GERMANY - Jochen Sanio, president of German financial services regulator BaFin, could be forced to step down following a report by the auditor PWC that found instances of fraud and gross mismanagement at the regulator.

In the report, which was leaked to German news magazine Der Spiegel, PWC alleges that a senior BaFin official may have embezzled €4m via information-technology purchases. According to the auditor, BaFin's leadership knew about the official's corrupt actions as early as 2004 but did nothing.

PWC also alleges that at least five BaFin employees may have misused expense accounts and hired unqualified friends and relatives for jobs at the regulator.

The report has prompted a full investigation by the public prosecutor in Bonn. On September 12, German finance minister Peer Steinbrück abruptly ordered Sanio to Berlin to comment on the PWC report.

Sanio is also to appear before BaFin's supervisory board on September 26. The German regulator's regulator includes Steinbrück and other senior finance ministry officials, MPs and financial industry representatives.

Although Sanio, a civil servant, cannot technically be fired, failure to assuage the board's doubts about his leadership of the BaFin could make his position untenable. Another possible resignation is that of Karl-Burkhard Caspari, the BaFin vice president in charge of operations.

Sanio has already written to the board to explain himself. In the letter, which was sent to deputy finance minister Thomas Mirow, admits that he and other top officials did not act quickly enough to conduct a full review of the IT purchases.

But Sanio also attacked the PWC report, insisting that it was biased. "The PWC report raises serious questions about the neutrality of the auditor," he told Mirow, who is chairman of the board overseeing the BaFin.

Still, the German finance ministry said that it was taking the report's findings "very seriously." Politicians from the opposition Green party have also called for Sanio's resignation should the findings prove to be wholly accurate.

A spokesman for the BaFin confirmed Sanio's appearance before the board but said he was not willing to comment any further on the events.

Germany's BaFin was formed in 2002, after the government merged the regulators for banking, insurers and securities trading. German pension funds, including equity-oriented Pensionsfonds as well as insurance-type Pensionskassen and Direktversicherungen are all part of the BaFin's brief.

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