the mediation or advice pertains only to investments distributed or issued by entities already obliged under the GwG.
- Advising companies on capital structure, industrial strategy, issues related to corporate mergers and acquisitions, and tendering services in such contexts.
- Money-broking business (Arranging loans between credit institutions).
However, it specifically excludes holding companies that only hold interests in firms outside the credit institution, financial institution, and insurance sectors and are not commercially active beyond managing investment holdings.
Section 2 (1) No. 6 of the German GwG identifies „financial companies“ as obliged entities under the German GwG, which means they are subject to its regulations and requirements. It includes financial companies operating within Germany, as well as German establishments, branches, and undertakings of financial companies whose registered office is outside Germany, provided they do not fall under other specified categories of obliged entities.
Joint Interpretation and Application Guidance on the German GwG of the Federal States of Germany
Financial Companies, as defined, are obliged entities within the meaning of Section 2 (1) No. 6 of the German GwG, unless they are already categorized as obliged entities under other sections of the GwG.
A financial company is an entity whose primary activity consists of:
- Acquiring, holding, or disposing of equity investments.
- Purchasing monetary receivables with a financing function.
- Trading in financial instruments for its own account.
- Acting as investment intermediaries according to § 34f paragraph 1 sentence 1 of the Industrial Code (Gewerbeordnung) or as fee-based investment advisers according to § 34h paragraph 1 sentence 1 of the Industrial Code, unless the mediation or advice exclusively concerns investments distributed or issued by entities under this Act.
- Advising companies on their capital structure, industrial strategy, mergers and acquisitions, and offering related services.
- Money-broking business (Arranging loans between credit institutions). Holding companies that solely hold interests in companies outside the credit institution, financial institution, and insurance sectors, and do not engage in other commercial activities beyond managing investment holdings, are not considered financial companies under the GwG. Business activities of entirely subordinate significance are also not considered. The same applies to holdings in companies within the credit institution, financial institution, and insurance sectors, provided they do not exceed a 5% stake. The determination of a primary activity is based on whether one or more of these activities constitute the focus of the company, either in terms of time spent or financial outcomes. Financial holding companies or mixed financial holding companies fall under BaFin supervision according to § 25l of the Banking Act (KWG) with regard to anti-money laundering regulations. In cases of doubt, it is essential to clarify with BaFin whether a company falls into this category. If it is a Private Equity Fund, it may be classified under § 1 paragraph 24 sentence 1 number 1 of the GwG (acquiring, holding, or disposing of equity investments), except when it is subordinate to a capital management company. In such cases, the Private Equity Fund is not subject to obligations, as it would result in double obligations.
Sections 34f and 34h of the German Industrial Code (Gewerbeordnung – GewO) address the regulation of financial companies, specifically focusing on investment intermediaries and fee-based investment advisers.
Section 34f (1) of the German GewO outlines the requirements for individuals or entities that wish to operate as investment intermediaries. It specifies that anyone engaging in the commercial brokerage or advice of financial investments, such as shares or stocks in open or closed investment funds (whether domestic, EU, or foreign), must obtain permission from the competent authority. This permission is necessary if the activities fall within certain exceptions of the Banking Act or the Securities Institutions Act. The section also mentions that the permission can be limited to specific financial investment categories and may be subject to conditions to protect the public or investors. Moreover, the permission process may involve the assessment of the applicant’s reliability, financial situation, and professional knowledge.
Fee-based Investment Advisers
Section 34h (1) of the German GewO deals with individuals or entities providing investment advice on financial investments without receiving compensation from product providers, thereby ensuring their independence and avoidance of conflicts of interest. Similar to Section 34f, these advisers must also obtain permission from the competent authority to operate. The scope of their advice can be limited to certain categories of financial investments, and their permission is subject to similar conditions aimed at protecting the public and investors. Importantly, if an applicant already holds permission under Section 34f, this existing permission will expire upon the granting of the new permission under Section 34h, emphasizing a regulatory distinction between the two types of financial services.
- German Banking Act (Kreditwesengesetz – KWG) https://www.bafin.de/SharedDocs/Downloads/EN/Aufsichtsrecht/dl_kwg_en.html
- German Anti-Money Laundering Act (Geldwäschegesetz – GwG) https://www.bafin.de/SharedDocs/Downloads/EN/Aufsichtsrecht/dl_gwg_en.html
- German Industrial Code (Gewerbeordnung – GewO) https://www.gesetze-im-internet.de/gewo/index.html
- Regional Council Darmstadt, Security, Money Laundering, Joint Interpretation and Application Guidance on the German GwG of the Federal States of Germany https://rp-darmstadt.hessen.de/sicherheit-und-kommunales/gefahrenabwehr/geldwaesche