Legal, illegal, who cares? – Sanctions for payment services and e-money business without a licence

As part of our daily advisory work, we often have to consider whether a license is required for a certain activity under the German Payment Services Supervision Act (ZAG). Much more seldomly, we are asked by our clients what would happen if they didn’t have such a licence despite it being required. In asking this question, some are perhaps fondly reminiscing about the lyrics of one of their popular childhood punk bands, Slime: “legal, illegal, scheißegal” (“legal, illegal, who cares”).

But what is the reality here? Is a contravention of the licence requirements under ZAG really a trivial offence? Who can even sanction such a contravention? Questions such as these demand further investigation.

Licence or registration?

Before we consider the punishments for prohibited business pursuant to ZAG, we should first look into what types of licences there are pursuant to ZAG. For this, we would like to refer you to our blog entry where we have already covered this question in detail. Thanks to this we know that a registration is required if only account information services will be provided. For all other payment services as well as e-money business a licence is required. As the difference between a registration and a licence is of no consequence to our topic today, we will always refer to a licence below, but what we mean is licence or registration, as applicable in the specific circumstances.

BaFin’s powers regarding prohibited activities under ZAG

When one looks into what consequences prohibited activities can have pursuant to ZAG, one will quickly come across Sections 7 and 8 ZAG. Upon reading these provisions, one realises quite quickly that Slime were not quite right – at least regarding violations of ZAG. BaFin, as well as the German Federal Bank, have far-reaching powers regarding suspects (including private persons), even if there is merely a suspicion of prohibited payment services or e-money business:

• BaFin and the German Federal Bank can demand information regarding all business activities as well as the provision of certain documents (e.g. agreements, internal e-mail correspondence). This also applies to documents that ordinarily would not be allowed to be published, e.g. due to a confidentiality clause contained in an agreement.
• BaFin and the German Federal Bank have the power to access and search business as well as private premises. Just to clarify again: this also applies to the private home of natural persons (e.g. the CEO of a company under suspicion).
• BaFin and the German Federal Bank can seize objects they find during their searches or another way. This means that the persons affected do not have access to these objects (e.g. computer) anymore.
• Finally, BaFin may inform the public about suspicious cases and may even name the company.

These powers are all subject to proportionality. This means, for example, that BaFin may not do a nocturnal search of their home if the relevant person is willing to cooperate.

If it transpires that somebody is engaging in activities that are prohibited under ZAG, BaFin can require the business operations be stopped and wound up. It can even install an independent liquidator at the cost of the company. These measures are also subject to proportionality. This means that the cessation and liquidation may generally not be the first method of choice. The measure must be proportionate. In many cases, BaFin will need to give the relevant company the possibility to wind up the prohibited activities itself or maybe even still apply for a licence.

If you now think that you have all the time in the world to engage in prohibited activities until BaFin asks you to submit a licence application, I would urge caution. One the one hand, you cannot trust that you will really get the chance to submit a licence application. BaFin could simply order the immediate cessation of the business operations. In this case it is important to know that this cessation may need to be implemented immediately. This means that any appeals against this decision will not have the effect of suspending the decision until all appeals have been heard.

Consequences for providing activities that are prohibited under ZAG

Additionally, the provision of prohibited activities under ZAG constitutes a crime. This is punishable by up to five years imprisonment or a fine pursuant to Section 63 ZAG. And a few people have already been imprisoned. Having said this, first-time offenders who did not act deliberately will most likely get away with a fine.

But again, any relief or joy felt over this outcome could be premature. In the event of a criminal conviction, the court may also order the confiscation of assets. This means that the convicted person must surrender to the State any financial benefit derived from the illicit activity. This has the potential to be painful. Really painful. In a case decided by the German Federal Supreme Court (under the old law), a gambling arcade had to surrender payment amounts they had gained from an illicit payment of cash in exchange for a girocard payment. The court did not accept the defendant’s argument that he had paid out the money exclusively to customers of the gambling arcade. Instead, the court pointed out that the gambling arcade’s annual profits were higher than the amount paid out and the money was therefore still available at the gambling arcade. In light of this, the court ordered the seizure of more than 450,000 euros.

Injunctive relief against the provision of prohibited activities under ZAG

If, in light of the above, you believe that the authority mills grind slowly, you might be right. However, this does not mean that when punishment does arrive for violations of the ZAG, it is not swift and severe. This is due to the fact that aside from the administrative and criminal sanctions, there is also the possibility of injunctive relief. Such injunctive relief can, for example, be invoked by competitors or consumer protection associations. If the relevant company is not prepared to cease the prohibited activity, it can be taken to court. Additionally, injunctive relief can be invoked in the form of an interim injunction. This is done by way of summary proceedings and can be a quick solution for the claimant. In some cases, this only takes a few days. The most well-known case in which such an interim injunction was granted for an illicit provision of payment services, was the proceedings involving pizza.de and Lieferheld. Ironically, those two brands are today part of the third player in that game: the Dutch Takeaway.com.

Latin instead of Slime

So, what is the lesson to be learned from all this? Regardless of what you think of Slime’s music and lyrics, when providing payment services and e-money business, you had better consider any potential consequences beforehand. Or for the Latin scholars amongst us: quidquid agis, prudenter agas et respice finem.

Cover picture: Copyright © Adobe Stock / Thomas Reimer