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The purpose of the fourth chapter is to show the relation between compliance norms and the other factors influencing their content. The issue addressed in the first subsection to reference these norms to other, external norms in relation to their impact on compliance norms in financial institutions. This applies to rulebooks such as those of the Basel Committee, but also to the general principles of the US and the EU legislation.
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Among the examined bank documents (taking into account the fact that the research was conducted in a different available access) there are the following materials HSBC Holdings Plc., JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp., Barclays Plc., Royal Bank of Scotland Group Plc., and The Goldman Sachs Group Inc.
See Basel Committee on Banking Supervision, Compliance Function in Banks, April 2005, https://www.knf.gov.pl/Images/Zgodnosc%20i%20funkcja%20zapewnienia%20zgodnosci%20w%20bankach_tcm75-25055.pdf, p. 9 et seq. (download 25 March 2019).
Among these other financial issues relating to bank customers are also issues relating to tax evasion, money laundering and the financing of terrorism. The document also provides a warning by stating that a bank that is knowingly engaged in transactions aimed at avoiding ‘regulatory or financial’ reporting obligations by the client, evading tax liability or facilitating illegal transactions, is exposed to a ‘serious risk of non-compliance’ (“ significant compliance risk”). M. Ojo, Basel II and the Capital Requirements Directive: Responding to the 2008/09 Financial Crisis, IGI Global 18/2009, p. 12.
The Basel Committee’s guidelines indicate that laws, regulations and compliance standards have different sources, including primary legislation, rules and standards issued by legislative and supervisory authorities, market rules, codes of practice issued by professional associations and internal codes of conduct for bank employees. The document also stresses that these non-legal norms refer to more broadly understood rules of conduct set out in accepted standards of integrity and codes of ethics. R. Ayadi, E. Arbak, W. P. De Groen, Implementing Basel III in Europe: Diagnosis and Avenues for Improvement, Centre for European Policy Studies 275/2012, p. 10.
While mechanisms to ensure compliance with corporate norms may appear less complex due to the uniform nature of these norms, compliance with laws and supervisory regulations is particularly difficult for global organizations given the amount of regulation that international financial institutions must take into account at the same time. This applies not only to the varying degrees of importance of corporate-level rules of continental law in relation to corporate activities, norms arising from precedent-setting court judgements in common law jurisdictions, but also, for example, from the different types of norms issued by regulators. Compliance services monitor changes in this respect at both local and global levels, where specialized units are set up to prepare so-called legislative and regulatory trackers, compiling information on this issue from multiple sources simultaneously. These sources include all types of legislative alerts usually prepared by law firms and trade associations, participation in various forums, discussions and conferences, as well as “ordinary” sources such as the legal press and the online available legal databases.
In practice, the individual capital agreements are referred to as Basel I, Basel II and Basel III, respectively.
The source of the Basel regulations dates back to 1974 and is linked to the collapse of the German bank Bankhaus Herstatt AG as a result of losses incurred as a result of its speculative activity in the foreign exchange market. This event also caused unprecedented problems for many other financial institutions that were counterparties to the bankrupt bank, and consequently for the currency market turbulence. In response to these developments, the Governors of the G10 central banks set up a permanent committee, the Basel Committee on Banking Regulation and Supervisory Procedures, under the auspices of the Bank for International Settlements. Over time, this institution has been renamed the Basel Committee on Banking Supervision, which has become a forum for ongoing cooperation between the countries concerned in the field of banking supervision. Since then, one of the Committee’s areas of activity has been the development of minimum standards for prudential standards for banks. The parallel objective of its activities was to develop a set of principles complementing the gaps in the banking supervision system and to promote such international standards of risk management in banks as to ensure that problems similar to those that were the original cause of the Committee’s establishment are avoided in the future. In 2009, the Committee was enlarged to include 17 new member states and is now composed of representatives of 27 countries. These countries are represented on the Committee by the delegates of their central banks or banking supervisors.
R. M. Lastra, Risk‐Based Capital Requirements and Their Impact Upon the Banking Industry: Basel II and CAD III, Journal of Financial Regulation and Compliance 12(3)/2004, p. 230.
The provisions of the Introduction to the Second Capital Accord authorize, inter alia, the Basel Committee on Banking Supervision, as part of the continuous improvement of banking supervision arrangements and the dissemination of good practices in banking institutions, to publish guidelines on compliance risk and the implementation of compliance functions in banks. The objective is to ensure that banking supervisors know that an effective compliance policy is in place, that procedures are established, and that management takes appropriate corrective action when non-compliance is identified. The document also states that “compliance policy starts at the top” and will be most effective in a corporate culture that emphasizes standards of integrity and honesty, where boards set examples to others. A bank should apply high standards of business conduct and always strive to respect both the spirit and the letter of the law. M. El Kharbili, S. Stein, I. Markovic, E. Pulvermüller, Towards a Framework for Semantic Business Process Compliance Management, Osnabrueck 2008, p. 9 et seq.
See M. Stefański, Nowe regulacje dotyczące wymagań kapitałowych wobec banków, Materiały i Studia NBP 12(212)/2006, p. 9 et seq.
The implementation of Basel III in the EU Member States takes place through the CRD IV package, which consists of the directive (CRD—Capital Requirements Directive), which replaces the provisions of Directive 2006/48/EC relating to the taking up and pursuit of the business of credit institutions and Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions and the regulation (CRR—Capital Requirements Regulation), which entered into force on 1 January 2014. Further specification of the prudential standards of the CRD IV package takes place in the so-called third level acts, i.e. acts issued in the form of binding technical standards (BTS), non-binding guidelines prepared by the European Banking Authority (EBA), which will be in force on a self-discipline basis (comply or explain). See A. Jurkowska-Zeidler, Nowe europejskie ramy ochrony stabilności wewnętrznego rynku finansowego [in] A. Dobaczewska, E. Juchniewicz, T. Sowiński [ed.] System finansów publicznych. Prawo finansowe wobec wyzwań XXI wieku, Warsaw 2010, p. 195 et seq.
See J. B. Caouette, E. I. Altman, P. Narayanan, Managing Credit Risk: The Next Great Financial Challenge, New York 1998, p. 23.
The intention of the so-called New Capital Accord, also commonly referred to as Basel II, was to strengthen the security and stability of the international banking system and to improve the manner in which the bank’s capital requirements were determined depending on the level of risk incurred and the size of its operations, as well as to take fuller account of new innovative financial instruments based on three pillars when determining capital adequacy. The first pillar concerns minimum capital requirements, which are calculated as the sum of capital requirements for credit, operational and market risk incurred by the bank using an improved method based on an appropriate classification of exposures. The second pillar concerns qualitative requirements related to internal processes of effective and safe risk management and mitigation. The third pillar concerns so-called market discipline, i.e. banks’ obligations to disclose risk related information. The Basel III objectives, on the other hand, are primarily: increasing banks’ capital requirements both in quantitative and qualitative terms, introducing capital protection mechanisms, introducing counter-cyclical capital buffer solutions (equipping financial supervisors with tools to temporarily increase banks’ capital requirements when, in the opinion of supervisors, excessive credit growth in the banking sector leads to significant systemic risks), limiting leverage, introducing new standards limiting short- and long-term liquidity risk and further specifying rules related to corporate governance and risk management in general. A. J. McNeil, R. Frey, P. Embrechts, Quantitative Risk Management: Concepts, Techniques and Tools, Princeton 2015, p. 42.
See Basel Committee on Banking Supervision, Compliance and Compliance Functions in Banks, April 2005, https://www.knf.gov.pl/Images/Zgodnosc%20i%20funkcja%20zapewnienia%20zgodnosci%20w%20bankach_tcm75-25055.pdf, p. 13 et seq. (download 4 February 2019).
See J. K. Levitt, Bottom-Up Lawmaking: The Private Origins of Transnational Law, Global Legal Studies Journal 15/2008, p. 50 et seq. and J. E. Stiglitz, Regulating Multinational Corporations Towards Principles of Cross-Border Legal Frameworks in a Globalized World Balancing Rights with Responsibilities, American International Law Review 23/2007, p. 467 et seq.
See also P. R. Wood, Op. cit., p. 132.
An example is the US Act of 18 November 2010 on tax compliance of foreign account holders, described in more detail below (Foreign Account Tax Compliance Act—FATCA), https://www.irs.gov/Businesses/Corporations/Foreign-Account-Tax-Compliance-Act-FATCA (download 22 April 2019).
EMIR, i.e. European Market Infrastructure Regulation of 4 July 2012 on OTC derivatives and Dodd- Frank Wall Street Reform and Consumer Protection Act adopted by the American Congress on 15 July 2010. See T. Aron, N. Lalone, C. Jackson, EMIR: An Overview of the New Framework, Journal of Investment Compliance 14(2)/2013, p. 57 et seq.
Such a practice may turn out to be highly unfavourable in financial institutions‘ relations with their customers. This may be exemplified by situations occurring in practice where, as a result of such decisions, when the parties were obliged to apply the provisions of the laws specifying the manner of calculating maximum interest.
The growing protection of consumer interests manifests in multiple provisions of laws relating to that on the countries’ levels.
Similarly referred to in the local banking laws provisions in numerous countries.
See art. 6 Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I), OJ L 177, 4 July 2008, pp. 6–16.
See art. 8 Ibidem.
More on the specific role of financial security regulations and prudential requirements adopted in the European Union in response to financial crises, which are a solid reference for compliance standards. See A. M. Jurkowska-Zeidler, Bezpieczeństwo rynku finansowego w świetle prawa Uni Europejskiej, Warsaw 2008, p. 198 et seq. On the same subject in. The context of the EU regulations. See C. Kosikowski, Nowe prawo runku finansowego Unii Europejskiej [in] A. Jurkowska-Zeidler, M. Olszak [ed.] Prawo rynku finansowego. Doktryna, instytucje, praktyka, Warsaw 2016, p. 27.
See J. K. Levitt, The dynamics of International Trade Finance: The Arrangement on Officially Supported Export Credits, Harvard International Law Journal 45/2008, p. 65 et seq.
Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories. Text with EEA relevance, OJ L 201, 27 July 2012, pp. 1–59 and Commission Delegated Regulation (EU) No 148/2013 of 19 December 2012 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards on the minimum details of the data to be reported to trade repositories. Text with EEA relevance, OJ L 52, 23 February 2013, pp. 1–10.
OTC transactions are transactions concluded on the over-the-counter (OTC) market. It is a securities market where transactions take place directly between market participants and therefore without the intermediation of a third party, typically a on stock exchange. On the OTC markets, share prices are set between the parties, for each transaction separately. The over-the-counter market enables companies to raise capital more quickly and without having to meet the high requirements of stock exchanges. As OTC markets are characterised by a higher level of risk and in many countries the possibility to invest in OTC markets is limited to specialised entities and investors with relevant experience, such as investment banks. OTC markets are regulated and supervised in most countries.
The repositories of the OTC transactions usually are established at the country depositories of securities.
These categories are:
FC (financial counterparts)—financial institutions;
NFCs (non-financial counterparts)—non-financial institutions;
NFC+ (non-financial counterparty plus)—non-financial institutions whose average exposure to derivatives exceeds the threshold set out in the EMIR Regulation during 30 working days.
Only certain types of derivatives concluded between each other are subject to central clearing obligations:
a counterparty of FC and another counterparty of FC;
counterparty to FC and counterparty to NFC+;
between two NFC+ counterparties.
FATCA—Foreign Account Tax Compliance Act Adopted by the US Congress as part of a wider law on the creation of instruments to promote employment growth (H.R.2847—Hiring Incentives to Restore Employment Act— HIRE), public law 111- 147 of 18 March 2010, https://www.congress.gov/bill/111th-congress/house-bill/2847 and http://www.gpo.gov/fdsys/pkg/PLAW-111publ147/pdf/PLAW-111publ147.pdf (download 5 June 2019).
H.R.4173—Dodd-Frank Wall Street Reform and Consumer Protection Act—( an act to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end “too big to fail”, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes), https://www.congress.gov/bill/111th-congress/house-bill/4173 (download 5 June 2019).
The responsibility of banks for cases of tax evasion by their customers, measured by the amount of penalties granted, leaves no doubt as to the necessity of a strong involvement of compliance services in the control over the correctness of their operations in this field as well. An example is Credit Suisse, which in May 2014 was found guilty of facilitating the use by American citizens of products that allow them to avoid paying taxes, as a result of which it had to pay a $2.6 billion fine to the US tax authorities. Cf. S. C. Morse, Tax Compliance and Norm Formation Under High-Penalty Regimes, Connecticut Law Review 44(3)/2012, p. 679 et seq.
See R. Eccleston, F. Gray, Foreign Accounts Tax Compliance Act and American Leadership in the Campaign Against International Tax Evasion: Revolution or False Dawn?, Global Policy 5(3)/2014, p. 225 et seq., J. Heiberg, FATCA: Toward a Multilateral Automatic Information Reporting Regime, Washington and Lee Law Review 69/2012, p. 1698 et seq. and also D. Singh, Banking Regulation of UK and US Financial Markets, Hempshire 2007, p. 69.
More on current trends in consumer protection in financial markets in connection with global development trends in the economy. See K. Ward, F. Neumann, Consumer in 2050. The Rise of the EM Middle Class, Global Economics, October 2012, p. 20 et seq., D. Freeman, The Role of Consumption of Modern Durables in Economic Development, Economic Development and Cultural Change 19(1)/2011, p. 24 et seq.
Moreover, in rare cases of conflicting regulations that may have a direct impact on the costs of banking activities, such as where differently defined systemic risks incurred by banks in different jurisdictions are associated with different core capital requirements and capital adequacy ratios, there is usually a tendency to determine the choice of more favourable regulatory environment and thus the arbitrage of regulatory regimes. See R. Lindsey, Capital Adequacy Standards, Journal of Financial regulations and Compliance 4(3)/1996, p. 209.
An interesting voice in the discussion on the extent to which the establishment of private values catalogues by corporations is the fulfilment of an axiological deficit and on the difference between democratic legitimacy in relation to the undemocratic performance of functions by entrepreneurs, i.e. the difference between governance (German Regierung) and management (German Verwaltung). See Z. Bauman, Szanse etyki w zglobalizowanym świecie, Cracow 2007, pp. 239–282.
This identity identification by reference to concrete values is also indicated by F. Tönnies as a basic feature distinguishing the community from the enterprise, in addition to the very purpose of unification. F. Tönnies, Community and Society: Gemeinschaft and Geselschaft, Michigan 1957, pp. 223–231.
The relationship between corporate standards and ethical standards and the programs implemented in companies to promote value among employees and the benefits of this. See e.g. B. Rok, Kręgosłup moralny firmy, Thinktank 18/2013, p. 56.
Przykładem jest choćby nieznana w spółkach funkcjonujących w jurysdykcjach kształtowanych pod wpływem niemieckiej myśli prawniczej instytucja rady dyrektorów z członkami posiadających i nieposiadających kompetencje zarządcze ( executive i non- executive directors w ramach jednej board of directors).
The importance of dynamics of rules, standards and discretion in prelegal social groups more: R. A. Posner, The Problems of Jurisprudence, Harvard 2000, p. 42.
N. MacCormick, O. Weinberger, An Institutional Theory of Law. New Approaches to Legal Positivism, Dodrecht 2010, p. 37 et seq.
See M. J. W. van Twist, L. Schaap, Introduction to Autopoiesis Theory and Autopoietic Steering [in] R. J. In t’ Veld, L. Schaap, C. J. A. M. Termeer, M. J. W. van Twist, Autopoiesis and Configuration Theory: New Approaches to Societal Steering, Rotterdam 1991, p. 129 et seq.
M. Zirk-Sadowski, Wprowadzenie do filozofii prawa, Warsaw 2011, p. 111.
M. Zirk-Sadowski, Ibidem, p. 166.
E. Erlich, Fundamental Principles of the Sociology of Law, New Brunswick 2002, p. 39 et seq.
Ibidem, p. 192.
On contemporary European concepts for interpreting omnipresent law. See M. Hertogh, A ‘European’ Conception of Legal Consciousness. Rediscovering Eugen Ehrlich, Journal of Law and Society 31(4)/2004, p. 456.
See K. Shields, A. Perry-Kessaris, Rewriting the Centricity of the State in Pursuit of Global Justice [ed.] Socio- Legal Approaches to International Economic Law: Text, Context, Subtext, New York 2013, p. 235 et seq.
Cf. M. Velverde, The Ethics of Diversity: Local Law and the Negotiations of Urban Norms, Law and Social Inquiry 33(4)/2008, p. 895.
E. Melissaris writes about what the law is not omnipresent that the ubiquitous law concept is neither a suppressed and closed theory of diversity nor a radically undefined question about the relationship of the right to integrity. See E. Melissaris, Ubiquitous Law: Legal Theory and the Space for Legal Pluralism, Ashgate 2009, p. 80 et seq.
About the emptiness of neo-formalism in legal theory. See B. Z. Tamanaha, Beyond the Formalist- Realist Divide. The Role of Politics in Judging, Oxford 2010, p. 159.
See K. Gordon, Rules for the Global Economy: Synergies Between Voluntary and Binding Approaches, Organisation for Economic Cooperation and Development Working Paper 1999/2000, p. 11 et seq.
F. Snyder, Governing Economic Globalization: Global Legal Pluralism and European Law, European Law Journal 5/1999, p. 334.
W. Rogowski, Nowe koncepcje i regulacje rynku finansowego, Warsaw 2014, p. 50.
The regulations quoted here are accordingly:
Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU Text with EEA relevance, OJ L 173, 12 June 2014, pp. 349–496;
Opinion of the European Economic and Social Committee on the Proposal for a Regulation of the European Parliament and of the Council on Money Market Funds COM(2013) 615 final—2013/0306 (COD), OJ C 170, 5 June 2014, pp. 50–54;
Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010 Text with EEA relevance, OJ L 60, 28 February 2014, pp. 34–85;
Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market, amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) No 1093/2010, and repealing Directive 2007/64/EC (Text with EEA relevance), OJ L 337, 23 December 2015, pp. 35–127;
Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council Text with EEA relevance, OJ L 173, 12 June 2014, pp. 190–348;
Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonization of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC, OJ L 390, 31 December 2004, pp. 38–57;
Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories Text with EEA relevance, OJ L 201, 27 July 2012, pp. 1–59;
Regulation (EU) No 260/2012 of the European Parliament and of the Council of 14 March 2012 establishing technical and business requirements for credit transfers and direct debits in euro and amending Regulation (EC) No 924/2009 Text with EEA relevance, OJ L 94, 30 March 2012, pp. 22–37.
The obligations under the Dodd-Frank Act do not only apply to swap transactions. They also imply, for example, obligations deriving from the so-called Volcker Rule. They concern financial operations on global markets and relate to certain transaction bans linked with hedge funds and private equity, which are referred to as ‘covered funds’. In connection with regulations in this area, banks usually set up various types of steering committees for derivative transactions, including commodity options on their own account (proprietary trading). J. Vinãls, C. Pazarbasioglu, J. Surti, A. Narain, M. Erbenova, J. T. S. Chow, Creating a Safer Financial System: Will the Volcker, Vickers, and Liikanen Structural Measures Help?, Washington 2013, p. 7 et seq.
O. Wyman, Conduct Risk Management in the Asia Pacific Region. Improving Relationship, Returns and Regulation, Asia Pacific Finance and Risk Series 1/2014, p. 11.
The involvement of lawyers in project management in global corporate transactions and the involvement of lawyers and compliance services in resolving issues related to the financing of projects by banks. See J. Dewar, International Project Finance. Law and Practice, Oxford 2011, p. 21 et seq.
Misselling is also defined as offering financial products in a manner that is misleading or offering products that are not suited to the financial capabilities (affordability), needs (suitability) or risk profile (appropriateness) of customers.
In the UK market, the amount of penalties and compensations paid by banks offering insurance products to customers, whose nominal purpose was to secure repayment of credits taken out by customers in the event of circumstances preventing such repayment (Payment Protection Insurance—PPI), has been spectacular. In practice, however, these products were so linked to the loans themselves that it was not possible to obtain loans without purchasing insurance products at the same time, the customers were not informed about their nature and price, and regardless of this, their design was so misaligned with the actual needs of customers that, due to their mass nature, in many tens of thousands of cases the subject of insurance were events that could not take place in practice. This is the case, for example, with the sale of products that insure against loss of job credit to people of retirement age. The total amount of disbursements of British banks on this account exceeded GBP 16.6 billion.
The obligation to provide full information is now increasingly reflected in national law and in a wider range of banking products. Cf. on the information obligations imposed on banks for the sale of consumer credit.: Z. Ofiarski, Ustawa o kredycie konsumenckim. Komentarz, Warsaw 2014, p. 138 et seq.
Regulatory supervisors alone are increasingly using the instruments at their disposal, such as, for example, the obligation for banks to implement resolution plans. Regardless of this, the regulators themselves, depending on the jurisdiction, impose penalties or seek redress before the courts. For example, the Financial Conduct Authority has introduced an obligation to control interest rate swaps sold to clients defined as non-professionals according to FCA criteria, as opposed to professional clients. Failure to meet the requirements within a set time limit will result in high penalties. The amount of penalties paid so far in the UK for this alone exceeded GBP 365 million. See J. Salmon, Shocking Tactics at the Heart of Lloyds Scandal: Whistleblower Opens Up Over Interest Rate Swaps, This Is Money 15 September 2014, www.thisismoney.co.uk (download 2 February 2019).
See J. Gregory, Counterparty Credit Risk and Credit Value Adjustment: A Continuing Challenge, Chichester 2012, p. 220 et seq.
N. Gennaioli, A. Martin, S. Rossi, Sovereign Default, Domestic Banks, and Financial Institutions, The Journal of Finance 69(2)/2014, p. 840.
See E. Blankendurg, Civil Litigation Rates as Indicators for Legal Cultures [in] D. Nelken [ed.], Comparing Legal Cultures, Brookfield 1997, p. 41.
See E. Blankendurg, Civil Litigation Rates as Indicators for Legal Cultures [in] D. Nelken [ed.], Comparing Legal Cultures, Brookfield 1997, p. 41.
Class actions against several banks are brought before US courts on behalf of persons who have been party to foreign exchange transactions at the rate published by WM/Reuters. The allegations against banks relate to price collusion in order to manipulate the exchange rate published by WM/Reuters and thus violate U.S. antitrust law.
At a number of times, both the European Commission and some national competition authorities of EU Member States have assessed the market behavior of some banks as being in breach of European competition rules. Similar information was provided, for example, by the Swiss Competition Commission, which reported on an ongoing investigation into potential anti-competitive behavior in currency markets without identifying the institutions that were under surveillance of the authority. In practice, questions to banks from competition authorities about currency speculation have been arriving relatively slowly.
The case concerns mainly entities incorporated in the United States, the United Kingdom, Luxembourg, the British Virgin Islands, the Cayman Islands, Bermuda, the Channel Islands, Italy, Switzerland and Austria and other related entities. See B. J. Richardson, Fiduciary Law and Responsible Investing: In Nature’s Trust, New York 2013, p. 279 et seq.
For example, in two of the larger number of cases against banks, HSBC Institutional Trust Services (Ireland) Limited (HTIE) concluded a settlement agreement in November and December 2012 in relation to claims brought by investors of Thema International Fund Plc against HTIE, which were brought before the Supreme Court in Ireland. In April 2013, HTIE successfully dismissed an action for EUR 25 million (USD 38 million) brought before a Milan court by a shareholder of Thema against HTIE and other entities. However, since then, several other settlements have been made for several hundred million dollars, including tens of millions of dollars of litigation costs. See http://webcache.googleusercontent.com/search?q=cache:B5MPMoboLOcJ:www.hsbc.com/~/media/hsbc-com/newsroomassets/2011/pdf/110607-exhibit-a-stipulation-and-agreement-of-partial_settlement%3Fla%3Den-gb+&cd=2&hl=pl&ct=clnk&gl=pl&client=safari (download 15 December 2018).
In principle, these are investigations carried out by the regulatory authorities of the United States, the United Kingdom, Canada, the European Union and some Asian countries. In these countries, including the United Kingdom, the United States, other EU countries, Switzerland, Hong Kong, Thailand, South Korea, investigations and inspections are conducted by both regulatory and competition authorities, as well as by enforcement authorities in order to secure execution of potential fines, both in connection with the alleged manipulation of LIBOR and EURIBOR rates, but also in connection with other interest rates, including the exchange rate by the participants of the fixing. Fixing is understood as the exchange trading system based on the single price of the day as a result of which prices of financial instruments are determined. In this case, it concerned the establishment of uniform daily exchange rates at the interest rates binding on interbank rounds, i.e. prices at which banks are willing to borrow currencies from each other. The effects of such pricing apply to all market participants, including those not connected with the interbank market, since the level of all interest rates, and thus even the interest rate on individual loans, depends directly on the cost of raising money for the bank. Irregularities in this respect took different forms and consisted in allowing price collusion, as a result of which the victims were numerous groups of people. See P. Ashton, B. Christophers, On Arbitration, Arbitrage and Arbitrariness in Financial Markets and Their Governance: Unpacking LIBOR and the LIBOR Scandal, Economy and Society 44(2)/2015, p. 188 et seq.
Regardless of the pending litigation cases before the courts, financial penalties were imposed on banks charged with manipulating LIBOR rates. So far, the total amount of penalties imposed on this account by American and British regulators has exceeded USD 3 billion, of which the FCA itself has punished banks with USD 532 million. Among these amounts are the USD 290 million fine for Barclays Bank and the USD 218 million fine for Lloyds Bank. For related similar manipulations on Forex platforms on which currency trading takes place, the British regulator imposed a penalty of USD 233 million on UBS, USD 225 million on Citibank, USD 222 million on JP Morgan, USD 217 million on RBS and USD 216 million on HSBC. The American regulator, on the other hand, on Citibank and JP Morgan for USD 310 million each, on RBS and UBS for USD 290 million each and on HSBC for USD 275 million. See e.g. http://www.cnbc.com/2014/03/11/forex-manipulation-how-it-worked.html (download 4 October 2019); E. Talley, S. Strimling, The World’s Most Important Number: How a Web of Skewed Incentives, Broken Hierarchies and Compliance Cultures Conspired to Undermine LIBOR, Financial Services Institute of Australasia Journal JASSA 2/2013, p. 50.
The case of liability for manipulation of LIBOR has recently taken on a new dimension, as it increasingly affects individuals, not only institutions, and in addition to disciplinary liability, penalties are also imposed. In August 2015 Tom Hayes was the first person to be sentenced during a trial in the United Kingdom on LIBOR manipulation penalties. He was proved guilty of eight charges and sentenced to 14 years’ imprisonment. In November 2015, the first judgment in the United States was passed on the manipulation of the LIBOR exchange rate, in which the Manhattan Court found two London traders, Anthony Allen and Anthony Conti, guilty. See D. Hou, D. Skeie, LIBOR: Origins, Economics, Crisis, Scandal, and Reform, Federal Reserve Bank of New York Staff Reports, Staff Report Nr 667/03/2014 p. 120 et seq.
Moreover, price manipulation, which consists in unfair practices that can affect the prices quoted on financial exchanges, does not concern only currencies. They also apply to so-called commodities, i.e. other goods valued and traded on these markets. For example, Barclays Bank was fined USD 330 million for proven manipulation of electricity prices and USD 26 million for manipulation of gold prices. See R. McCormick, The ‘Conduct Crisis’: Will Banks Ever Get It Right? , Business Law International 16(2)/2015, p. 110 et seq.; G. Giroux, Accounting Fraud: Maneuvering and Manipulation Past and Present, New York 2014, p. 60 et seq.
The total amount of penalties imposed on Citibank by the FCA (Financial Conduct Authority) and CFTC (The U.S. Commodity Futures Trading Commission) on 12 November 2014 by the decision of the British, American and Swiss regulators for applying illegal currency fixing practices amounted to $668 million, while the amount for JP Morgan was $662 million, while for RBS and HSBC it was $634 million and $618 million, respectively. UBS Bank was also fined by FINMA (Swiss Financial Market Supervisory Authority) and the total amount of penalties for this bank is exactly $800 million. Earlier, other banks also received financial penalties from CFTC for manipulating the reference exchange rates: on 28 July 2014 Lloyds Bank—in the amount of $105 million, on 29 October 2013 Rabobank—in the amount of $475 million, on 6 July 2013 RBS—in the amount of $325 million, on 19 December 2012 UBS—in the amount of $700 million, on 27 June 2012—in the amount of $200 million. As Aitan Goelman stated, ‘The setting of reference rates was not just one more opportunity to increase profits for banks. Countless individuals and companies around the world, acting with confidence in these rates, have determined the financial value of contracts, believing in the integrity of those who have set them.’ G. Tchetvertakov, In a Co- Ordinated Blitz, Regulators Bombard Top Banks for Systemic Collusion in the Forex Market, www.forexmagnates.com/ (download 22 February 2019).
See more broadly on unfair practices in financial market financial markets with clients who are not professional trading participants. E. Rutkowska-Tomaszewska, Nadzór nad rynkiem finansowym a nieuczciwe praktyki rynkowe banków wobec konsumentów – zakres, potrzeba i możliwości podejmowanych działań, http://www.bibliotekacyfrowa.pl/Content/38956/010.pdf (download 18 August 2018).
More on current trends in corporate law with regard to investor interests. See G. Ferrani, E. Wymeersch, Investor Protection in Europe: Corporate Law Making, The MiFID and Beyond, Oxford Scholarship Online 2009, http://econpapers.repec.org/bookchap/oxpobooks/9780199202911.htm (download 11 April 2019); Developing Our Approach to Implementing Mifid II Conduct of Business and Organizational Requirements, Financial Conduct Authority Discussion Paper Nr 3 (DP15/3), March 2015 passim.
A comprehensive UK market study conducted by the FCA in 2012 concluded that a total of 25% of investment advice provided to clients was debatable, of which 15% were not sufficiently covered by advisers. See D. O’Loughlin, A. Wassall, HSBC Estimates GBP 96m Bill for Investment Advice Mis-Selling, FT Adviser, 24 February 2014.
The amount of these obligations, including customer indemnification and financial penalties imposed on banks, exceeds GBP 7 billion.
So in art. 166 of Financial Services and Markets Act 2000 —FSMA, http://www.legislation.gov.uk/ukpga/2000/8/section/166 (download 3 January 2018).
The amicable settlement of this case with customers affected by irregularities in the sale of these products in 2005–2007 cost different banks depending on the degree of their involvement, the scale of their operations and the amount of losses incurred by customers in huge amounts. For Deutsche Bank, for example, this was a $1.9 billion fine paid to the US Federal Housing Finance Agency in December 2013. Earlier, in November 2013, Bank JP Morgan Chase paid the American regulators a record amount of USD 13 billion, while on the same days it agreed to pay out USD 4.5 billion at the same time on the basis of an agreement concluded with pension funds and other institutional investors in connection with the sale of these products. In the same way, the sums paid out amounted to USD 16 billion, which were paid by the Bank of America as a result of a settlement following a class action brought against it. USD 7 billion was paid in a similar case by Citigroup, USD 1.25 billion by Morgan Stanley and USD 885 million by Bank UBS, and the total amount of penalties imposed on other banks in connection with the practice of selling these products amounted to over USD 8.5 billion. See R. H. Brescia, Tainted Loans: The Value of a Mass Torts Approach in Subprime Mortgage Litigation, University of Cincinnati Law Review 78/2009, p. 6 et seq.; J. Ackermann, The Subprime Crisis and Its Consequences. Regulation and the Financial Crisis of 2007–08: Review and Analysis, Journal of Financial Stability 4(4)/2008, p. 230 et seq.; G. Gorton, The Subprime Panic, European Financial Management 15(1)/2009, p. 20.
The total amount of financial penalties imposed on banks and other financial institutions, including brokers offering mortgage-backed investment products on properties, the “subprime mortgage” segment, by September 2014 by the SEC amounted to USD 35.9 billion, www.sec.gov/spotlight/ent-actions-fc.shtml (download 4 January 2019).
For example, Bank Morgan Stanley—one of the world’s largest investment banks—has been fined USD 3.2 billion for misleading customers and investors when selling subprime mortgage bonds without simultaneously providing a full assessment of the risks associated with these instruments that should have been held by the bank. Bank Morgan Stanley did not grant risky loans itself, but only bought them from other financial institutions and distributed mortgage-based bonds. See Money.pl/wiadomości_bankowe/swiatowy_kryzys z 12 February 2016 r. (dowload 23 March 2019).
In the case of some banks, settlement negotiations did not yield the result expected by the banks. Examples include the Bank of America Bank with a fine of USD 17 billion and JP Morgan Chase with a fine of USD 13 billion, both banks selling mortgage loan bonds “using their customers’ naivety’”. The risk backed securities had a higher yield than deposits, which made them more attractive to customers. J. Rakoff, a federal judge adjudicating the case, stated that the penalty was imposed at such a high level primarily because of “false and reckless credit activity, which created conditions conducive to the development of the financial crisis in 2008”. See financemagnates.com 25 August 2014 r. (download 5 February 2019).
The report results from the FSA’s notification to HSBC, JP Morgan Cazenove, Credit Suisse Securities (Europe) Limited and Prudential Plc of the obligation to prepare a “Skilled Persons Report” pursuant to Article 166 of the Financial Services and Markets Act (FSMA).
In March 2013, Prudential Assurance Company Limited was fined £16 million (USD 24 million). Prudential Plc received a fine of GBP 14 million (USD 21 million). The banks, on the other hand, received letters from UKLA, in which the FCA’s concerns resulting from the auditor’s report were presented.
This was a very well-known, but not the only, case of violation of bank investors’ confidence as a result of irregularities in the securities issue process. Another well-known case is that of Hypo Group Alpe—Adria Bank (now HETA Asset Resolution AG) against Bayern LB, which acquired a majority stake in the Hypo Group. See R. Cotarcea, Banking Debacle Worth Billions, CEE Legal Matters. In- Depth Analysis of the News and Newsmakers that Shape Europe’s Emerging Legal Markets, vol. 2 April 2015, p. 25.
Cf. T. Mellor, M. Rogers Jr., An Introduction to Legal Risks and Structuring Cross- Border Lending Transaction, The International Comparative Legal Guide to: Lending & Secured Finance 2014. A Practical Cross- Border Insight into Lending and Secured Finance, London 2104, p. 15 et seq.
Cf. L. Sasso, Capital Structure and Corporate Governance. The Role of Hybrid Financial Instruments, New York 2013, p. 140.
This relates to numerous such issuers as Ambac, Countrywide, Lehman Brothers, Wells Fargo, Indymac, Citigroup, Wachovia, AIG, ING, BNP Paribas, General Electric, Kosmos Energy, Metlife and Overseas Shipping.
According to the SIFMA Underwriting Agreement signed by the sub-issuers in the US, the underwriter is fully indemnified against any liability in respect of the securities it underwrites unless the issuer goes bankrupt.
In practice, in the case of actually pending bankruptcy proceedings, this instrument is so strong that in some of the claims against Ambac, IndyMac, GE, MBIA, Countrywide, Citigroup, Wachovia, BNP Paribas, Wells Fargo and HSBC, these claims ended in an agreement which became a safer solution for these institutions than taking the risk of entering into court proceedings, the outcome of which, from the formal point of view, could in all probability prove to be unfavourable to them.
One example of the numerous negative consequences for many other financial institutions that have emerged from the collapse of Lehman Brothers was the need to compensate for their involvement in the servicing of so-called minibonds. This structure consisted in the fact that numerous financial institutions acted as trustees for several Lehman Brothers’ bills of exchange programs, acting as representatives for companies within their own structures in other markets, outside the USA, including in particular Hong Kong and other Asian countries. However, this did not automatically mean that these institutions were also distributors of mini-bonds. The corporate services provided to Lehman Brothers consisted in providing extensive on-site services for these issues, including the provision of expert advisory services to the issuer, inclusive of the secondment of its employees to senior management positions at Lehman Brothers. Other companies from the same banking groups, on the other hand, acted as depositories of the credit derivatives underlying the bonds. After the collapse of Lehman Brothers as a result of investor concern about the value of the promissory notes held, the whole matter gained wide publicity and became the subject of analyses and, with time, investigations by regulators.
M. C. S. Wong, The Risk of Investment Products. From Product Innovation to Rik Compliance, Singapore 2011, p. 41 et seq.
See O. Wyman, Streamlining Risk, Compliance and Internal Audit. Less Is More, Asia Pacific Finance and Risk Series 2/ 2015, s. 8.
For a comparison of the location of the compliance function in banks operating in different jurisdictions and the scope of its responsibilities, see Legal and Regulatory Risk Note. A risk management briefing putting the key issues at the top of the agenda, Allen and Overy Report, London 2014, p. 24 et seq.
More on practical legal issues faced by banks outsourcing part of their operations. See M. Olszak, Outsourcing w działalności bankowej, Warsaw 2006, p. 36.
On building corporate governance and the resulting complications in the context of global economic processes. See D. A. Krueger, The Governance and Corporation of Business Regulation [in] D. A. Krueger [ed.] The Business Corporation and Productive Justice, Nashville 1997, p. 75.
W. Frąckowiak, Fuzje i przejęcia, Warsaw 2009, p. 131 et seq.
For example, the French Bank BNP Paribas was fined USD 8.83 billion in July 2014 by the US Department of Justice’s Attorney General for breaching sanctions against Iran, Cuba and Sudan. Earlier, in 2012, Bank Standard Chartered agreed to pay a fine of USD 340 million on charges of concealing “billions of pounds” worth of transactions to support terrorist activity and drug trafficking.
“Global Sanctions Policies” of financial institutions are published in internal procedures relating, for example, to global risk management compliance procedures.
Responsibility for compliance with sanctions in EU countries is regulated by Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC (Text with EEA relevance), OJ L 141, 5 June 2015, pp. 73–117, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32015L0849 (download 6 May 2019).
It is worth taking this opportunity to draw attention to the question of the legitimacy of this type of regulation and the strengthening of its effectiveness in terms of recognition of the legitimacy and correctness of its implementation. (“ Individuals consider legitimacy not only in terms of substantive outcomes, but moreover in procedural fairness.”)—E. F. Gerding, Bubbles, Law and Financial Regulation, New York 2014, p. 215. On the rightness and distinction of this concept from the concept of good in justice. See J. Rowls, Teoria sprawiedliwości, Warsaw 2013, p. 635 et seq.
These and other examples have been identified in policies relating to the obligation to comply with international sanctions created within the framework of different financial institutions and which are subject to successive amendments.
Depending on the level of detail of the internal procedures, these may be of a general nature and may include common rules of procedure for all the group’s entities, as well as more detailed guidelines for specific entities and obligations to carry out specific actions in the event of specific situations. In some banks, for example, these are functional instruction manuals (in the absence of a better translation, “functional” in this case means what it means for specific functions), business procedures manuals, and desk instruction manuals.
In most financial institutions, updates are required at least every 6 months.
Such adaptation work consists, for example, in the introduction of a specific type of client designation in automated databases, filters to capture specific entities or types of transactions, or connecting transactions that may be linked.
This is similarly regulated in the banking laws of many EU member countries.
A. Grünbichler, P. Darlap, Integration of UE Financial Markets Supervision: Harmonization or Unification? Journal of Financial Regulation and Compliance 12(1)/2004, p. 59 et seq.
This raises the issue of whether, in the absence of consent to the conclusion of an outsourcing agreement for a financial institution, such as services related to banking activities, or in the absence of such an agreement, the disclosure of personal data is unlawful and constitutes a breach of both the rules on the protection of bank secrecy and on the protection of personal data.
An example of the most common ways to manage this risk is to strictly define the so-called levels of access for bank employees to information of different kinds by directly defining it in the relevant internal procedures, as well as to contractually guarantee adequate protection of such data in the event of authorized access by third parties in relation to the provision of outsourcing services to the financial institution. Cf. A. Martin, T. M. Lakshmi, V. P. Vankatesan, An Information Delivery Model for Banking Business, International Journal of Information Management 34(2)/2014, p. 139.
The procedural model presented here has the character of an author’s reconstruction model, reproduced from normative practice observed in financial institutions, and is therefore not a normative model. Therefore, it does not constitute a formal representative model in the strict sense of the term. See T. Gospodarek, Modelowanie w naukach o zarządzaniu oparte na metodzie programów badawczych, Monografie i opracowania Uniwersytetu Ekonomicznego we Wrocławiu 189/2009, p. 61.
This is made possible by assigning the right codes to the right transactions.
See B. Gong, Understanding Institutional Shareholder Activism: A Comparative Study of the UK and China, New York 2014, p. 46 et seq.; L. Canibano, E. De las Heras, Enforcement in the European Union. A Comparative Survey: Spain and the UK [in] G. Frattini [ed] Improving Business Reporting: New Rules, New Opportunities, New Trends, Milano 2007, p. 202; and I. G. MacNeil, Risk Control Strategies: An Assessment in the Context of the Credit Crisis [in] I. G. MacNeil, J. O’Brien [ed.] The Future of Financial Regulation, Portland 2010, p. 154.
On financial penalties imposed on the banking sector for fraudulent behavior in operations carried out by banks in their own name and on their own behalf. See e.g. R. Wandhoefer, Transaction Banking and the Impact of the Regulatory Change, New York 2014, p. 249 et seq.
The practice investigated concerns five London banks: HSBC Holdings Plc., Lloyds Banking Group Plc., Standard Chartered Plc., Barclays Plc. and Royal Bank of Scotland Group Plc.
See. N. King, Governance, Risk, and Compliance Handbook, Birmingham 2012, p. 415.
Recent discussions within banking institutions have raised the question of whether a zero risk appetite approach to compliance risk makes any sense at all, given the obvious fact that breaches do occur and that, despite the implementation of increasingly restrictive control mechanisms, it is difficult to assume that they could be excluded completely. However, it has not yet been decided to change this approach and to specify in the formal bank documents to be disclosed to regulators that the bank would be prepared to accept the risk of non-compliance to a certain extent.
See L. Hobe, The Changing Landscape of the Financial Services, International Journal of Trade, Economics and Finance, 6(2)/2015, p. 146 et seq.
See L. Thévenoz, R. Bahar, Conflicts of Interest: Corporate Governance and Financial Markets, Aalphen an den Rijn 2007, p. 119 et seq.
To a similar extent, this issue was also addressed in the US by the Dodd-Frank Act. See E. D. Herlihy, L. S. Makow, A Federal Reserve Wake- Up Call to Directors of Financial Institutions, Harvard 7 June 2014, www.blogs.law.harvard.edu (download 16 February 2019). Also: The Future of Global Banking. Bank Governance Leadership Network View Points, December 2014, www.tapestrynetwork.com (download 16 February 2019) as well as: J. O’Kelley III, Insights from Conversations with U.S. Banking Regulators: Implications for Bank Directors, Global Leadership 09/2014, p. 203.
This does not apply if they are members of the governing bodies of banks and, by virtue of their function, represent a member state.
Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 Text with EEA relevance, OJ L 176, 27 June 2013, pp. 1–337, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32013R0575 (download 6 June 2019).
More on the responsibilities of members of bank governing bodies. See J. Gliniecka, Publiczne prawo bankowe, Warsaw 2013, p. 177.
The deadline for the European Banking Authority to issue the guidelines referred to here is 31 December 2015. Meanwhile, the Member States were obliged to implement this directive by 31 December 2013.
It is not a complete list, but only an example of the tasks performed by compliance within the framework of monitoring activities. They vary in scope and scope from one institution to another, and depending on the profile of the bank’s business, the recommendations made by regulators, the legal environment, the expectations of bank authorities, etc., may include different spaces and may differ in the methodology used and the depth of research carried out.
Cf. D. Cowan, Legal Consciousness: Some Observations, Modern Law Review 67(6)/2004, p. 928 et seq.
Knowledge in the areas mentioned here is not only helpful but also necessary. The areas themselves, however, are not listed in a catalogue, and their calculation here is only an example of the extent of the matter in which knowledge may affect the quality of performance of tasks by the compliance functions. All these issues have an impact on the environment in which the compliance function operates.
This may include reviewing sales documentation in relation to the requirements of customer identification programs or ensuring the suitability of products offered to customers.
See C. Chinkin, Normative Development in International Legal System, International and Comparative Law Quarterly 38/1989, p. 850 et seq.
These are co-called internal audit guidance letters.
Definition of audit issues related to compliance responsibilities in the internal audit policy of one of the London banks: “Information contained in the audit report which carries a direct risk of non-compliance and indicates the need for consultation or support by the compliance function prior to taking action to mitigate the above risk”.
These values are different in various banks. However, they usually exceed USD 1.5 million (or the equivalent in other currencies). All criminal lawsuits against banks and administrative proceedings involving regulators who take action in relation to irregularities detected and threatened by fines imposed by regulators are usually also granted the status of material cases.
The concept of ‘directive expression’ has been attributed here to the meaning of the conventional verbal act of influencing people’s behavior. See K. Opałek, Z teorii dyrektyw i norm, Warsaw 1974, p. 152 et seq.
See J. J. Kirton, M. J. Trebilcock, Hard Choices, Soft Law: Voluntary Standards in Global Trade, Environment and Social Governance, Toronto 2004, p. 121.
“Fair play strategies”, “Treat customer fairly strategies” and other documents with similar names have recently been adopted by most international banks.
See S. K. Mandal, Ethics in Business and Corporate Governance, New Delhi 2010, p. 62 et seq.
Originally, this division for insurance corporations may also apply to banking compliance norms. See M. Olszak, Bankowe normy ostrożnościowe, Białystok 2011, p. 72.
These eight banking groups are: HSBC Holdings Plc., Citigroup Inc., ING Groep NV, Societe Generale SA, BNP Paribas SA, Barclays Plc., Royal Bank of Scotland Group Plc. and Credit Agricole SA.
- The Scope of Compliance Norms in Financial Institutions
- Chapter 4
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