A critical examination of how contract law is used by financial institutions operating in multiple jurisdictions.

• Jurisdiction: Australia
• Author: Chaikin, David
• Date: 01 April 2010

[Financial institutions operating in multiple jurisdictions are vulnerable to extraterritorial jurisdictional claims, especially under United States anti-money laundering and economic sanctions laws. A survey shows that banks licensed in Australia have revised their standard form contracts so as to reduce the risks arising from the extraterritorial enforcement of foreign laws. Under the new contracts, customers have purportedly consented ex ante to banks supplying confidential information directly to foreign states and agreed to the freezing of their bank accounts based on a possible breach of foreign law. The contractual provisions, are controversial because they circumvent the legal procedures that would otherwise apply in cases of international criminal, civil or regulatory assistance. The legal efficacy and policy implications of the contractual terms are analysed.]

CONTENTS I Introduction II Why Are Multinational Banks Vulnerable? III Extraterritorial Application of AML and Sanctions Laws A Subpoenas over Correspondent Bank Accounts B Forfeiture of Monies in Correspondent Bank Accounts C Australian AML Rules on Correspondent Banking D Extraterritorial Application of Sanctions Laws IV Standard Bank-Customer Contract Terms A Survey of Standard Contract Terms B Disclosure of Confidential Information to Foreign Authorities C Freezing of Bank Accounts to Assist Foreign Authorities D Indemnifying Banks for Customers' Violations of Foreign Law V Legal and Policy Efficacy of New Standard Contract Terms A Are the Purported Terms Part of the Bank-Customer Contract? B Are the Terms Misleading or Deceptive and/or Unfair Terms? C Are the Terms Enforceable under Private International Law Doctrines? D Are the Terms Objectionable on Grounds of Public Policy? VI Conclusion I INTRODUCTION

The extraterritorial application of domestic laws is one of the most important international legal developments in the past 50 years. The extension of local laws to extraterritorial conduct is an inevitable consequence of globalisation. Individuals and businesses are increasingly acting in a global context. The rapid growth of international trade in goods and services and the internationalisation of securities and capital markets continue at breathtaking speed. International banking and multinational banking services are now available not only for wholesale clients but also for retail customers. Technological developments, such as the growth of the internet, have facilitated the globalisation of business. At the same time, crime has become increasingly globalised, particularly the crimes of drug trafficking, money laundering, corruption and fraud. These developments have presented national governments with significant law enforcement and regulatory problems. A legal response to these developments has been the extraterritorial application of domestic laws.

There is a rich resource of academic and practitioner literature on the concept and application of national and international laws governing extraterritorial jurisdiction. David Rivkin, the Chair of the International Bar Association's Legal Practice Division, pointed out in 2008 that:

Many jurisdictions now apply their laws extraterritorially in a myriad of fields, including antitrust, banking, bribery and corruption, criminal, insolvency, securities, transport, tax, telecommunications, tort, trade sanctions, privacy and human rights. (1) A local law may be applied to extraterritorial conduct by any of the three branches of government, namely the legislature, the executive or the judiciary. (2) Where states apply or enforce their national laws extraterritorially, two important legal issues are raised: the extent to which international law allows states to assert jurisdiction extraterritorially and the nature of the appropriate legal mechanisms and rules to resolve potential conflicts of jurisdiction. (3) In regard to the latter issue, international bodies, national legislatures and courts have canvassed a range of approaches to dealing with overlapping jurisdiction.

Techniques to reduce jurisdictional conflicts include: imposing a legal hierarchy to determine whether a state has priority in claiming jurisdiction; encouraging states to refrain from exercising jurisdiction because of international comity; establishing systems of mutual recognition and cooperation between multiple states with jurisdiction; and encouraging harmonisation of substantive law. (4) These techniques have been well explored in the academic literature, which has put forward various solutions to the jurisdictional issues under private international law. (5) This article does not deal with these issues, but instead concentrates on a new development--the potential role of private law, such as contract, in minimising the impact of extraterritorial legislation. It does not provide any general solution to the extraterritoriality problem, but instead addresses how contract law has been used by financial institutions operating in multiple jurisdictions to deal with certain extraterritorial risks.

This article in Part II provides a theoretical and conceptual explanation of why multinational financial institutions are vulnerable to competing laws in multiple jurisdictions. It shows the unique vulnerability of banks arising from the complex nature of a bank account and the impact of technology on the location of a bank account. Part III then provides concrete legislative examples of the vulnerability of financial institutions. It deals with the extraterritorial application of United States ('US') anti-money laundering ('AML') and economic sanctions laws, and in particular how foreign financial institutions may be subject to US investigatory demands for confidential information through subpoenas under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA Patriot Act) Act of 2001 ('Patriot Act') (6) and the freezing and forfeiture of assets through correspondent bank accounts. The extraterritorial enforcement of such laws has resulted in the imposition of hundreds of millions of dollars in fines on financial institutions and generated new legal and reputational risks in conducting international business. Part IV examines how financial institutions operating in multiple jurisdictions have responded to AML and sanctions laws by amending their standard form contracts. The study shows that banks have attempted to reduce their risks by increasing their legal capacity to cooperate with foreign authorities. Under new and revised contracts, customers have purportedly consented ex ante to banks supplying confidential information directly to foreign states and agreed to the freezing of their bank accounts based on a possible breach of foreign law. Financial institutions have also used new indemnity clauses to transfer to their customers the risks of non-compliance with foreign laws. The justification for using private law is that neither the domestic courts nor the legislature has provided adequate legal tools to protect financial institutions when those institutions are faced with extraterritorial demands by law enforcement or regulatory authorities in relation to their customers. Such contractual provisions are controversial because they circumvent the legal procedures that would otherwise apply in cases of international criminal, civil or regulatory assistance. The legal efficacy and policy implications of the new contractual terms are analysed in Part V.

II WHY ARE MULTINATIONAL BANKS VULNERABLE?

Multinational banks may establish a commercial presence in a jurisdiction by various means. A bank may establish a wholly-owned subsidiary in another country, which is treated as a separate legal entity, albeit that the subsidiary may be under the bank's effective control. Alternatively, a bank may conduct its international operations by establishing an office in a foreign jurisdiction, usually a branch, which is part of the single legal personality of the parent. (7) The expansion of multinational banking through the establishment of branches has given rise to and exacerbated conflict of law problems. (8) The essence of the problem is that a foreign branch may be classified as subject to the laws of the place where it is physically located ('territorial' or 'location' theory) or the laws of the place where its parent bank has its headquarters ('registration', 'charter' or 'incorporation' theory). (9) Applying the theory that a branch bank is subject to the territorial jurisdiction of the place where it is located, the branch bank is bound to comply with its duty of confidentiality under local law. Support for this theory is reinforced by the notion that the contractual relationship between a bank and its clients is generally governed by the law of the place where the bank account is physically located. (10) On the other hand there is a competing theory that a branch bank is merely an extension of the parent bank with the same legal personality, (11) with the consequence that a foreign branch bank must comply with the legal duties imposed on its parent. If a court in the jurisdiction of the parent bank issues an order for disclosure of information held in its overseas branch, then, applying the 'registration' theory, the branch bank is duty-bound to comply with that order.

The local branch of a parent bank headquartered in a foreign jurisdiction faces an acute dilemma where there are conflicting requirements imposed under the laws of the branch bank and of the parent bank. Where the branch bank is ordered by a court in the parent bank's jurisdiction to disclose confidential information, this may violate its duty of confidentiality imposed under local law. On the other hand by refusing to comply with a foreign court order, the branch bank risks being held in contempt of court. This legal dilemma is further complicated where the local duty of bank confidentiality...