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I just rebuilt the starter on a '95 640 and saw the same area. Since I thought it was strange I looked it up. Here's a picture under Magneto Case.

There is an accordion pressure bulb under there that controls the pressure in the magneto case. It looks just like the one on the impeller case. Their function is to maintain a water tight seal while allowing the air trapped in that area to heat up and expand. Without this type of relief the air would heat up and push out from around a seal, then when it cooled back down it suck in air or water.
Based on what you said, and I'm guessing here, your accordion bulb thingy has been blown off by pressure in the magneto case. The problem is there should be NO oil, gas, vapor or pressure in that area. You have pressure in the part of the case, I would guess the front crankshaft seal is leaking. But that's just a guess.
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