European Private Banks Facing Cross-Border Investigations And Litigation: Practical Considerations - Financial Services - European Union

[Gunnar Larson]

Subject: European Private Banks Facing Cross-Border Investigations And
Litigation: Practical Considerations - Financial Services - European Union

https://www.mondaq.com/france/financial-services/1422856/european-private-banks-facing-cross-border-investigations-and-litigation-practical-considerations-


Private banks are a core piece of the European financial services
landscape. While some of the largest operations are concentrated in Geneva,
London, Paris, Luxembourg and Monaco, the industry has a strong presence in
Belgium, Germany, Iberia, Italy, the Netherlands and the Nordics. A 2023
McKinsey study shows industry profits rose to a historic high of €22bn in
2022, largely driven by high value of assets under management (AUM) and a
substantial increase in net interest margins. Growing operating and
regulatory costs can make deep dents in profit margins, especially for
smaller institutions, which may not benefit from the shared resources of a
larger global banking network. This includes external adviser and
operational expenses necessitated by growing enforcement actions by
regulators and prosecutors on both sides of the Atlantic. European private
banks are disproportionately exposed to higher anti-corruption, sanctions
and anti-money laundering (AML) enforcement risks given that their global
clientèle may include high and ultra-net worth individuals from higher-risk
jurisdictions, including politically exposed persons (PEPs).

Despite the growing enforcement risks, senior management and general
counsel at private banking institutions often do not dispose of the same
internal resources as large financial institutions (FIs). Thus,
cross-border disputes and investigations must be conducted effectively to
manage the costs that can escalate given the unique challenges caused by
the complex interplay of sometimes conflicting legal frameworks, as well as
the cultural and linguistic differences evident across different
jurisdictions. Mobilising the right internal resources and partnering with
external advisers with multijurisdictional capabilities and a deep
knowledge of the industry is therefore essential. Here are some of the key
high-level considerations for senior management and general counsel at
European private banks facing a cross-border litigation or investigation.

Understanding the legal frameworks in each country
It is important that FIs' legal teams familiarise themselves with the legal
systems of the countries involved in the cross-border investigation or
litigation, including differences in banking secrecy, data privacy laws,
employment laws, evidence gathering procedures, enforcement mechanisms,
applicable international treaties and penalties for non-compliance with
foreign procedures. This is particularly important where a private bank in
a European civil law jurisdiction may be unfamiliar with its obligations
under common law jurisdictions, most notably in the US. Working with
external legal advisers with prior experience in these issues is critical
to understanding the overall impact of applicable regulations, best
practices of similarly situated institutions, and key risks.

Effective resource allocation
Understanding and planning each phase of the cross-border litigation or
investigation in advance can help conserve limited resources and provide
senior management with visibility into potential costs. For instance, more
restrictive legal obligations in some jurisdictions may necessitate greater
attention and effort to collect, redact and transfer relevant information.

External counsel and electronic discovery providers with expertise in
cross-border litigation can help anticipate the various stages of the
proceedings and suggest potential economies. Comparing the potential
exposure against the potential cost of litigation or investigation may also
inform management's decision to explore an early settlement.

In matters involving historic facts, conducting initial interviews with
witnesses and key personnel with knowledge of historic IT and human
resources systems can allow the bank to take a more surgical approach in
identifying and collecting data, thereby reducing data hosting and
treatment costs during the life of the project.

Respecting banking secrecy
Financial centres in Europe have some of the strongest banking secrecy laws
protecting confidential information, with no uniform rules that apply
across the entire continent. Most European countries have also implemented
measures to enhance financial transparency and combat tax evasion and money
laundering, in line with international standards. Care must be taken in the
context of cross-border litigation and investigations, to ensure that
applicable banking secrecy laws are respected, especially where any
documents may be produced as evidence in foreign legal proceedings.

It is equally important to understand how local law in each jurisdiction
defines confidential information that is subject to banking secrecy.
Typically, confidential information must be entrusted, recorded, inferred
or learned from third parties or more generally be of a secret nature. It
must have been received in a professional capacity, it must not be known to
the public, and it must be sufficiently specific.

Confidential information subject to banking secrecy would typically be
redacted prior to transfer, unless consents are obtained from the relevant
parties, or a regulatory exception allows such information to be
transferred abroad without redactions.

Failure to respect banking secrecy obligations in cross-border proceedings
may result in both civil as well as criminal sanctions, as well as
potential exposure to civil litigation. Disciplinary sanctions from
European banking regulators can range from reprimands to warnings and
prohibition from conducting certain operations, in addition to financial
penalties and reputational harm.

Respecting data privacy and protection obligations
With the growth of European data privacy obligations, compliance with data
protection laws and regulations in each jurisdiction impacted by the
cross-border dispute or investigation is essential. Private banks must
develop strategies to handle and transfer sensitive information securely,
while complying with applicable local legislation, including the General
Data Protection Regulation (GDPR). In some instances, employee or
third-party consents may be necessary, absent which certain information may
need to be redacted, unless a special exception in applicable legislation
(such as necessary for legal defence) can be invoked. As with banking
secrecy, failure to comply may result in significant monetary penalties.

Coordination with local regulatory authorities
Contact with local authorities may be advisable, especially in countries
where certain public entities may be dedicated in assisting companies faced
with cross-border litigation and investigation involving transfer of
evidence or sensitive information covered by a blocking statute. Prior
authorisation from or notice to such authorities may be required, and
building in time for that process is needed to avoid unnecessary delays.

In some instances, a letter of support recalling obligations and
constraints of national law from the concerned authority may be needed, for
submission to a foreign jurisdiction which may not be otherwise amenable to
redactions of certain information pursuant to local law. Authorities in
certain European jurisdictions routinely provide such letters in support of
entities operating in their jurisdictions facing US proceedings, and
establishing a channel of communications with the authorities is key.

Engaging an external advisory team
Lawyers from both local and foreign jurisdictions must work as a team to
assist the bank in understanding its obligations, and navigate the
intricacies of local laws, especially when there are potential conflicts or
ambiguity on the ability to disclose information across borders.
Cross-border investigations and disputes attorneys in Europe who are
admitted to the bars of multiple jurisdictions and have linguistic
capabilities can function more effectively in this space.

Similarly, selecting an e-discovery vendor with experience in handling
knowledge of European banking secrecy and data privacy restrictions in
production of large volumes of documents to jurisdictions abroad is
important. In general, partnering with external advisers who already
understand the private bank's operations can be helpful in hitting the
ground running.

Managing documentation and record-keeping
European private banks are typically subject to existing record-keeping
requirements, which can vary according to the type of record. Once a
cross-border investigation or litigation begins, banks must ensure
potentially relevant data is not purged in the ordinary course of business,
as it could expose the bank to enforcement actions abroad. Any purges of
non-relevant data must be meticulously documented with a clear audit trail,
to anticipate potential challenges to the preservation practice in place.

Considering whistleblower protections
When conducting internal investigations locally that may involve transfer
of information abroad, the impact of any European whistleblower protection
laws should be considered, which may restrict how certain information
gathered from a whistleblower may be treated, as well as ensuring the
confidentiality of the whistleblower. Early involvement of external counsel
can also prevent the misuse of information gathered from whistleblowers.

Considering technology and cyber security
Some European private banking institutions may often deal with sensitive
high-profile clients. The unintended loss or theft of such sensitive client
data in the context of a cross-border investigation and litigation, where
multiple external third parties may be accessing the data, is a real risk
that can cause reputational harm as well as expose the bank to further
litigation from clients. It is important to ensure that robust cyber
security measures are in place to protect sensitive information and ensure
that technology solutions comply with local regulations.

In many cases, dedicated on-site servers can be installed, thereby
restricting the flow of data from the bank's workspace and transiting
through multiple third-party networks, where the risk of data loss is
higher.

Cultural sensitivity and language
Language issues come up immediately in any cross-border investigation, from
review of underlying documents and interviewing witnesses to dealing with
local employees and regulators.

Recognising and respecting cultural differences is crucial, as they can
impact the way investigations are conducted and perceived in different
countries. Given a wave of US enforcement actions in some European
jurisdictions, employees at private banks are often sensitive to requests
from external advisers in the context of cross-border disputes and
investigations and are wary of being potentially implicated in foreign
proceedings. Engaging multilingual external counsel with prior experience
in conducting investigations in the jurisdiction with witnesses in their
native language and with sensitivity to local culture is therefore crucial
to ensuring necessary cooperation.

When documents are being produced abroad, managing translation costs can
become a challenge. E-discovery vendors can often propose more
cost-effective AI-driven translation tools that may reduce document review
expenses.

Confidentiality and communication strategy
Assurance of confidentiality is a key driver of the European private
banking business, so efforts must always be made to ensure that any
external communication is sensitive to potential reputational risks. As the
cross-border litigation or investigation progresses, it may be necessary to
develop a clear and consistent communication strategy to manage the
associated reputational risks. Once the cross-border dispute or
investigation is made public or once it ends, certain communication may be
necessary to investors (where such entities are part of a publicly traded
parent institution) and other stakeholders, that must similarly respect all
applicable laws.

Finally, at various points in the investigation or cross-border dispute,
confidential communications to local regulators on ongoing findings may be
necessary under applicable banking supervision laws.

Originally published by Financier Worldwide.
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