"We are checking whether directives against money laundering are respected by UBS," a Bafin spokesman told news agency AFP.
UBS confirmed in a statement that its German subsidiary was the target of a probe by the German watchdog, with which it was working in "close cooperation."
A UBS spokeswoman contacted by the German magazine Der Spiegel said Bafin had launched its probe following one by prosecutors in Frankfurt to determine if the Swiss bank systematically helped clients avoid taxes. UBS is carrying out an investigation of its own, the spokeswoman said.
Bafin cannot sanction banks directly if it uncovers evidence of wrong-doing, but can order that remedial measures be taken.
The affair was revealed when a UBS customer told Frankfurt prosecutors the bank had helped him set up a false address in Zurich to defraud the German tax system.
In March, prosecutors in Düsseldorf, western Germany, opened a separate investigation of some 1,100 Credit Suisse clients suspected of tax fraud, a probe that included bank workers.
German tax authorities can expect to rake in more than €1 billion ($1.35 billion) from tax dodgers after buying a CD containing their names, a German tax union said Saturday.
Relations between Germany and Switzerland have been strained by alleged tax fraud for several years, and they are currently negotiating terms of a treaty to avoid double imposition.