UPDATE 1-German watchdog orders N26 to safeguard against terrorist financing

* BaFin: N26 must put in place internal controls, safeguards

* BaFin appoints special commissioner to monitor progress

* N26 says will work closely with commissioner (Adds N26 comment, background)

BERLIN, May 12 (Reuters) - German financial regulator BaFin has ordered online bank N26 to put in place internal controls and safeguards to prevent money laundering and terrorist financing, BaFin said on Wednesday.

The regulator said it has appointed a special commissioner to monitor the implementation of this order and N26’s progress in resolving other shortcomings identified.

Sources had told Reuters earlier this year that BaFin was extending its oversight of N26 to cover the whole company as it tightened controls following the collapse of payments firm Wirecard.

Late last month, BaFin also ordered Deutsche Bank to enact further safeguards to prevent money laundering, a blow to the nation’s largest lender as it tries to repair its reputation.

N26 said it would work closely with the BaFin-appointed commissioner to coordinate its progress in taking measures to fight illegal financial transactions.

“Since the start of the COVID pandemic, criminal activity in connection with online trade has increased strongly around the world,” N26 said, adding that fraudsters were manipulating third parties into opening new accounts to use them for fraudulent purposes.

“The demands of BaFin aim among other things to prevent the opening of such accounts, to identify illegal financial transactions as quickly as possible and to block them,” it said. (Reporting by Maria Sheahan and Nadine Schimroszik, editing by Thomas Escritt)