1

EXTRATERRITORIAL MEASURES OF THE UNITED STATES OF AMERICA

AND THE IMPACT ON FOREIGN BANKS

The Example of Financial Sanctions

DISSERTATION

Submitted in fulfillment of the requirement for the

Master in International Law

by

Milic REPA

(Czech Republic)

Under supervision of

Prof. Zachary Douglas, QC

Geneva

2015

2

Abstract

Between 2005 and 2015 U.S. authorities took a series of controversial actions against several

foreign banks for conducting overseas financial transactions that violate the U.S. economic

sanctions. This thesis analyses the legality of the American conduct. I argue that the link connecting

the foreign banking activities to the USA is extremely weak. Consequently, even though the USA

could support its enforcement actions by a territorial link stemming from certain dollar clearing

activities and arguably by the effects doctrine or the protective principle, the US jurisdiction is still

an instrumental misuse of the existing jurisdictional grounds. In addition, the assertion of

jurisdiction by the USA is unreasonable because it causes regulatory chaos and interferes in the

internal affairs of certain EU States. Thus the US measures do not comply with the international law

on jurisdiction. These issues can be addressed by stronger cooperation between States or by

international tribunals such as ICJ and WTO. Moreover this work highlights the importance of a

strong reaction of States to denounce misinterpretations of international law.

3

EXTRATERRITORIAL MEASURES OF THE UNITED STATES OF AMERICA AND

THE IMPACT ON FOREIGN BANKS: THE EXAMPLE OF FINANCIAL SANCTIONS

1. THE CONTEXT OF US ECONOMIC SANCTIONS AND INTERNATIONAL BANKING ........ 8

1.1 Reasons Behind the Regulation of Financial Institutions.............................................................. 8

(a) The Transnational Challenges of the 21st Century .................................................................... 8

(b) International Banks: the Gateway to the Global Economy ....................................................... 9

1.2 US Economic Sanctions and Banking Regulation ........................................................................10

(a) Economic Sanctions ...................................................................................................................11

(i) Mechanism of Economic Sanctions .............................................................................................11

(ii) Economic Sanctions Programme of the USA ...........................................................................12

(b) Secondary Legislation Related to Economic Sanctions ............................................................13

1.3 Enforcement of Economic Sanctions against the Foreign Banks .................................................14

(a) An Overview of OFAC’s Actions against the Banks ................................................................14

(b) The Conduct of the European Banks ........................................................................................14

(c) The Character of OFAC’s Actions ...............................................................................................15

2. LEGALITY OF AMERICAN ACTIONS AGAINST THE FOREIGN BANKS ............................16

2.1 Fundamental Principles Related to the Exercise of State Powers ................................................17

(a) State Sovereignty .......................................................................................................................17

(b) The Limits of State Sovereignty ................................................................................................18

2.2 Rules on Jurisdiction in International Law and the US Approach ..............................................19

(a) The doctrine of Jurisdiction ......................................................................................................19

(b) Test of Legality for Assertion of Jurisdiction ...........................................................................20

(i) Part One: Grounds for Jurisdiction ...............................................................................................21

(ii) Part Two: Reasonableness .......................................................................................................23

(c) The US Approach to Jurisdiction .................................................................................................24

(i) Influence on Economic Sanctions ................................................................................................25

(ii) Influence on Other Legislation Concerning Banks....................................................................26

(d) International Reaction to the American Approach ..................................................................26

2.3 Legality of American Extraterritorial Measures under International Law ................................27

(a) Jurisdictional Grounds Applicable to American Conduct: Pushing the Limits of the

Jurisdiction............................................................................................................................................28

(i) Nationality Principle and the OFAC’s Actions .............................................................................28

(ii) Territorial Principle and the OFAC’s Actions...........................................................................30

(A) USD Transactions and the Territorial Principle ...................................................................30

(B) Electronic Messages going to the USA as a Territorial Link .................................................35

(C) US Dollar as a US Origin Product .......................................................................................36

(iii) Effects Doctrine and the OFAC’s Actions ................................................................................37

(iv) Protective Principle and the OFAC’s Actions ...........................................................................38

(b) The Reasonableness of American Conduct ...............................................................................40

(c) Conclusion on Legality under Traditional International Law .....................................................42

4

2.4 Legality of OFAC’s Actions under the US National Law ............................................................42

(a) Breach of the Rules on Statute Interpretation ..........................................................................42

(b) Disregard for the Corporate Separateness ...............................................................................43

(c) Punishment for Non-criminal Conduct: Modified SWIFT Messages ..........................................43

(d) Excessive Fines ..........................................................................................................................44

3. IMPACT OF THE AMERICAN EXTRATERRITORIAL MEASURES ON THE

INTERNATIONAL LAW AND PRIVATE BUSINESS .........................................................................45

3.1 Issues with Legitimacy and the Negative Reactions to the OFAC Actions ..................................45

(a) Potential Positive Effects of Extraterritoriality and its Abuse .................................................45

(b) The Lack of Legitimacy of OFAC’s Enforcement and the Consequent Reactions..................46

(i) Financial Imperialism: Acts Based on National Interest ...............................................................47

(ii) The Attempts to Control SWIFT ..............................................................................................47

(iii) Bullying by the OFAC: Extraterritoriality, Lack of Transparency and Forced Settlements ........48

3.2 Impact of OFAC’s Actions on the International Law and its Actors ..........................................50

(a) Business Complications for International Banks......................................................................50

(i) Conflicting Regulatory Environment: Troubles for Multinational Banks ......................................50

(ii) “Parent-based” Regulation: The New Informal Approach to International Lawmaking ............52

(b) Effect of the American Actions on the International Legal System .........................................53

(i) Interference in Domestic Affairs of States: Violation of International Obligations? ......................53

(ii) Disruption of International Norms on Jurisdiction ....................................................................54

(c) Are the International Rules of Jurisdiction Robust Enough? ......................................................55

3.3 Remedies for the Extraterritorial Measures of the USA .............................................................57

(a) Need for Intervention from the Affected States ........................................................................57

(b) Possibility of International Adjudication: Remedy at ICJ or WTO? ......................................58

(c) Need for International Cooperation and Mutual Respect............................................................60

(i) Cooperation and Transparency in the Area of Financial Sanctions................................................61

(i) International comity.....................................................................................................................61

(ii) A New Instrument in the Area of Jurisdiction and Banking? ....................................................62

4. CONCLUSION .................................................................................................................................63

5

Abbreviations (Terms)

AML Anti-Money Laundering

EU European Union

ICJ International Court of Justice

KYC “Know Your Client”

OFAC Office of Foreign Assets Control

SWIFT Society for Worldwide Interbank Financial

Telecommunication

USA United States of America, identifies

legislative, executive and judiciary branch

USD United States Dollar

WTO World Trade Organisation

This thesis also repeatedly uses the terms “OFAC’s actions” which describes a

series of thirteen enforcement cases against foreign banks for violations of

financial sanctions; and “punished banks” which identifies the foreign banks

fined by the American authorities in course of the OFAC’s actions.

6

Abbreviations (Banks)

RBS Royal Bank of Scotland Group Plc.

HSBC HSBC Holdings Plc.

CS Credit Suisse Group AG

Lloyds Lloyds TSB Bank Plc.

Barclays Barclay’s Bank Plc.

ING ING Bank N.V.

SCB Standard Chartered Bank Plc.

BNPP BNP Paribas S.A.

Commerzbank Commerzbank A.G.

7

EXTRATERRITORIAL MEASURES OF THE UNITED STATES OF AMERICA AND

THE IMPACT ON FOREIGN BANKS: THE EXAMPLE OF FINANCIAL SANCTIONS

The new millennium has brought complex regulatory challenges for the international

community. Political disagreements, financial instability and insecurity are just some of the issues

that influenced regulators all around the world in their actions. Because of their complexity and the

transnational nature, these issues cannot be efficiently addressed by regulation on a territory of a

single State. But instead of cooperation certain States started to unilaterally apply and enforce the

domestic law far beyond their territory, thus crossing the traditional boundaries of jurisdiction1.

Within the past decade, the international community has been marked by the unprecedented

regulatory actions of the USA against foreign banks for alleged violations of US economic

sanctions based on financial activities with Iran, Cuba, Burma and Sudan. Up to date, there have

been thirteen instances2 when a foreign bank has settled with US authorities for the alleged breach

of the US sanctions. The financial community has been surprised by the audacity of American

regulators and by the unprecedented amount of fines which repeatedly exceeded the threshold of

billions of US dollars3. The legal community was rather surprised by the way a single State applies

and enforces its own legislation to foreign entities’ conduct outside of its territory4. The US

enforcement actions gave rise to questions concerning the validity of the arguments that the USA

uses to justify this unprecedented enforcement.

The goal of this work is to analyze the legality of the extraterritorial enforcement of

economic sanctions and its impact on non-US banks and the international legal order. The central

theme is the conformity of the American conduct to the rules on jurisdiction in international law,

but some considerations of American law are given as well. The conclusions are based on an

analysis of the published settlement agreements with the European Banks5 and on the legal

instruments and arguments that underpin the enforcement actions. This work tries to give answers

to main questions arising from the US conduct including: Is the extraterritorial enforcement of

economic sanctions legal? How do the grounds for jurisdiction invoked by the USA comply with

the traditional international law on jurisdiction? What are the risks that the US conduct represents

1 IBA, 2008, Report of the Task Force on Extraterritorial Jurisdiction, p. 5, concerning the insistent extraterritorial jurisdiction by the USA

2 Released OFAC settlements, available at http://www.treasury.gov/resource-center/sanctions/CivPen/Pages/Additional-Select-Settlement-

Agreements.aspx, as of May 2015. 3 See section 2.4(d)

4 Marija Dordeska, 2014, From Targeted Sanctions to Targeted Settlements: International Law-Making Through Effective Means, EJIL.

5 Out of 13 OFAC’s cases against foreign banks, 11 were European, see supra n. 2

8

for the international law and what can be done to remedy the risk? The structure of this thesis

corresponds to (in order): facts, applicable law, application of the law, effects and remedies.

The main finding of this work indicates that the American enforcement actions breach the

international rules of jurisdiction because they are based on an insufficient link with the USA and

because they do not comply with the reasonableness requirement. In consequence, American

conduct presents a risk for international banks who suffer from loss of profits and conflicting

regulatory frameworks. The US conduct also undermines the traditional understanding of customary

rules on jurisdiction and possibly constitutes an infringement upon the sovereignty of foreign States.

Even though a deviation from established rules on jurisdiction might have a legitimate regulatory

cause, States should still avoid such conduct as it creates an opportunity for abuse and it contributes

to the degradation of the international legal environment, including the creation of economically

burdensome and chaotic situation for banks.

The first part describes the events and the context relevant for the analysis of American

sanctions enforcement (1). Second part of the thesis analyses the legality of American actions (2).

The third part focuses on the consequences of the American actions on the international legal

system, it conducts an axiological analysis of the rules on jurisdiction and it studies the possible

remedies for the American actions (3).

1. THE CONTEXT OF US ECONOMIC SANCTIONS AND INTERNATIONAL

BANKING

1.1 Reasons Behind the Regulation of Financial Institutions

The 21st century has been marked by the continuous intensification of many regulatory

challenges such as financial instability, international crime and human rights violations. Banking

regulation has become a common instrument to address these issues.

(a) The Transnational Challenges of the 21st Century

In the past decade, the global financial system has witnessed a considerable upheaval and

instability. Despite the increasing number of transactions and exchanges, the financial crisis of

2007-2010 represents one of the harshest economic events since the Great Depression in 1930’s6.

Financial regulators took the crisis seriously which resulted in a new wave of regulation of banking

6 Financial crisis of 2007-2010, also known as the Great Recession, see http://www.reuters.com/article/2009/02/27/idUS193520+27-Feb-

2009+BW20090227 ,

9

activities such as the Dodd-Frank Act7 or the European System of Financial Regulation

8. Apart

from the economic instability, regulators also put their focus on terrorism. Following the attacks on

September 11th

2000, the Moscow Theatre Crisis and other consequent incidents9, many States

introduced laws to fight terrorism through control of finance. This movement resulted in creation of

legislation such as PATRIOT Act10

or EU Anti Money-laundering Directive11

. Consequently there

was an unprecedented amount of banking regulation whose goal was to prevent the terrorist

activities and the illicit use of assets.

Financial instability, terrorism and money laundering share common characteristics. All of

these issues are transnational because their constitutive elements can take place in the territories of

various States. Because of the globalisation12

and the emergence of an integrated world market,

State borders become more open for wrongdoers and the dealing with these challenges generally

requires even stronger cooperation between States. But cooperation is sometimes difficult to

achieve. In consequence certain States started to address the problems unilaterally13

. The demand

for security and stability pushes States to expand the reach of their national legislation to address

the global issues. In this environment banks are particularly concerned because of their

characteristics and importance.

(b) International Banks: the Gateway to the Global Economy

Banks14

represent the backbone of the existing economic order. The first “international”

banks with activities in multiple States appeared in Europe in the 15th century when a few

prosperous Italian banks established branches in other parts of Europe15

. Today, we observe

international banking groups that are networks of massive corporations capable of serving clients

from all around the world.

Banks fulfil functions that are vital for the modern economic organisation. This work is

concerned mainly by the payment intermediary function of banks – the transfer capital16

. The

majority of international financial transactions today is done through electronic payments17

. Banks

7 Dodd–Frank Wall Street Reform and Consumer Protection Act 2010

8 Regulation (EU) No 1093/2010, see also Regulation (EU) No 1095/2010,

9 Hostage crisis in Moscow October 2002, other incidents include Madrid (2004) and London (2005) attacks

10 Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (PATRIOT Act)

11 EU directive 2005/60/EC

12 The Merriam Webster Online Dictionary, “globalization”, retrieved March 6. 2015. http://www.merriamwebster.com/dictionary/globalization

13 USA, Walter A. McDougall, Promised Land, Crusader State (1997)

14 “Financial institution with depository, payment or landing function”, definition at Investopedia, “banks” , retrieved March 10. 2015

http://www.investopedia.com/terms/b/bank.asp 15

MacDonald, Gastmann, 2004, A History of Credit and Power in the Western World, pp.5-20 16

31 C.F.R at §515.311 (1998). “Transaction” is defined broadly to include any possible type of service or exchange 17

King, McKay, Marshall, Lee, Vielhand,(2008). Electronic Commerce 2008: A Managerial Perspective, p.554

10

collect funds from one party and will administer the transfer of the funds to other party. This

function is essential to any commercial activity and it consists of operations on the territory of

multiple States. Because of its extraordinary importance, in most States banking is a strictly

regulated activity and banking corporations generally need a license to provide banking services.

Majority of States apply fractional reserve banking system where the commercial banks are

regulated by a central authority18

. In the USA, all banks are regulated by the Federal Reserve

System (FED) which acts as the central bank of the United States and also sets monetary policy19

.

Banking groups have varying legal structure. Most of the international banks apply either

the parent-subsidiary structure or the “branch” structure20

. The parent-subsidiary structure is

valuable because it creates a corporate separation where the parent corporation owns the subsidiary,

but remains a separate legal entity. In branch structure, the whole banking group is the same legal

entity, there are only different branches located in different territories. Branch structure is

administratively less demanding. In the USA the presence of foreign banks also takes form of either

subsidiaries (E.g. HSBC) or branches (E.g. Standard Chartered). Under American federal law

foreign banking organisation is defined as any bank, or "any company of which the foreign bank is a

subsidiary" that "controls a bank in the United States" or "operates a branch, or agency in the

United States21

”.

For the purpose of this work we can observe that the banking regulation consists of two sets

of rules. The first set is technical and it prescribes how banks do business. Such regulation contains

reporting and monitoring duties, capital requirements, etc. The second set concerns who the banks

do business with. These rules contain restrictions and prohibitions to deal with certain entities. The

goal of this regulation is to exclude certain individuals or organisations from the financial system to

prevent a misuse of assets (e.g. terrorism) or to punish them (e.g. political enemies). Economic

sanctions fall in this category.

1.2 US Economic Sanctions and Banking Regulation

Economic sanctions considerably impact private corporations, thus they are part of the wider

area of business regulation. The USA maintains a comprehensive sanctions programme that

concerns banks.

18

Mishkin, 2012, Economics of Money, Banking and Financial Markets, 19

FED, http://www.federalreserve.gov/aboutthefed/mission.htm, consulted April 10, 2015. 20

Fiechter, IMF note , March 7, 2011, Subsidiaries or Branches: Does One Size Fit All, see also infra n.260. 21

12 C.F.R. Part 211 (Regulation K). Branches may accept deposits and agencies cannot, see

http://www.ct.gov/dob/cwp/view.asp?a=2235&q=297894

11

(a) Economic Sanctions

This section will analyze the theory of economic sanctions and the US sanctions.

(i) Mechanism of Economic Sanctions

Economic sanctions can be described as coercive economic and financial measures that are

supposed to change the political behaviour of the target entity through the restriction of economic

activity22

. By financial sanctions we understand prohibition to conduct financial transactions.

Economic sanctions are imposed based on of various economic, political and security

considerations23

. Sanctions are generally accepted under international law, even though the targeted

States consistently oppose sanctions’ legality24

.

The State that imposes the sanctions is known as the Sender State and the penalized entity is

the target. Economic sanctions’ target entities have been traditionally States or groups of States.

The 20th

century has been marked by the emergence of targeted sanctions, or so called smart

sanctions25

. Compare to the traditional economic sanctions, the targeted sanctions do not aim the

whole population of a State, but only certain corporations, political organisations or individuals.

Targeted sanctions have been generally praised because they are effective, but the whole population

of a State does not have to suffer the negative consequences26

.

Economic sanctions usually take form of laws enacted by the legislator with the power for

the executive branch to designate the targets.27

The legitimacy and the respect of the sanctions are

also determined by the fact whether the sanctions are imposed unilaterally or multilaterally by

several States28

. Unilateral sanctions are common in the contemporary era of international relations

although some scholars claim that unilateral sanctions are illegal under international law because

they interfere with State sovereignty29

and because they are a form of subjective private justice30

.

Despite such criticism, unilateral sanctions are an established practice even though the multilateral

sanctions tend to have more legitimacy and recognition31

.

22

C. Galway Buys, 1999, United States Economic Sanctions: The Fairness of Targeting Persons from Third Countries, p. 242 23

Alexander,(2009), Economic sanctions law and Public policy, p. 11 24

Supra n. 22, p. 253; 25

See history of smart sanctions at http://foreignpolicy.com/2012/04/23/smart-sanctions-a-short-history/ , retrieved 7 May, 2015 26

Hufbauer, Schott, Elliott and Oegg,(2007) Economic Sanctions Reconsidered, p. 138 27

E.g. USA, France or Czech Republic, see the section 1.2(a)(ii) 28

Multilateral sanctions are usually past of the UN Sanctions Programmes created by Security Council Resolutions, see the list at

http://www.un.org/sc/committees/ 29

Alexander, supra note 23, pp. 58-62 30

Malloy, 1990, Economic Sanctions and U.S. Trade, p. 592. 31

Kaempfer,Lowenberg, 2002, Unilateral Versus Multilateral International Sanctions: A Public Choice Perspective

12

Certain States tend to increase the effect of their unilateral sanctions by creating so called

secondary sanctions. Secondary sanctions, also known as the “secondary boycott measures”, are

supposed to apply the sanctions to foreign individuals and corporations even outside of the territory

of the sender State. Secondary sanctions do not directly punish the target entity/State anymore but

they incriminate third State nationals for doing business with the entities that are directly sanctioned

by the sender State. Legality of these sanctions is frequently questioned32

.

(ii) Economic Sanctions Programme of the USA

USA maintains a comprehensive system of sanctions. Economic sanctions represent a

traditional instrument of American foreign policy33

used to limit commercial exchanges with States,

corporations and designated individuals. USA has used the sanctions to harm enemies such as in

times of war (E.g. Nazi Germany). Outside of periods of war USA imposes economic sanctions on

the politically hostile countries, criminals and pariahs.

The creation of economic sanctions laws is the competence of the US Congress34

. US

Congress passes the economic sanctions framework laws, but it delegates the power to the president

to decide when and to whom the sanctions shall be applied. In the USA, the authority primarily

responsible for the administration and enforcement of the economic sanctions is the Office of

Foreign Assets Control (OFAC). OFAC is the successor of the World War II Office of Foreign

Funds Control which was the authority designed to block the assets and financial transactions from

and to the Axis powers. OFAC was formally created in 1950 and ever since it managed the

enforcement of the American economic sanctions. Today, OFAC operates under the US department

of treasury and it has been called the “the most powerful yet unknown governmental agency35

”. It is

a felony to violate a sanction administered by OFAC36

.

The legislative framework for economic sanctions is based on the Trading with the Enemy Act37

(TWEA), International Emergency Economic Powers Act38

(IEEPA) and the Export Administration

Act39

(EAA). Based on these laws, the president of the USA can impose economic sanctions in

relation to national security and foreign policy. This includes complete ban on commercial

exchanges and financial transactions with designated countries, corporations and individuals.

32

Supra n.22, p.253 33

Razzano,2010, U.S. economic sanctions laws: practical implication for European Companies, p.128 34

The Constitution of the USA, Article 1, Section 8 35

Wall Street Journal, Rubenfeld, OFAC Rises as Sanctions Become A Major Policy Tool, February 5, 2014 36

International Emergency Economic Powers Act of 1977 (IEEPA), 50 USC §§1705. 37

Trading With the Enemy Act of 1917 (TWEA) , 12 U.S.C § 95a, limits trade with countries hostile to the USA 38

IEEPA, 50 USC 1702, Enables the president of the USA to regulate commerce after declaring the state of emergency in the USA having as a cause

a foreign source 39

Export Administration Act of 1979 (EAA), 50 USC §§2401

13

As of the beginning of 2015, American economic sanctions directly concern 21 States and

crime, terrorism and narcotic trafficking organisations40

. Notable examples of sanctioned countries

include Iran, Cuba, Burma or Sudan41

. Most of the sanctions maintained by OFAC are multilateral

and based on the mandate of the United Nations, but OFAC also administers sanctions that are

unilateral and based only on the American national interest. Such sanctions are justified by

considerations of national security, fight against nuclear proliferation or respect of human rights

(E.g. Cuba). The economic sanctions prohibit a large spectrum of commercial activities. These

prohibitions include loans, payment services or any other kind of financial assistance42

. Such

prohibitions of financial transactions are a vital component of the sanctions and they directly affect

banks.

(b) Secondary Legislation Related to Economic Sanctions

USA has a wide range of secondary legislation that concerns American banks and is

connected to economic sanctions. The two notable areas of law include anti-money laundering

schemes (AML) and anti-terrorism regulation. The legislation impacting banks the most is probably

the Bank Secrecy Act43

(BSA). BSA is an anti money laundering law that requires banks to monitor

and to report financial transactions and activities44

. BSA compliance is a part of OFAC

compliance45

. Despite the fact that OFAC sanctions and the BSA are separate and their

requirements differ, these laws are still connected as they serve a common purpose: national

security46

. The BSA also incorporates sections of other controversial laws such as the anti terrorism

law PATRIOT Act47

. PATRIOT Act was passed in 2001 as a tool to fight terrorism. Banks are

particularly impacted by this law as they might be forced to respect certain procedural and

substantive requirements including keeping the records of transactions, report transaction exceeding

certain amount of money and reporting suspicious activity48

.

40

See OFAC programmes at http://www.treasury.gov/resource-center/sanctions/Programs/Pages/Programs.aspx 41

Cuban Assets Control Regulations, 31 C.F.R. §§515, Iranian Transactions Regulations, 31 C.F.R. §§560; the Burmese Sanctions Regulations, 31

C.F.R. §§537; the Sudanese Sanctions Regulations, 31 C.F.R. §§538, 42

See for example 31 CFR §§515.201 43

Currency and Foreign Transactions Reporting Act of 1970 (BSA), 12 USC §§ 1724-1813 44

31 USC §5311 et seq 45

FFIEC, June 2005, BSA/AML Examination Manual, p. 1 46

http://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Documents/ofac_sec_frb.pdf page 1 47

Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (PATRIOT Act),

see 31 U.S.C. §§5311–5330 48

31 U.S.C §§ 5311-5330, C.F.R. §§ 1010.100-1060.800 Banks are either forced to block a transactions or to apply very strict control standards

depending on whether they do business with „uncooperative“ or „sanctioned“ country, or “Know Your Customer” (KYC) requirements.

14

1.3 Enforcement of Economic Sanctions against the Foreign Banks

The OFAC’s actions represent a severe blow for the foreign banks doing business with the

US sanctioned entities.

(a) An Overview of OFAC’s Actions against the Banks

For many years, OFAC played a rather quiet role in the American foreign policy. The

situation changed in the early 2000’s when the sanctions watchdog started to aggressively enforce

the sanctions against the foreign corporations and individuals49

. Subsequently between 2005 and

2015, thirteen foreign banks have been punished by the American authorities for the violation of the

economic sanctions maintained by the USA50

. Out of the thirteen banks, eleven were European.

Notable examples of the punished foreign banks include (chronologically): Royal Bank of Scotland

(2005), Lloyds TSB Bank Plc. (2009), Credit Suisse AG (2009), Barclays’ Bank Plc. (2010), ING

Bank N.V.(2012), Standard Chartered Bank (2012), HSBC Holdings plc. (2012), BNP Paribas S.A

(2014), and finally Commerzbank A.G (2015). OFAC also targeted certain Australian and Chinese

banks51

.

Each of these cases was unique and the allegedly criminal transactions slightly differed, but

all of the cases share similar characteristics that raise the same questions. All the punished banks are

major foreign international banking groups, the conduct generally took place outside of USA and all

of the cases finished with a settlement agreement.

(b) The Conduct of the European Banks

From the 1990’s to 2010’s the punished banks processed electronic USD payments with the

entities targeted by US economic sanctions52

. There were allegedly 2 types of wrongful conduct.

First, the banks conducted operations with the sanctioned entities. The violations of the US

sanctions were allegedly constituted when the foreign banks provided financial assistance to or

processed electronic payments on behalf of clients from Iran, Cuba, Sudan and other sanctioned

countries. The transactions were denominated in U.S. dollars (USD transactions)53

. Second, the

49

Rathbone, Jeydel, LentzSanctions, Sanctions Everywhere: Forging a Path through Complex Transnational Sanctions Laws, Georgetown Journal of

International Law, 2013, p. 52 50

Supra n.2 51

See KunLun Bank China (2012) or Australia and New Zealand Banking Gourp (2009) http://www.treasury.gov/press-center/press-

releases/Pages/tg1661.aspx 52

First transactions condemned by OFAC in the settlements date to 1991 (Credit Suisse settlement, §6), the majority of the allegedly wrongful

transactions occurred between 2001-2006 (BNP Parisbas §§ 7-13, Commerzbank AG §§ 3-13). For simplification in this work the

references to the settlements are done in form of “name of bank” and “§ of the settlement”. All the used documents can be found in the

bibliography. 53

Transactions were denominated in USD, for examples see (settlements SCB, BNPP, ING, etc.)

15

banks allegedly altered banking messages in order to disguise the wrongful operations.

Consequently the US authorities blamed the banks for “providing U.S. dollar trade finance services

to sanctioned entities through misleading payment messages”54

. The US authorities consider these

conducts as a violation of the International Emergency Economic Powers Act, (50 U.S.C. §§ 1701-

06), Trading With the Enemy Act, (50 U.S.C. App. §§ 1-44., 31) as well as a breach of certain

duties relevant for each target entity55

.

When a foreign bank wants to make a USD transaction, this transaction requires US Dollar

clearing. USD clearing refers to the conversion of foreign currency to U.S. dollars. Electronic

payments are made based on requests that the payer bank sends. These electronic requests are made

through messages set up by the Society for Worldwide Interbank Financial Telecommunication

(SWIFT). SWIFT is a private member owned cooperative which was set up in 1973 to provide a

secure network for exchange of messages for financial transactions. SWIFT is incorporated in

Belgium. The most frequent SWIFT messages used for international electronic financial

transactions are the MT103 and the MT202. These messages ask the payer bank to provide

information concerning the currency, sender, recipient, account information and others. In most of

the cases, the foreign banks allegedly removed or changed the names, addresses and countries of

origin from the standard SWIFT messages that accompany financial transfers56

. This practice is

generally referred to as “wire stripping”. Sometimes banks paid on the name of a different existing

client or set up special purpose entities (E.g. Commerzbank). Most of the banks also used “cover

payments” which are transactions made through a chain of independent banks57

. In course of cover

payments the intermediary banks are not aware of the payer or the recipient of funds. Because of

this conduct, the US financial network filters were not able to detect the transactions with the

targeted entities. All conduct took place outside of the USA58

but for certain transactions the

clearing took place at banks located in the USA59

.

(c) The Character of OFAC’s Actions

The investigation process was vigorous. OFAC and other US authorities conducted a

lengthy enquiry and forensic analysis of foreign banks’ activities. The concerned banks started to

54

ING Bank, N.V. case, Department of Justice press release, June 12 2012. 55

For precise CFR sections for each sanctioned country see supra n. 41 56

E.g. (SCB §12), (Lloyds §6) 57

E.g (SCB § 12), (RBS § 8) 58

Notable locations are: Dubai (SCB §12), Geneva, Paris ( BNP Paribas §3), Belgium (ING §9) Germany (Commerzbank §10), etc. 59

E.g (Lloyds, §15), etc

16

collaborate under threat of fines and revocation of their banking licenses60

. All the cases were

concluded by settlement agreements. Apart from sanctions violations the US authorities also

accused the foreign banks for the violations of secondary legislation which is connected to

economic sanctions61

. The foreign banks were blamed for the violations of BSA, breach of

reporting and monitoring duties, insufficient due diligence, and falsification of records62

.

The rhetoric and the public image that was attributed to the punished banks was remarkably

pejorative. In attempts to gain more legitimacy, the US publically associated the conduct of the

banks with terrorism and money laundering. The American authorities have commented on the

cases in the following way:

“Motivated by greed, SCB acted for at least ten years without any regard for the legal,

reputational, and national security consequences of its flagrantly deceptive actions”63

.

The banks were fined criminally by the Department of Justice and then civilly by

Department of Treasury. The fines were colossal - the combined amount of the fines collected by

the American authorities in the nine mentioned cases alone exceeded 16 billion dollars64

. A notable

case was BNP Paribas which alone was fined 8.9 billion dollars65

. But the monetary fines are not

the only punishment. As part of the settlements the banks were also forced to fire certain

employees, create additional AML compliance teams, cease business contact with the controversial

entities and agree to further reporting and monitoring duties to the American authorities etc. Certain

banks were also prohibited from further USD clearing transactions66

. All banks entered a deferred

prosecution agreement the duration of which ranged from 1 year (RBS) to 5 years (HSBC). Finally

banks had to give up their right to “any possible legal objection”67

.

2. LEGALITY OF AMERICAN ACTIONS AGAINST THE FOREIGN BANKS

This section studies the legality of OFAC’s actions. Such study requires application of the

relevant rules of international law to the American conduct. We shall also see some particular

aspects of OFAC’s actions under American national law.

60

Levine, Paretzky, November 6, 2012, Increasing ‘Extraterritorial’ Application of U.S. Trade Control Laws to Non-U.S. Businesses, see

http://www.mwe.com/Increasing-Extraterritorial-Application-of-US-Trade-Control-Laws-to-Non-US-Businesses-11-06-2012/ 61

E.g settlement (Commerzbank AG) 62

E.g settlement (HSBC) 63

New York State Department of Financial Services commentary, see http://www.dfs.ny.gov/about/ea/ea120806.pdf 64

Total sum paid to American authorities in the nine cases, see supra n.2 65

Total sum paid to American authorities (BNPP settlement) see http://www.federalreserve.gov/newsevents/press/enforcement/20140630a.htm 66

E.g. Settlement (SC) 67

E.g. (HSBC §37), (Lloyds §21)

17

2.1 Fundamental Principles Related to the Exercise of State Powers

The section exposes the legal concepts that concern the exercise of State power.

(a) State Sovereignty

The modern organisation of the international society is based on the concept of sovereign

equality of States. This idea is referred to in the UN Charter Article 2.1. The basic postulate of the

sovereign equality is that all the States are supreme and there is nothing above them. Max Huber

claimed that “sovereignty in the relations between States signifies independence.”68

. These various

descriptions express the same clear message: every State maintains internal order and security

exclusively by itself and according to its own interests69

. In this way the sovereignty contributes to

the coexistence of States and to consequent wellbeing of the international community.

An important occasion when an international tribunal addressed the sovereignty was the

Lotus case70

of 1927. This case concerning the jurisdiction of States provides us with two relevant

rules concerning the sovereignty. First, a State cannot exercise its power outside of its territory

unless a rule of international law allows it71

. Second, inside its territory a State can act in any way

unless a rule of international law forbids it72

. This finding, also known as the Lotus principle,

corresponds to the idea that what is not prohibited is allowed, or in other words: “restriction upon

the independence of States cannot [...] be presumed73

”.Sovereign States can act in any manner as

long as they do not violate a prohibition existing in the international law. Today the decision causes

mixed reactions74

. On one side Lotus sets limits for state sovereignty in form of prohibitions under

international law. On the other hand, this decision gives States relatively free hand on the way they

exercise their power inside their territory which might have strong impact even outside of their

territory. The ratio decidendi of the Lotus case is notorious, but since the actual judgement in 1927,

the Lotus decision and its approach to jurisdiction have been questioned. In these later decisions,

the ICJ chose to apply more strict approach as for limitation of State sovereignty. In the Fisheries75

case ICJ created a presumption of territorial application of the national law stating in the process

that the Lotus principle was “formerly correct in the days of absolute sovereignty,[but] it is no

longer so at the present day76

”.According to the separate opinions in the Arrest Warrant case77

, the

68

Island of Palmas Case (Netherlands v. United States of America), 1928, United Nations, Reports of International Arbitral Awards, vol. II, 1928, pp.

829-871, at p. 838. 69

Akehurst,1972, Jurisdiction in International Law, p.152 70

The Case of the S.S. "Lotus" (France v. Turkey), PCIJ, 1927 71

Ibid §45 72

Ibid §§ 46, 67 73

Ibid p. 18 74

Gerber, Beyond Balancing: International Law Restraints on the Reach of National Laws, 10 Yale J. int'l l., pp. 196-197 75

Fisheries Case (United Kingdom v. Norway), ICJ, 1951 76

Ibid, 116,.para.10

18

Lotus principle was described as “high water mark of laissez-faire in international relations and an

era that has been significantly overtaken by other tendencies”. These decisions also manifest that

despite its’ notoriety the Lotus principle is somewhat an anachronism.

(b) The Limits of State Sovereignty

The common point of all the cited decisions is the view that the State sovereignty has limits.

If the sovereignty was taken as absolute, a State could exercise power in any way it wishes,

anywhere it wishes and to any extent it wishes. This is would disrupt the international legal system

because the relations between States would not be governed by the law, but by the strongest State.

The Basic understanding of sovereignty is that States can exercise power exclusively only

on the territory which is under their control. Thus the traditional limit for the exercise of

sovereignty is the territory. This logic was already employed in ancient Greece78

, it was reflected in

Westphalian system79

and this reasining is found even in the Lotus case. In the recent decades the

importance of territory underwent a significant evolution80

. The territory still remains the point de

repère for limitation of State power, but it is now usual that State sovereignty might concern

conduct beyond the territory of the State81

.

Another fundamental limitation of sovereignty is the principle of non-intervention.

Non-intervention is a parallel to the principle of State sovereignty. This principle was described in

the famous decision of Nicaragua v. USA82

: “The principle of non-intervention involves the right of

every sovereign State to conduct its affairs without outside interference”. It is illegal for one State to

intervene in the domestic affairs of another States. This principle is not in itself present in the UN

Charter, but it is included for example in the Friendly Relations Declarations of 197083

which

stated: “No State or group of States has the right to intervene, directly or indirectly, for any reason

whatever, in the internal or external affairs of any other State. Consequently, armed intervention

and all other forms of interference or attempted threats against the personality of the State or

against its political, economic and cultural elements are in violation of international law84

.”

Consequently, the intervention does not have to be military but even an economic intervention

could constitute a violation of international law.

77

Separate opinions Higgins, Kooijmans, Burguenthal, Arrest.Warrant.of.11.April. 2000, (Dem. Rep. of Congo v Belgium) ,ICJ, 2002 para.51.at.78. 78

Shaw, 1992, International Law, p. 62. 79

Caporaso, 2000, Changes in the Westphalian Order: Territory, Public Authority, and Sovereignty International Studies Review, pp. 5-15 80

Ibid pp. 7-20, in the sense that today the territory is not taken as a strict limit for sovereignty. 81

Ibid pp 7-20, see also for French Code pénal, art. 113-6 to 113-12, 82

Military and Paramilitary Activities in and against Nicaragua (Nicaragua v. United States of America), ICJ REP. 392 June 27, 1986 83

United Nations General Assembly Resolution 2625, 24 October 1970. 84

Friendly Relations Declaration (UN General Assembly, 1970),

19

2.2 Rules on Jurisdiction in International Law and the US Approach

One of the ways States exercise their sovereignty is by regulation. The application and

enforcement of legal norms are limited by the jurisdiction of that regulating State.

(a) The Doctrine of Jurisdiction

Doctrine of jurisdiction articulates the idea that a State can only regulate the conduct,

persons and property in its power. It is defined as “the limits of the legal competence of a State to

make, apply and enforce rules of conduct85

”. Exercise of jurisdiction can be threefold: prescriptive,

enforcement and adjudicative. Prescriptive jurisdiction describes the extent to which the State can

create and apply their legislation and other rules. Enforcement jurisdiction describes the situations

where the States can enforce these rules and the adjudicative jurisdiction defines when national

courts can deliver judgments.

States have traditionally restricted the exercise of their jurisdiction to their territory, for

example as early as in the Ancient Greece the prescriptive jurisdiction of a city State was limited to

the territory under its control86

. But at the same time there have been exceptions. It is acceptable

that under certain conditions a State can exercise its power even outside of its territory. This idea is

known as extraterritorial jurisdiction. Extraterritorial jurisdiction is described as “a situation in

which State powers govern relations of law situated outside the territory of the State in

questions87

”. Despite the importance of territory, it has become evident that in certain cases States

can assert jurisdiction to regulate conduct outside of their territory without interference and without

infringing upon the sovereignty of other States88

. Historically the extraterritorial jurisdiction was

already asserted in the medieval Italy, sixteenth century Britain and seventeenth century Germany89

.

The major development of extraterritorial jurisdiction came with the emergence of transnational

commerce in the 19th century when States continually showed interest in regulating transnational

conduct such as commerce or crime, consequently the extraterritorial jurisdiction started to be

asserted more systematically90

.

85

Jennings, Watts, 1992, Oppenheim’s International Law, 9th.ed, p. 456 86

Zaide, 1983, World History, page 122. 87

Definition “Extraterritorial Jurisdiction”, Jean Salmon, Dictionnaire de droit international public, Agence Universitaire de la Francophonie, 88

Gruson, 2004, The US jurisdiction over transfers of US dollars between foreigners and over ownership of US dollar accounts in foreign banks,

Colum. Bus. L. Rev. 721, p.762, (apart from consent of the State) 89

Supra n.69, pp. 145,163. 90

Liakopoulos, Marsilia, 2010, The Regulation of Transnational Mergers in International and European Law, p. 8

20

The extraterritorial jurisdiction can be exercised directly and indirectly91

. Domestic

measures with extraterritorial effects represent the indirect use of extraterritorial jurisdiction. Direct

assumption of extraterritorial jurisdiction over activities abroad is the direct use of the

extraterritorial jurisdiction. Indirect extraterritorial jurisdiction is generally less controversial, even

though it can as influential as the direct extraterritorial jurisdiction92

. The international law limits

the exercise of both types of extraterritorial jurisdiction.

If we apply the controversial Lotus principle to the issue of extraterritorial jurisdiction, the

obvious assumption would be that the States can regulate extraterritorially mainly through the

domestic measures - unless the international law does not forbid it. Under this logic only a few

limits would exist (e.g. non-interference). The Lotus case established rather a permissive rule

concerning the jurisdiction. Today the Lotus principle is incompatible with the approach to

jurisdiction of many States93

such as the UK, Australia and Japan who remain proponents of strict

territorial jurisdiction94

. The consequent decisions of the ICJ applied a more restrictive approach to

the jurisdiction. In the Fisheries95

case ICJ created a presumption of territorial application of the

national law. In the Nottebohm96

case ICJ stated that extraterritorial legislation is generally seen as

illegitimate97

. These decisions helped to reinstate the classical paradigm of jurisdiction: the

territoriality as general rule and the extraterritoriality as an exception. This premise has been

continually supported throughout the last century. As an example, in 1990, Frederick Mann wrote

that “Normally no State is allowed to apply its legislation to foreigners in respect of acts done by

them outside the dominions of the sovereign power enacting. That is a rule based on the

international law, by which one sovereign power is bound to respect the subjects and the rights of

all other sovereign powers outside its own territory” 98

.

(b) Test of Legality for Assertion of Jurisdiction

It is often in the national interest of a State to regulate conduct outside of its territory. But

the international law places limitations on assertion of jurisdiction99

. Consequently an assertion of

jurisdiction must be justified by certain links (i) and by the context of the situation (ii).

91

Zerk, 2010, Extraterritorial Jurisdiction: Lessons for the Business and Human Rights Sphere from Six Regulatory Areas , Working Paper No. 59,

p.5 92

Ibid 93

Alexander, 2009, The Efficacy of Extraterritorial Jurisdiction and US and EU Tax regulation, p. 467 94

“The UK opposes all assertions of extraterritorial jurisdiction by foreign other states over its individuals and companies”, July 2005, Ministerial

Statement, HL Deb.,Vol. 673, UKMIL, 76 BYIL, 2006, p. 850, see also supra n. 93, p. 472, see also 1969 UK aide-memoire to the EC for

Dyestuffs case, (Imperial Chemical Industries Ltd. v Commission of the European Communities). 95

Supra n. 75 96

Nottebohm case (Liechtenstein v. Guatemala), ICJ, 1955. 97

Supra n.88, p. 762 98

F.A. Mann, Further Studies in International Law, 1990, p.5 99

Z. Douglas, Class, Private International Law course Fall 2014, Graduate Institute of International and Development Studies Geneva, lecture 2

21

(i) Part One: Grounds for Jurisdiction

The first requirement for the jurisdiction is a link to the State. There are five100

major

grounds that justify an assertion of jurisdiction under international law. There is no formal hierarchy

of these bases for jurisdiction, but certain grounds are more established than others101

. Furthermore

the USA can choose to justify its actions on more than one principle.

Territoriality principle

The territoriality principle is the standard basis for jurisdiction102

. This principle allows

States to assert jurisdiction over persons, objects or a property present in their territory.

Territoriality principle is also one of the parallel rules of the state sovereignty- a State has exclusive

jurisdiction over all conduct within its territory. Territoriality has two subdivisions: subjective and

objective territoriality. Subjective territoriality is the traditional form of jurisdiction over a conduct

that has happened entirely within the territory of one State. The more recent objective territoriality

is a jurisdiction on the basis that a conduct happened only partially on the territory103

. The objective

territoriality is often criticized as ground for abuse104

.

In certain situations a territorial link of an activity might exist but it might be weak. Then the

issue may be to determine whether the link of the conduct to the territory is strong enough to anchor

it and to assert the jurisdiction. Consequently the territoriality is sometimes invoked by States as

ground for jurisdiction in atypical territoriality situations such as where emails, phone call and

money transfers are the connecting links105

.

Nationality principle

Another established ground for jurisdiction is the nationality principle. It provides States

with jurisdiction over conducts of their nationals even outside of their territory. The nationality

principle has two aspects, the classical active personality principle provides jurisdiction where the

national is the author of the conduct, and the passive personality principle covers situation where

the national is the victim of a conduct106

. The nationality principle is the legacy of the orthodox

vision of private international law107

which holds that nationals of one State are purely under

100

Shaw, supra n.78, treats the Effects Doctrine under teritoriality principle. Becuase of the importace of this doctrine for the current case, it is treated

as a separate ground. 101

Supra n.91, p. 19 102

Supra n.91, p.18 103

Supra n.72, p. 152 104

Jennings, 1957, Extraterritorial Jurisdiction and the United States Antitrust Laws, 33 BRIT. Y.B. INT'L L. 146, 159-60. 105

See section 2.3(a)(ii)(A)I 106

Passive personality principles is less used and more controversial than the active personality principle (Supra n.91, pp. 10, 20) 107

Postglossator’s 14th century theory on private international law, example of “statuts personnelles”

22

jurisdiction of their State of nationality State and not the host State. Nationality link was used

already by the ancient Romans108

who had a vision of an empire with flexible borders where the

conduct is regulated based on the affiliation of the author of the conduct rather than the place of the

conduct.

Effects doctrine

The effects doctrine is a rule according to which a State can assert jurisdiction over a

conduct that takes place outside of the territory but that produces effects on territory of that

regulating State. The effects doctrine derives from the territoriality principle109

. Certain scholars

blame the Lotus decision as a basis for the creation the effects doctrine110

. This ground is used

particularly in the area of competition law to assert jurisdiction over foreign anticompetitive

conduct having an impact on the domestic market111

. However the use of the effects doctrine

outside of competition law has been strongly criticized112

.

Protective principle

The protective principle entitles a State to assert jurisdiction over conduct committed outside

of its territory if this conduct could endanger the national security or a national interest of that State.

It is not exactly delimited what the scope of this ground is and what precise national interests it

protects, but it probably covers neither general economic interests113

nor the foreign policy

objectives114

. This ground for jurisdiction was used for espionage, counterfeiting or to protect

Exclusive Economic Zone in maritime law115

. Other uses are controversial116

.The risk of abuse

exists here because this ground inherently allows the States to defend their individual interests,

which may go against the international law.

Universality principle

The universality principle allows States to exercise criminal jurisdiction in cases where a

grave international crime was committed by a foreign national outside of that State. The use of the

universality principle is limited mainly to grave international crimes such as genocide, war crimes,

108

Alexander, supra n.93 p. 109

Supra n.78, p. 688 110

Gerber supra n.74, pp. 196-197 111

United States v. Aluminium Company of America, 148 F.2d 416 (2d Cir. 1945), effects doctrine used for extraterritorial application of the Sherman

Act (15 U.S.C. §§ 1–7). In the European Union, the effects doctrine was used in the in the EU Wood Pulp Case, A. Ahlström OY v. E.C.

Commission,1988 E.C.R. 5193. 112

Supra n.22 p. 253, see also Shaw, supra n.78 p.689. 113

Case concerning the Barcelona Traction, Light and Power Co. (Belgium v. Spain), 5 February 1970,ICJ. Rep. 3, para. 87, 114

De Schutter, 2006, Extraterritorial Jurisdiction as a tool for improving the Human Rights, p.24 115

French Criminal Code of 1808, art. 5-6, see also supra n.91 p. 121 116

Zerk, supra n.91 p.19, see also Shaw, supra n.78 p. 667

23

etc. This jurisdictional ground is quite recent and its use has been extremely controversial and often

resulted in international crises117

.

To conclude we see that the only non-contentious jurisdictional grounds are the subjective

territoriality principle and the “active” nationality principle.

(ii) Part Two: Reasonableness

Having a jurisdictional ground is not enough to be in conformity with international law. The

assertion of jurisdiction must also be reasonable118

. We have noted that weak jurisdictional links

might be difficult evaluate. Thus due to the emergence of modern technologies and the transnational

activities the jurisdictional grounds might be misinterpreted. Consequently such assertion of

jurisdiction could harm a foreign State. For such cases the reasonableness provides an invaluable

guidance to determine whether a State should actually assert jurisdiction in a given situation or not.

Reasonableness was affirmed also by ICJ judge Fitzmaurice stating that a State should “exercise

moderation and restraint as to the extent of its jurisdiction ... to avoid undue encroachment on a

jurisdiction more properly appertaining to”119

.

The reasonableness requirement generally demands that an assertion of extraterritorial

jurisdiction does not interfere with interests of other States, that it does not breach other norms of

international law and that the conduct is sufficiently connected to the territory120

. The

reasonableness is not a binary issue121

and it might be difficult to assess. For these reasons States

sometimes tend assert jurisdiction even though the reasonableness does not uphold such action.

There is no single definition of reasonableness in international law. The approximate content of this

principle can be rather seen in the domestic law of different States. The UK explains reasonableness

as “where there is international consensus that certain conduct is reprehensible and that concerted

action is needed involving the taking to international jurisdiction, ... where the vulnerability of the

victim makes it particularly important to be able to tackle instance of the offense”122

. In the USA we

can find the indicative factors for reasonableness in the Third Restatement123

. A rather complete

117

Belgian Act Concerning Punishment for Grave Breaches of International Humanitarian Law which had universal jurisdiction. Its use resulted

in the ICJ Case Concerning the Arrest Warrant of 11 April 2000 (Democratic Republic of the Congo v Belgium), 2002. Similar

controversy concerned Spanish Universal Jursidiction Act 1985. 118

Cameron, 2007, International Criminal Jurisdiction, Protective Principle, MPEPIL, edited July 2007, retrieved March 27, 2015, see also Zerk,

supra n.91, p.20, see also supra n.1 p.6 (reffered to as „appropriatness“), see also De Schutter, supra n.114 p.46, see also Ryngaert, 2011,

Jurisdiction in international law: United States and European Perspectives, pp. 42-46 119

Fitzmaurice, separate opinion, Barcelona Traction, supra n.113 §105 120

Zerk, supra n.91 p.20 121

Reasonableness is not a question of yes or no, it has a large specutrum of possibilities. See also Zerk supra n.91 p.212 122

UK Home Office, July 1996, “Review of Extraterritorial Jurisdiction Report”, para. 2.21 123

Restatement (Third) of U.S. Foreign Relations Law, 1987. § 403, The Third Restatement is not a binding legal norm but it has a strong persuasive

value.

24

description of the reasonableness is given in the report on extraterritorial jurisdiction124

. This

empirical report identifies a group of indicators (“red lights”) that specify when the use of

jurisdiction is prima facie unreasonable under international law.

(c) The US Approach to Jurisdiction

The USA recognizes the jurisdictional grounds and the requirement of reasonableness for the

assertion of jurisdiction125

. The US legal theory conforms to the international law but the practice is

different.

As for the grounds for jurisdiction the US authorities and courts generally refer to the

jurisdictional grounds as set by the international law to determine whether they should assert

jurisdiction126

. In the US law there is a presumption of territorial application of the national

legislation127

. The specificity of the USA is that it interprets the jurisdictional grounds much more

widely than other states128

.Consequently there is a significant number of laws that are applied

extraterritorially129

.

As for the reasonableness, its description through factors in the Third Restatement is

considered as “to date, the most commendable attempt to develop [reasonableness]”130

. The

milestone in the development of reasonableness came in the Timberlane case where the court

famously held: "At some point the interests of the United States are too weak and the foreign

harmony incentive for restraint too strong to justify an extraterritorial assertion of jurisdiction"131

.

Today the factors contained in the Third Restatement are applied through the “interest balancing”

test where a US court compares US national interest to other interests and determines whether the

jurisdiction should be asserted132

. But this test is criticized as insufficient respect of international

law133

. In addition a controversial rule exists stating that: “when the DOJ brings an action, the

courts shall not apply independent comity analysis as the government will already have decided

that the US interests outweighs the foreign States”134

. This rule basically pre-empts the

124

Zerk, supra n.91 p.213 125

Third Restatement, supra n.123 §403, see also Timberlane Lumber Co. v. Bank of America 549 F.2d 597 (1976), see also Hartford Fire Insurance

Co. v. California, 509 U.S. 764 (1993). 126

Harford Insurance, ibid. 127

American Banana Co. v. United Fruit Co., 213 U.S. 347 (1909), see also Kiobel v. Royal Dutch Petroleum Co. 569 U.S.C (2013), 128

Kristina Larsson, United State Extraterritorial Application of Economic Sanctions adn the new International Sanctions against Iran, page 51 129

See section 2.2(c)(ii) 130

Ryngaert, supra n.118 p.46. see also Third Restatement supra n.123 §§402(1)(c), 403(1), 213, 414 the for the jurisdictional grounds 131

Judge Choy in Timberlane Case, supra n. 125, p.509 (Antiturst case) 132

Ryngaert, supra n.118, p.149 133

Roth, 1992, Reasonable Extraterritoriality: Correcting the "Balance of Interests", 41 Int'l & Comp. L.Q. 245, page 275 134

Department of Justice's Antitrust Guidelines for International Operations, page S-22, n.167. This rules relates to antitrust law, but it is a general

evidence that the US executive branch wants to direct the actions by itself without the interference from the courts.

25

consideration in public federal case, it also manifests that the US executive branch might sometimes

be afraid that the US courts could consider their extraterritorial actions as illegal.

(i) Influence on Economic Sanctions

This extensive view on jurisdiction has two consequences: First, the US primary economic

sanctions apply to a large base of entities. Second, the USA uses secondary economic sanctions.

The primary US economic sanctions generally apply to “persons subject to US jurisdiction”

or “US persons” 135

. This term is broad and includes US citizens, US residents and US companies

with their foreign branches136

, but the list is not exhaustive and it remains unclear in what exact

situations the sanctions will be applied. This vagueness is continually criticized137

. Furthermore to

indict an entity of sanctions violations, the authorities must prove that the defendant was aware of

the sanctions and actually knew that he violates them138

. Concerning the financial sanctions the US

persons are not allowed to make loans, invest or facilitate any transaction to the sanctioned

entities139

. An example of application of the term “US person” is the Cuba sanctions programme.

Cuban sanctions apply to “any person subject to the jurisdiction of the USA”, however in 1992

Cuban Democracy Act extended the sanctions even to “foreign subsidiaries of the U.S.

companies”140

.

Furthermore the USA makes recourse to secondary sanctions as it tries to prevent third

States from conducting business with the sanctioned entities. The USA maintains several secondary

sanctions laws which extend to foreign persons outside of the USA. The most notorious secondary

sanctions are the Iran Sanctions Act (ISA)141

and the Cuban Liberty and Democratic Solidarity Act

(Helms-Burton)142

. Both of these laws make it a criminal offence under American law for any

individual or corporation to conduct business with the sanctioned entities. For example Helms

Burton act143

allowed the US authorities to impose additional sanctions to the foreign collaborators

who help to violate the sanctions.

135

31 C.F.R. § 515.201, see also Buys, supra n.22 p. 246, see also Meyer, 2009, Second Thoughts on Secondary Sanctions, p. 925 136

31 C.F.R. § 560.314. 137

Buys, supra n.22, p. 248 138

Buys, supra n.22, p.259, see also United States v. Macko, 994 F.2d 1526, 1532-33 (1993) breach must be wilful. 139

OFAC, USA PATRIOT Act and other Anti-Terrorism Regulations Relevant for Lenders, us.practicallaw.com, retrieved 26 March 2015. 140

Cuba is on the US sanction list since February 1962 with the Cuban Assets Control Regulations 31 CFR 515., the Cuban Democracy Act 22 U.S.C

§6001 extended it. 141

Iran and Libya Sanctions Act of 1996, extraterritoriality is related to section § 5(c)(2), 142

Cuban Liberty And Solidarity Act of 1996 (Helms-Burton Act), see 22 U.S.C.A. §§ 6021–6091 143

Ibid sections §6038

26

(ii) Influence on Other Legislation Concerning Banks

Extraterritoriality is also deeply entrenched in other American legislation connected to

economic sanctions. Consequently it applies even to foreign banks.

The examples such extraterritorial legislation are the BSA and the PATRIOT Act. The BSA

creates provisions concerning money laundering and terrorism applicable to foreign banks144

.

Furthermore the PATRIOT Act145

creates reporting and due diligence duties that concern

correspondent accounts of foreign banks dealing with the USA. Consequently it puts a considerable

pressure on banks146

. In addition there is also the Antiterrorism Act of 1990147

which applies

extraterritorially to acts of support of terrorism as it was illustrated in the Arab Bank case148

. Here a

Jordanian bank was found liable in the USA for financial transactions for terrorist groups in the

middle-east region.

(d) International Reaction to the American Approach

Apart from the multilateral sanctions, the European Union (EU)149

and United Nations (UN)

sanction programmes generally do not reflect the American sanctions. Even where there are

multilateral sanctions EU applies them differently than the USA150

.Consequently the American

extraterritorial approach to sanctions gave rise to a serious international turmoil when the

international community voiced concerns about the legality of such measures. United Nations

General Assembly has made a series of resolutions that condemn the conduct of the United States -

the creation of sanctions and their enforcement151

. Furthermore the number of UN States opposing

the secondary sanctions against Cuba has grown from 59 member States in 1992 to 182 States in

2005152

. For example during his visit of Cuba in May 2015, president Hollande openly called for

total withdrawal of Cuban sanctions153

.

The European Union has been traditionally resilient to the US extraterritorial enforcement of

unilateral sanctions stating as early as in 1982 that “the United States’ measures as they apply in the

144

31 U.S.C. § 5318(h), see also Graves, Ganguli,2007, Extraterritorial Application of the USA PATRIOT Act and Related Regimes: issues for

european banks operating in the United States, p.971-972, see also 18 USC section 1956 145

PATRIOT Act,Title III subtitle B 146

Graves, Ganguli, supra n.144, p. 968 147

18 U.S.C. 2333 148

Linde v. Arab Bank, PLC (2014) 149

Even though EU is not a State under International Law, in this work it is compared to a State for the purposes of exercise of jurisdiction 150

E.g.the EU put Iran on the sanction list in 2010 but the EU sanction program remains much narrower that the US sanctions

http://eeas.europa.eu/cfsp/sanctions/docs/measures_en.pdf, see also Dordeska, supra n.4 §5 151

Elimination of coercive economic measures as a means of political and economic compulsion, resolution of the UNGA A/RES/51/22 (6 Dec.

1996) A/RES/53/10/ ( Nov. 3. 1998), A/RES/57/5 (Nov. 1, 2002) and finally A RES/61/170 (Feb 27, 2007) 152

Statement of South Africa at the occasion of the approval of the resolution UNGA A/61/OV.50 (8 Nov. 2006) 153

http://www.france24.com/fr/20150511-cuba-hollande-annulation-embargo-americain-raoul-castro-fidel-visite-economie-la-havane

27

present case are unacceptable under international law because of their extra-territorial aspects”154

.

In 1996 the EU issued a formal declaration against Helms-Burton155

. In 2006 EU representatives

stated that “the EU cannot accept the fact that unilateral measures imposed by the Untied State on

specific countries limit the Union’s economic and commercial relations with third countries – in

this case Cuba”156

.

Some States went even further and they tried to negate the legal effects of the American

sanctions. As a reaction to the US secondary sanctions, the European Union created a sanctions

Blocking Statute157

. The statute prohibits support and compliance with unilateral sanctions imposed

by a foreign State against another foreign State. It provides for non-recognition of foreign

judgements, prohibits discovery motions and creates a “clawback” provision which gives a cause of

action to the damaged EU entities to sue for damages158

. As of 2015 this regulation is still valid.

Similar measures have been adopted by Canada159

, Germany160

, Mexico161

and the UK162

expressly

to protect their sovereignty163

.

Despite the European legislative framework that does not require and even forbids

compliance with US sanctions, certain European banks with US business voluntarily complied with

some aspects of the US sanctions164

. But what used to be a good will compliance is now evidently

considered mandatory by OFAC.

2.3 Legality of American Extraterritorial Measures under International Law

This section analyzes the legality of the OFAC’s actions under international law. The

OFAC’s actions concern the conduct of non-US entities outside of the US territory. Thus we might

axiomatically classify these measures as extraterritorial. The allegedly wrongful transactions did not

breach the EU law, German law, English law or international law165

- the foreign banks only did not

comply with the American sanctions and secondary legislation. Thus are the OFAC’s actions legal?

154

N.Y. times, Aug. 13 1982, Text of common market statement on pipeline embargo, At A-4 155

Negative official reactions to the « Helms-Burton » and « d’Amato-Kennedy » Acts of 12 March and 5 August 1996 (ILM, vol. 35, p. 357-378

and 1273-1279) can be found in the Secretary General of the United Nations (Doc. NU, A/50/401). 156

Statement of Finland, UNGA, A/RES/61/170 (Feb. 27. 2007) 157

Council Regulation (EC) n°2271/96 of 22 November 1996, O.J. (L 309) 158

Ibid, Article 6 159

Canada’s Foreign Extraterritorial Measures Act of 1985 (FEMA) 160

Graves, Ganguli, supra n.144 pp.990-991, see also Aussenwirtschaftsverordung „AWV“ Section 4(a) 161

Law to Protect Trade and Investment from Foreign Law that Contravenes International Law, D.O 22 October 1996 162

Protection of Trading Interests Act of 1980 163

Foreign extraterritorial measures Act R.S.C ch. F-29 §5 (1) (1985) 164

settlement (Commerzbank, §15): Commerzbank liquidated almost all of its direct Iranian business in 2007 at which point such decision already

cost Commerzbank hundreds of millions of dollars in profit 165

At the time of the conduct the alleged wrongful transactions did not breach the EU or UN sanction programmes, see also infra n.281

28

The US authorities claim that the sanctions must be respected in general and they blame the

banks for “abuse of American financial system”166

.In the published settlement documents, the USA

does not expressly address the question of jurisdiction, however the language of the settlements

implies that the USA justifies its actions by the territorial principle, the protective principle and, to a

certain extent, the effects doctrine. The justification on the basis of universal jurisdiction is not

implied and seems unlikely because there is no international crime involved.

(a) Jurisdictional Grounds Applicable to American Conduct: Pushing the Limits

of the Jurisdiction

The section analyzes the presence of a jurisdiction ground for the assertion of jurisdiction by

the American authorities.

(i) Nationality Principle and the OFAC’s Actions

This section studies possible justification of US action under the active personality principle

and the passive personality principle.

Active personality

The nationality of a corporation can be difficult to determine because it might have

connections to many countries and its presence takes many forms. The nationality of a company

under international law was addressed in the Barcelona Traction case167

. The court held that a

corporation has the nationality of either the State of incorporation or the state of principal place of

business. It was emphasized that the nationality of the shareholder does not have effect on the

nationality of the company168

. Despite this rule, USA regularly applies its domestic law to overseas

corporations that do not fulfil the requirement for US nationality under international law169

. US

financial sanctions apply to US persons. The term US person is broad and it is interpreted

extensively to cover biggest amount of entities including citizens, persons present in the USA,

foreign subsidiaries or residents170

. This allows US sanctions to be applied even to conduct of

foreign entities outside of the US territory171

.

166

US Department of Treasury press release from 6/30/2014: “Treasury Reaches Largest Ever Sanctions-Related Settlement with BNP Paribas SA for

$963 Million” §3. 167

Barcelona Traction, supra n.113, p. 3. 168

Ibid, p.7 169

Foreign subsidiary controlled by the USA, see supra n.135 170

Graves, Ganguli, supra n. 144 p. 981, see also Clark, 2004, Dealing With US Extraterritorial Sanctions and Foreign Countermeasures, p.6, see

also Buys, supra n.22 p.250. 171

US law applies to „resident aliens regardless of where they are located or foreign subsidiaries owned or controlled by U.S. nationals” which are

two situations where the entities can be overseas, see also supra n.45

29

The punished banks were incorporated and headquartered in the EU172

. They were neither

owned nor directed by the US nationals. Furthermore the punished banks all had important business

operations in the USA, but the USA was not the principal place of business as the banks had many

other foreign operations173

. The analysis under the Barcelona Traction rule indicates that none of

the punished foreign banks was the nationals of the USA. In addition the US operations were run

either by the American subsidiaries or branches of the punished banks174

. The subsidiaries are US

nationals but they are separate legal entities. According to practice of many States the determination

of the corporate nationality respects the principle of separate legal personality175

. Thus the

American subsidiaries do not make their foreign parent a US national.

As for the US branches, even though they do not switch the nationality of the banks per se,

they create further links between the foreign banks and the USA. In this respect, the fundamental

fact is that that the quasi totality of the allegedly wrongful transactions did not go through the US

branches or subsidiaries of the foreign banks. In fact, the foreign banks actively hid the alleged

misconduct from their US subsidiaries and branches to avoid contact with the USA176

.

The conclusion is that the active personality principle likely does not apply to OFAC’s

actions because the authors of the conduct were not US nationals. To assert jurisdiction on this basis

would be an extensive interpretation of the nationality principle that would defy the classical

concepts of corporate law.

Passive personality

The passive personality principle is difficult to argue for the USA. This is mainly due to the

fact that there was no victim of the alleged crime: no entity was harmed, no property damaged or

stolen. Consequently this ground should not apply.

The nationality principle cannot justify OFAC’s actions because the punished banks are not

US nationals and should not be subject to American sanctions. This view is also supported by many

international law scholars177

.

172

E.g. in the EU (BNP Paribas,Commerzbank AG, etc) or Switzerland ( Credit Suisse), The incorporation of Banks is mentioned in the OFAC

settlement documents 173

Generally speaking, all the sanctioned banks were major international banking holdings and belonged to the top 20 global bank s by assets in 2014

http://www.relbanks.com/worlds-top-banks/assets. 174

Subsidiaries: (e.g. HSBC, Credit Suisse). Branches: (e.g. Standard Chartered, BNPP, etc.) 175

Zerk, supra n.91 p. 9 176

E.g. settlement Lloyds (§9) 177

Buys, supra n. pp. 250, 255

30

(ii) Territorial Principle and the OFAC’s Actions

The territorial principle seems to be the main US argument for jurisdiction. The USA claims

that since the transactions were denominated in the USD they were necessarily processed through

American financial system and thus they have contact with the US territory178

. We will see that this

premise may not always be true.

United States Dollar has a unique role as the world’s dominant currency. In 2013

approximately 60% of the world’s financial transactions were denominated in USD179

. USD is the

standard currency for majority of the financial transactions and it also serves as reserve currency for

the global financial system180

. As a consequence, more than 50% of the existing USD in circulation

is located outside of the USA181

. Using USD transactions is a standard solution to settle payments

and it is also cheaper and easier that other currencies. This implies that recourse to a USD

transaction does not automatically indicate that the parties to the transaction want to have a link to

the USA, but rather that they use a standard payment method.

(A) USD Transactions and the Territorial Principle

This section focuses on a possibility of a territorial link caused by the USD transactions.

I. Past Examples of US Jurisdiction Based on USD

Transactions

In the past the USA has already based its jurisdiction on the fact that transactions were

denominated in USD. The USA has used this approach for the enforcement of corruption legislation

(FCPA182

) and of anti-terrorism laws (PATRIOT Act) to extraterritorially freeze assets or to block

transactions denominated in USD183

.

As for the FCPA, in the Siemens AG184

case, American authorities have pressed charges

against foreign subsidiaries for conduct outside of the American territory on the basis that there was

a wire transfer done in USD allegedly routed through US banks185

. In the KBR and Halliburton186

case the jurisdiction was based on the USD wire transfers and emails sent to the USA. In an official

178

BNPP Settlement Department of Justice press release June 30, 2014, available at http://www.justice.gov/opa/pr/bnp-paribas-agrees-plead-guilty-

and-pay-89-billion-illegally-processing-financial ,see also supra n.45 p. 3 179

The Federal Reserve in the International Sphere, publication of FED, 2005, pp.52-57 180

Ibid, The Federal Reserve System: Purposes & Functions, a publication of the Board of Governors of the Federal Reserve System, 9th Edition,

June 2005, see also: Larry Christensen, “There will come a time when the US currency has a less of a dominant role that it does now” 181

Gruson, supra n.88 p. 772 182

15 U.S.C. § 78dd-1, et seq. 183

Gruson, supra n.88, 184

Settlement on Dec. 15, 2008, http://www.sec.gov/news/press/2008/2008-294.htm 185

Zerk, supra n.91 p. 32 186

Settlement on Feb. 11, 2009 http://www.sec.gov/news/press/2009/2009-23.htm

31

government guide, the USA has claimed that territorial connection would be satisfied if “the foreign

entity used the U.S. banking system187

”. For the US authorities the USD payments constitutes a

ground for jurisdiction as it is assumed that such payment must have passed through a

correspondent account188

in the USA, meaning through the territory of USA.

As for the terrorism the PATRIOT Act introduced a possibility to seize or to block foreign

USD assets189

. The blocking or seizure can be done even if the funds are located in the foreign

account. The jurisdiction is claimed either on the fact that the foreign bank has an interbank USD

account in the USA, or on the legal fiction that the foreign bank’s overseas account is actually an

account in the USA190

.

Except for the USA, no other State is known to take the position that using its national

currency is a sufficient ground for the jurisdiction. Furthermore, the jurisdiction in the area of

economic sanctions is not the same as in the area of corruption or terrorism. Corruption and

terrorism both have proven negative effect on democratic society and they are both criminalized in

almost every State around the world. However unilateral economic sanctions are extremely specific

to national interests of one State and they are not criminalized elsewhere. A violation of general

trade sanctions does not necessarily cause direct harm to the Sender State.

II. USD Transactions and their Clearing through the US

Financial System

The punished banks used modified SWIFT messages and Cover payments191

to make USD

transactions that were allegedly “processed through the financial institutions located in the United

States192

”. In the OFAC’s actions we can observe that in majority of the transactions a non-US

entity outside of the USA sent a payment to a non-US entity outside of the USA. No funds were

initially sent from the territory of the USA. However a percentage of the transactions was sent to the

beneficiaries located in the USA193

. For these transactions sent to the USA the territorial link is

obviously stronger. But even in these few cases no foreign bank acted on the territory of the USA,

only a third party US bank on the territory of the USA received the payment.

187

Department of Justice, November 2012, A Resource Guide to the U.S. Foreign Corrupt Practices Act, p. 11 188

31 U.S.C. § 5318A(e)(1)(B): „An account established to receive deposits from, make payments on behalf of a foreign financial institution, or

handle other financial transactions related to such institution“. 189

18 U.S.C. § 981(k)(1)(A), 190

Gruson, supra n.88 pp. 748-749, see also infra n.194 191

E.g. RBS (§ 3, 8) 192

E.g. SCB (§§ 12,19-23), Lloyds (§§ 9-10), ANZ (§ 5-6), RBS (§15-19) Barclays (§ 5). HSBC (§§ 16-18), Paribas (§§ 3, 18-20) 193

E.g. “transactions to” in SCB (§13), Lloyds (§10), Barclays (§6)

32

Possibilities of the USD clearing

When two non-US banks want to make a payment in USD, there are 3 possibilities of how to realize

such transaction194

. The first possibility is that the transaction will be initiated in a foreign currency

that will be cleared (exchanged) at a third bank in the USA (Scenario 1). The second possibility is

that the transaction will start in a foreign currency that will then be cleared at a third bank having

USD provisions, but the clearing will be done at the location of the third foreign bank outside of

the USA (Scenario 2 ). The last possibility is that two foreign banks have both USD accounts, held

mutually or at a third foreign bank, in which case the payment will be done without interbank

relation and completely outside of the territory of the USA (Scenario 3). Finally there is also the

“cover payment” method which is a hybrid combination between the precedent scenarios.

According to the settlement documents, the US seems to assert jurisdiction in all of these situations.

Scenario 1

In the Scenario 1 the sender and the recipient are located outside of the territory of the USA.

The sender transfers the money to the clearing centre (a bank) in the USA where the foreign

currency is exchanged to US dollars. For this purpose the sender and the recipient use their

correspondent accounts located in the USA. Subsequently the funds are sent to the end recipient

outside of the USA. In this first scenario the transaction primarily takes place outside of the USA

but an important part of the transaction happens on the territory of the USA. Such transactions are

indeed “processed by the US financial system”195

. The Scenario 1 corresponds to the objective

territoriality principle because an element of a conduct takes place on the US territory.

According to the settlement documents, this type of transactions took place196

. Thus in

theory the USA could assert jurisdiction based on the territorial link between the USA and the

clearing activities. European banks cleared majority of the transactions in the USA through

unaffiliated US banks – rarely through their own US subsidiaries or branches as they were warned

that such conduct could amount to violation of US sanctions197

. Furthermore some transactions

were then sent to beneficiaries located in the USA198

. Even in these cases no foreign bank’s branch

or subsidiary processed the payment. Foreign banks only requested the clearing at an unaffiliated

bank in the USA.

194

Gruson, supra n.88 pp. 6-13 195

BNPP press release, supra n.178 196

SCB (§§ 12,19-23), Lloyds (§§ 9-10), ANZ (§ 5-6), RBS (§15-19) Barclays (§ 5). HSBC (§§ 16-18), BNPParibas (§§ 3, 18-20) 197

BNP Parisbas FACT statement, §§ 30-34 198

SCB (§13), Lloyds (§10), Barclays (§6)

33

US authorities can clearly act against the US banks in the USA that cleared the transactions

but no such action occurred. OFAC acted only against the foreign banks. We have seen that the

objective territoriality is controversial. Firstly, certain sources indicate that the territoriality

principle requires that not only the conduct but also the authors to be physically present in the

territory of the regulating State199

. This is not the case because the foreign banks did not act on the

US territory. Secondly, the contact with the USA is actually minimal because an American bank

only routinely exchanged and forwarded currency through an automatised computer operation.

Scenarios 2 and 3

In scenarios 2 and 3 the transactions are denominated in USD, but they take place entirely

outside of the territory of the USA. The transferred funds never have contact with the USA because

the clearing takes place at a third bank outside of the US territory. These transactions occurred in

BNPP case where the French bank was fined also for conducting clearing operations outside of the

USA200

. Similar pattern of actions also appeared in the Lloyds and HSBC cases (see note 205).

Scenarios 2 and 3 are technically possible because of the existence of the Eurodollars.

Eurodollars are provisions of US dollars that are located at an institution outside of the USA. It is

also generally established that Eurodollars are not under jurisdiction of US and that “they are not

subject to US banking regulation201

”. US Supreme Court described Eurodollars in Citibank v. Wells

Fargo Asia202

as "United States dollars that have been deposited with a banking institution

located outside the United States, with a corresponding obligation on the part of the

banking institution to repay the deposit in United States dollars". From a technical point of view,

any US dollar in circulation is reflected by a sum on a correspondent account in the USA that a

financial institution initially deposited in order to acquire the US dollars. But since this moment

there might have been countless number of overseas transactions. Thus neither the transferor nor the

transferee has any legal connection to the sum located on the correspondent account in the USA203

.

Scenarios 2 and 3 are strongly incompatible with the assertion of jurisdiction by the USA

because no territorial contact exists. This has been confirmed by the Libyan Arab foreign Bank v.

Bankers Trust Co204

decision. In this case a Libyan bank had a USD correspondent account at

London branch of an American bank Bankers Trust. Bankers Trust refused to pay the deposits

199

Buys, supra n.22 p.250 200

BNP Paribas case (Fact Statement §34). Clearing took place in Switzerland 201

Federal Reserve Bank of Richmond, Virginia Guide, 1998, page 48. Also, the definition of „Eurodollar“ at

http://www.investopedia.com/terms/e/eurodollar.asp, retrieved 21 April, 2015. 202

Citibank, N.A. v. Wells Fargo Asia Ltd., 495 U.S. 660, 663 (1990) 203

Gruson, supra n.88, p.734 204

Libyan Arab Foreign Bank v Bankers Trust Co [1989] 1 QB 728

34

because USA had already declared sanctions against Libya. The court held that the payment did not

necessitate any clearance to be done in the USA. Consequently it was held that English law applies

to this case and that USA does not have jurisdiction over transactions cleared outside of the USA.

The American bank was forced to make the payment.

Surprisingly, although in the scenarios 2 and 3 the US jurisdiction is clearly against the

international law the USA argues that such transactions are within the jurisdictional reach. In many

of the settlements the USA condemned the foreign banks for mere operating of USD accounts

overseas for the sanctioned entities205

what is obviously a controversial claim. The USA argues that

the fact that the transactions are done in US dollars means that these precise US dollars are reflected

by the US dollars located in the correspondent accounts in the USA206

.It is widely assumed that this

argument it wrong207

. It is based on a legal fiction208

that a correspondent link exists, but in reality

this legal presumption is a mere instrument created by the US authorities to facilitate the assertion

of jurisdiction of USA. The same fiction is used in the PATRIOT Act enforcement where the US

will block even non-USD assets based on the fiction that “the allegedly illegal funds have been

deposited in a correspondent account held in the US” 209

. This instrument attempts to deal with the

complication for assertion of jurisdiction made by the fact that the banks did business with the

sanctioned entities outside of the USA, meaning outside of the US sphere of legal power.

To conclude, the USA basically assimilates the scenarios 2 and 3 with the scenario 1 which

is wrong. These situations are inadequate for the assertion of US jurisdiction as the territorial links

are uncertain or inexistent. At one point in the past, the US dollars were cleared in the USA and

there were reflected on a correspondent account in the USA. But since this moment, the Eurodollars

could have been transferred countless times between various foreign banks. An assertion of

jurisdiction over such case would deny the legal nature of Eurodollar. Furthermore it would be a

clear misuse of the territorial principle based on a legal fiction which would have severe effects on

the international finance. Consequently, OFAC’s territorial jurisdiction over the foreign banks

transactions in scenarios 2 and 3 is invalid.

Cover payments

Cover payments represent another possibility of clearing. Here the transactions originate in a

foreign country in a foreign currency but the money is forwarded and cleared through a chain of

205

E.g. Lloyds (§13), HSBC (§§ 22-24), BNP it happened in Switzerland, (§ 9) Iran (§ 14-15) SCB (§ 12) 206

Graves, Ganguli, supra n.144, p. 985, see also Gruson, supra n.88 pp. 734, 746-748 207

Gruson, ibid pp. 747-748 208

Ibid 209

Supra n.144 p. 985

35

third banks. Technically, it is a “member of the chain” (cover intermediary bank) that requests the

clearing in the USA, and so neither the initial payer nor the recipient is in contact with the clearing

centre. Once the clearing is done the money is sent to the recipient again through a chain of banks.

Cover payments appeared in almost all the cases against the foreign banks. For example in the ING

case, the cover payments were initiated in Brussels210

and in the HSBC case the payments were

initiated in London211

.

Due to the nature of cover payments in majority of cases the initial payer does not have any

direct relationship with the USA212

. Even though a foreign bank initiates the payment, technically it

never directly sends money to the USA and never directly requests the payment. Consequently the

foreign bank should not be connected to the USA as no territorial link exists. Cover payments by

their structure correspond more to the scenarios 2 and 3 rather to the scenario 1.

Cover payment can be used to facilitate operations where the sender and the recipient do not

have a business relationship and it is a common way to make transactions213

. But US considers

them mainly as an instrument for wrongful transactions. Despite the US approach cover payments

do not create any direct link between the foreign banks conduct and the USA. Consequently the

assertion of US jurisdiction in this case is likely illegal.

(B) Electronic Messages going to the USA as a Territorial Link

In the past USA also claimed jurisdiction in situations where a foreign entity directed

commercial activity to the USA214

. An electronic communication to the USA could be a proof of

such territorial link. This might be relevant for the transactions of Scenario 1 because in their course

all the foreign banks sent SWIFT electronic messages to the US clearing banks to request transfers.

Such situation could correspond to the objective territoriality principle. Consequently the USA may

try to assert the jurisdiction on this fact.

A SWIFT message can be connected to the territory because it is sent to a US bank or

because the actual data of the SWIFT messages will be stored on a server located in the USA215

. On

one hand, the SWIFT message could constitute a territorial link to the territory. On the other hand

sending such message is an automatic and necessary part of an ordinary payment process.

210

Settlement ING (§9) 211

Settlement HSBC (§3) 212

http://www.swift.com/about_swift/shownews?param_dcr=news.data/en/swift_com/archived_news/home_page_stories_archive_2009_Newstandard

sforcoverpayments.xml , retrieved 6 May, 2015 213

DIS, May 2009, Due diligence and transparency regarding cover payment messages related to cross-border wire transfers, p.1 available at

http://www.bis.org/publ/bcbs154.pdf 214

IBA, supra n.1, p. 276 215

Graves, Ganguli, supra n.144 p. 971: During the SWIFT controversy, the USA requested information from SWIFT servers located in the USA.

36

Consequently a link exists but it is weak. The use of a SWIFT message alone as a ground for

jurisdiction would be likely illegal but it might fortify other existing links if used together.

Furthermore cases where electronic messages were used to assert jurisdiction have already

occurred. In the context of securities law and corruption law it was held that sending faxes, emails

or making phone calls to the USA is sufficient to create a territorial connection between the conduct

and the USA216

. Leasco Data v. Maxwell217

held that mails or phone calls to the territory of the

State are sufficient to assert jurisdiction. In Deutsche Bank v. Montana218

it was held that a single

transaction in the USA is sufficient for assertion of jurisdiction, even if the defendant does not enter

the territory. This case was particularly controversial as Deutsche Bank only sent a message via an

instant messaging service.

To conclude the US interpretation of the territoriality principle considers it sufficient to

invoke electronic messages to assert jurisdiction over foreign entities. Sending emails or SWIFT

messages may result in creating a territorial link however under the traditional interpretation of

territoriality principle this link is too weak and controversial to be used by itself.

(C) US Dollar as a US Origin Product

Another unconventional factor that the USA considers as a territorial link is the “US origin”.

In certain sanctions law the USA bases its jurisdiction on the fact that US origin goods are involved.

This concerns for example prohibition for foreign persons to re-export certain U.S.-origin goods or

services to Iran219

. Similar prohibitions of re-export exist for Cuba220

.

The USA claims that US origin links the US made goods to the US jurisdiction221

.This

unorthodox legal logic raises questions about the territorial link. The process of creation could link

a product to the territory. But such link is particularly weak, especially where the product is outside

of the territory. Each US dollar originates in the USA because it is issued by the US government.

The USA also continually regulates the value and the use of its currency222

. So a US dollar as object

of transaction could be considered as US origin product. But such assertion of jurisdiction is hard, if

not impossible, to fit with classical idea of territorial jurisdiction. This argument would also directly

216

Leasco Data Processing Equipment Corp v. Maxwel,l 468 F 2d 1326, 1335 (2d Cir 1972), Continental Grain (Australia) v. Pacific Oilseeds Inc.,

592 F 2d 409, 420 ( 8th Cir 1979), see also IBA, supra n.1 p. 223, see also FCPA, 18 USC ss1341, 1343 (2008) – mails and wire fraud. 217

Leasco, ibid. 218

Deutsche Bank Sec., Inc. v. Montana Bd. of Inv. , 7 N.Y.3d 65, 71 (2006) 219

Iranian Transactions Regulations, 31 C.F.R. Part 560, and the Iranian Assets Control Regulations, 31 C.F.R. Part 535., see al so Clark, supra n.170

p.5 220

List of prohibitions in 15 C.F.R §746.2(a), similar duties exist in the area of AML, see supra n.45 221

Clark, supra n.170 p.7, see also Third restatement, supra n. 123 §431, comment (d)(t) 222

31 U.S.C. § 5103, See also Mann, 1992, The Legal Aspect of Money, (5th ed), p. 266-79

37

oppose the legal nature of Eurodollars that are officially not under the US jurisdiction. Even the US

Department of Treasury has confirmed that it does not enforce these provisions to non-US persons

(see Clark, p.67). Consequently such provisions should not normally apply the foreign banks. Thus

this argument for jurisdiction is invalid for the OFAC’s cases.

(iii) Effects Doctrine and the OFAC’s Actions

In occurrence the US argument that the financial transactions were “processed through

American financial system223

” does not have to be looked at purely from the territoriality

perspective. This same argument could be also made under the effects doctrine. In the press release

the USA invoked a law according to which if a foreign person causes a US person to violate the

sanctions, the foreign person is liable as well224

. In this sense we may perceive the banks actions as

a behaviour of foreign actors that caused negative effects on the territory of the USA. Foreign banks

used incomplete SWIFT messages and consequently the US banks could not detect the sanctioned

entities. The negative effects could be that the US banks violated American law (n.1), and that the

US banks unknowingly provided financial services and benefits to the political enemies of the USA

(n.2). In this light the effects doctrine could be invoked.

But this situation is not so clear. The effects doctrine is controversial, so even if there are

undesirable effects on the territory, it is still not guaranteed that the assertion of jurisdiction on such

ground will be legal under international law225

. Furthermore in the past the effects doctrine has been

used almost exclusively in the area of competition law226

. The OFAC’s actions do not concern

competition law which might indicate that the effects doctrine will not be applicable here. Also the

negative effects could have been easily avoided if the clearing banks asked for complementary

information and clarification. This leads us to the question whether the negative effect caused by the

foreign banks on the US territory is sufficient. There is an infinite number of ways of how a foreign

conduct could negatively impact the USA. Thus it is necessary to specify the negative effect. For

example in the USA the courts in the past required direct foreseeable and substantial harm227

. In

more recent cases the US courts required that the harm must be intentional and substantial228

. The

transactions of scenarios 2 and 3 have no effect on the US commerce, but the scenario 1 causes

effects. The harm that the foreign banks caused for scenario 1 is intentional and direct since the

banks directly prepared it. However it is questionable whether this harm is substantial especially

223

AML/BSA, supra n.45, p. 3 224

Section 206(a) of the IEEPA Enhancement Act of 2007 225

See section 2.2 (b)(1) 226

Ibid 227

AlCoA, supra n.111 228

Hartford supra n.125

38

when we consider that the amount of foreign banks’ transactions229

was low and they resulted only

in routine computer operations on the US territory. Thus the harm is also vague because neither the

USA nor the US economy suffered from any particular damage. To conclude it is dubious whether

the effects doctrine could apply to OFAC’s conduct. Its application will depend on the requirements

for the harm. Certain negative effect is created, so if the threshold for the harm is low then the

application of the effects doctrine is tenable.

(iv) Protective Principle and the OFAC’s Actions

In the course of OFAC enforcement actions the US authorities also invoked the protection of

national security and foreign policy as the basis for jurisdiction. The US authorities stated that “The

violations undermined US national security, foreign policy and the objective of the US sanctions

programs230

” or that the “activity through USA gave substantial economic benefit to Iran and

Libya, thereby undermining US national security231

”. Such statements call for analysis under the

protective principle.

The protective principle can serve as a basis for jurisdiction where a foreign conduct

compromises a national interest. But under international law the protective principle provides a

valid jurisdictional ground neither for general economic interests232

nor for the foreign policy

objectives233

. Consequently USA cannot justify the enforcement actions on the fact that the foreign

banks’ transactions contributed to the economy of the target States or that the transactions

undermine general foreign policy of the USA. Neither can the USA base its jurisdiction on the

claim that the USD transactions constitute a national interest. The protective principle has also been

used for counterfeiting234

. But the foreign banks’ conduct does not interfere with the currency per se

because there has been no crime against the US dollar.

To invoke the protective principle the USA would have to prove that the violation of the

economic sanctions by the foreign bank indeed threatens the national security. According to the

USA the economic sanctions are designed to protect the national security of the USA and they must

be respected235

. The logic of the US arguments would be that foreign banks allowed the sanctioned

countries to profit from the American financial system and that they provided economic benefits to

the enemies of the USA in Iran, Cuba or Sudan. Consequently the hostile enemies could abuse these

229

In light of numbers on the BNP Paris 230

E.g. HSBC (§27), RBS (§22). 231

E.g. Lloyds (§15) 232

Barcelona Traction, supra n.113, para. 87 233

De Schutter, supra n.114, p.24 234

Akehurst, supra n.69, p. 157 235

E.g. HSBC (§27), RBS, (§22)

39

funds for terrorism or to endanger the US nationals in other ways. This argument is rational but it

has several flaws.

First, the actual menace to the US national security is speculative, indirect and imprecise. It

would be hard to prove in what concrete ways the economic benefit or the use of US dollars could

endanger the US national security and how the foreign banks cause it. The problem is that despite

all the possible American arguments for the application of the protective principle, it still seems that

the USA is using this ground to protect its foreign policy rather than to protect its national security.

The protective principle does not cover such situations. The USA generally justifies its sanctions by

the risk stemming from the support of terrorism or the nuclear proliferation. But the countries like

Cuba, Sudan or Burma are sanctioned for their internal conduct, not for their hostile foreign

policies. For example the goal of the Cuban embargo was described as “democratisation and

greater respect of human rights236

”. Such interests are not covered by the protective principle. On

the other side Iran is sanctioned because of its hostile acts and the nuclear proliferation237

which are

legitimate security threats. However in majority of the allegedly wrongful transactions the foreign

banks traded only with ordinary Cuban or Iranian nationals238

. In practice it would be hard to prove

how these persons could directly compromise the US security. This consideration is important

because the EU courts have been recently delisting previously sanctioned entities due to the lack of

proof of any dangerous activities239

.

Second, it is not clear if the protective principle could materially apply to the area of

economic sanctions. The protective principle has never been used in the area of business regulation

before the creation of the PATRIOT Act240

. Under the US law it was held in Zehe case that the

protective principle allows jurisdiction where “[the] conduct is generally recognized as a crime

under the law of states that have reasonably developed legal systems241

.” Following this case the

protective principle should not apply because no other State considered it a criminal offense to

commercially engage with Cuban nationals at the time of the banks conduct242

.

At last, many States are involved in the trade with the sanctioned countries. For example

Iran’s trade partners include China, UAE or Turkey243

. Based on the US argument the USA could

236

U.S. Department of State, Cuban Democracy Act of 1992 237

Terrorism and nuclear weapons (http://www.treasury.gov/resource-center/sanctions/Programs/Documents/iran.pdf) 238

Generally, the foreign banks’ conduct did not violate the EU, or International Sanctions, see also infra n.315 239

http://curia.europa.eu/juris/document/document.jsf?text=&docid=141406&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=7

459055 E.g. of delisting of sanctioned entities. Judgment Of The General Court, (Fourth Chamber), EU, 16 September 2013 240

Gruson, supra n.88, p. 763 241

United States v. Zehe, 601 F. Supp. 196, 199 (D. Mass. 1985) 242

Only USA had sanctions against Cuba 243

http://ec.europa.eu/trade/policy/countries-and-regions/countries/iran/

40

also assert jurisdiction over all entities who still deal with Iran. But this would be an unacceptable

stretching of jurisdiction amounting to a direct control of foreign trade.

To conclude, the justification of the US conduct based on the protective principle is

conceivable. However the legality of such application of this ground is not clear. The validity of the

US argument depends on the precise requirements for “threat” to the national security.

(b) The Reasonableness of American Conduct

In the previous section concerning the grounds for jurisdiction, we see that the US

enforcement actions could be possibly based on several jurisdictional grounds (territorial principle,

effects doctrine, protective principle). However the nexus of the banks’ conduct to the USA is

always weak. Consequently the interpretation of the jurisdictional grounds is ambiguous. In such

setting it is important to appropriately consider the second requirement for legality of jurisdiction-

the reasonableness.

There is not a uniform definition of reasonableness in international law but this legal

concept has been described many times (see section 2.2(b)(ii)). The concept of reasonableness

embodies the idea that extraterritorial jurisdiction is legal only if it does not create problems for

international community and if it does not interfere with the domestic affairs of other states.

An indicative approach for the assessment of reasonableness has been proposed by Jennifer

Zerk in her report of extraterritorial jurisdiction244

. This empirical study analyses State practice and

identifies 15 general factors (red lights) that indicate that a certain assertion of extraterritorial

jurisdiction is unreasonable. Taking into account these red lights clearly indicates that the US

conduct is unreasonable. The OFAC enforcement actions correspond to at least 11 out of 15 factors

indicating unreasonable extraterritorial actions. The notable factors that indicate that US measures

are unreasonable are the following. The extraterritorial enforcement actions of the USA are based

on unilateral economic sanctions that the USA applied voluntarily. The OFAC’s actions are based

neither on any multilateral framework nor on other international legal obligation (Red light n.1).

The enforcement actions are motivated only by the national interest of the USA. The States (e.g.

France, Germany) that are impacted do not share the same policy. In addition these foreign interests

were not taken into account245

(Red light n.2). At the time of enforcement there wasn’t any

international consensus that the financial transactions with Cuban, Iranian, Sudanese or other

244

Zerk, supra n.91 p.213 245

Commerzbank and BNPP Financial operations with Iran

41

nationals are wrongful. This is the case of French foreign policy on Cuba246

. Other States did not

have such economic sanctions when the alleged violations took place (Red light n.3). The

International community including State governments, legal and business experts have contested the

appropriateness and the proportionality of the massive penalties put on the banks247

. Many States

have also opposed the scope of additional obligation imposed on the banks248

(Red light n.4). The

enforcement of the trade sanctions has not been consulted with the affected European States (Red

light n.6). The US actions are based on a weak link between the USD transactions and the USA. As

we have seen this is the issue with all the jurisdictional grounds that might be applicable to US

conduct (Red light n.9). The US enforcement creates obligations on foreign European banks in

relation to the conduct that takes place outside of the USA (Red light n.10). Finally, the US

enforcement of the trade sanctions creates regulatory conflict in the area of banking249

(Red light

n.13). According to these factors which reflect the State practice, the American enforcement actions

are unreasonable.

However this is not the only indication of the unreasonableness. Even according to the

American legal tradition the OFAC’s actions are unreasonable. The Third Restatement provides an

illustration of the factors that should be considered to determine the reasonableness250

. Out of the

eight factors, the OFAC’s enforcement actions correspond to at least six factors that indicate

unreasonableness. For example, the foreign bank’s home States are more suitable and have a

stronger interest to regulate the banks than the USA. The punished banks are incorporated mostly in

EU (France, Germany or UK) where the transactions were prepared and initiated. By the assertion

of extraterritorial jurisdiction the USA regulates on who the foreign banks can do business with

outside of the USA which should be a sphere of regulation of the EU. American actions also cause

conflicting regulatory environment where the banks have to comply with contradictory legal

norms251

. The OFAC enforcement is also a direct extraterritorial opposition to the EU blocking

Statute. The USA also ignored the international comity considerations. Furthermore the American

use of jurisdiction is inconsistent with the traditional interpretation of the jurisdictional grounds252

.

Thus even by American standards the OFAC actions are unreasonable.

246

http://www.france24.com/fr/20150511-cuba-hollande-annulation-embargo-americain-raoul-castro-fidel-visite-economie-la-havane 247

See section 3.1(b), see also Declaration of Laurent Fabius, infra n.283 248

Letter of president Hollande, infra n.282 249

see section 3.2(a)(i) 250

Restatement Thid, supra n.123, §403 251

Ibid (h) 252

Ibid (f)

42

In light of all the negative legal effects and complications we can clearly conclude that the

US enforcement does not comply with the requirement of reasonableness. Consequently the

OFAC’s actions violate the international law on jurisdiction.

(c) Conclusion on Legality under Traditional International Law

There are several grounds for jurisdictions that could help to justify the American

enforcement actions against the foreign banks. But if we study the facts of the cases we come to

conclusion that the foreign banks’ links to the USA are extremely weak, or a result of a legal

fiction. In this sense the American extraterritorial jurisdiction is based on an excessive interpretation

and unconventional use of the existing jurisdictional grounds. Thus a possible application of any

jurisdictional ground is dubious. If there is still some uncertainty concerning the grounds, there are

no questions about the fact that the OFAC actions are unreasonable since they cause an

extraordinary amount of additional legal problems and complications. Based on this analysis the US

enforcement actions do not comply with the international law on jurisdiction.

The USA profits from a jurisdictional grey zones caused by the particular nature of the

electronic transactions. The USA tries to classify such transactions to as legal category under its

control- which no longer reflects the reality. The US arguments are innovative but they are

evidently an instrument designed to allow the USA to regulate conduct outside of its sphere of

regulation. This represents a politically motivated misuse of law. Thus the US extraterritorial

enforcement actions violate the international law on jurisdiction.

2.4 Legality of OFAC’s Actions under the US National Law

The OFAC actions are not controversial only under international law; they also raise

questions under American domestic law. However, these questions are purely hypothetical as there

was no court litigation for any of the cases and the banks also waived their rights to any legal

objections in the future253

.

(a) Breach of the Rules on Statute Interpretation

In the Charming Betsy case254

, the US Supreme Court held that in cases where multiple

possibilities of interpretation exist, an interpretation of US law that violates international law is

contrary to the US Constitution. This rule provides guidance to the US courts on how to construe

253

E.g. SCB (§35), RBS (§31), etc. 254

Murray v. The Charming Betsy, 6 U.S. (2 Branch) 64 (1804)

43

US legislation. OFAC ignored this rule especially in the course of the construing the term US

Person. A more restrictive interpretation would not violate the law on jurisdiction. The

jurisdictional provisions of the US sanctions laws255

and BSA256

also could have been construed

more restrictively to avoid its application to foreign entities. Consequently the USA would avoid

interference in banking regulation of the European States.

The OFAC’s actions also breach the Supreme courts view on extraterritoriality. OFAC

applied US financial sanctions extraterritorially even to transactions that happened outside of the

USA. In the Aramco case257

or the recent Kiobel case258

the Supreme Court applied the general

presumption against extraterritorial application of US legislation. Even though these cases

concerned different areas of law and also different situations259

, the view on extraterritorial

jurisdiction here was significantly more restrictive than the OFAC’s approach.

(b) Disregard for the Corporate Separateness

In American law there is the principle corporate separateness. According to this rule the

corporation and its shareholders (i.e. parent company) are two distinct legal entities260

. The OFAC

actions against the foreign bank disregarded this principle. The foreign banks had subsidiaries in the

USA but these subsidiaries did not process the funds and were not aware of the ongoing

transactions with the US sanctioned entities261

. The USA has jurisdiction over the subsidiaries

(example HSBC Bank USA N.A.), but the foreign parent (example HSBC Bank plc.) is a separate

legal entity and thus the USA does not have jurisdiction over it. If the corporate separateness was

respected the USA would have jurisdiction only for the conduct where the foreign banks cleared the

transactions though their own US branches and subsidiaries – which happened sporadically.

(c) Punishment for Non-criminal Conduct: Modified SWIFT Messages

In the settlement documents the US authorities repeatedly claim that sending modified

messages is a grave violation of law and an act against the USA262

. But under American law as well

as in the rules of SWIFT, it is not illicit to send unclear or incomplete electronic payment SWIFT

messages. The reality is that every bank provides the information in the SWIFT differently and

255

Including 50 U.S.C. app. §5(b)(1)(1994), see also C.F.R. §515.201 (1998) 256

Patriot Act, supra n.10, Title III 257

EEOC v Arabian American Oil Company and Aramco Services, 499 US 244 (1991) 258

Kiobel, supra n.127, concerning adjudicative jurisdiction and the extraterritorial application of the ATS (28 U.S.C. § 1350) 259

Adjudicative and prescriptive jurisdictions 260

E.g. UK House of Lords, Salomon v. A Salomon & Co Ltd (1896) 261

E.g. BNPP Parisbas (fact statement, §§ 30-34), similar in Settlement with Lloyds, etc. 262

IEEPA Enhancement, supra n224, Section 206(a)

44

banks regularly use incomplete or modified messages263

. The modification of the SWIFT messages

seems to be general practice that does not per se indicate a criminal activity or fraud264

. From a

regulatory point of view at the moment of the transactions it was also indifferent whether the banks

use simple MT202 messages or more the more elaborate MT103 messages. Modified SWIFT

messages were not only sent to the US sanctioned entities but also to other non-contentious clients.

The US authorities acknowledged this fact in certain settlements265

.

The initial and the main purpose of the SWIFT message is to inform the other party

sufficiently to make a payment, not to gather information about the parties and the beneficiaries.

The USA makes continuous efforts to transform the SWIFT into global ant-terrorism and AML

instrument266

. But if the USA wants collect information it must respect the rule of law and base its

actions on a proper legislative basis.

(d) Excessive Fines

The 8th

amendment to the American constitution states: “Excessive bail shall not be

required, nor excessive fines imposed, nor cruel and unusual punishments inflicted”. Thus for the

fines to be legal they must be proportional to the offense. The formidable amount of fines was one

of the particularities of the OFAC’s actions. In the nine cited cases US authorities imposed

sanctions in amount of more than 16 billion dollars267

. The most alarming was the case of BNP

Paribas where US authorities demanded 8.9 billion dollars268

which represents the entire annual

profit of the whole BNP Paribas group. For illustration such amount corresponds to the 2014 GDP

of Rwanda269

. The French foreign minister Laurent Fabius commented on the BNP Paribas case: "If

there is a violation of a rule, it is normal to have a penalty, but the penalty must be proportional

and reasonable. These figures are not reasonable270

".

In Bajakajian case271

the court held that the fines must be proportional and must correspond

to the gravity of the fine. Consequently the enormous OFAC fines are manifestly excessive,

especially if we take into account that no actual damage was done neither to the USA nor to the US

entities. To conclude, such disproportional fines qualify as “excessive” which makes them illegal

under US law.

263 JP Morgan Chase, 2011,Publication, Understanding SWIFT for Corporates , P.5 264

E.g. Lloyds (§8) 265

ibid 266

See SWIFT controversy 3.1(b)(ii) 267

Total amount paid by the banks to American authorities (mentioned) 268

Total amount paid to the American authorities by the bank, see supra n.65 269

CIA, the World Factbook 2014, GDP per country, 2014 270

http://www.wsj.com/articles/frances-fabius-says-possible-10-billion-bnp-fine-unreasonable-1401783540 ,retrieved on April 12, 2005 271

United States v. Bajakajian, 524 U.S. 321, 334 (1998).

45

3. IMPACT OF THE AMERICAN EXTRATERRITORIAL MEASURES ON THE

INTERNATIONAL LAW AND PRIVATE BUSINESS

The American extraterritorial conduct has a significant impact on the international legal order.

3.1 Issues with Legitimacy and the Negative Reactions to the OFAC Actions

Extensive extraterritorial actions do not necessarily have bad effects; however the

international community has not perceived the OFAC’s actions in such way.

(a) Potential Positive Effects of Extraterritoriality and its Abuse

The excessive use of jurisdiction is not perceived well by the international community. This

view is natural because the excessive extraterritorial jurisdiction is usually associated with abuse of

power or interference with the sovereignty of other States. But an aggressive use of extraterritorial

jurisdiction does not necessarily have to be bad.

Extraterritorial actions of one State can address the regulatory gaps or areas where the

foreign States do not have means to act. Notable examples exist in the area of criminal law,

specifically child sex tourism or corruption. Following the outburst of the child prostitution mainly

in Thailand and Cambodia272

, the USA introduced legislation273

that allows it to prosecute sex

offenders for crimes that take place outside of the US territory. This step helped to improve the

situation with child prostitution in South Asia274

. Another example is the Filartiga case275

where

ATS was applied extraterritorially by US courts to assert jurisdiction over human rights violations

committed abroad. Such extraterritorial application of the statute is controversial but it contributes

to the respect of human rights. This is to illustrate that the extensive use of extraterritorial

jurisdiction can contribute to the good administration of criminal justice. Even though many States

do not like the American intrusion into their domestic affairs, many States adopt increasingly

aggressive extraterritorial measures. Among these States, we see France, Germany and

Canada276

.For example France has recently created a law on extraterritorial responsibility of its

companies277

. This law requires French multinational corporations to conduct a due diligence on

risks of human rights abuses and corruption. This law applies to multinationals, their overseas

272

16,000 Victims of Child Sexual Exploitation - IPS ipsnews.net, retrieved 12 May 2015, see also http://abcnews.go.com/US/story?id=2325416 273

E.g.: 18 U.S.C. § 2423(c): Engaging in illicit sexual conduct in foreign places, 18 U.S.C. §§ 2251(c) and 2260(a): Production of Child

Pornography outside the United States, see also section 2.3(a)(ii)(A)I(I) relative to the extraterritorial measures relating to corruption. 274

Leheny,1995, A political economy of Asian sex tourism Annals of Tourism Research. 22(2):, see also

https://www.academia.edu/5710535/Prostitution_in_Thailand_and_Womens_Rights p. 10 275

Filártiga v. Peña-Irala, 630 F.2d 876 (2d Cir. 1980) This case was later reversed by Kiobel case, supra n.127. 276

Alexander, supra n.93 p. 473 277

Loi sur le devoir de vigilance des sociétés mères et donneuses d’ordres, approved March 30th, 2015.

46

subsidiaries and even to the activities of their subcontractors278

. In case of breach, the multinationals

are liable according to article 1382 and 1383 of French Code Civil.

Breach of the rules on extraterritorial jurisdiction can provoke various reactions from the

international community. The amount of upheaval and tensions depends greatly on the regulatory

motives and the subject matter in which the extraterritorial measures are taken279

. States tend to be

more lenient to breaches of international law when the motive is seen as legitimate. However,

legitimacy should not be confused with legality. The promotion of democracy and the fight against

crimes are both “noble” causes. But justifying any breach of international law (including excessive

jurisdiction) is dangerous. Accepting such argument would create a slippery slope as the States

could act in their national interest under the pretext that their cause is legitimate. This would disrupt

the order in international law.

(b) The Lack of Legitimacy of the OFAC’s Enforcement and the Consequent

Reactions

Despite the American statements about the foreign banks’ “greed and disregard for

reputation”280

the affected States and organisations generally considered the US actions as illegal

and illegitimate. The American extraterritorial enforcement of financial sanctions has been rather

labelled as financial imperialism or bullying281

. Following the individual cases of enforcement,

there was progressively more public display of dismay.

Many States protested formally against the American actions. After the BNP Paribas

settlement, President Holland condemned the American acts in a public letter addressed to U.S.

President Barrack Obama282

. The French government also criticized the amount of fines283

. On the

other side, the British authorities remained silent284

which was consequently criticized285

. European

Central Bank issued a statement in which it expressed its concerns about the stability of the EU

monetary market and about the health of the main lenders following the massive financial fines286

.

In 2009, after the Credit Suisse case, the Swiss Federal Financial Market Regulator FINMA issued

278

Ibid Article 1, line 2 279

Zerk, supra n.91 pp 206-216 280

Supra n.63 281

Osborne, The Telegraph, http://www.telegraph.co.uk/comment/10649219/The-US-has-bullied-our-banks-into-handing-over-a-billion-dollars.html

,consulted 12 March 2015 282

http://www.wsj.com/articles/hollande-backs-bnp-paribas-in-letter-to-obama-1401885257 , . 283

http://www.wsj.com/articles/frances-fabius-says-possible-10-billion-bnp-fine-unreasonable-1401783540 284

Osborne, supra n. 281 285

http://blogs.telegraph.co.uk/news/peteroborne/100265389/britain-is-being-bullied-and-blackmailed-by-the-us-treasury-william-hague-must-stand-

up-for-our-interests/ , consulted 12 March 2015 286

http://www.wsj.com/articles/ecb-officials-anxious-about-impact-of-u-s-fines-on-eu-banks-1401798968?tesla=y&mg=reno64-wsj

47

a press statement saying that: “The scope of application of the OFAC rules has continually been

extended over time and thus leads to considerable legal uncertainty”287

.

The American actions have also sparkled opposition from the private actors. During the

negotiations with the American regulators a notable reaction came from the Standard Chartered

Banks group finance director Richard Meddings who allegedly said: “You f*cking Americans. Who

are you to tell us, the rest of the world, that we're not going to deal with Iranians?288

”. Thus we can

observe problems with the legitimacy of the OFAC’s actions.

(i) Financial Imperialism: Acts Based on National Interest

Despite the American claims that the economic sanctions were enforced to fight crime and

terrorism289

, the American conduct has not been seen as legitimate. The OFAC’s actions became

rather infamous as being linked exclusively to the US national interests and were consequently

called as “imperialism”290

.

In the context of economic sanctions, this pejorative term describes the extensive

extraterritorial use of American criminal and business law as an instrument for control of foreign

financial institutions and the flow of capital. First, the enforced economic sanctions were unilateral

and they were not consented to by other sovereign States. Second, by imposing secondary financial

sanctions, the USA can effectively control with whom the foreign banks can do business. This

means that single strong jurisdiction will have an impact on how the multinational banking

corporations are run as a whole. Furthermore the recent OFAC’s actions fall in the mosaic of

finance-based regulatory actions that shape the economic activity outside of the USA. Other such

actions include the implementation of Sarbanes-Oxley291

, Dodd-Frank Act292

or actions against

money services companies’ overseas operations like PayPal293

. As a result, the foreign countries

and multinationals banks have seen these regulatory actions more as an attempt to control

international financial system rather than an effort to promote democracy and human rights.

(ii) The Attempts to Control SWIFT

SWIFT is a Belgian private company that processes majority of the world payment

messages. Consequently it holds a huge quantity of information concerning the banks, accounts and

287

http://www.finma.ch/e/aktuell/Documents/bericht-cs-usbehoerden-20091216-e.pdf 288

http://www.businessinsider.com/standard-chartered-iran-details-2012-8 289

See sections 2.3(a)(iv) Protective principle 290

Barkow,Perry , 2014, American Prosecutorial Imperialism?, see also http://rt.com/usa/203399-treasury-banks-tax-evaders/ 291

Sarbanes–Oxley Act of 2002, section 2(a)(7) 292

Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, Title VII 293

See OFAC PayPayl settlement agreement, http://www.treasury.gov/resource-

center/sanctions/CivPen/Documents/20150325_paypal_settlement.pdf

48

their beneficiaries. For data safety reasons, SWIFT has 2 servers one of which is located in the

USA294

. In 2006 it was reported that American authorities survey the information processed by

SWIFT on the basis of a subpoena that was obtained by OFAC. Belgian Data Protection Authority

investigated the matter and came to conclusion that SWIFT’s conduct violated the Belgian and

European data protection laws295

. Furthermore, this type of behaviour also undermines the banking

secrecy rules. Today there is a formal EU-USA SWIFT agreement296

which allows the USA to

retrieve information processed by the SWIFT network for terrorism investigation. The agreement

has been repeatedly called for to be cancelled297

. But despite the privacy problems associated with

this agreement, it guarantees at least basic protection against the abuse298

. American attempts to

control SWIFT are yet another proof that in course of information gathering the USA did not have

any intention to collaborate and to respect the laws of other States. Even if the USA allegedly

exercised territorial control (some data servers were in the USA) such control will still result in

negative extraterritorial effects (the privacy of EU nationals is compromised).

What is essential, in course of the OFAC’s actions the US authorities gathered a massive

amount data concerning the banking activities, transactions and their beneficiaries. This information

can be easily abused, as there are no American guarantees how to handle this data. Thanks to such

extensive reporting obligations in the settlement agreements with the banks, the USA does not need

this SWIFT agreement anymore as the banks provide the information voluntarily299

.

(iii) Bullying by the OFAC: Extraterritoriality, Lack of Transparency and

Forced Settlements

Nowadays OFAC is the new super-regulatory organisation which operates far beyond of

what it was conceived for. The perceived illegitimacy of its methods and its’ non-transparent

behaviour only incite further dismay.

First, OFAC is a controversial agency. On one hand it frequently issues statements, press

releases and guides for the companies concerning the enforcement of the sanctions300

. On the other

294

Graves, Ganguli, supra n.144, p. 996 295

Ibid pp. 970-972 296

TFTP agreement between the European Union and the United States, came into force on 1 August 2010, 297

http://www.europarl.europa.eu/news/en/news-room/content/20131021IPR22725/html/MEPs-call-for-suspension-of-EU-US-bank-data-deal-in-

response-to-NSA-snooping 298

Graves, Ganguli, supra n.144 p.992 299

Marija Dordeska, March 20, 2015, OFAC’s Settlement with Commerzbank AG: Coerced Voluntary Settlements of the Competitively

Disadvantaged, EJIL. 300

http://www.treasury.gov/resource-center/sanctions/Documents/facbk.pdf

49

hand, many entities complain about the opacity of the OFAC enforcement actions301

. Sanctions

violations have severe consequences but the OFAC’s interpretation of the sanctions legislation is so

unclear that the concerned subjects cannot identify whether the sanctions apply to them and what

constitutes the violation of the sanctions302

. In the past OFAC has also been known to act in silence

to modify the standards and to enforce them303

.Before the first enforcement case in 2005, it was

unclear if and in what scope OFAC would enforce the sanction laws against the foreign banks

operating outside of the USA. To find out in the 2005 Commerzbank sought a legal advice from the

American law firm Cleary Gottlieb Steen and Hamilton LLP.BNP Paribas and Barclays also

solicited other US law firms between 2004 and 2006304

. In each case the law firms told the banks

that their conduct would not violate the US sanctions if the financial transactions would not be

cleared through the banks’ US branches and subsidiaries305

. Despite these legal opinions, OFAC

enforced the sanctions against them which manifests the uncertainty and the lack of transparency

associated with the OFAC’s actions.

Secondly, OFAC has only territorial jurisdiction in the USA306

and it is not supposed to

punish the banks extraterritorially. But today OFAC operates and acts against foreign companies all

around the world from Europe to Australia and can basically reach any bank or corporation having

the smallest relation to the USA.

Thirdly, there is a general understanding that the settlements agreements between the banks

and the authorities were not voluntary307

. There have been recurrent calls from the people involved

in the negotiations that the banks were “bullied” into entering the settlement agreement under the

menace of revocation of their American banking licenses. “OFAC tells the British bank that it will

suffer consequences [such as] loss of a US banking licence or blacklisting, if it doesn’t agree to a

settlement308

”. Such statement from the authorities is evidently a menace. The revocation of a

banking license can be done only by the appropriate State regulator after a due consideration and

not by OFAC. The banks’ fear of losing their licenses could explain why they did not litigate their

cases in court309

. The obvious disadvantage of court proceedings is that they are lengthy and their

result is not predictable compare to the settlement agreements. But the absence of a formal hearing

301

Rubenfeld, 2014, OFAC Rises as Sanctions Become A Major Policy Tool, Wall Street Journal, see also Buys, supra n.22 pp.247-248, see also

Kolender v. Lawson 461 U.S. 352, 357 (1983) 302

Before the OFAC enforcement, the foreign banks consulted US lawfirms, see infra n.304 303

Burdett, OFAC Quietly Raises the Bar on Sanctions Filtering, 2013, can be seen at http://www.fincrimepartners.com/ofac-quietly-raises-bar-

sanctions-filtering/ 304

BNPP settlement (§ 17), Barclay’s (§ 3) 305

BNPP (fact statement, §§ 30-34) 306

Graves, Ganguli, supra n.144 p.979 307

See infra n. 308, see also Dordeska, supra n. 299 308

Osborne, supra n.281 309

Ibid

50

does not go along well with the many legal ambiguities of the OFAC’s actions. This view is also

underlined by the atypical and burdensome obligations imposed on the foreign banks including

extensive disclosure, prohibition of using USD transactions or other extraterritorial limitation on

banking activities. For example BNPP agreed not to clear transactions with the targeted entities

including the transaction that are not in USD and that do not go through USA310

.

Thanks to all these aspects, the settlement agreements were seen as coerced agreements that

banks agreed to only because of the fear of further persecution. The massive financial fines only

supported the impression that the US authorities abuse their powers in an effort to create an

environment of regulatory deterrence and to scare the foreign financial institutions. As a result,

foreign banks often voluntarily agreed to respect the US sanctions, rather than to endanger their

activities and risk the colossal fines.

3.2 Impact of OFAC’s Actions on the International Law and its Actors

A repeated misuse of extraterritorial jurisdiction presents risks such as conflicting regulatory

environment, legal uncertainty or the violation of the basic principles of rule of law. These issues

are surmountable, but they present additional complications for already fragile international legal

system.

(a) Business Complications for International Banks

Through the extensive use of the parent-based regulation, the USA contributes to regulatory

chaos on the international level

(i) Conflicting Regulatory Environment: Troubles for Multinational Banks

The American actions against the foreign banks have brought a hostile legal environment for

multinational banks. It is an environment where banks are subject to onerous and conflicting

regulatory framework. Apart from the direct consequence of the OFAC settlements, the foreign

banks also had to face other indirect negative effects of the American enforcement actions. The

concerned banks all had to cease operations with Iran and other sanctioned entities. This means a

significant business loss because for certain banks the business with Iran was important311

.

Furthermore, all the banks had to adopt extensive compliance procedures that correspond to the

American requirements which is particularly costly in long run.

310

BNPP settlement (§23) 311

E.g. Commerzbank AG and the Iran Shipping Lines (§10)

51

But the most disastrous impact on the American actions is the conflicting regulatory

framework. Until now there was a simple principle that a corporation has to conform to the

regulation of the State where it operates, but not to the laws of other States312

. This principle is now

being annihilated by the USA. On one side the USA expects the European banks’ operations in

Europe to follow the US sanctions; on the other side EU criminalizes compliance with foreign

unilateral sanction through the EU Blocking Statute. Consequently the corporations that are

concerned by the laws of these two frameworks do not know, and cannot know, how to deal with

this conflicting regulation. This issue has many illustrations:

First, when corporations in general respect the US trade sanctions outside of the US

territory, they might violate anti-discrimination laws of other States. This issue has appeared many

times. In 2006 in the Mexico Sheraton controversy313

the Sheraton Hotel in Mexico, subsidiary of

an American company, expelled Cuban nationals to comply with US sanctions. The hotel was later

prosecuted by the Mexican government for the violation of anti-discrimination laws. The same issue

also appeared in Canada Wal-Mart controversy314

. In 1996 the Canadian subsidiary of Wal-Mart

was compelled to respect the US sanctions concerning its sales of Cuban origin products. After the

company complied with the US sanctions it was prosecuted by the Canadian Government for the

violation of discrimination laws. In the area of banking the problem of conflicting framework was

illustrated in 2007. Austrian bank BAWAG closed accounts for almost 100 Cuban nationals as a

part an acquisition of the bank by the US equity firm Cerberus Capital. Consequently the Austrian

authorities prosecuted BAWAG for violating the EU Blocking Statute. The Austrian government

commented on this action: “U.S. law is not applicable in Austria. We are not the 51st state of the

United States. Neither the EU nor the UN have implemented a general economic or contact

embargo against Iran or Cuba”315

. Following the Austrian action, BAWAG was exempted by the

American authorities and re-opened the accounts.

Second, the settlement obligations interfere with the foreign privacy laws. As part of the

settlements the foreign banks were subjected to extensive reporting duties to the American

authorities316

. This data is object to privacy317

, data protection and banking secrecy laws318

.

International banks have clients in many jurisdictions and there is a varying degree of privacy

protection accorded to them by law. Citizens of EU traditionally enjoy a high degree of privacy and

312

Consequence of the territorial sovereignty 313

http://www.dominicantoday.com/dr/world/2006/2/7/10080/Mexico-to-probe-hotel-that-expelled-Cubans 314

Clark, supra n. 170 p. 2 315

Reuters, Austria Charges bank after Cuban accounts cancelled, April 27. 2007. 316

See the settlements, Supra n.2 317

US v. First National City Bank, 396 F.2d 897 (2d Cir.1968) (Germany). 318

US v. Bank of Nova Scotia, 691 F.2d 1384 (11th Cir. 1982), 462 U.S.1119 (1983) (Bahamas).

52

data protection319

. Consequently the banks are pushed either to violate their US obligations, or to

violate EU data protection and privacy laws. As a result the banks might get sued in their home

States. Such litigation has already appeared when the clients in Europe had to sue banks to prevent

them from providing information to American authorities320

.

To conclude, multinational banks are involved in business in several countries. It is

obviously their duty to comply with all the relevant applicable regulation. But if the requirements

are conflicting and overlapping the compliance for the banks is impossible. As a reaction to the

recent enforcement actions against the foreign banks, many financial institutions have started

offering clearing transactions through other currencies than USD, particularly Euro or Renminbi, to

avoid the additional contact with the USA321

. This step manifests that the multinational banks are

distressed and try to avoid the position of being between the rock and a hard place.

(ii) “Parent-based” Regulation: The New Informal Approach to

International Lawmaking

The US approach to financial sanctions as seen during the OFACs’ actions is based on the

indirect exercise of extraterritorial jurisdiction: so called parent-based regulation.

The parent-based regulation corresponds to situations where the USA, as a home State,

forces American parent corporations and their subsidiaries to implement the American regulation

throughout their entire groups – even to overseas entities. If the subsidiaries in third countries do

not comply, the entity present in the USA will be responsible and punished. The specificity of the

American parent-based approach is that the USA, as a host State, seems to require even foreign

parent corporations having a US subsidiary to respect American sanctions overseas. For example

OFAC requires BNP Paribas, HSBC and others to respect American sanctions regardless of their

location and regardless of currency they use for the operations322

.

The Parent-based regulation is an efficient way in which States can influence the business

standards in third countries. It is a form of a subtle “international” law making because it results in a

global implementation of the American regulation. Certain authors support the parent-based

319

Directive 95/46/EC, but there are also respective national laws 320

Landgericht, Kiel (1983) 22 I.L.M. 740 321

See Deutsche Banks recent actions. https://www.db.com/en/media/At-the-centre-of-Renminbi-internationalisation--A-brief-guide-to-offshore-

RMB.pdf 322

BNP settlement (§23)

53

approach as a tool that could address human rights violations323

. This approach has also been used

in the French corporate responsibility law324

. The problem with the parent-based regulation is that

it will certainly interfere with the interests of third States and their companies. As an example, in

BAWAG case325

, Austria did not intend to sanction Cuban nationals, but because of the parent

based approach the Austrian companies under American control were being forced to sanction

Cubans. In this sense multinational banks are abused because they are used as an instrument to

achieve goals that they are not designed to fulfil. Thus the parent-based approach is an evident

deviation from the classical territorial approach to regulation where the Host States do not require

the corporations to adopt the same standards outside of their territory. Consequently the use of this

approach should be restricted only to situations where international consensus about the conduct

exists.

(b) Effect of the American Actions on the International Legal System

The US conduct is an infringement upon sovereignty of certain States. In addition the

continual misinterpretation of the jurisdictional grounds could destabilize the international legal

order.

(i) Interference in Domestic Affairs of States: Violation of International

Obligations?

The Friendly Relations Declaration326

highlights that the interference “for any reason

whatever” is illegal. By the assertion of extraterritorial jurisdiction over the foreign banks’ conduct

the USA regulates on who the European banks can do business with. European regulators have

naturally stronger jurisdictional claim to the regulation of these banks. Such actions limit EU

banking regulators’ control over the European banks. In addition the American actions have

negative impact on the European banking market and on the macroeconomic stability327

.

Consequently the American actions constitute an intervention in the domestic affairs of the UE

States who are supposed to regulate the European banks.

The American actions also infringe upon the sovereignty of EU states in other ways. The

OFAC extraterritorial actions constitute a direct opposition to the EU blocking Statute. Firstly,

blocking Statutes are designed to protect sovereignty of the legislating States328

. In the EU Blocking

323

De Schutter, supra n.114 p.52 324

French Law, supra n.277 325

See 3.2(a)(i) 326

Friendly Relations Declaration (UN General Assembly, 1970) 327

See ECB reaction http://www.wsj.com/articles/ecb-officials-anxious-about-impact-of-u-s-fines-on-eu-banks-1401798968?tesla=y&mg=reno64-

wsj 328

Foreign extraterritorial measures Act R.S.C ch. F-29 §5 (1) (1985)

54

Statute it is explicitly stated that its goal is to protect the “legal order ... and the interests of the

Community329

”. At the time of the enforcement, the US authorities must have been fully aware of

this legislation and of the EU States’ position on the issues of unilateral sanctions. An

extraterritorial action that defies the Blocking Statute amounts to a direct challenge of the European

legal framework. Secondly, the competence of States to choose their trade partners is an integral

part of their sovereignty330

.By limiting this competence for France, Germany and others, the USA

has infringed upon the sovereignty of these affected States.

To conclude, the USA breaches its international obligations towards the European States

whose banks and regulatory environment are harmed by the excessive extraterritorial actions. But

the harm in international law is a subjective concept331

. Hence for the harm to be identified and

recognized, States must voice their concerns. The extent of the injury caused by extraterritorial

actions corresponds to the level of disapproval of the affected States. This highlights the importance

of protest – if the affected States wish to address the issue they must be more strict in denouncing

the US interference and its undesired consequences.

(ii) Disruption of International Norms on Jurisdiction

The recent US behaviour poses a systemic risk for the international legal order as a whole,

not only for certain States. We have already demonstrated that the US extraterritorial enforcement

impedes on the legal certainty and predictability. But what is more alarming, such continuous

excessive assertion of jurisdiction could undermine the traditional understanding of what

extraterritorial State conduct is acceptable and healthful.

A wrong interpretation of an international legal norm can constitute a breach of international

law332

. We have observed that the US jurisdiction is based on a twisted and extensive interpretation

of various jurisdiction grounds which results in many legal complications. Thus such interpretation

of the grounds should be avoided. The main risk is that the US approach to jurisdiction might be

contagious to other States. If other economically powerful States apply the same extensive view on

jurisdiction, this would establish an interpretation of the jurisdictional grounds that is incompatible

with the goals of the doctrine of jurisdiction. Instead of limiting the State power, the jurisdiction

329

Regulation EC 2271/96, 1996, Legislative intent, §9 330

E.g. Joint Declaration of the Eastern Partnership Summit (Riga, 21-22 May 2015) 331

Bianchi, Reply to Professor Maier, in K.M. MEESSEN, Extraterritorial Jurisdiction in Theory and Practice, 1996, 74, 79. 332

Douglas, supra n.99

55

would become a justification to act. In such scenario the international legal order would be

destabilized333

.

The current situation emphasizes the importance of denouncing misinterpretations of

international law. To publicly condemn misinterpretations and breaches of international law is

important because State acts and representations can contribute to the creation of customary law and

its interpretation334

. When States denounce and react to the breaches of international law they

slowly create the counterbalance which helps to remedy the violations of the law.

(c) Are the International Rules of Jurisdiction Robust Enough?

In light of the current events and the resulting controversies, we must question whether the

international rules on jurisdiction are strong enough to command respect and to achieve the goals

for which they exist.

An important observation about the rules on jurisdiction is that they are not static. Their

application varies according to the context of the situation and their understanding evolves over

time. This means that what might be considered as a violation of rules in the domain of

environmental law can be legal in the domain of business law. The typical example of this

phenomenon is the effects doctrine. Effects doctrine is accepted when applied to antitrust, but it is

controversial in criminal law. This specificity of the rules needs to be taken into account when we

evaluate the rules. Thus if we evaluate the rules on jurisdiction we should stay specific and focus

mainly on examples of jurisdiction in the area of financial sanctions.

International law on jurisdiction is mostly customary. The traditional understanding of

international custom is based on two requirements: State practice and opinio juris. In order to have a

valid customary rule, we should have the two elements. Concerning the opinio juris, even the States

with the most controversial conduct (USA) continually acknowledge the existence and the

importance of the five main grounds for jurisdiction. The grounds for jurisdiction and

reasonableness can be found in American law335

. The USA also regularly invokes the jurisdictional

grounds to justify its extraterritorial actions336

. Consequently there seems to be a strong

international consensus on the opinio juris. Concerning the State practice, the situation is slightly

different. Judging from the lack of protest, States generally conform to the international customary

333

For illustration, if the a UE States would use the US approach, they would require the American subsidiaries of the European companies to respect

the EU sanctions programmes in the USA. But this approach would be applied when differences in sanctions exist, it would reset in a

regulatory impasse. 334

Jennings, Watts, supra n.85 p. 26 335

Third Restatement, supra n.123 §403 336

Even for the OFAC case, the US arguments by the territorial principle

56

rules on jurisdiction, but certain States (USA) sometimes act inconsistently with the spirit of the

rules. This results in the creation of secondary sanctions and in an extensive application of the

jurisdictional grounds (E.g. “US origin” re-exports, emails as territorial link). The state practice is

not uniform. So is the international custom on jurisdiction still a valid legal norm? If we talk

generally about the custom on jurisdiction the answer is yes, it is still valid. An occasional lack of

practice does not always put in peril the validity of a custom. As explained by professor Frederic

Kirgis in his article Custom on a Sliding Scale337

, the two components of custom, practice and

opinion juris, are mutually interchangeable. This means that a certain lack of practice can be made

up for by stronger opinio juris. This phenomenon can be clearly seen at the customary rules on

jurisdiction. Occasionally the State practice is not uniform. But the rules on jurisdiction are

underpinned by the sovereign equality of States. The limitations on jurisdiction are important for

the peaceful coexistence on the international level. Thus the value reflected in the opinio juris is a

value taken from an associative obligation between States: coexistence. States have interest to stay

in a peaceful community, thus there is an obligation to respect this rule. It corresponds to the

“dimension of substance” as elaborated by Kirgis. So despite the “practice” component of the

custom may be varying, the opinio juris is strong enough to make up for it. Thus the custom on

jurisdiction is a valid and established rule of international law.

Even though the customary law on jurisdiction is well established as an essential part of the

international law, the rules on jurisdiction are not perfect - there two main shortcomings. First the

jurisdictional grounds can be abused because there is no clear requirement for the intensity of the

link. As we have seen the grounds for jurisdiction are flexible338

. Some flexibility is necessary as it

allows States to apply the grounds to particular situations, but too much flexibility and vagueness

can be a cause of misinterpretation. The internet, e-banking and virtual currencies have created a

reality whose legal nature is blurred. Due to the emergence of modern technologies there are many

possibilities how a conduct can be connected to a State. But an assertion of jurisdiction based on a

weak link often results in a violation of the international law. The jurisdictional grounds per se are

silent as for the intensity and the type of the link. Consequently the grounds may be used to justify

an assertion of jurisdiction that ought not to be allowed. This problem concerns territoriality (can an

email to the territory justify the jurisdiction?) but also the protective principle (can protection of

economic interest justify the jurisdiction?). Second issue is that the requirement of reasonableness is

not defined clearly enough and States do not consider it properly. The disregard of reasonableness

337

Kirgis, 1987,Custom on a Sliding Scale, 81 Am. J. Int'l L. 146 (1987). 338

Zerk, supra n.91 pp. 206, 212.

57

subsequently undermines the whole custom. A due consideration of reasonableness will prevent

States from acting contrary to the interests of foreign States even where the jurisdictional grounds

per se could allow jurisdiction.

In the area of banking regulation the two aspects should be improved in the following

manner: First, the rules on jurisdiction need to emphasise the importance of a genuine link339

between a financial conduct and the regulating State – not only a forceful classification under one of

the jurisdictional grounds. Second, the rules need to emphasize the importance of reasonableness

and they should propose an objective way to evaluate reasonableness340

. Concepts such as the

balancing test shall be abandoned. Thus, the reasonableness should be more explicit and its

structure better defined.

3.3 Remedies for the Extraterritorial Measures of the USA

Certain scholars have come to conclusion that the international law cannot provide a

solution for the problems of excessive use of extraterritorial sanctions341

. But this approach is not

correct. The problems associated with extraterritorial jurisdiction can be effectively resolved under

the international law either through legal concepts of mutual respect between States, or by

adversarial State actions.

(a) Need for Intervention from the Affected States

Despite the negative reactions, neither the USA nor other States made any steps to address

or to prevent the controversial OFAC’s actions in the future. The OFAC precedent needs to be

reversed in order to re-establish a harmonious banking regulation on the international level. But at

this point it is unlikely that foreign banks will be able to change the US approach to regulation by

themselves. If the European Union and its member States will continue to tolerate the US

aggressive enforcement actions in the area of financial sanctions, for one part they acquiescence to

infringement on their sovereignty, and for other part they allow a misinterpretation of international

law to be established.

A durable solution for the problem starts with EU States highlighting their foreign policy,

indentifying the harm and denouncing the misinterpretations of law. There are historical examples

that this approach works. In the past the EU and its Member States have stood up for the European

339

States could be inspired by the requirement for a „genuine“ link as described in Nottebohm case (supra n.96), In this sense Ryngaert, supra n.118

p.155 340

This means setting aside the interest-balancing test which has been criticized, see supra n.133 341

Larson, Supra n.128, p. 2,

58

corporations in cases where European corporations were treated unfairly. The examples include

Compagnie Europeenne des Petroles S.A. v. Sensor Nederland B.V. (1982), the intervention of

France in the Dresser France controversy (1982)342

. Also in 1982 Margaret Thatcher, a close ally of

the USA, actively opposed Reagan administration during the John Brown Turbines controversy343

when USA wanted fine British companies who sold turbines to the USSR. In Fruehauf v. Massardy

(1968)344

, the minority shareholder of a French company sued the American majority shareholders

in a French court (action en abus de majorité) to avoid compliance with the US sanctions.

Following the diplomatic upheaval the USA dropped the case.

If the State intervention worked in the 1982 under Reagan’s administration we can assume

that a similar State intervention could also address the OFAC’s actions today. Furthermore such

intervention could turn into a legal action.

(b) Possibility of International Adjudication: Remedy at ICJ or WTO?

Apart formal diplomatic complaints and negotiations, States also have international legal

channels through which they can address the problems of extraterritorial actions in conformity with

the international law. There are two main fora where they can initiate an action: the dispute

settlement mechanism of the World Trade Organisation, and the International Court of Justice.

WTO

WTO Dispute Settlement Body serves as a forum to litigate controversial economic actions

of sovereign States. WTO has been used in the past to address the issues of extraterritorial

economic sanctions. In 1996 the EU sued the USA for the Helms-Burton Act345

. The complaint

created further leverage for negotiations between the two parties who finally settled outside of the

WTO and the controversial sanction law was not enforced346

. In 1998, Japan and EU sued347

the

USA because of a Massachusetts State law that prohibited attribution of public procurement

contracts to the companies that have been involved in trade with the Burma. The case was closed

after the Supreme Court ruling held that the law was invalid. In June 2000, in Havana Club case348

,

the EU sued the USA because of the section “211” of the US Omnibus Appropriation Act

342

Concerning creation of compressors for the USSR in France, France issued instructions to the concerned companies and ordered them to respect

the contracts, Soviet Gas People CRS report at CRS-15 343

1982, John Brown, see also supra n.281 344

D.S. Jur. 147, J.C.P. II 14, ( Cour d’appel Paris) 345

WTO dispute DS38, USA,The Cuban Liberty and Democratic Solidarity Act, 1996 346

Clark, supra n.170, p. 29 347

WTO dispute DS88, USA — Measure Affecting Government Procurement 348

WTO dispute DS 176, USA Section 211 Omnibus Appropriations Act of 1998

59

prohibiting trademark claims made by Cuban nationals. The WTO held that the US act violates the

WTO terms.

Today, any WTO member State that was hit by the primary or secondary extraterritorial

economic sanctions could lodge a claim at the WTO. The dispute settlement mechanism of the

WTO is compulsory349

. However the USA could choose not to participate in the dispute as it did in

the past350

. The US extraterritorial financial sanctions and their impact on banking and financial

services are covered by GATS351

. The harmed States could invoke a violation of GATS article I,

article II (MFN clause), article III (transparency) and article XI (payment and transfers). We can

suppose that the USA would possibly try to invoke the national security352

exemption that

dispenses a member State of its obligations, as it was invoked in the Helms-Burton case. But the

WTO interprets this exemption particularly strictly and limits it only to the most grave and

imminent cases of danger353

. So the national security consideration would not stop the tribunals

from a positive ruling on a violation.

ICJ

The second possibility for the international adjudication is a complaint at the International

Court of Justice. Even though the punished banks cannot lodge a claim at the ICJ, their respective

States can exercise diplomatic protection and file a complaint. The problem with ICJ could be the

jurisdiction to hear the claim. ICJ has a material competence to adjudicate virtually any issue

concerning international law, but it is unlikely that the USA would consent to the court’s

jurisdiction. In case that the USA consents, the harmed States could invoke the violation of their

sovereignty and request the aggressive extraterritorial measures to be stopped. In case that the USA

does not consent, the harmed States could still persuade a relevant UN body to request an advisory

opinion on the legality of American actions354

.

The issue of extraterritoriality has been touched in several of the courts decisions. The

obvious example is the Lotus case. Despite the lack355

of an ICJ precedent on extraterritoriality of

financial sanctions, in previous ICJ decision we can find hints of how such dispute could be

349

Articles 21(5) and 23(2) of the DSU 350

Helms-Burton, supra n.142 351

General Agreement on Trade in Services (GATS) 352

GATS, Article XIV bis: (b) 353

Shailja Singh , 2012, Working Paper, WTO Compatibility of United States' Secondary Sanctions Relating to Petroleum Transactions with Iran , p.

22 354

Advisory Opinions, article 65 of the Statute of the ICJ. Advisory opinions are not binding, but they could provide a persuasive interpretation of the

rules on jurisdiction. 355

The court analysed economic sanctions in the Lockerbie case but only as a „threat“. ( ICJ, Libyan Arab Jamahiriya v. United States of America,

1998)

60

decided. In the Oil Platforms case356

the court has attributed itself the jurisdiction over the question

of the “national emergency” which the USA might want to invoke. From the Fisheries case and

Nottebohm cases357

we know that there is a general presumption against the extraterritorial

application of national law, and that extraterritorial legislation is generally seen as illegitimate.

From these ruling we could predict that an ICJ claim against the USA could succeed.

Conclusion on International Adjudication

Despite the fact that the US compliance with a judgement from an international tribunal is

uncertain, a complaint at ICJ or WTO would be useful. Both of these fora have the capacity to

determine breaches of international law. Consequently the tribunals would settle the ambiguous

legality of the US measures, they would set a precedent and they would bring more legitimacy into

the dispute to benefit of the harmed States. Thus the true value of either tribunal’s judgement is not

only the judgement in itself but rather the international pressure on the USA.

The problem with a complaint at an international tribunal is that the harmed banks could not

initiate it by themselves. Action at the ICJ or WTO is based on a State action. Such State

interventions are subjective and not systematic. Only the most important and valuable banks will be

able to profit from such governmental action. Thus a complaint at an international tribunal might be

helpful on a ad hoc basis for certain important banks, but is not a regular solution for the problems

of economic sanctions.In this respect the international adjudication is not the sole remedy. As we

can see in Massardy358

or Kiel359

cases, even a domestic court can create significant pressure to help

the banks. It is also much easier to put in motion. On the other hand domestic court lacks the

authority and the legitimacy.For these reasons, the international community should look for a

different, and more durable, solution for the problems of extraterritorial jurisdiction and economic

sanctions.

(c) Need for International Cooperation and Mutual Respect

Lawsuits, blocking statutes and diplomatic complaints are not long-lasting solutions to the

issues related to financial sanctions. To address the issues permanently States need to cooperate and

establish rules of interpretation that will better reflect the techno-legal nature of international

financial transactions.

356

Oil Platforms ( Islamic Republic of Iran v. United States of America), preliminary objection, judgment, 1996 I.C.J. 803 ( Dec. 12. 1996) 357

Supra n.96, supra n.75 358

Fruehauf v. Massardy (1968), 359

Privacy violation see section 3.2(a)(i)

61

(i) Cooperation and Transparency in the Area of Financial Sanctions

The problems with extraterritoriality would be obviously avoided if the USA self-restrained

itself on the use of extraterritorial jurisdiction. But this is a utopian idea because extraterritoriality

seems to be deeply entrenched in the American legal culture. Still, many problems linked to the

extraterritorial sanctions could be prevented if States set aside unilateral sanctions and would only

apply and enforce multilateral economic sanctions. In occurrence this would mean to enforce only

the UN sanction programmes in the extent defined by the Security Council360

. These multilateral

sanctions have more legitimacy and they also tend to produce bigger economic effects361

. The idea

is that with multilateral sanctions there would be a harmonisation of legislative frameworks

between home States and host States which would result in conflict-free regulation for banks.

If the USA continues to enforce unilateral sanctions, the situation could be addressed by

more transparency especially relating to third States and their banks. Transparency in itself will not

eliminate the consequences of the American actions, but it will make the situation more predictable

for the multinational banks– which is already an improvement. In this sense OFAC should

systematically provide information to the foreign Banks and should avoid regulatory grey zones.

Similar agreements already exist in the area of antitrust and these could be extended to banking

regulation362

.

(i) International comity

International cooperation also means more respect for the interests of foreign States. This

implies a due regard to international comity. International comity, also known as the foreign

compulsion doctrine, expresses the idea that one State should give deference to the regulation and

interests of other States in the regulatory actions on its territory. In practice this rules means that a

foreign law or measure can constitute a defence from proceedings in another State. The comity is

underpinned by the respect of sovereignty principle363

. The USA also recognizes the concept of

international comity364

. To apply the comity under American law there needs to be “true direct

conflict between the foreign countermeasures and the US extraterritorial sanctions”365

.

360

UNSC sanctions resolutions can be founds at http://www.un.org/sc/committees/list_compend.shtml 361

Kaempfer, Lowenberg, 2002, Unilateral Versus Multilateral International Sanctions: A Public Choice Perspective, 362

EU-US agreement [1991] 4 C.M.L.R. 823. 363

http://lawreview.law.ucdavis.edu/issues/44/1/articles/44-1_Childress.pdf p.11 364

Third Restatement, supra n.123 §403 365

Hartford, supra n.125 §764

62

Conformably to this idea it has been held that “an entity should not be held liable for conduct

outside of the territory that is obligatory under laws the State where the conduct took place” 366

.

In theory the OFAC’s actions against the EU banks seem to fulfil the criteria for application

of the international comity, but in practice there is no hint of comity consideration in the settlement

agreements. Even though many authors claim that the non-application of comity is not per se a

violation of international law367

, still this lack of comity consideration seems unfair for the foreign

banks who complied with the European law and also for the EU States whose interests have been

harmed. In this sense the OFAC’s regulatory actions set a very low standard as for the respect of

international and foreign law in course of regulatory actions. This is another reason why the OFAC

actions must be condemned.

(ii) A New Instrument in the Area of Jurisdiction and Banking?

In light of increasing amount of controversy related to assertion of extraterritorial

jurisdiction, many prominent scholars and organisations have called for a new international legal

instrument on extraterritorial jurisdiction368

. A binding international treaty would be helpful but

such instrument is unlikely to be accomplished. A regional instrument in the area of jurisdiction is

not unprecedented, for example in the Europe there is the Brussels regulation369

or Lugano Treaty.

However the creation of a global treaty on jurisdiction, including prescriptive and enforcement

jurisdiction, would be unimaginably more complicated. Even if the existing customary law on

jurisdiction is entirely codified, the resistance of major States including the USA will probably be

insurmountable. The differences in legal traditions and the diverse regulatory interests are unlikely

to permit the creation of an international binding instrument.

To promote harmonious and consonant use of extraterritorial jurisdiction in the area of

banking, a better option would be to adopt a soft law approach. In this sense an inspiration can be

taken from the John Ruggie’s report on business and human rights370

. Despite its non-binding

nature this approach celebrated success when many corporations implemented it and France has

recently based it domestic law on it371

. To create a similar specialized instrument in the area of

extraterritorial regulation and economic sanctions is possible. Such soft law instrument could act as

366

E.g. Re. Uranium Antitrust Litig., 617 F.2d 1248, 1253-54 (7thCir.1980) affirms intent not to interfere with foreign legilsation; Interamerican

Ref. Corp. v. Texaco Maracaibo, Inc., 307 F. Supp. 1291, 1296-98 (1970) affirms comity as a valid defense. 367

Paul, 1991, “Comity in International Law”, 32 Harv. Int’l L.J. 1, 10 368

Council of Europe, Parliamentary Assembly, report by Haibach, Human Rights and Business, Doc. 12361, 2010, p.27, see also report of Hervé

Ascensio, Extraterritoriality as an instrument, 2011 369

Brussels regulation (44/2001), 370

Protect, Respect and Remedy: a Framework for Business and Human Rights, A/HRC/8/5, 2008 371

Supra n.277

63

a guide for States to assert jurisdiction and it would become a reference for the multinational banks

as for what the risks are. Consequently such instrument could be greatly beneficial for the

international legal order.

4. CONCLUSION

Under the traditional customary law on jurisdiction, the OFACs’ actions against the foreign

banks are illegal. Despite its origins in classical international law on jurisdiction, the contemporary

American approach to extraterritorial financial sanctions causes collateral damage to third party

foreign banks and it disrupts the established system of international business regulation. We do not

see these issues for the last time since the OFAC enforcement spree is not over yet. American

authorities are currently in negotiations with French banks Credit Agricole and Societe Generale372

.

We might expect similar jurisdictional issues in other areas of business law, particularly in the

securities regulation373

. For example Deutsche Bank is under investigation by the US authorities for

interest rate manipulations374

.

Extraterritorial jurisdiction is a puissant yet dangerous tool to extend the power of a State

beyond its borders. The OFAC’s cases manifest that unless States rely more on the reasonableness

factor, the jurisdictional grounds per se can allow extraterritorial banking regulation that harms

third States- which is evidently wrong. These problems arise due to the attempts to extraterritorially

control international transactions that employ modern communication technologies and the digital

currency. Fortunately such jurisdictional issues related to technology are still relatively new and

their solution is not yet clearly established. Thus the controversy stemming from the OFAC

regulatory actions offers a superb opportunity to settle the jurisdictional issues concerning financial

transactions once and for all. But to turn the odds in favour of international law States must be

proactive and must start to reshape the guiding principles that will apply to extraterritorial

jurisdiction in the area of banking.

372

Sanctions Breaches, http://www.wsj.com/articles/SB10001424052702304732804579425192656268798, consulted 21 April 2015. 373

Controvery with jursidiction of Dodd Frank Act http://www.americanthinker.com/articles/2011/10/dodd-frank_disaster.html , retrieved May 7.

2015 374

Deutsche Babn Libor, http://www.nytimes.com/2015/04/10/business/dealbook/deutsche-bank-nears-plea-deal-over-libor-manipulation.html?_r=1 ,

retrieved 12 May, 2015

64

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