Social Credit Rating

Books

Oliver Everling (editor): Social Credit Rating, Wiesbaden 2020, Springer Gabler Verlag, eBook ISBN 978-3-658-29653-7, Softcover ISBN 978-3-658-29652-0.

Social credit ratings are the result of social credit systems. These include online rating or scoring systems which are making use of a variety of databases, using, for example, the creditworthiness, criminal record and social behavior of individuals or organizations, such as businesses or non-governmental organizations, to classify their reputation.

The German driver fitness register of the German Federal Motor Vehicle Office, which scores and stores points of misappropriation, driving bans or criminal offenses for everyone, is just as well-known and recognized as the SCHUFA credit rating, the Creditreform index, the FICO score or credit ratings from rating agencies. Similar systems such as seller ratings in online shops, likes, and certificates of all kinds are common in Germany as well as in many other countries and worldwide in social media

At all important intersections in China, cameras ensure increased vigilance and discipline of road users.

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The establishment of a state-owned social credit system, adopted by the Chinese State Council, has taken such ratings and scorings to a new dimension through unique links that were only made possible by new information and communication technologies. This initiative calls for rethinking the interaction of the systems.

This book gives a deep insight into the used data, procedures, methods and models as well as discusses importance, benefits, functions and application areas of Social Credit Ratings. The book addresses the key players, authors of both practice and science.

Social Credit Rating: Reputation und Vertrauen beurteilen

Infographic: The Most Surveilled Cities in the World | Statista

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Toward A Reputation State: A Comprehensive View of China’s Social Credit System Project

Governance, Read

China’s Social Credit System Project (the “SCSP”) is one of the most misunderstood recent developments in China’s law and policy. In the book “Social Credit Rating“, Xin Dai offers a comprehensive conceptual thesis that explains the SCSP as the Chinese government’s multi-faceted strategy to use reputation in law and governance.

The SCSP envisions that reputation mechanisms such as blacklisting, rating, and scoring be used to tackle a range of the country’s intractable governance problems in its social and economic realms. “While knowing no apparent equivalent elsewhere in the world,” Xin Dai points out, “the SCSP portends the rise of the “reputation state” on a wider scale, as government authorities outside of China will also increasingly seek to use reputation mechanisms and technologies in the spheres of law and governance. And as it both raises high hopes and stokes grave fears, the SCSP has so far been shaped and limited by the institutional and market forces that animate it in the first place.”

Xin Dai is associate professor (tenured) at Peking University Law School. His primary areas of research interests include legal theories, law and economics, information privacy, internet law, and digital governance. He received his LL.B from Peking University, J.D from Duke University, and J.S.D from the University of Chicago. Xin practiced corporate and securities laws with Shearman & Sterling’s New York and Hong Kong offices, and taught previously at Ocean University of China Law School where he served as an associate dean.

Reflections on China’s Credit Reporting Practice

Read, Systems

Prof. Wu Jingmei discusses in her contribution to the book “Social Credit Rating” the current situation, logic and development trends of China’s credit reporting system. China’s credit reporting system is composed of financial, commercial and administrative credit reporting, which were set up according to its resource allocation system divided into financial sector, non-financial sector, and government sector, respectively.

The three sectors take credit as one of the referential factors in resource allocation, and establish corresponding credit reporting systems and credit evaluation mechanisms. The high participation of government departments in resource allocation gives the pattern, content, and purpose of the credit reporting systems its Chinese character, says Prof. Wu Jingmei. China’s three major resource allocation systems and three major credit reporting systems complement each other, which is a new type of social governance model to achieve co-governance on credit rules.

Professor Wu Jingmei, School of Finance, Renmin University of China. Prof. Wu has engaged in credit research for more than 30 years. She founded modern credit theory and built the theory of credit capital and three-dimensional credit theoretical framework. Her credit theory has a far-reaching influence on the construction of China’s social credit system.

Prof. Wu has participated in the formation and argumentation of many credit-related policies of China. As a core member of the drafting team and the leader of the expert argumentation committee, she took part in “Outline of the Plan for the Building of Social Credit (2014-2020)”, issued by the State Council of China. She was also the leader of the expert argumentation committee of “Overall Plan for the Building of Unified Social Credit Code System for Legal Persons and Other Organizations” (approved and transmitted by the State Council of China). In the assessment of the first-batch model cities of social credit system building in China, she was the leader of the expert assessment committee. So far, she has led hundreds of credit research projects of government ministries, local governments and large corporations.

A Study on the Typological Regulation of the Dishonesty Punishment – also on the Rule Design of the Social Credit Law

Governance, Read

The punishment of dishonesty is an important content of the credit rule of law, writes Wang Wei in the book “Social Credit Rating“. “The punishment of dishonesty is not a precise legal concept,” he says, “so we must use legal technology to analyze and define it.”

In the market punishment, industrial punishment, social punishment, administrative punishment, judicial punishment and other punishment mechanisms, the punishment by the public power is the focus of the credit rule of law, he points out: “Administrative disciplinary measures are not all power-limited measures. In essence, the administrative blacklist measure of power restriction belongs to administrative punishment, but it does not violate the principle of “one punishment for one violation”. In the future, when legislating the social credit law, we should typologically regulate dishonesty punishment and focus on the administrative punishment regulating the constitutive elements, punishment measures and procedures, credit restoration mechanism and other issues.”

Wang Wei, male, PH.D, professor, director of Civil, Commercial & Economic Law Division attached to Politics and Law Department of Central Party School of CPC (Chinese Academy of Governance) (Beijing 100091). He graduated from Law School of Renmin University of China, mainly engaged in the research of social credit law. company law, market regulation law. In recent years, he focuses on the research of social credit law and involved in the projects from National Development and Reform Commission, State Administration for Market Regulation, and so on. He has participated in drafting a number of expert proposals on social credit legislation. Still. he acted as civil and commercial judge in Kunming Intermediate People’s Court of Yunnan Province for a couple of years. This paper was originally published in Zhongzhou academic journal, issue 5, 2019, and reprinted in issue 8 of constitutional law and administrative law in Periodical Literatures by Renmin University of China.

Risk Culture as a Means of Mitigating Conduct Risk

Methodologies, Models, Read

Thomas Kaiser and Tatjana Schulz write in their contribution to the book “Social Credit Rating” about the similarities with and differences to the China Social Credit System: Banks around the world have been exposed to numerous cases of misconduct at individual as well as on a systemic level, inflicting harm on single customers and the society as a whole. This includes inappropriate product design (e. g. securitizations which led to the financial crisis), large-scale market manipulations (LIBOR and other reference rates) as well as other fraudulent activities (e. g. creation of accounts without the knowledge of the affected clients).

“Regulatory bodies have reacted with a broad range of requirements and recommendations. A key tool in fighting misconduct”, Thomas Kaiser and Tatjana Schulz write, “is the strengthening of risk culture as an institution’s norms, attitudes and behaviours related to risk awareness, risk-taking and risk management, and the controls that shape decisions on risks.”

They see implementing risk culture frameworks as a means of influencing behaviour of employees to mitigate those risks in individual banks and thus ultimately to improve the reputation of the banking sector as a whole. While banks have made progress in designing those frameworks, the maturity of this particular discipline is still at a moderate level and full-scale implementation is not yet common.

The China Social Credit System also aims at improving behaviour of individuals and corporations by setting clear expectations and measuring compliance with those, the authors say: “Chinese authorities have gathered substantial experience with this methodology during pilot implementations and are refining the approach further during the rollout throughout the country. A comparison of those two approaches leads to suggestions on what the two approaches could learn from each other.”

Prof. Dr. Thomas Kaiser has been working in risk management for more than 20 years. He is Director in the Financial Services division of KPMG AG Wirtschaftsprüfungsgesellschaft in Frankfurt / M. and honorary professor for risk management at the Goethe University Frankfurt. After studying business administration in Saarbrücken and completing a doctorate in the field of financial econometrics in Tübingen, Prof. Kaiser held a managerial role in risk controlling at four major German banks. He is co-editor of the Journal of Operational Risk and the author of numerous essays and books on risk management topics.

Tatjana Schulz works for KPMG AG Wirtschaftsprüfungsgesellschaft in Munich. As a psychologist with a focus on risk research and a banker with many years of experience in the financial services sector, she deals with the qualitative elements of risk management at KPMG. Among other things, she supports the audit teams in the areas of operational risk and risk culture and has valuable insights into the current state of implementation of the regulatory requirements in the German banking landscape.

Determinants of Consumer Credit Default in Romania: A Comparison of Machine Learning Algorithms

Read, Uses

Prof. Dr. Monica Dudian and Ana-Maria Sandica investigate the separation power of several machine learning techniques and compared them with the benchmark logistic regression using real data from 17520 private individuals of a Romanian commercial bank. The result of their research can be read in the book “Social Credit Rating“.

In order to capture the financial crisis effect they equally divided the data in two samples prior and posterior the crisis and we compared 13 models in terms of misclassification Type I and II Errors. As the models aim to catch best the patterns in the “default” profile of a consumer credit borrower, they split the variables in socio-demographic factors (Social Rating) and financial factors (Financial rating) and conclude that “default” profile prior crisis is captured better by the linear models while the patterns of the financial crisis are captured better by the non-linear models.

Monica Dudian and Ana-Maria Sandica found that the accuracy ratio gives the better results on decision trees and ensembles based on decision trees such as adaptive boosting methods (Financial Rating) and Random Forest (Credit Rating, Social Rating) irrespective of the sample choice.

The power of the model to classify the debtors using Social Rating, Financial Rating and the mix of these, the Credit Rating, depends on the trained data used. The Financial Rating’s champion model’s results are best on posterior crisis data, meaning that financial factors counted the most in detecting the patterns in “default” after the financial crisis. The order is not the same for Social Rating, where the best classification is obtained on prior crisis data meaning that classification considering the individual’s creditworthiness is more difficult on posterior crisis “default” patterns.

Prof. Dr. Monica Dudian is Professor of Economics at The Bucharest University of Economic Studies, where she received her PhD in Economics in 1999. She also held the position of Vice dean of the Faculty of Economics of The Bucharest University of Economic Studies, during 2001 – 2008. Her teaching is focused primarily on microeconomics and industrial organization. She manages research grants and performs research on country risk, credit risk, and industrial economics.

Dr. Ana-Maria Sandica has been developing credit risk models for more than 10 years. She started to study machine learning techniques during her master degree in Financial Econometrics (Dofin) and continued with completing a doctorate in the field of stochastic equilibrium models in Macroeconomy. Her thesis on postdoctoral research links the macroeconomic shock transmission mechanism in estimating the probability of bankruptcy for companies. She held a managerial role in model risk validation at a major German bank.

The Social Credit System and China’s Rule of Law

Governance, Read

In 2014, the People’s Republic of China’s (PRC’s) central government formally declared the construction of a Social Credit System (SCS) a national task. Meanwhile, government-designated localities and companies are experimenting with scoring systems for businesses, citizens and the administration.

“The government’s initiative introduces mechanisms for a massive aggregation and exchange of data about ‘credit subjects’, pushes for the application of such credit information in the decision-making processes in both the public and the private sector, and elevates the punishment of naming and shaming to new prominence”, writes Marianne von Blomberg in the book “Social Credit Rating“. “Its conceptual heritage is social management, a governance strategy born in the political apparatus of the PRC that does not operate with the traditional notion of law. The SCS’ potentially heavy impact, as well as its conceptual heritage in social management, begs the question of what difference it makes to the rule of law in the PRC.”

A legal framework for the SCS does not (yet) exist. “It has been held that the SCS is a powerful tool to strengthen the rule of law. However,” says Marianne von Blomberg, “this thesis aims to bring to light challenges that arise from the SCS for the rule of law. It does so by considering the SCS’ conceptual cradle, and further mapping what has surfaced of the SCS to date in policy and legislative documents, the commercial credit market, and local pilot projects.”

Drawing on this comprehensive picture of the SCS, elements which appear at odds with rule of law are pointed out in her contribution to the book “Social Credit Rating“. They include a lack of legal definitions for SCS key terms such as ‘trustworthiness’, opaque procedures and possible penalties that bypass the law. Marianne von Blomberg considers ways to integrate them into the Rechtsstaat, all of which necessitate a re-definition of what law is.

“Finally,” concludes Marianne von Blomberg, “the angle of social management offers a meta-social credit system as a solution to conciliate the SCS and rule of law. The question remains whether the SCS can truly solve all problems that it brings about merely by means of its own conceptual heritage, social management theory – or whether an independent organ outside of itself is indispensable.”

Marianne von Blomberg is doing a PhD in Chinese Law at Zhejiang University in Hangzhou, from which she also holds an LL.M Degree, and is a Research Associate at the University of Cologne’s Institute for East Asian Studies. During her undergraduate studies at Zeppelin University, she discovered her passion for ancient Chinese rhetorics and wrote about the concept of originality in China in the face of architectural mimicry and counterfeit products. After having interned at the Mercator Institute for China Studies, the Future Research Department of Volkswagen AG, and the German Embassy in Ottawa, she moved to Hangzhou in 2016, where she continues to take a sociological perspective in her observations of the PRC legal system and social credit in particular. Part of her research was funded by the Fritz Thyssen Foundation under grant 10.19.2.003RE.

Consumer Reporting Agency Against Bonus Hoppers

Agencies, Read

“If you want to purchase electricity and gas cheaply, you have to compare prices and, if necessary, change providers. Energy suppliers obviously want to change that with Schufa and a credit agency.” An article about energy suppliers on tagesschau.de introduces the topic: “Electricity and gas customers who want to change their provider more often could soon be systematically discouraged.”

NDR and “Süddeutsche Zeitung” are dealing with a planned offer by SCHUFA and the Italian-owned credit agency CRIF Bürgel in Munich to save contract data from as many energy suppliers as possible across the industry.

“Consumer and data protectionists fear that energy providers will use it to identify consumers who are willing to switch and subsequently reject them.” The criticism: “So far, only data from customers who do not pay their bills or who cheat can be exchanged across the industry.” The new databases, on the other hand, would make contract-loyal customers “fair game” with their data.

“Bonus hoppers” who take the trouble to do their own research and compare utility companies are hardly a problem for energy suppliers. There have always been customers who, year by year, patiently deal with the various offers and choose the one that is cheapest for them. This cluster of consumers is a fairly small minority in Germany.

The real “game changers” with disruptive potential for the energy industry are experts such as Wechselpilot or SwitchUp. These enable the customer to switch energy providers reliably and effortlessly. Registration and some information on previous consumption and supplier are sufficient to automatically switch from year to year and save costs – depending on how advantageous it is. These comparison portals take on the rating based on various criteria and customer-specific requirements.

The added value of the planned services from SCHUFA and CRIF Bürgel, on the other hand, is not very high for the other side of the market, the energy suppliers: The energy suppliers already recognize customers who are willing to switch and can save this customer data.

This conclusion results from the logic of the system: comparison portals that have looked after their customers for years are dependent on intervening in the communication between customers and energy providers. Only in this way can they relieve the customer of the trouble of analyzing consumption, obtaining offers, comparing offers, submitting applications, filling out forms, etc.

Communication takes place via customer-specific e-mail addresses, e.g. at SwitchUp according to the pattern name@mailsup.de. Due to the still small number of comparison portals, the energy provider can in any case use these email addresses to identify who is one of the “bonus hoppers”. In addition, energy providers are not obliged to work with SCHUFA or CRIF Bürgel, so that the latter are in competition for data.

SwitchUp was founded by Arik Meyer, who previously built Audible and sold it to amazon. At companies like SwitchUp, all data on the energy consumption of German households that benefit from the advantages of this system are now pooled. If comparison portals are sold to American “data octopuses”, their data merely increases the data pools of US corporations.

Therefore, from a competition point of view, it is questionable whether regulation, i.e. restricting the business opportunities of European companies such as SCHUFA or CRIF Bürgel by banning e-pools would be in the service of healthy market competition.

An Economic Approach to China’s Social Credit System

Methodologies, Models, Read

In an effort to increase trustworthiness across society, the Chinese government has been building its Social Credit System since 2014. This system targets all natural and legal persons in China and consists of four major elements: a central data platform, a rating system for commercial creditworthiness, a propaganda system for educative purposes and a publicly available listing system with black- and redlists (for negative or positive behavior) as well as consequential joint punishments and rewards.

While most of the related academic discourse has focused on the system’s political implications, Theresa Krause and Doris Fischer provide in their paper to the book “Social Credit Rating” an economic perspective on the Chinese government’s rationale for setting up such a system. Transaction cost economics has shown that trust is an important factor for business transactions and economic growth.

“However, China’s rapid economic development and modernization has weakened societal trust, including the traditional trust-building approach via guanxi (interpersonal relationships). Hence,” Theresa Krause and Doris Fischer write in conclusion, “the Chinese government is using the Social Credit System as an alternative approach for trust-building. The system is supposed to strengthen institutional mechanisms and incentivize trustworthy behavior. It can be regarded as an add-on to the currently rather weak legal system and fragmented government enforcement apparatus.”

Theresa Krause is a doctoral candidate at the Chair of China Business and Economics at the Julius Maximilians University of Würzburg and researches the subject of “Compliance and the social credit system in China”. In 2010/11 she worked in NGOs in Shanghai as part of the BMZ’s weltwärts program and then studied in Karlsruhe, Taiwan and London with a focus on economics, politics and China. Before her doctorate, Theresa Krause was a consultant at an international consulting company.

Doris Fischer holds the chair for China Business and Economics at the Julius Maximilians University of Würzburg. She is chairwoman of the board of the German Society for Asian Studies and was chairwoman of the German expert group for the German-Chinese platform innovation on behalf of the BMBF from 2017-2019. She is currently cooperating with colleagues from the Technical University of Munich on a project funded by bidt on the effects of the Chinese social credit system on companies.

Trust In a Time of Uncertainty

Criteria, Read

The corona pandemic is far from over. This is especially true if you do not look at it from a purely medical point of view, but also from the perspective of the social and economic consequences. The virus divides the opinions of experts: on the one hand those who warn of the dangers of the virus and are concerned that not enough is being done to combat the spread of the virus, on the other hand those who warn of excessive measures and see the many implications that are not medical but societal, social and economic.

Most people cannot call themselves experts on any of the questions raised. The majority are not medical professionals, sociologists, economists or whatever expertise is still needed to assess the various consequences of both the virus and the measures taken. Those who cannot judge for themselves have to rely on the judgment of others. That requires trust. It is particularly about trusting the decisions of others – politicians, doctors, entrepreneurs and many others who are responsible for their fellow human beings.

The operators of social media are increasingly aware of their responsibility. For example, LinkedIn presents a paper entitled “Trust in a Time of Uncertainty“. It addresses the partnership between companies and their customers and business partners. “Trust is of the utmost importance in uncertain times,” argue the social media experts at LinkedIn.

The Edelman Trust Barometer 2020 shows that despite a strong global economy and also at times of full employment, none of the four social institutions – government, companies, non-governmental organizations (NGOs) and the media – are trusted anymore. The cause of this paradox lies in people’s fears of the future and their role in it. This is a wake-up call for these institutions to find new ways to effectively build trust: to reconcile competence with ethical behavior. Social credit ratings could play a role here. Edelman is based on 34,000 surveys in 28 markets worldwide.

In most countries, confidence was fueled by economic growth. This continues in Asia and the Middle East, but not in developed markets, where income inequality is the more important factor influencing confidence levels today. The majority of respondents here do not believe they will be better off in five years’ time, and more than half of those surveyed around the world believe that capitalism in its current form is doing more harm than good to the world.

Inequality is no longer seen as a gratifying result of freedom, but as a malfunction of capitalism. In this way, no longer state interventions and privileges, but capitalism are made responsible. The injustice of state intervention is neither recognized nor understood. The privileges based on state coercion force competitors out of the market who do not have access to those who know how to privilege certain organizations and companies through regulation and create competitive advantages. In practice, only large or highly profitable companies can afford to actively influence legislation.

Capitalism only thrives on the basis of free decisions by as many people as possible. The freedom to decide about one’s own work results and to weigh between consumption and investment leads to the optimal allocation of resources in capitalism. Edelman shows how far the population in developed countries is now from an elementary understanding of the connection between freedom and capitalism.

According to Edelman, the result is a world of two different trust realities. The informed public – wealthier, educated, and frequent consumers of news – trust any institution far more than the general public. In most markets, less than half of the masses trust their institutions to do the right thing.

In the 2020 Edelman Trust Barometer, the Trust Index is an average of the percent trust in NGOs, corporations, government and the media. NGOs, companies, government and the media enjoy the greatest trust in the world among the people of the People’s Republic of China. In the overall population of China, trust increased in 2020 compared to the previous year (from 79% to 82%). The opposite is true in countries such as the USA (from 49% to 47%) or the United Kingdom (from 43% to 42%).

These results can no longer be explained solely with restrictions on the freedom of the press and freedom of expression in the People’s Republic of China. Because of the large population, many Chinese families have a wide network of contacts around the world. The Chinese are among the people who love to travel. The economic rise allows millions of Chinese to travel to all countries in the world. In Germany, too, travel opportunities for the Chinese were not restricted by the Chinese government, but rather by a restrictive German visa policy. The level of knowledge of educated Chinese about the conditions in Germany is much better than that of Germans in China. China’s leading position in terms of popular trust in government, businesses and organizations therefore requires further research.

Trust is one dimension of a company’s reputation. This reputation has been systematically measured in many pilot projects in China since 2014 and combined in ratings. After initial mistakes, the corona crisis brought the Chinese leadership, among other things. therefore faster under control, as it relied on help from companies and organizations that have good ratings. The crisis is not only about financial stability, but also about the trustworthiness of socially responsible behavior. Therefore, social credit ratings were used to select well-reputed companies. More on this and on many other aspects of social credit ratings in the Springer-Verlag book.

How the Authority Determines Whether a Board Member Has Sufficient Time

Certifications, Read, Registrations, Regulations

Within the scope of the Banking Act, the notification of intent to appoint a management board member must include the material facts for an assessment of whether sufficient time is available for the performance of the related duties. Board members are required to provide detailed information on how they spend their time. It is at the discretion of the authority to decide to what extent the reported time is spent privately or professionally.

The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) provides information on what information has to be provided on how a board member spends his time. It is laid down in its Guidance Notice on management board members. This is pursuant to the German Banking Act (Kreditwesengesetz – KWG), the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz – ZAG) and the German Capital Investment Code (Kapitalanlagegesetzbuch – KAGB).

This information has to be provided on the form “Details of reputation, available time and additional mandates”. As a rule, BaFin assumes that a person will only accept an appointment as a management board member if he or she considers himself or herself capable of fulfilling the time requirements associated with this activity. Accordingly, this person has to conduct an overall review of all of his or her current activities and mandates and estimate the amount of time associated with this new activity.

The following guidance notes shall be complied with in notifying BaFin of whether this person has sufficient time. All activities and mandates, including the mandate subject to notification, are to be included. The time required to perform these activities and mandates is to be estimated and disclosed to BaFin as such.

All of the management board member’s full-time and part-time professional activities must be indicated. All mandates in administrative and supervisory bodies must also be included. The amount of time required for a mandate on an advisory council must be indicated if the duties and powers of this advisory council are analogous to those of an administrative or supervisory body and are regulated by law or in the articles of association or the partnership agreement.

In the case of mandates in administrative and supervisory bodies, in addition to

  • the time needed to take part in meetings,
  • the time required for meeting preparation and
  • postmeeting work

is to be taken into account, as is participation in committees and

  • travel, where applicable.

The assessment shall also reflect the fact that an activity as a member of an administrative or supervisory body will also take up time outside the scope of regular meetings and that this time requirement may suddenly increase if the undertaking is faced with extraordinary situations.

As a rule, purely voluntary positions and activities which form part of the person’s private life need not be included. The private life of the board member might be carefully analyzed if there is any doubt about his ability to devote sufficient time to the task assigned to him.

A management board member shall report without delay any commencement and any termination of an activity as a management board member of another undertaking or as a member of the administrative or supervisory body of another undertaking. This notification is necessary so that BaFin is able to regularly assess compliance with the limitations of mandates under supervisory law as well as the need for the person to have sufficient time available. This notification obligation applies irrespective of whether or not individual mandates are included in the maximum number of mandates permitted.

Mandates on non-mandatory supervisory boards must also be indicated. Mandates on advisory councils must be indicated if the duties and powers of the advisory council are analogous to those of an administrative or supervisory body and are regulated by law or in the articles of association or the partnership agreement. It is also irrelevant for the notification obligation whether an activity is part-time or full-time in nature.

Where multiple mandates held by the management board member are considered to be a single mandate, this has to be documented by means of supporting statements or documents. In case of mandates held as a representative of the German federal government or the German federal states, the relevant basis in law has to be indicated or the relevant articles of association are to be appended. For an assessment of whether the member of the administrative or supervisory body has sufficient time available, the notification must provide relevant details, including the new mandate

A management board member shall report without delay any acquisition or disposal of a direct participating interest in an undertaking and any changes in the amount of this participating interest. A direct participating interest shall be deemed to be the holding of at least 25 per cent of the undertaking’s capital.

BaFin points out that a violation of the management board member’s notification obligations under the Banking Act and the Capital Investment Code will constitute an administrative offence which may result in an administrative fine of up to one hundred thousand euros. Violation of the notification requirement means failing to make a notification or making such notification incorrectly, incompletely or not in due time.

Management Board Members Must Submit a Certificate of Good Conduct for Official Purposes

Certifications, Read, Registrations, Regulations

Depending on their nationality and place of residence, management board members must submit the original copy of a “certificate of good conduct for presentation to a German authority (certificate of good conduct for official purposes)” (document type “O”) issued by the Federal Office of Justice (Bundesamt für Justiz – BfJ). This document is issued in accordance with section 30 (5) of the German Federal Central Register Act (Bundeszentralregistergesetz – BZRG). Alternatively, it could be a “European certificate of good conduct for presentation to a German authority” in accordance with sections 30 (5) and 30b of the BZRG or certificates of good conduct equivalent to those named above, or certifications of reputation assessments performed by supervisory authorities in the country of residence after consultation with the relevant division of BaFin (“equivalent documents”).

The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) provides information on what certificate is used to establish a bank management board member’s reputation rating in its Guidance Notice on management board members. This is pursuant to the German Banking Act (Kreditwesengesetz – KWG), the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz – ZAG) and the German Capital Investment Code (Kapitalanlagegesetzbuch – KAGB).

Management board members who have resided in different countries in the previous ten years must submit certificates of good conduct and relevant documents from each country. The relevant division of BaFin has to be provided with detailed information regarding any legal obstacles to their furnishment. If the relevant documents are already available, they have to be submitted to BaFin together with the other documents to be appended to the notification of intent. However, subsequent submission is also possible.

In countries in which certificates of good conduct are issued by a public agency, other documents may not be used as a substitute. The “certificate of good conduct for presentation to a German authority” should not be confused with the “extended certificate of good conduct” referred to in section 30a of the BZRG.

Section 30a of the BZRG determines the following: An extended certificate of good conduct is issued to a person on request, if the grant is provided for in statutory provisions with reference to this provision or if this certificate of good conduct is required for professional or voluntary supervision, care, education or training of minors or an activity which, in a manner comparable to letter a, is suitable for making contact with minors. Anyone who applies for an extended certificate of good conduct must submit a written request in which the person who requests the extended certificate of good conduct from the applicant confirms that the requirements are met.

Every person who has reached the age of 14 is given a certificate on the contents of the register concerning them on request (certificate of good conduct). If they have legal representation, this is also entitled to apply. The application must be submitted in writing to the registration authority in person or with an officially or publicly certified signature. When submitting the application, the identity and, in the case of legal representation, the power of representation must be proven. The applicant and their legal representative cannot be represented by an authorized representative when submitting the application. The registration authority receives the fee for the certificate of good conduct, keeps two fifths of it and pays the remaining amount to the federal treasury.

If the person making the application lives outside Germany, they can submit the application directly to the registry authority. Sending the certificate of good conduct is only permitted to the applicant. If the certificate of good conduct is requested to be presented to an authority, it must be sent to the authority immediately. The authority must allow the applicant to inspect the certificate of good conduct upon request. The applicant can demand that the certificate of good conduct, if it contains entries, is first sent to a local court designated by him for inspection by him. The registration authority must inform the applicant of this possibility in the cases in which the application is submitted to them. The district court may only grant the applicant person access to it personally. After inspection, the certificate of good conduct is to be forwarded to the authority or, if the applicant objects, to be destroyed by the local court. A foreign applicant can demand that the certificate of good conduct, if it contains entries, is first sent to an official representation of the Federal Republic of Germany designated by him for inspection.

The management board member must submit a request for a “certificate of good conduct for presentation to a German authority” and a “European certificate of good conduct for presentation to a German authority” to his or her local registration office (Meldebehörde) (section 30 (2) sentence 1 of the BZRG) or electronically to the Federal Office of Justice (section 30c of the BZRG). German nationals who reside outside the Federal Republic of Germany may apply directly to the Federal Office of Justice as the registration authority (section 30 (3) sentence 1 of the BZRG).

To allow BaFin to allocate the certificates of good conduct which it receives to the undertaking to which the relevant management board member is to be appointed, the name of the notifying undertaking and the BAK number have to be indicated as the reference. The BAK number is a six-digit number which BaFin assigns to each institution for internal classification purposes. It forms part of the BaFin reference number under which correspondence with an institution is registered and is listed in BaFin’s database of undertakings as the “ID”. BaFin is responsible for issuing and publishing a BAK number. The BAK number of an institute can be found on the website of the Federal Financial Supervisory Authority (www.bafin.de).

The certificate of good conduct for official purposes must be up-to-date, i.e. at the time of notification of intent it may not be more than three months old. The date of the document’s issue will be key for this purpose.

In the event that a certificate of good conduct is to be used within BaFin for further checks as to the reputation of a person, this document may not be more than twelve months old. The Federal Office of Justice will send both the “certificate of good conduct for presentation to a German authority” and the “European certificate of good conduct for presentation to a German authority” directly to BaFin. There is no need to request additional copies for the Deutsche Bundesbank or the auditing association, in the case of credit institutions that are members of one.

Data for Bank Management Board Member’s Reputation Rating

Certifications, Criteria, Read, Registrations, Regulations

The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) provides some insights into what kind of data is used to establish a bank management board member’s reputation rating in its Guidance Notice on management board members. This is pursuant to the German Banking Act (Kreditwesengesetz – KWG), the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz – ZAG) and the German Capital Investment Code (Kapitalanlagegesetzbuch – KAGB).

On the form “Details of reputation, available time and additional mandates“, the management board member has to issue a personally signed and dated declaration providing information on any criminal proceedings and proceedings for administrative offences, decisions under trade law and insolvency or enforcement proceedings. The declaration need not include previously pending criminal proceedings that were terminated for lack of sufficient evidence to support the suspicion of a criminal offence. The same is true in the event that the proceedings were terminated because of a procedural bar.

The declaration need not include previously pending criminal proceedings which resulted in an acquittal or by virtue of which an entry in the Federal Central Criminal Register (Bundeszentralregister – BZR) was deleted or cancelled, or that are not required to be disclosed according to section 53 of the German Federal Central Register Act (Bundeszentralregistergesetz – BZRG).

Section 53 of the Act on the Central Criminal Register and the Educative Measures Register determines convicted person’s duty of disclosure: Convicted persons may refer to themselves as having no previous convictions and need not disclose the facts on which a conviction was based if the conviction does not have to be included in the certificate of good conduct or only in a certificate of good conduct in accordance with section 32 (3) or (4) BZR or is to be deleted. Insofar as courts or authorities have a right to the unrestricted disclosure of information, convicted persons may derive no rights from subsection (1) no. 1 vis-à-vis them if they are instructed about this fact.

Entries which must be deleted from the Central Trade and Industry Register under section 153 of the German Industrial Code (Gewerbeordnung – GewO) need not be mentioned. Section 153 determines that certain entries have to be deleted after a period of time of three years if the amount of the fine does not exceed 300 euros or five years in the other cases. If the register contains several entries, the deletion of an entry is only permissible if the period has expired for all entries. An entry to be deleted will be removed from the register one year after the requirements for the deletion have been met. During this time, no information may be given about the entry. If the entry in the register has been deleted or if it is to be deleted, the administrative offense and the fine decision may no longer be used to the detriment of the person concerned. This does not apply if the person concerned applies for admission to a trade or other economic enterprise, if the admission would otherwise lead to a considerable risk to the general public, or if the person concerned applies for the lifting of a business or other economic enterprise that prohibits the exercise of the trade Decision requested.

According to these stipulations, entries which must be deleted from the Central Trade and Industry Register under section 153 GewO need not be mentioned. On the other hand, criminal proceedings terminated under sections 153 and 153a of the German Code of Criminal Procedure (Strafprozessordnung – StPO) have to be indicated.

A termination under these provisions will not eliminate the assumption of innocence under criminal law; however, irrespective of this the circumstances of the case may give rise to indications for a lack of reputation, particularly in case of proceedings associated with punishable violations of relevant supervisory law, property- or insolvency-related criminal offences or tax offences.

Similar situations in other jurisdictions also have to be indicated. In case of doubt, the relevant division of BaFin should be contacted. These details have to be complete and accurate. In the case of any notifiable proceedings, copies of the rulings, decisions, sanctions, notices or other relevant documents have to be appended. BaFin reserves the right to obtain further information from the competent authorities, where necessary

For an assessment of possible conflicts of interest, on the form “Details of reputation, available time and additional mandates” the management board member must also declare any familial relationships with members of the management and the members of the administrative or supervisory body, both for the notifying undertaking and for its parent undertaking or subsidiary. If no details are provided on the form, this will be deemed a statement of “nil”.

On the form “Details of reputation, available time and additional mandates”, business relationships which could result in a certain degree of commercial dependence on the notifying undertaking have to be indicated as follows: Management board member, undertaking which is managed by the management board member, close relatives of the management board member = spouses, registered life partners, partners in a long-term relationship, children, parents, other relatives who belong to the household of the member. The relationships to the notifying undertaking, parent undertaking of the notifying undertaking and subsidiary of the notifying undertaking have to be disclosed. The nature of this relationship and the manner in which it is conducted have to be described. If no details are provided on the form, this will be deemed a statement of “nil”.

man in blue suit

Professional and Personal Requirements for Persons Appointed as Management Board Members

Certifications, Compliances, Read, Registrations, Regulations

The Federal Financial Supervisory Authority of Germany (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) provided a Guidance Notice on management board members pursuant to the German Banking Act (Kreditwesengesetz – KWG), the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz – ZAG) and the German Capital Investment Code (Kapitalanlagegesetzbuch – KAGB). The following introduces the approach how to check compliance with the law in the context of a forensic rating of financial institutions.

The methodology applies to all credit institutions and financial services institutions supervised by Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht- BaFin) under the Banking Act (Gesetz über das Kreditwesen – KWG) and all payment and electronic money institutions supervised by BaFin under the Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz – ZAG). It is also intended for undertakings supervised by BaFin under the Capital Investment Code (Kapitalanlagegesetzbuch – KAGB). The Banking Act, the Payment Services Supervision Act and the Capital Investment Code impose stringent requirements regarding the qualifications of a management board member. The major significance of these requirements is reflected in the fact that it is the claim of BaFin to issue a licence only when all conditions are met to conduct banking business and e-money business and to provide financial services and payment services.  The licences under the Investment Code, too, are only issued if the management board members fulfil the professional and personal requirements stipulated in the respective law. BaFin may withdraw this licence if these requirements are no longer fulfilled.

The European provisions were enshrined in the Banking Act through the ” Act on the Implementation of the Directive 2013/36/EU on Access to the Activity of Credit Institutions and the Prudential Supervision of Credit Institutions and Investment Firms and on the Regulatory Alignment to the Regulation (EU) No 575/2013 on Prudential Requirements for Credit Institutions and Investment Firms” (Gesetz zur Umsetzung der Richtlinie 2013/36/EU über den Zugang zur Tätigkeit von Kreditinstituten und die Beaufsichtigung von Kreditinstituten und Wertpapierfirmen und zur Anpassung des Aufsichtsrechts an die Verordnung (EU) Nr. 575/2013 über Aufsichtsanforderungen an Kreditinstitute und Wertpapierfirmen – CRD IVUmsetzungsgesetz) of 28 August 2013, Federal Law Gazette I p. 3395, and the ” Act Amending Laws Relating to the Financial Market” (Gesetz zur Anpassung von Gesetzen auf dem Gebiet des Finanzmarktes – FinMarktAnpG) of 15 July 2014, Federal Law Gazette I p. 934. Moreover, the recommendations of the European Banking Authority “EBA Guidelines on Internal Governance” (GL 44) of 27 September 2011 and the “EBA Guidelines on the Assessment of the Suitability of Members of the Management Body and Key Function Holders” of 22 November 2012 have been transposed into German law. The second edition of this Guidance Notice outlines the professional and personal requirements for persons appointed as management board members under the relevant supervisory legislation. It provides an overview of the associated notification obligations, including the documents which must be submitted. It considers in detail the expanded requirements for management board members resulting from the changes to the Banking Act.

The credit institutions which are members of a cooperative auditing association (genossenschaftlicher Prüfungsverband) or which are audited by the auditing body of a savings bank and giro association (Sparkassen- und Giroverband) are to send the notification and any documents to be appended via their association, together with an extra copy intended for that association. The role of the associations must be observed in Germany.

Since 4 November 2014, the European Central Bank (ECB) has served as the supervisory authority for significant German credit institutions within the scope of the Single Supervisory Mechanism (SSM). The ECB supervises these significant institutions on the basis of national supervisory legislation, except where European law is directly applicable. Significant institutions submit notifications concerning the appointment and resignation of management board members – including all of the documents to be appended – to BaFin and the Deutsche Bundesbank.

The European Central Bank is responsible for assessing the professional suitability, the reputation and the available time of a management board member and will notify the institution of the result of its assessment directly. This assessment is made on the basis of the provisions of the Banking Act. However, the ECB is not bound by an existing national interpretation or administrative practice.

The European Central Bank, BaFin and the Deutsche Bundesbank shall be notified of other activities of a management board member of a significant institution and of any direct participating interests. The notifications and all documents and declarations to be appended must be submitted in German. The following deviating provisions apply to significant institutions directly by the ECB. Where documents are not issued in German, a certified translation or a translation prepared by a publicly appointed or sworn interpreter or translator will be required in addition to the original version. The relevant BaFin division may waive the translation of English-language documents. Significant institutions directly supervised by the ECB may submit the notification as well as all documents to be appended in either German or in English. The notifications prescribed by the Banking Act, the Payment Services Supervision Act and the Capital Investment Code shall be submitted without delay. As a rule, BaFin will no longer assume that a notification has been submitted without delay if a period of four weeks has been exceeded following the decision made by the relevant body. BaFin may require further documents and information if this appears necessary in an individual case. BaFin will not assume the costs associated with the required documents.

On their websites, BaFin and the Deutsche Bundesbank provide the following forms which are to be used for the individual notifications and for the declarations to be made.

Banking Act

  • Personnel changes relating to management board members,
  • Details of reputation, available time and additional mandates,
    • Declaration concerning criminal proceedings and proceedings for administrative offences, decisions under trade law and insolvency or enforcement proceedings,
    • Declaration concerning familial relationships,
    • Declaration concerning business relationships,
    • Details of additional mandates as a management board member or as a member of administrative and supervisory bodies,
    • Details of available time,
  • Secondary activities of management board members,
  • Participating interests of management board members.

Capital Investment Code

  • Personnel changes relating to management board members,
  • Details of reputation,
    • Declaration concerning criminal proceedings and proceedings for administrative offences, decisions under trade law and insolvency or enforcement proceedings,
    • Declaration concerning familial relationships,
    • Declaration concerning business relationships,
  • Secondary activities of management board members,
  • Participating interests of management board members.

Payment Services Supervision Act

  • Details of reputation,
  • Secondary activities of management board members,
  • Participating interests of management board members,

An intention to make an appointment, its realisation, its withdrawal (Banking Act) or a change of this intention to appoint (Banking Act) a management board member shall be reported without delay. The institution or the KAGB undertaking must submit this notification. Management board members within the meaning of the Banking Act and the Payment Services Supervision Act are those natural persons who are appointed according to law, articles of association, articles of incorporation or a partnership agreement to manage the business of and represent an institution organized in the form of a legal person or a commercial partnership. Management board members within the meaning of the Capital Investment Code are those natural persons who are appointed according to law, articles of association, articles of incorporation or a partnership agreement to manage the business of and represent a capital management company as well as natural persons who actually manage the business of the capital management company without being formally appointed as management board members. This notification obligation also applies for the appointment of an acting management board member to fulfil the function of a management board member if the latter is unable to do so.

In its long-standing administrative practice, BaFin has refrained from forwarding appointment notifications submitted by the relevant association of auditors for credit cooperatives’ board members serving in an honorary capacity. However, notice must be provided of an intention to appoint a part-time management board member. Already the intention to appoint a management board member is subject to notification.

Basic documents

The following documents/declarations have to be appended to the notification:

  • Curriculum vitae,
  • Details of management board members’ reputation,
  • “Certificate of good conduct for presentation to a German authority”, “European certificate of good conduct for presentation to a German authority” or “equivalent documents” from another country,
  • Excerpt from the Central Trade and Industry Register,
  • Details of additional mandates as a management board member and in administrative and supervisory bodies,
  • Details of available time.


By submitting the information and declarations from the management board member which have to be appended to the notification, the notifying institution or the notifying KAGB undertaking confirms that the information submitted is accurate to the best of its knowledge. If the management board member who is to be appointed has been, or is already a management board member or a member of the administrative or supervisory body of an undertaking supervised by BaFin, all of the documents/declarations to be presented in connection with this notification have to be re-submitted. BaFin may waive this requirement in individual cases.

A curriculum vitae has to be appended to the notification of intent. This curriculum vitae must be complete and truthful and must be personally signed and dated. The curriculum vitae shall focus primarily on the positions held during the management board member’s professional career. For these individual positions, the CV has to indicate not only the year, but also the month in which this position began or ended. In the description of positions held, in particular details of this person’s powers of representation, his or her internal decision-making powers and the divisions within the undertaking overseen by him or her shall be provided. Job references for employment positions within the last three years prior to submission of the notification have to be appended to the curriculum vitae, if available. Within the scope of the Capital Investment Code and the Payment Services Supervision Act, job references must only be submitted as required by BaFin. The curriculum vitae has to include the following details:

  • surname, all first names,
  • birth namedate of birth,
  • place of birth,
  • place of residence,
  • nationality,
  • a detailed description of relevant education and training,
  • the names of all undertakings for which the management board member currently works or has previously worked,
  • details of the nature and duration of the relevant activity, including secondary
    activities.

If a management board member has resided outside Germany within the last ten years, the period and country in question must be indicated. If the principal place of residence of the management board member and his or her place of work did not lie within the same country, this also has to be indicated. This information is relevant for BaFin insofar as this affects the register excerpts which must be submitted.

The social credit rating is comprehensively checked: Details of the management board member’s reputation, a “Certificate of good conduct for presentation to a German authority”, “European certificate of good conduct for presentation to a German authority” or “equivalent documents” from another country, excerpt from the Central Trade and Industry Register, details of additional mandates as a management board member or in administrative or supervisory bodies (Banking Act), details of available time (Banking Act). Comprehensive additional regulations must be observed for these points.

The Road Ahead For Social Credit Rating

Uses

In the book “Social Credit Rating” you can read a lot about the nature and content of the social credit system, learn about governance, law and sustainability, as well as methods, models and functions. But what does that mean – for citizens as well as for companies? How can, how will Social Credit Rating change the world in the future?

Social Credit Rating is to be understood in the context of global digital transformation and geopolitically in the midst of the world-changing triad of “political systems”, “economic systems” and “digital systems”. As a digital system, it is crucial for Social Credit Rating which overarching values ​​guide this technology in its interrelationships with business and politics and with which goal it is used.

In democracies, Social Credit Rating systems can help preserve citizens’ freedom. In autocracies they run the risk of becoming an instrument of everyday hostage that restricts individual freedom. In the economy, Social Credit Rating can support entrepreneurial assumption of responsibility, for example in the fight against climate change; in state capitalism, the fear is justified that Social Credit Rating mainly serves to build totalitarian power.

I recommend that you read the Contribution by Prof. Bernd Thomsen in the book “Social Credit Rating” by Springer.

Dr. Oliver Everling, RATING EVIDENCE GmbH

So it shouldn’t be about discrediting Social Credit Rating, but about questioning the intentions of those responsible for digital rating systems. The current global crisis of meaning of the liberal democracies coincides with a shift in power in favor of repressive regimes. The current depression of capitalism coincides with a hype of state capitalism. Many people are just beginning to understand the extent of this. Social Credit Rating is a factor to be taken seriously not only in its transformative effect, but also for the western industrialized nations.

Prof. Bernd Thomsen

China’s Social Credit System

Experts, Histories, Systems, Tools

The Social Credit System (SCS) is perhaps the most prominent manifestation of the Chinese government’s intention to reinforce legal, regulatory and policy processes through the application of information technology, writes Rogier Creemers, Van Vollenhoven Institute at Leiden University. Yet its organizational specifics have not yet received academic scrutiny. He published a paper which identifies the objectives, perspectives and mechanisms through which the Chinese government has sought to realise its vision of “social credit”.

Reviewing the system’s historical evolution, institutional structure, central and local implementation, and relationship with the private sector, he describes the SCS as an ecosystem of initiatives broadly sharing a similar underlying logic, than a fully unified and integrated machine for social control. With regards to big data and artificial intelligence notwithstanding, he sees the SCS as a relatively crude tool.

See his video or read his paper here.

For more historic background information: Oliver Everling, Yan Yin and Yusi Ding (Herausgeber, Associate Chief Editor, http://www.cnis.gov.cn/): Domestic and Foreign Credit Theory Studies and Standardization Practices, Technical Book Series on Standardization of Social Credit in China, Chen, Yuzhong, und Qian, Yumin (Chief Editor), compiled by National Technical Working Group on Credit of Standardization Administration of China (http://www.sac.gov.cn/), China Metrology Publishing House, Beijing, 1. Auflage, August 2010, 420 Seiten, ISBN 978-7-5026-3332-5.