CONFLICTING … Emme… · Conflicting&Rules&in&International&Financial&Regulation& & 3& borderbankingbusiness.4&Anemployeeof&CreditSuisse requestedanorder from&a&Geneva&court&to&forbidthebank&totransmither

CONFLICTING RULES IN INTERNATIONAL FINANCIAL REGULATION: CAN WE MITIGATE THE EFFECTS OF EXTRATERRITORIALITY ?

Susan Emmenegger

[work in progress]

I. Introduction .................................................................................................... 2 II. Extraterritoriality .......................................................................................... 7

A. What is "ʺExtraterritoriality"ʺ? ............................................................... 7 B. Justifications for Extraterritoriality in International Law ................ 9 C. Extraterritoriality as a Core Element in International Financial

Regulation ............................................................................................ 13 1. Consolidated Supervision ........................................................... 14 2. Single Point of Entry Resolution ................................................ 16 3. OTC Derivatives Rules ................................................................ 18 4. Money Laundering ...................................................................... 21 5. Conclusion ..................................................................................... 23

D. Multilateral and Unilateral Extraterritoriality ................................ 23 E. Conclusion ............................................................................................ 26

II. Resolving Conflicts arising from Extraterritoriality .............................. 27 A. Prescriptive Jurisdiction ..................................................................... 27

1. Treaties ........................................................................................... 27 2. Harmonisation of substantive law ............................................. 27 3. Substituted Compliance/Functional Aquivalence ................... 27 4. Consulting obligations for legislation with substantial

extraterritorial reach .................................................................... 27 3. Conflict of Laws Modell for Financial Regulation .................. 27

B. Enforcement Jurisdiction .................................................................... 27 1. Sanction Colleges for Enforcement Procedures ....................... 27 2. Double jeopardy as working principle in IFR .......................... 27

C. Conclusion ............................................................................................ 27

Susan Emmenegger

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I. Introduction

In April 2015, Deutsche Bank agreed to pay $2.5 billion to four regulators in the US and in the UK to settle the claims that the bank had manipulated the Lon-‐‑don Bank Offered rate (LIBOR) for the US Dollar, the Euro and the Swiss Franc. The settlement with the New York State Department of Financial Services (NYSDFS) included an obligation of the bank to dismiss seven executive em-‐‑ployees in Europe. The order states that if such action is not permissible under local law, then the employees are barred from certain duties or functions within the bank.1 Such deference to foreign local law is unusual in the context of an enforcement action. However, in the LIBOR case, Deutsche Bank had already dismissed ten employees as a result of the NYDFS investigation. Four Frank-‐‑furt-‐‑based employees were re-‐‑instated pursuant to a German labor court judg-‐‑ment which held the dismissals to be disproportional under German labor law.2

In May 2014, Credit Suisse entered into a non-‐‑prosecution agreement with the US Department of Justice (DOJ) in connection with undeclared bank ac-‐‑counts of US persons held by Credit Suisse. It agreed to transmit the "ʺname and function of any relationship manager, client advisor, asset manager, financial advisor [...] or any other individual or entity functioning in a similar capacity know by the Bank to be affiliated with said account [...].3 The negotiations had started in 2011, and the DOJ had made it clear from the beginning that a condi-‐‑tion for any agreement included the bank'ʹs consent to transmit "ʺall personnel files for the executives, management and employees involved in the US cross-‐‑

1 New York State Department of Financial Services, in the Matter of Deutsche Bank AG,

Consent Order, 23 April 2015, Para. 73, available at: < http://www.dfs.ny.gov/about/press/-‐‑pr1504231.htm>, containing a link to the pdf file.

2 Arbeitsgericht Frankfurt, Urteile vom 11.09.2013, AZ 9 CA 1551/13, 9 Ca 1552/13, 9 Ca 1553/13, Ca 1552/14. Press release available at: <https://arbg-‐‑frankfurt-‐‑justiz.hessen.de>. See also NYSDFS Order of 23 April 2015, Para. 72.

3 United States District Court for the Eastern District of Virginia, United States of America v. Credit Suisse AG, Criminal No. 1:14-‐‑CR-‐‑188, Plea Agreement, May 19, 2014, at 7./B. Credit Suisse'ʹs disclosure mirrors the ones in Sections II.D.1 and II.D.2 for the Program for Non-‐‑Prosecution Agreements or Non-‐‑Target letters for Swiss Banks. See US Department of Jus-‐‑tice Program for Non-‐‑Prosecution Agreements or Non-‐‑Target Letters for Swiss Banks, Au-‐‑gust 29, 2013, available at: < http://www.justice.gov/iso/opa/resources/753201382916464-‐‑4664074.pdf.>

Conflicting Rules in International Financial Regulation

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border banking business."ʺ4 An employee of Credit Suisse requested an order from a Geneva court to forbid the bank to transmit her name to the US authori-‐‑ties. The court granted the request, holding that under Swiss data protection law, the bank was barred from fulfilling its obligations with the DOJ.5

In 2013, French banks who were signing up to be swap dealers in the US were required to report comprehensive transaction and/or position data, in-‐‑cluding the identities of the counterparties of swap transactions, to regulators or to swap data repositories.6 Under the French Code monetaire et financier, information on counterparties can only be disclosed pursuant to a list of statu-‐‑tory exemptions or if the counterparty delivers its consent for each individual disclosure.7 The statutory exemptions do not cover the reporting of data to pri-‐‑vate entities such as trade repositories. The singular disclosure is not an option in the high-‐‑volume market of OTC derivatives.8 Potential penalties for viola-‐‑tions of the French privacy requirements include fines, suspension of opera-‐‑tions, withdrawal of business licenses and imprisonment up to one year for natural persons.9

4 Letter of the DOJ of 12/09/2011. For a full account of the DOJ'ʹs list of information concern-‐‑

ing the cross-‐‑border business see Tribunal de première instance GE, 28 mai 2015, C/1271/2013-‐‑7, Para. 20.

5 Tribunal de première instance GE, 28 mai 2015, C/1271/2013-‐‑7. A summary of the judge-‐‑ment can be found in Emmengger/Thévenoz, Das schweizerische Bankprivatrecht, SZW 2015, r32. Preliminary orders to stall the transmission of the employee'ʹs name to the DOJ were issued on 11 January 2013 and on 21 June 2013, see Tribunal de première instance GE, 28 mai 2015, C/1271/2013-‐‑7, ad Para. 36 and 45.

6 See e.g., 17 C.F.R. § 20.4(c)(4), § 20.5(a)(1), § 45.5(b)(i), § 45.6 (a). 7 See Code monétaire et financier (CMF), Art. L. 511-‐‑33 et seq., L. 531-‐‑12 et seq. The statutory

exceptions regard data transmission to the supervisory and to the prosecution authorities and data transmission for certain bank operations (e.g., syndicated credits, assignment of credits or of contracts, aquisition of stocks of a bank).

8 The volumes traded in the over-‐‑the-‐‑counter derivatives market remain impressive in the post-‐‑crisis era: For 2013, the Bank for International Settlements (BIS) calculated a daily turnover average of USD 2.3 trillion for interest rate derivatives, such as swaps and for-‐‑ward rate agreements. See Bank for International Settlements, The OTC interest rate deri-‐‑vatives market in 2013, available at: < http://www.bis.org/publ/qtrpdf/r_qt1312h.pdf>.

9 See ISDA Comment Letter on the Cross-‐‑Border Application of Certain Swaps Provisions of the Commodity Exchange Act (RIN 3038-‐‑AD57) of August 27, 2012, available at: < http://www2.isda.org/functional-‐‑areas/public-‐‑policy/united-‐‑states/>, August 27, 2012. See

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In all three examples, the banks were confronted with conflicting require-‐‑ments from different jurisdictions and the conflict resulted from claims (by the US) to regulate conduct taking place outside the domestic territory. Sometimes, the conflict can be resolved. In the case of Deutsche Bank, the NYDFS used comity and formally included it in its order. In the case of Credit Suisse, the is-‐‑sue is still open. However, as there as not been any visible action, informal com-‐‑ity on the side of the DOJ can be assumed. In the case of the French Banks, the European Regulation EMIR has helped; under EMIR, reporting trade data to a data repository approved by the European Securities and Markets Authority (ESMA) is not considered in violation of that counterparty'ʹs confidentiality ob-‐‑ligations in any state of the European Union.10

Sometimes, the conflict cannot be resolved. Let us consider the example of a bank in Switzerland whose client is not on the UN sanctions list but figures on the Specially Designed Nationals list of the US Office of Foreign Assets Control. US law requires the bank to freeze the assets. Swiss embargo legislation will not consider US sanctions law as sufficient to interfere with the contractual duties of the bank; the bank is therefore required to release the assets to the client. In these situations, compliance becomes a matter of risk management. Most likely, the bank will remember the USD 8.9 billion fine of BNP Paribas for violating US sanctions law. From a risk management perspective, the relevant law to be fol-‐‑lowed is easily determined.

As the endeavor to regulate and supervise financial markets and their in-‐‑termediaries as well as to sanction non-‐‑compliance has greatly increased, con-‐‑flicts resulting from contradictory legal requirements are bound to become more frequent. In my research, I will examine if and how the conflicts which result from extraterritorial financial regulation can be avoided or at least miti-‐‑gated. The research will proceed as follows: In the first part, I will examine the issue of extraterritoriality in financial regulation. To begin with, we need to un-‐‑

also M. Kentz, ‘French Banks Struggle with Swap Conflicts’ Reuters (9 November 2012); Edward F. Greene/Ilona Pothia, Issues in the extraterritorial application of Dodd-‐‑Frank'ʹs deriva-‐‑tives and clearing rules, the impact on global markets and the inevitability of cross-‐‑border and US domestic coordination, 8 CAPITAL MARKETS LAW JOURNAL 338 (2013), at 365.

10 Reg. 648/2012 of July 4, 2012, on OTC derivatives, central counterparties and trade reposi-‐‑tories (EMIR), Art. 9(4).


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derstand what extraterritoriality is (A.) Extraterritoriality is often described as a "ʺmeasure which imposes obligations on persons who do not enjoy a relevant territorial connection with the regulating state."ʺ11 This territorial nexus approach follows the predominant line of argument in international law which holds that territoriality is the cornerstone of jurisdictional order and extraterritoriality is the exception which needs specific justification. This being the case, a narrow definition of extraterritoriality, paired with an extensive understanding of terri-‐‑toriality, will best fit the purpose to have a broad basis for the assertion of juris-‐‑diction. However, neither the territorial nexus approach in defining extraterri-‐‑toriality nor the jurisdictional primacy of territoriality in international law are entirely convincing. An alternative approach would understand extraterritorial-‐‑ity to encompass every exercise of jurisdiction outside the territorial border. It would also accept that domestic jurisdiction based on the effects of foreign con-‐‑duct is not covered by the territoriality principle but constitutes a separate prin-‐‑ciple for the exercise of (extraterritorial) jurisdiction. Regardless of these classi-‐‑fication issues, international law offers a variety of jurisdictional grounds for the exercise of extraterritoriality. In other words: most extraterritorial regula-‐‑tion is legal under international law (B.).

On policy grounds, the criticism is that extraterritoriality represents a fun-‐‑damentally undemocratic method of regulation and that it undermines tradi-‐‑tional multilateral processes.12 This needs closer scrutiny. My preliminary find-‐‑ing is that in the field of international financial regulation, extraterritoriality is a core instrument and that it is consensus-‐‑driven (C.). Indeed, the standards and principles developed by the international standard setters have been a main driver for extraterritoriality in all major fields of financial regulation. This type of extraterritoriality will be exercised by single nations, but it is based on a mul-‐‑tilateral consensus. At the same time but to a lesser extent, unilateral extraterri-‐‑toriality has acted as a trigger for international convergence on substantive reg-‐‑ulation – FATCA being the latest example. Thus, extraterritoriality and interna-‐‑

11 Joanne Scott, Extraterritoriality and Territorial Extension in the EU, 62 Am. J. Comp. L. J. 87

(2014), 89 et seq. See also RESTATEMENT (THIRD) OF THE FOREIGN RELATIONS LAW OF THE

UNITED States, § 402(1)(a). 12 Austen L. Parrish, The Effects Test: Extraterritoriality'ʹs Fifth Business, 61 Vanderbilt L. Rev.

1455 (2008), 1504 et seq.

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tional convergence are complementary rather than contradictory developments in the field of financial regulation. For an objective (objectivized?) discussion on extraterritoriality we should distinguish between unilateral and multilateral extraterritoriality. The political legitimacy criticism holds true only for extrater-‐‑ritoriality in its unilateral form (D.).

The fact that most extraterritorial jurisdiction is legal from the perspective of international law and legitimate on policy grounds can contribute to a more objective discussion of the emotionally charged issue of extraterritoriality. But it will not eliminate the conflicts over which state'ʹs jurisdictional assertions are the most legitimate – the regulation of OTC derivatives is a point to that. The question then becomes how we can avoid or at least mitigate the effects of con-‐‑flicting requirements on financial intermediaries and notably banks resulting from the extraterritorial application of financial regulation. This is the second part of my research (II). The ambition is not to design a comprehensive frame-‐‑work for regulatory conflict resolution, but to explore which instruments seem most promising for certain types of conflicts. A preliminary argument is that we need to distinguish between extraterritoriality in substantive law (prescrip-‐‑tive jurisdiction) and extraterritoriality in enforcement (enforcement or execu-‐‑tive jurisdiction). In the field of prescriptive jurisdiction (A.), instruments such as the harmonization of substantive law, the concepts of substituted compli-‐‑ance/functional equivalence or the consulting obligation for legislation with substantial extraterritorial reach will be among the first choices. Their function-‐‑ality as conflict resolution instruments has yet to be examined.

With regard to enforcement jurisdiction (B.), the starting point is the multi-‐‑ple fines imposed by different national regulators to sanction banks for their misconduct. So far, the multi-‐‑billion dollar fines have been a specialty of the US regulators. However, the appetite of other regulators is awakening. The banks'ʹ pockets are deep, but they are not infinite. If multi-‐‑billion dollar fines become a standard, regulators will find themselves in a sanctioning race to make sure that their pockets are filled before the banks'ʹ pockets are empty. The LIBOR scandal, and notably the sanctions imposed on Deutsche Bank, shows that co-‐‑operation between the authorities is possible beyond the investigation stage. Yet the question is whether there could be a more solid framework for the co-‐‑operation on the sanctioning level.


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A (very preliminary) finding is that the concept of double jeopardy could offer some guidance. Countries such as the UK actually apply the principle of international double jeopardy in criminal cases. Yet this is an exception and it does not apply in the field of administrative sanctions. Also, it is evident that in connection with fines, the concept needs some adaptation, or else we will see race by the banks to receive a sanction by the most lenient regulator. A possible solution could be that fines imposed by one regulator will be counted in when another regulator imposes a fine for the same conduct. This will allow a more adequate sanctioning, but it will not reduce the risk of a "ʺregulators race"ʺ. For this, one could consider the institution of an international sanctioning college within the structure of the present international institutions (BCBS, preferably FSB). This committee could function on similar bases as other colleges or groups (e.g., the supervisory colleges and the crisis management groups for global systemically important banks) and sanctions could be assessed on a global basis and imposed in a coordinated way.

II. Extraterritoriality

A. What is "ʺExtraterritoriality"ʺ?

Generally speaking, extraterritoriality refers to the exercise of jurisdiction out-‐‑side territorial borders. Beyond this, there are multiple understandings of what constitutes extraterritoriality.13 An accepted distinction of various types of ex-‐‑traterritoriality draws on the different strands of jurisdiction: Prescriptive extra-‐‑territoriality refers to the claim of a state to apply its domestic laws and regula-‐‑tions outside the national territory. Adjudicative extraterritoriality refers to the claim of a state to subject foreign parties to the judicial process. Finally, execu-‐‑tive extraterritoriality refers to the claim of a state to enforce its domestic laws and regulations outside the national territory.14

13 [See Hanna L. Buxbaum, Territory, Territoriality, and the Resolution of Jurisdictional Conflict,

57 AM. J. COMP. L. 631 (2009), at 635]; [Werner Meng, Extraterritorial Jurisdiction in Public Economic Law, Berlin 1994].

14 Anthony Colangelo, What is extraterritorial jurisdiction?, 99 CORNELL L. REV. 1303 (2014), at 1304 et seq.

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Scholarly writing points to the complexities to determine whether extraterri-‐‑toriality is indeed present in the claim of a state actor who asserts jurisdiction, noting that the foreign aspects or the points of contacts can be of different in-‐‑tensity.15 According to these scholars, extraterritoriality should only be as-‐‑sumed if the foreign element is strong; in all other cases, one would be in pres-‐‑ence of a territorial measure.16 This approach is mirrored by the jurisdictional practice of the courts, notably in the US. Thus, the Third Restatement of Foreign Relations Law of the United States provides that states may exercise territorial jurisdiction over conduct that occurs wholly or in substantial part within the ter-‐‑ritory of that state.17

The reason for this is that the territoriality principle is the most basic and undisputed base for the exercise of jurisdiction in international customary law.18 In the presence of a territorial claim, jurisdiction is automatically as-‐‑sumed to be justified. Extraterritoriality, on the other hand, carries the taint of questionable legitimacy, needing strong and specific justification. The frequent reproaches of U.S. of extraterritorial over-‐‑reach and the criticism of the EUs "ʺunilateral regulatory globalization"ʺ, known more colloquially as the "ʺBrussels Effect"ʺ are examples for this. Another example is the presumption against extra-‐‑territoriality, as stated in the U.S. Supreme Court'ʹs judgment in Morrison v. Na-‐‑tional Australia Bank.19 The recurring theme is that territoriality should be con-‐‑strued as largely as possible, whereas extraterritoriality should be construed as narrowly as possible. The concept of "ʺterritorial extension"ʺ20 developed in scholarly writing is the most recent attempt to achieve this objective. 15 Colangelo, 99 CORNELL L. REV., supra note 14, at 1304. 16 See Scott, 62 Am. J. Comp. L., supra note 11, at 89 et seq. ("ʺ[A] measure will be regarded as

extraterritorial when it imposes obligations on persons who do not enjoy a relevant territo-‐‑rial connection with the regulating state."ʺ).

17 RESTATEMENT (THIRD) OF THE FOREIGN RELATIONS LAW OF THE UNITED States, § 402(1)(a). 18 Cédric Ryngaert, Jurisdiction in International Law, Oxford 2008, 42. [update to version

2012]. 19 Morrision v. National Australia Bank, 130 S. Ct. 2869. For a discussion see Lea Brilmayer, The

New Extraterritoriality: Morrison v. National Australia Bank, Legislative Supremacy, and the Presumption against Application of American Law (2008), Faculty Scholarship Series, Paper 3755.

20 The concept has been developed by Joanne Scott, The new EU "ʺExtraterritoriality"ʺ, CML REV. 2014, 1343.


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There are a number of weaknesses in the relevant territorial nexus ap-‐‑proach. First, it blurs the distinction between territoriality and extraterritoriali-‐‑ty, undermining legal certainty. Second, it is conceptionally flawed because it includes the main justification for extraterritoriality in its definition. Third, it assumes that a measure is either territorial or extraterritorial, when in fact they are often a mixture of both.

I propose a definition of extraterritoriality which is based on textual inter-‐‑pretation. "ʺExtraterritorial"ʺ means "ʺoutside of one'ʹs territory"ʺ. Whenever juris-‐‑diction is claimed over persons, things or conduct outside the national territory, it is extraterritorial.21 Under this approach, the intensity of the territorial nexus is not a question for the determination of territoriality or extraterritoriality; it is a question which has to be examined when we determine whether extraterrito-‐‑riality is justified in the case at hand. Furthermore, this approach operates on the basis that in the making, applying or enforcing laws, there is a frequent overlap of territorial and extraterritorial elements. Accordingly, jurisdiction is not either territorial or extraterritorial. Rather, it can contain elements of both.22

B. Justifications for Extraterritoriality in International Law

Independently of a broad or a narrow construction of extraterritoriality, the question remains whether extraterritoriality is legal. The answer to that ques-‐‑tion lies in public international law. In Browlie'ʹs Principles of Public Interna-‐‑tional Law, James Crawford explains that "ʺJurisdiction is an aspect of sover-‐‑eignty: It refers to a state'ʹs competence under international law to regulate the conduct of natural and juridical persons."ʺ He further explains that "ʺthe starting point in this part of the law is the presumption that jurisdiction (in all its forms)

21 See also Austen L. Parrish, Evading Legislative Jurisdiction, 87 NOTRE DAME L. REV. 1673

(2013), at 1678, with further references in note 16. 22 For a similar view see Jennifer Zerk, Extraterritorial Jurisdiction: Lessons for the Business and

Human Rights Sphere from Six Regulatory Areas (Harvard Corporate Social Responsibility Initatiative Working Paper No. 59, June 2010), at 15 (explaining that where conduct spans more than one state, it will be territorial only in relation to those elements of conduct ta-‐‑king place within the territory of the regulating state).

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may not be exercised extra-‐‑territorially without some specific basis in interna-‐‑tional law."ʺ23

As the primacy of territorial jurisdiction is premised upon the principle of sovereign equality of States, extraterrorial jurisdiction is an exception to the rules of customary international law.24 This explains the attempts to construe the territorial principle rather broadly, notably by extending it to situations where conduct abroad produces effects within one'ʹs own territory.25 However, the effects doctrine is rightly seen as an exception to territoriality rather than an extension of it.26 The effects doctrine has been acknowledged by the majority in the Lotus case27 and by certain members of the International Court of Justice in Arrest Warrant.28 Also, it is practiced largely by the United States29 and it is in-‐‑

23 James Crawford, Brownlie'ʹs Principles of Public International Law, 8th ed., Oxford Uni-‐‑

versity Press 2012, 456. This approach is mirrored by the verdict in the Island of Palmas ar-‐‑bitral case, Perm. Ct. Arb., Island of Palmas (US v. Netherlands), 2 RIAA 829 (1928). There, the arbitrator Max Huber (a famous Swiss scholar and statesman) held that "ʺSovereignty in the relations between States signifies independence. Independence in regard to a portion of the globe is the right to exercise therein, to the exclusion of any other State, the function of a State. This development [...] of international law [has] established this principle of the exclusive competence of the State in regard to its own territory in such a way as to make it the point of departure in settling most questions that concern international relations."ʺ

24 In the famous Lotus case (1927), the Permanent Court of International Justice (the prede-‐‑cessor of the International Court of Justice, ICJ) had taken a different approach: States are allowed to exercise prescriptive (but not enforcement) jurisdiction as they see it fit, unless there is a prohibitive rule to the contrary. See PCIJ, SS Lotus (France v. Turkey), PCIJ Re-‐‑ports, Series A, No. 10, p. 19 (1927). However, this "ʺpermissive principle"ʺ is no longer the approach taken by the majority of the doctrine and by most states. See Ryngaert, Public In-‐‑ternational Law, supra note 18, at 22.

25 See Ryngaert, Public International Law, supra note 18, at 42. 26 See Crawford, Brownlie'ʹs Principles, supra note 23, 462 et seq.; Scott, CML Rev. 2014, supra

note 20, at 1356; Parrish, Notre DAME L. REV. 2013, supra note 21, at 1691; Zerk, Working Paper No. 59, supra note 22, at 7.

27 PCIJ, SS Lotus (France v. Turkey), PCIJ Reports, Series A, No. 10, p. 23 (1927). 28 ICJ Reports 2002, p. 3, 77 (Judges Higgins, Kooijmans and Buergenthal). 29 The practice does not resolve the disagreement in US scholarship and case law on the

question whether domestic effects should be treated as territorial or extraterritorial. See Scott, Am. J. Comp. L. J. 2014, 92 (explaining that most courts and commentators treat effects-‐‑based jurisdiction as extraterritorial, but that important sources of law such as the Restatement (Third) of Foreign Relations Law treat it as territorial). Furthermore, the Sup-‐‑


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creasingly practiced by the EU.30 Therefore, in spite of the disagreement about its jurisdictional salience, the exercise of jurisdiction over foreign conduct based on that conducts domestic effects is not unlawful under international law.

Furthermore, other possible justifications for extraterritorial jurisdiction are discussed in connection with customary international law, namely the active personality principle, the passive personality principle, the protective principle and the universality principle. The active personality principle is generally deemed uncontroversial.31 Thus, a state is entitled to exercise jurisdiction over its nationals outside its own territory. This is an accepted principle in criminal law, but also in the field of economic law.32 As to the passive personality prin-‐‑ciple, there is not the same consensus regarding the question whether a state may lawfully exercise jurisdiction based on the nationality of the victim. How-‐‑ever, there is no established practice which unequivocally affirms jurisdiction under the passive personality principle. However, there is also no clear practice or ICJ ruling that outlaws it.33

reme Court in Morrison v. National Australia Bank, Ltd. rejected the argument that the effects test could overcome the presumption against extraterritoriality. See 130 S. Ct. 2869 (2010), at 2884.

30 For examples see Scott, CML Rev. 2014, supra note 20, at 1343, 1356 et seqq. 31 See Ryngaert, Public International Law, supra note 18, at 85. 32 [A. Bianchi, Reply to Professor Maier, in KM Meessen (ed.), Extraterritorial Jurisdiction in

Theory and Practice, Martinus Nijhoff Publishers 1996, 74, 94]. See also Ryngaert, Public In-‐‑ternational Law, supra note 18, at 91. The limitation posed by the ICJ in economic law is that the nationality of a corporation cannot be defined by who exercises control and thus the shareholder identity. See ICJ, Barcelona Traction, Light and Power Co Ltd. (Belgium v. Spain), ICJ Rep 4, § 41 (1970): "ʺSeparated from the company by numerous barriers the shareholder cannot be identified with it."ʺ See also § 213 of the RESTATEMENT (THIRD) OF FO-‐‑REIGN RELATIONS LAW: "ʺFor purposes of international law, a corporation has the nationali-‐‑ty of the state under the laws of which the corporation is organized"ʺ).

33 See Ryngaert, Public International Law, supra note 18, at 94.; [W. Berge, Criminal Jurisdiction and the Territorial Principle, 30 Mich. L. Rev. 238 (1931), 268 ("ʺIt is submitted that if this type of jurisdiction is undesirable it should be outlawed by international agreement, but that, until this can be done, nations disapproving of such jurisdiction will have to tolerate its exercise by those nations who claim it."ʺ)].

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The protective principle counts among the generally accepted principles al-‐‑lowing the exercise of extraterritorial jurisdiction.34 Thus, a state can lawfully assert jurisdiction outside its territory when its vital interests are concerned.35 These interests primarily regard its sovereignty or its right to political indepen-‐‑ce. However, the protective principle is also invoked under less dramatic cir-‐‑cumstances such as the counterfeiting of foreign currency, making false state-‐‑ments to consular officials in order to obtain a visa or drug smuggeling.36 There has not been any discernible controversy about this extension. In other words: to base extraterritorial jurisdiction on the protective principle is not unlawful under international law.

Under the universality principle jurisdiction is based solely on the nature of the crime, without any other link to the state. The main offenses amenable to universal jurisdiction are the so-‐‑called "ʺcore crimes against international law"ʺ, which include genocide, war crimes, crimes against humanity and torture.37 Even in the absence of an international convention, these crimes are violations of jus cogens, and therefore subject to universal jurisdiction.38 The primary role of the universality principle is in criminal law; for questions on the legality of extraterritoriality in financial regulation it will be of little relevance.

Lastly, one should not forget that extraterritoriality can be based on treaty law. When sovereign states enter into a treaty wherein one or both parties ac-‐‑cept extraterritorial jurisdiction by the other, there is no question about the va-‐‑lidity of the claim to exercise extraterritorial jurisdiction from the perspective of international law.

34 See Ryngaert, Public International Law, supra note 18, 96 et seq.; Harvard Research on In-‐‑

ternational Law, Draft Convention on Jurisdiction with Respect to Crime, 29 Am. J. of Int'ʹl L. 439 (1935), 556.

35 IBA, Report of the Task Force on Extraterritorial Jurisdiction (2009), 14. See also Ryngaert, Public International Law, supra note 18, at 95.

36 See Ryngaert, Public International Law, supra note 18, at 99. 37 Kenneth C. Randall, Universal Jurisdiction Under International Law, 66 TEX. L. REV. 758

(1988), 788. See also IBA, Report 2009, 14 et seq. (regarding the differentiations between criminal and civil law). See Ryngaert, Public International Law, supra note 18, at 115.

38 See RESTATEMENT (THIRD) OF THE FOREIGN RELATIONS LAW OF THE UNITED STATES § 404 (1987). See also Colangelo, CORNELL L. REV. 2013, supra note 14, at 1327; Ryngaert, Public In-‐‑ternational Law, supra note 18, at 115.


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The starting point of this section was that jurisdicton may not be exercised extraterritorially without some specific basis in international law. As might be clear from the paragraphs above, international law offers a variety of jurisdicti-‐‑onal grounds to exercise extraterritorial jurisdiction. Thus, in the great majority of cases in the area of financial regulation, the assertion of extraterritorial juris-‐‑diction will be presumptively valid.

C. Extraterritoriality as a Core Element in International Financial Regulation

It has been argued above that from the perspective of international law, extra-‐‑territoriality needs specific justification, but that this justification exists in the great majority of the cases. Nevertheless, extraterritoriality, notably of US pro-‐‑venience, has attracted much criticism.39 It is argued that extraterritoriality sub-‐‑verts traditional multinational processes,40 and that to turn away from multilat-‐‑

39 See, e.g., Austen L. Parrish, VANDERBILT L. REV. 2008, supra note 12, at 1504 et seq. (extrater-‐‑

ritorial laws are a significant threat to long-‐‑term American interests and represent a fun-‐‑damentally undemocratic method of regulation); Parrish, 87 NOTRE DAME L. REV. 2013, supra note 21, at 1701; Stephen J. Choi/Andrew T. Guzman, The Dangerous Extraterritoriality of American Securities Law, 17 Nw. J. Int'ʹl L. & Bus. 207 (1996-‐‑1997), 208 (extraterritoriality is undesirable and leads to frequent conflicts between the United States and other nations); Kung Young Chang, Multinational Enforcement of U.S. Securities Laws: The Need for the Clear and Restrained Scope of Extraterritorial Subject-‐‑Matter Jurisdiction, 9 Fordham J. of Corp. & Fin. L. 89 (2003), 92 (extraterritorial scope of federal jurisdiction is inconsistent and expan-‐‑sive, and this results in conflicts with other countries and the potential for redundant and uneceessarily costly systems of overlapping regulations); Kern Alexander, The Efficacy of Extra-‐‑territorial Jurisdiction and US and EU Tax Regulation, SZW 2009, 463 (EU model of mutual legal assistance offers an alternative to the much criticised US unilateralism and extraterritoriality); Thomas Reutter, Der lange Arm des US-‐‑Kapitalmarktrechtes, Neue Zürcher Zeitung, 12.10.2001 (US extraterritoriality in securities regulation is an extrava-‐‑ganza which can hardly be justified in view of the ongoing harmonization of international securities law); Markus Städeli, Lukratives Geschäft mit dem Export der eigenen Gesetze, NZZ am Sonntag, 6.7.2014 (noting that the US have an export item which is hated by the rest of the world: US law).

40 On FATCA: [Arthur J. Cockfield, The Limits of International Tax Regime as a Commitment Projector, 33 VA. TAX REV. 59 (2013), at 102-‐‑103 ("ʺsubverts traditional multinational proces-‐‑ses)]; Allison Christians, Putting the Reign Bank in Sovereign, 40 PEPP. L. REV. 1347 (2013), at 1408 ("ʺproposes a turn away from multilateralism"ʺ). For additional cricital comments on

Susan Emmenegger

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eralism is particularly damaging at a time where the governmental responses to the financial crisis have been remarkably consensus-‐‑oriented, giving rise to a large body of international standards with a harmonizing effect on the global scale.41 A similar criticism is voiced with regard to the more recent EU financial regulations, whose growing extraterritorial out-‐‑reach has been termed the "ʺBrussels Effect"ʺ.42

Yet if one looks at the standards and principles developed by the interna-‐‑tional standard setters, extraterritoriality emerges as a core instrument in all major fields of financial regulation: in prudential supervision, in market and transaction regulation and in conduct regulation. This type of extraterritoriality will be exercised by single nations, but it is based on a multilateral consensus. There is a point to be made: When sovereign states discuss issues of financial regulation, extraterritoriality emerges as the key instrument to attain superviso-‐‑ry and/or regulatory goals.

1. Consolidated Supervision

When the leaders of the G20 held their summit meeting in Washington in the peak of the financial crisis in 2008, they issued a declaration in which they pledged to ensure that all financial markets, products and participants are ade-‐‑quately regulated.43 With regard to banks, this reiterated a central tenet of fi-‐‑nancial regulation which has been at the core of the work of the Basel Commit-‐‑tee on Banking Supervision (BCBS). The BCBS has been most famous for its

FATCA see Joshua D. Blank/Ruth Mason, Exporting FATCA, NYU Law & Economics Re-‐‑search Paper Series, Working Paper No. 14-‐‑15 (February 2014).

41 James Cox, Extraterritorial Reach of U.S. Financial Laws, in: Hopt/Wymeersch/Ferrarini (Eds.), Financial Regulation and Supervision: A Post-‐‑Crisis Analysis, at 468-‐‑469.

42 Sarah Miller, Revisiting Extraterritorial Jurisdiction: A Territorial Justification for Extratraterri-‐‑torial Jurisdiction under the European Convention, 20 European Journal of International Law 1223 (2010), at 1223. See also John C. Coffee Jr., Extraterritorial Financial Regulation: Why E.T. can'ʹt come home, 99 CORNELL LAW REV. 1260 (2014), at 1263 note 9 ("ʺAlthough U.S. banking lobbyists and other critics of the U.S. policy regularly portray U.S. financial regulators as uniquely and arrogantly applying our law extraterritorially, the EU has actually done much the same over the same period."ʺ).

43 Summit on Financial Markets and the World Economy, November 15, Washington 2008, available at: <https://g20.org/wp-‐‑content/uploads/2014/12/Washington_Declaration_0.p-‐‑df>.


15

work on capital standards. However, it has always had another major strand of work, namely, the development of principles for the supervision of cross-‐‑border banking.44 Starting in 1974, the BCBS has continuously developed those principles along the line that no bank should escape supervision. At the heart of this endeavor is the concept of consolidated supervision. As the Committee ex-‐‑plained in its Concordat of 1983, "ʺthe principle of consolidated supervision is that parent banks and parent supervisory authorities monitor risk exposure [...] of the banks or banking groups for which they are responsible, as well as the adequacy of their capital, on the basis of the totality of their business wherever con-‐‑ducted."ʺ45

The Concordat principles were reformulated as minimum standards in 1992. They further developed the concept of consolidated supervision, effective-‐‑ly extending it to "ʺall prudential matters pertaining to international banks"ʺ, in-‐‑cluding the bank'ʹs conduct in terms of criminal activity or violations of banking law.46 On the substantive side, they specified that the home supervisor should have the capability to prevent the bank or banking group from creating foreign banking establishments in particular jurisdictions.47 While reiterating the im-‐‑portance of the information flow between supervisors, they also introduced the instrument of on-‐‑site examinations by the home supervisor in all jurisdictions where the bank is active as an element of consolidated supervision.48 A joint report of the BCBS and the Offshore Group of Banking Supervisors published

44 On the history of the BCBS see the comprehensive work of James Goodhart, The Basel

Committee on Banking Supervision: The Early Years 1974-‐‑1997, Cambridge University Press 2011.

45 BCBS, Principles of the Supervision of Bank'ʹs Foreign Establishments (May 1983), Point III, available at: <http://www.bis.org/publ/bcbsc312.pdf>.

46 BCBS, Minimum Standards for the Supervision of International Banking Groups and their Cross-‐‑Border Establishments (July 1992), Introduction. The text refers to the supervisors'ʹ active committment to cooperate in said areas. But effectively, this means that consoli-‐‑dated supervision will include areas of law which are beyond the scope of traditional pru-‐‑dential supervision and regulation.

47 BCBS, Minimum Standards for the Supervision of International Banking Groups and their Cross-‐‑Border Establishments (July 1992), II./1. at 3.

48 BCBS, Minimum Standards for the Supervision of International Banking Groups and their Cross-‐‑Border Establishments (July 1992), II./3. at 5.

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in 1996 set out the standard procedures for the on-‐‑site inspections.49 The report was discussed at the Ninth International Conference of Banking Supervisors and its principles were endorsed by the supervisors of one hundred and forty countries.50

If a home country supervisor can order the bank'ʹs foreign branches and subsidiaries to transmit information about their local operations, if he is in a position to prohibit such operations and if he can go as far as conducting on-‐‑site inspections, then his supervisory power is clearly extraterritorial. Indeed, con-‐‑solidated supervision as the core concept of effective cross-‐‑border banking su-‐‑pervision is based on the assumption of extraterritoriality. As shown above, the extraterritoriality in the context of consolidated supervision is not restricted to purely prudential matters, but extends to the conduct of banks with regard to criminal law and banking law. Moreover, these minimum standards are either implemented or at least endorsed by a very large number of countries, meaning that there is a widespread consensus on the appropriateness of extraterritoriali-‐‑ty in regulating banks with cross-‐‑border activities.

2. Single Point of Entry Resolution

In 2011, the Financial Stability Board (FSB) published and adopted the Key At-‐‑tributes of Effective Resolution Regimes for Financial Institutions, setting out twelve essential features that should be part of the resolution regimes in all ju-‐‑risdictions. The G-‐‑20 Heads of States endorsed the key attributes at the Cannes summit meeting as "ʺnew international standards for resolution regimes."ʺ51

As has been famously said, "ʺbanks are global in life, but national in death"ʺ.52 In designing the key attributes, the FSB has been mindful of the fact that territo-‐‑

49 BCBS and Offshore Group of Banking Supervisors, The Supervision of Cross-‐‑Border Ban-‐‑

king (October 1996), at 21. 50 BCBS and Offshore Group of Banking Supervisors, The Supervision of Cross-‐‑Border Ban-‐‑

king (October 1996), Preface. 51 See FSB, Key Attributes of Effective Resolution Regimes for Financial Institutions, October

2011, revised version published in October 2014 (no changes to the 12 key attributes), available at: <http://www.financialstabilityboard.org/wp-‐‑content/uploads/r_141015.pdf>

52 The dictum is attributed to Mervyn King, Governor of the Bank of England from 2003 – 2013. See Eva Hüpkes, Too Big, Too Interconnected and Too International to Resolve? How to Deal with Global Financial Institutions in Crisis, in: Financial Regulation at the Cross-‐‑


17

rial borders will be watched more closely for banks in death than for banks in life. Accordingly, key attributes'ʹ primary aim is to make one national death look as much alike as the other. Yet even in this essentially territorial context, the multinational Crisis Management Groups (CMGs) are required to define the roles and responsibilities of the national authorities and to reach an agreement with regard to the cross-‐‑border implementation of specific resolution measures.53 In order to be effective, these agreements are bound to include ex-‐‑traterritorial powers in favor of one national authority, presumably the home authority.

More importantly, the FSB has published a Guidance on Developing Effec-‐‑tive Resolution Strategies in 2013, complementing the Key Attributes and map-‐‑ping possible resolution strategies by the CMGs.54 Therein, it sets forth two res-‐‑olution strategies: The single point of entry (SPE) ad the multiple point of entry (MPE). In the MPE, resolution tools are applied to different parts of the group by two or more resolution authorities in a coordinated way. In the SPE, resolu-‐‑tion powers are applied to the top of a group by a single national resolution authority. The SPE approach seems to be carrying the day, as it is favored by the U.S. and the UK (and Switzerland). Both approaches require extraterritorial powers of the resolution authorities. This is particularly evident in the case of the SPE, where the resolution powers are concentrated at the level of the single resolution authority, which, according to the FSB, will probably be "ʺin the juris-‐‑diction responsible for the global consolidated supervision of a group."ʺ55 Con-‐‑ceptually, the SPE replicates the concept of consolidated supervision in the area of bank recovery and resolution. Needless to say that its implementation is much more challenging, as it implies that host authorities will refrain from in-‐‑dependent resolution action based on the assumption that the group-‐‑wide reso-‐‑lution by the home authorities will adequately reflect its interests in the resolu-‐‑tion process.

roads. Implications for Supervision, Institutional Design and Trade, Panagiotis Deli-‐‑matsis/Nils Herger (eds), Kluwer 2008, 75, 93 note 64.

53 See FSB, Key Attributes of Effective Resolution Regimes, KA 9.1 (ii), (viii). 54 FSB, Recovery and Resolution Planning for Systemically Important Financial Institutions:

Guidance on Developimg Effective Resolution Strategies (16 July 2013), p. 12, available at: < http://www.financialstabilityboard.org/wp-‐‑content/uploads/r_130716b.pdf>.

55 Id.

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The SPE has not yet been tested. Whether it will ever be successfully im-‐‑plemented remains an open question.56 From an extraterritoriality perspective, however, what emerges from consensus-‐‑oriented international standard-‐‑setters such as the FSB is that not only in life, but also in the death of banks the super-‐‑visory process hinges on the extraterritorial application of one authority'ʹs reso-‐‑lution framework to the worldwide subsidiaries and branches of the failing bank.

3. OTC Derivatives Rules

At the summit meeting in Pittsburgh in September of 2009, the G-‐‑20 leaders called for tougher regulation of over-‐‑the-‐‑counter (OTC) derivatives. They agreed that the risks posed by these types of activities should be addressed by four regulatory responses. First, all standardized OTC derivative contracts should, where appropriate, be traded on exchanges and electronic platforms. Second, these contracts should be cleared through central counterparties by end-‐‑2012 at the latest.57 Third, OTC derivative contracts should be reported to trade repositories. Forth: Non-‐‑centrally cleared contracts should be subject to higher capital requirements.58 At the Toronto summit in June 2010, the G-‐‑20 leaders committed to "ʺaccelerate the implementation of over-‐‑the-‐‑counter (OTC) derivatives regulation and supervision and to increase transparency and stand-‐‑ardization."ʺ59 Furthermore, they committed to work towards the establishments of CCPs and TRs in line with global standards and ensure that national regula-‐‑

56 The U.S. as one of the advocates of the SPE requires large foreign banks to place their U.S.

subsidiaries under a U.S. intermediate holding company. This allows the U.S. to imple-‐‑ment a SPE resolution under its own control. Needless to say that this undermines the very idea of an SPE resolution.

57 The measure regarding the requirement of a Central Clearing Party (CCP) is a response to the collapse of American International Group, Inc. (AIG) in 2008. AIG had been exposed to sudden margin calls from its counterparties in its OTC derivatives trades and had to be bailed out by the U.S. government. On the AIG bailout see [William K. Sjostrom, Jr., The AIG Bailout, 66 WASH. & LEE L. REV. 943 (2009).]

58 See Leader'ʹs Statement: The Pittsburgh Summit (Sept. 24-‐‑25, 2009), available at: < https://g20.org/about-‐‑g20/past-‐‑summits/2009-‐‑pittsburgh/>, Para. 13, third bullet point.

59 Leader'ʹs Statement: The Toronto Summit (June 26-‐‑27, 2010), avilable at: <https://g20.org/wp-‐‑content/uploads/2014/12/Toronto_Declaration_eng.pdf>, Para. 25.


19

tors and supervisors have access to all relevant information."ʺ60 The FSB had been charged with the assessment of the implementation of the G20 regulatory agenda. Under its lead, a working group published 21 recommendations for implementing the G20 commitments to reform the OTC derivatives markets. The FSB publishes progress reports on a regular basis.61 In the following years, progress reports were published on a half-‐‑yearly basis a report with recom-‐‑mendations on the implementation of the OTC derivatives regulation in Octo-‐‑ber 2010.62

The Leader'ʹs Declarations and the FSB recommendations avoid the term "ʺextraterritoriality"ʺ. However, in view of the fact that the OTC derivatives mar-‐‑kets are essentially cross-‐‑border markets,63 effective regulation and supervision presumes extraterritoriality.64 The regulation and supervision of central clearing parties can only be effective on the basis of an extraterritorial reach of the rele-‐‑vant (national) authority. The same is true for the trade repositories. Indeed, when the G-‐‑20 Leaders affirm that national regulators and supervisors must have access to all relevant information, it is understood that they must be able to gather said information from trade repositories in foreign jurisdictions. Final-‐‑ly, the G20 Leader'ʹs call for the mutual recognition of the regulatory regimes with similar outcomes at the summit meeting in St. Petersburg in 201365 effec-‐‑

60 Id. 61 Progress reports were published in April 2011, October 2011, June 2012, October 2012, Ap-‐‑

ril 2013, September 2013, April 2014, November 2014, July 2015. The reports are available on the FSB website: <http://financialstabilityboard.org>, publications, progress reports.

62 FSB, Implementing OTC Derivatives Markets Reforms (10 October 2010), available at: < 63 According to the SEC, "ʺcross-‐‑border transactions are the norm, not the exception."ʺ Exchan-‐‑

ge Act Release No. 34-‐‑6940 ("ʺCross-‐‑Border Security-‐‑Based Swap Activities; Re-‐‑Proposal of Regulation SBSR and Certain Rules and Forms Relating to the Registration of Security-‐‑Based Swap Dealers and Major Security-‐‑Based Swap Participants"ʺ), 78 Fed. Reg. 30, 968, 30,976 (May 23, 2013).

64 See also Greene/ Pothia, CAPITAL MARKETS LAW JOURNAL 2013, supra note 9, at 359 (poin-‐‑ting at a speech by the acting director of the Division and Trading of the SEC, John Ram-‐‑sey, delivered to the ABA on May 2013, where Ramsey noted that the implementation of the G20 committments make extraterritoriality inevitable).

65 G20 Leader'ʹs Declaration, St. Petersburg Summit (September 2013), at Para. 71, available at: <https://g20.org/wp-‐‑content/uploads/2014/12/Saint_Petersburg_Declaration_ENG_0.-‐‑pdf>.

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tively refers to the instrument of "ʺsubstituted compliance"ʺ. Substituted compli-‐‑ance (in the European terminology: "ʺfunctional equivalence"ʺ) has been the main mechanism in the current transnational efforts to coordinate OTC derivatives regulations.66 It asserts compliance with the rules of one country if there is compliance with another country, provided that the other country'ʹs rules are judged equivalent.67 This, however, presupposes the existence of a regulatory claim in the first place.68 In other words: substituted compliance is a mechanism to avoid conflicting outcomes resulting from extraterritorial claims. In the case of OTC derivatives regulations, the claims as such are not called into question.

The assumption and indeed the consensus on the extraterritorial reach of OTC derivatives regulation and the fact that the regulatory regimes are similar has not prevented controversies among the major regulatory powers regarding the implementation of the OTC derivatives markets regulation.69 Notably, there has been substantial friction between the U.S. and the EU, as both have imple-‐‑mented regulation with an express extraterritorial reach.70 As of today, the

66 See, e.g., Greene/ Pothia, CAPITAL MARKETS LAW JOURNAL 2013, supra note 9, at 386. For a

critical view on substituted compliance see Coffee, CORNELL LAW REV. 2014, supra note 42, at 1265 ("ʺthe concept has not received the scrutiny it needs. Sometimes, its costs may out-‐‑weigh its benefits."ʺ); Alexy Artamonov, Cross-‐‑border application of OTC derivatives rules: re-‐‑visiting the substituted compliance approach, 1 Journal of Financial Regulation 1 (2015), 3 et seqq.

67 For a statutory example see EMIR'ʹs art. 13 (2) and especially (3): "ʺAn implementing act [of recognition] on equivalence [...] shall imply that counterparties entering into a transaction [...] shall be deemed to have fulfilled the obligations contained in Art. [...] where at least one of the counterparties is established in that country.

68 See also Coffee, CORNELL LAW REV. 2014, supra note 42, at 1265. 69 Generally speaking, the G20 OTC Derivatives Regulators Group (ODRG) on cross-‐‑border

Implementation Issues has noted in its report of March 2014 that issues of actual or poten-‐‑tial overlap, duplications, conflicts and gabs in regulatory requirements remain a problem in the implementation of the OTC derivatives regulation framework. See: <http://www.esma.europa.eu/system/files/2014-‐‑03-‐‑ddrg_odrg_report_to_the_g20_march_2014>.

70 For the EU: Reg. 648/2012 on OTC derivatives, central clearing counterparties and trade repositories (EMIR). For the U.S.: Dodd-‐‑Frank Wall Street Reform and Consumer Protec-‐‑tion Act (Dodd-‐‑Frank Act), Sec. 722, 7 U.S.C. § 2(i) (2012). [Explicit extraterritorial reach in Sec. 722(d)]. For a discussion see Coffee, Cornell Law Rev. 2014, supra note 42, at 1274 et seqq.; Artamonov, Journal of Financial Regulation 2015, supra note 62, at 3 et seqq.


21

compromises that have been reached71 are uncertain to eliminate the risk that the regulated actors will face conflicting regulatory demands, even though the regulatory regimes are similar. Thus, to assume extraterritoriality as an under-‐‑lying concept does not make the design of the actual regulatory framework any less challenging. But this should not distract from the finding that in the sys-‐‑temically relevant field of OTC derivatives rules, the regulatory responses pro-‐‑posed by the main international institutions operate under the assumption of extraterritoriality. It is also clear that, whatever the outcomes of the present co-‐‑operation and harmonization efforts will be, they will include extraterritoriality as a central regulatory and supervisory tool.

4. Money Laundering

In the late 1980s the problem of drug trafficking had reached alarming propor-‐‑tions and had become a concern in the US and in Europe. At the summit meet-‐‑ing of the G772 hosted by French President François Mitterrand in the new arch of Paris la Défense (sommet de l'ʹarche) in 1989, the Ministers stressed the need for decisive actions to combat drug trafficking. This included the establishment of the Financial Action Task Force (FATF) to be comprised by the summit members and other countries interested in these problems.73 In 1990, the FATF published a report which contained forty recommendations to improve the na-‐‑

71 The key term here is "ʺsubstantive compliance"ʺ or "ʺfunctional equivalence"ʺ. Thus, the U.S.

framework will appply to OTC derivatives transactions (transaction level) and counterpar-‐‑ties to such transactions (entity level) if the transaction is: (i) within the U.S., (ii) outside the U.S. with at least one party being a U.S. person and foreign branch or affiliate of a U.S. person, unless substituted compliance is available. Furthermore, the same rules will apply to non-‐‑U.S. persons who have significant transactions with U.S. counterparties. For a discus-‐‑sion of the substituted compliance concept see, e.g., [Howell E. Jackson, Substituted Compli-‐‑ance: The Emergence, Challenges, and Evolution of a New Regulatory Paradigm, 1 Journal of Fi-‐‑nancial Regulation (2015)]. [See also: Artamonov, Journal of Financial Regulation 2015, sup-‐‑ra note 62, at ##].

72 The meeting included the President of the Commission of the European Communities. 73 See FATF, History of the FATF, available at: <http://www.fatf-‐‑gafi.org/about/historyofthef-‐‑

atf/>. Originally, its members comprised the G7 (United States, Japan, Germany, France, United Kingdom, Italy Canada), the Eu Commission and eight other countries (Sweden, Netherlands, Belgium, Luxemburg, Switzerland, Austria). As of 2015, the FATF counts 36 members.

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tional legal systems against money laundering.74 Since then, the FATF has con-‐‑sistently extended its mandate to the combat of terrorist financing (2002)75, to the financing of proliferation of weapons of mass destruction (2008),76 and to the general combat of financial crime, including tax crimes (2012).77

The revised FATF recommendations of 2012 are entitled "ʺInternational Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation"ʺ. They figure in the Compendium of Standards published by the Financial Stability Board which lists the standards which are "ʺinternational-‐‑ly accepted as important for sound, stable and well functioning financial sys-‐‑tems."ʺ78

The current version of the FATF recommendations of 2012 include the fol-‐‑lowing interpretive note to recommendation 3 on the money laundering of-‐‑fence: "ʺPredicate offenses for money laundering should extend to conduct that occurred in another country, which constitutes an offence in that country, and which would have constituted a predicate offence had it occurred domestically. Countries may provide that the only prerequisite is that the conduct would have constituted a predicate offence, had it occurred domestically."ʺ79

The short version of the interpretive note is: extraterritoriality. Predicate of-‐‑fenses to money laundering are explicitly extended to conduct in another coun-‐‑try. This makes perfect sense. If the proceeds of a crime could legally be invest-‐‑

74 FATF, Report 1990, available at: < http://www.fatf-‐‑gafi.org/media/fatf/documents/reports-‐‑

/1990%20ENG.pdf>. The recommendations were an integral part of the report which also addressed the money laundering process (containing estimates of the financial flows re-‐‑sulting from drug trafficking) as well as the status of international treaty law and national legislation with regard to money laudering. The 1990 report adressed money laundering exclusively under the aspect of drug trafficking.

75 This led to the publishing of eight (later nine) Speical Recommendations on Terrorist Fi-‐‑nancing. See FATF, Annual Report 2001-‐‑2002, available at:< http://www.fatf-‐‑gafi.org/m-‐‑edia/fatf/documents/reports/2001%202002%20ENG.pdf>.

76 FATF, History, supra note 73. 77 FATF, International Standards on Combating Money Laundering and the Financing of

Terrorism and Proliferation (2012), at 113 (designated categories of offenses now include tax crimes), available at: <http://www.fatf-‐‑gafi.org/about/historyofthefatf/>.

78 See FSB, The Compendium of Standards, available at: <http://www.financialstability-‐‑board.org/what-‐‑we-‐‑do/about-‐‑the-‐‑compendium-‐‑of-‐‑standards/>.

79 FATF, International Standards, supra note 77, at 34.


23

ed in any country other than the one where the crime was committed, the fight against money laundering would be a sham. National provisions on money laundering consistently include this extraterritorial scope, and they differ only with regard to the condition of double criminality.

5. Conclusion

Extraterritoriality is at the core of the efforts of consensus-‐‑oriented international standard setters charged with enhancing the regulation and supervision of banks. This is particularly true for prudential regulation and supervision, i.e. the rules and measures to strengthen the banks financial resilience and – if this should fail – their resolution. Here, the concept of consolidated supervision op-‐‑erates under the assumption of the extraterritorial exercise of jurisdiction by the home supervisor. The extension of consolidated supervision to general conduct issues such as criminal law and banking law implies a consensus about the ne-‐‑cessity of extraterritoriality beyond the core aspects of prudential regulation and supervision. Extraterritoriality is also a central regulory tool in the systemi-‐‑cally relevant field of OTC derivatives regulation. Finally, extraterritoriality is the underlying principle in the international efforts to combat money launder-‐‑ing. In short: In international financial regulation, extraterritoriality extends from prudential regulation to markets and transaction regulation and to con-‐‑duct regulation.

D. Multilateral and Unilateral Extraterritoriality

As I have pointed out, extraterritoriality is criticized as undermining coordinat-‐‑ed multilateral responses to the challenges of global finance.80 It is also seen as fundamentally undemocratic because it imposes obligations on individuals and groups who have not consented to those laws.81 A closer look at the current regulatory architecture has revealed that extraterritorial financial regulation is often driven by international institutions such as the BCBS, the FSB and the FATF. In these cases, extraterritoriality is the result of a multilateral consensus.

80 Cox, Extraterritorial Reach, at 468-‐‑469; Parrish, NOTRE DAME L. REV. 2013, supra note 21, at

1703. 81 Parrish, NOTRE DAME L. REV. 2013, supra note at 21, at 1701.

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Multilateral extraterritoriality does not suffer from a democratic legitimacy problem as long as the measures are aimed at other members of these institu-‐‑tions.

The situation is different when countries exercise extraterritorial jurisdiction on their own initiative. At first sight, examples for unilateral extraterritoriality abound. On the US side, they include the Sherman Antitrust Act (1890)82 and the Foreign Trade Antitrust Improvement Act (1982),83 the Foreign Corrupt Practices Act (1977)84, the International Emergency Economic Powers Act (1977)85, the Patriot Act (2001),86 the Sarbanes/Oxley Act (2002)87, the Foreign Account Tax Compliance Act (2010)88, parts of the Dodd-‐‑Frank Act (2013)89. On

82 26 Stat. 209, 15 U.S.C. §§ 1-‐‑7 (1890). 83 Pub. L. No 97-‐‑290, 96 Stat. 1246, 15 U.S.C. § 6. In the field of antitrust law, the attempt to

exercise extraterritorial jurisdiction failed, as legislators in Europe and elsewehere passed blocking laws. For a more detailed account see Coffee, CORNELL L. REV. 2014, supra note 42, at 1266.

84 PL 95-‐‑213 (1977), amended in 119, PL 105-‐‑366, 15 U.S.C. §§ 78dd-‐‑1 et seq. The FCPA prohib-‐‑its bribing of foreign officials to obtain or retain business, and applies to all U.S. citizens and nationals and all foreign companies listed in the U.S. for all acts committed in or out-‐‑side the U.S. A widely noted application of the Act took place in the DOJ'ʹs prosecution of the German company Siemens. The case was settled in 2008, Siemens paid USD 800 Mio. in fines.

85 PL 95-‐‑995, 50 U.S.C. Sec. 1701 et. seq. 86 Uniting and Strenghtening America by Providing Appropriate Tools Required to Intercept

and Obstruct Terrorism Act, Pub. L. No. 107-‐‑56. Extended by President Obama on May 27, 2011, renewed by the USA Freedom Act in 2015.. The Act applies to all acts of U.S. natio-‐‑nals and all affiliates of U.S. companies outside the U.S., as well as foreign companies outs-‐‑ide the U.S. causing a U.S. person to violate the act, and U.S. and non-‐‑U.S. third parties such as banks who approve or facilitate violations of sanctions rules. In practice, this me-‐‑ans that the Act allows to freeze assets in a U.S. correspondent account if the foreign bank is alleged to have a terrorist client. For a more detailed account see [Kern Alexander, Extra-‐‑territorial US Banking Regulation and international terrorism: The Patriot Act and the international response, J. B'ʹING REG. 307 (2002), passim.]

87 Pub. L. No. 107-‐‑204, 116 Stat. 745, 15 U.S.C. § 7210 et seq. SOX requires all companies listed on US. stock exchanges to install whistleblower procedures in their worldwide operations. It also requires the US PCAOB to inspect foreign auditors of companies with listings in the U.S.

88 Publ. L. No. 111-‐‑147, section 501 (Hiring Incentives to Restore Employment Act). FATCA requires tax reporting of all foreign financial institutions regarding their U.S. clients.


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the EU side, one can point at the Regulation on the Control of Concentrations between Undertakings (1989/2004),90 the Markets in Financial Instruments Di-‐‑rective and Regulation (2004/2014),91 the European Market Instruments Regula-‐‑tion (2012),92 the Capital Requirements Directive (2013)93 and the Market Abuse Regulation (2014)94.

However, to what extent these acts have a truly unilateral foundation needs further examination. Also, the democratic legitimacy deficit may be less of an issue if there is a choice in submitting to these rules. Market access rules might be considered to include that choice, although one would have to determine to

89 Pub. L. No. 111-‐‑203, § 201 et seq., 124 Stat. 1375 (2010), codified at 12 U.S.C. §5381 et seq. 90 Reg. No. 139/2004 on the control of concentrations between undertakings, Ingress (10). See

Case T-‐‑102/96, Glencore v. Commission, [1999] ECR II-‐‑753, para 90. The ECJ held that the application of the Merger Regulation is justified under public international law whent it is foreseeable that the proposed merger will have an immediate and substantial effect within the EU. Reg. This decision was taken under the first Merger Regulation No. 4046/89 of 21 December 1989. The decision was integrated in Introduction (10) of the present merger rule.

91 Directive 2004/39/EC (MiFID I), amended by Directive 2014/65/EU (MiFID II) and regulati-‐‑on 600/2014 (MiFIR). MiFIR applies clearing obligations to third-‐‑country entities if the contract has direct, substantial and forseeable effect within the EU (Art. 28 (5) MiFIR). Mi-‐‑FID applies to financial intermediaries who provide cross-‐‑border investment services to clients in the EU, even if the actual services are offered outside the EU.

92 Reg. 648/2012 on OTC derivatives, central clearing counterparties and trade repositories (EMIR). EMIR imposes clearing and risk-‐‑mitigation obligations on persons concluding certain types of derivatives contracts. Contracts that are concluded exclusively between entities outside the EU my be subject to these obligations where the contract in question has a direct, substantial and foreseeable effect within the EU (Art. 4 (1)(a)(v).

93 Directive 2013/36 on access to the activity of credit institutions and the prudential supervi-‐‑sion of credit institutions and investment firms, O.J. 2013, L176 (CRD IV). IN CRD IV, the EU fixes the variable element of remneration at a maximum of 100% of salary or twice this level with explicit shareholder approval (Art. 94 (1)(g)). These provisions operate at group, parent company and subsidiary levels, including in relation to institutions that are estab-‐‑lished in offshore financial centers outside the EU (Art. 92(1)). The provisions had first be-‐‑en challenged by the UK before the ECJ and later withdrawn. See Case C-‐‑507/13, United Kingdom v. European Parliament and Council, Order of the President of the Court, 9 Decem-‐‑ber 2014.

94 Regulation No. 596/2014 (MAR). MAR applies when the transaction, order or behaviour has or is likely or intended to have an effect on the price or value of a financial instrument

Susan Emmenegger

26

what extent access to central markets are a matter of choice. Finally, unilateral extraterritoriality may trigger international convergence on substantive regula-‐‑tion. FATCA is an example for such a development.95 In this case, unilateral ex-‐‑traterritoriality develops into multilateral extraterritoriality.

Important unilateral extensions of extraterritoriality remain. Financial sanc-‐‑tions law is such a field. But this should not divert out attention from the fact that the problematic instances of extraterritoriality are less frequent than is usu-‐‑ally surmised in the legal and political discourse.

E. Conclusion

In the first part of this research, I have examined the issue of extraterritoriality. I have defined extraterritoriality broadly to encompass every exercise of jurisdic-‐‑tion outside the domestic territory. Jurisdictional claims which are based on the effects that a certain conduct will produce inside the territory are considered extraterritorial. The test whether extraterritorial measures are legal turns on international public law. The result is that most of the measures are legal be-‐‑cause international law offers a broad range of justifications for the exercise of extraterritorial jurisdiction. However, legality does not mean legitimacy. Pro-‐‑tests and frictions between states reflect uneasiness about the democratic con-‐‑tent of measures that are applied extraterritorially. Moreover and especially in the field of financial regulation, extraterritoriality is seen to undermine the ef-‐‑forts to find multilateral solutions to global regulatory challenges. My finding is that extraterritoriality is a core element in international regulatory architecture and that it spans from prudential regulation to market and transaction regula-‐‑tion and finally to conduct regulation. The drivers for this architecture are the international standard-‐‑setters. All of them operate on the consensus of its members who are, for the most part, the world'ʹs largest and emerging econo-‐‑mies. It results from this that extraterritoriality is consensus-‐‑based and that it is complementary rather than contradictory to international convergence in the field of financial regulation. Important "ʺproblem zones"ʺ remain, notably in the

95 On FATCA'ʹs role in developing international convergence see Blank/Mason, Exporting

FATCA, supra note 40. Another example may be the FCPA, if one looks at the 19997 OECD Anti-‐‑Bribery Covention.


27

field of economic sanctions law. Also, international consensus on the need for extraterritorial regulation does not mean that the framework is easy to design. Concurring jurisdiction resulting from extraterritoriality is bound to create reg-‐‑ulatory conflicts. This is why the second part of my research will focus on pos-‐‑sible instruments to avoid or at least mitigate the consequences of such conflict.

II. Resolving Conflicts arising from Extraterritoriality

Whereas extraterritoriality in financial regulation has a number of benefits, it does come with certain costs. These costs include a potentially excessive burden on the regulated actors and even a risk of violating the laws or regulatory de-‐‑mands of one country by being in compliance with the laws or regulatory de-‐‑mands of another. In a second part, the paper analyses the mechanisms which can be used to mitigate the costs of extraterritoriality and the conflicts it is bound to create.

A. Prescriptive Jurisdiction

1. Treaties

2. Harmonisation of substantive law

3. Substituted Compliance/Functional Aquivalence

4. Consulting obligations for legislation with substantial extraterritorial reach

3. Conflict of Laws Modell for Financial Regulation

B. Enforcement Jurisdiction

1. Sanction Colleges for Enforcement Procedures

2. Double jeopardy as working principle in IFR

C. Conclusion

Susan Emmenegger

28

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Documents

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