Compliance Norms in Financial Institutions: Measures, Case Studies and Best Practices

By Tomasz Braun

Initially, introducing compliance functions within the financial industry had been forced by regulatory scrutiny. Later, it started to spread to other regulated companies, in particular those publicly listed. Now, compliance has become an asset of corporates that want to build their reliability among clients, shareholders, employees and business partners. This book looks at the efficiency of the compliance measures introduced and the best practices of building compliance norms.

This recently observed practice of compliance was triggered by the expectation of regulators, shareholders, clients, business partners and the public for robust compliance mechanisms. This book looks at the vast interest in this topic among business people who strive to introduce the systems and the mechanisms of non-compliance risk management in their companies and at the uncountable difficulties and obstacles they meet. The book fills the gap of thorough analysis of this subject by pointing out the solutions successfully introduced in global financial organizations, and would be of interest to academics, researchers and practitioners in corporate finance, corporate governance and risk management.

• Language: English
• Publisher: Palgrave Macmillan
• Release date: Oct 25, 2019
• ISBN: 9783030249663

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© The Author(s) 2019

T. BraunCompliance Norms in Financial Institutionshttps://doi.org/10.1007/978-3-030-24966-3_1

1. Introduction

Tomasz Braun¹  

(1)

Lazarski University, Warsaw, Poland

Tomasz Braun

Email: [e-mail]

1 Aim of the Book

The aim of this book is to present a theoretical legal analysis of the nature and function of contemporary compliance norms in corporations from the perspective of a general theory of norms based on the example of financial institutions. The term ‘Compliance norms‘ is understood as a set of interrelated norms introduced in corporations, which impose on their addressees the obligation of specific ways of behaving, whose aim is to ensure the operation of these corporations in accordance with binding laws, the administrative regulations of supervisory authorities, and other rules of conduct specified in internal normative acts of these corporations.¹ Compliance norms are, therefore, all those norms created within the framework of global business institutions, addressed to their employees, statutory authorities and shareholders, as well as to entities entering into economic relations with them. The purpose of these compliance norms are to ensure that they act in conformity with the norms binding in the territories in which these financial institutions operate, as well as with other normative recommendations, which, due to their administrative, social, economic, ethical or cultural nature, have been included by these organisations to a catalogue of binding obligations, prohibitions and empowerments.²

This book also aims to analyse the conceptual apparatus used by corporations and in particular by the financial institutions, relating to compliance norms from the point of view of the theory of norms.³ The aim of the study is also to characterise the specific properties of particular types of compliance norms. The book describes the scope of these norms together with examples and practical complications resulting from their global reach.⁴ What is also important is the real impact that these norms have on financial institutions activity today, and indirectly also on much broader global economic relations.⁵

The research described in this book covers the phenomenon of norm-setting by financial institutions corporations.⁶ As a result of it, entire sets of norms are created for entities, who have different degrees of connection with these corporations.⁷ Such activities also take place in non-financial institutions corporations, i.e. large international business institutions, that carry out other types of activities.⁸ Their common feature is that these institutions issue different types of internal regulations, the scope of which varies depending on many factors, such as the type of economic activity conducted by them, the jurisdictions in which corporates’ activities are conducted, and the various legal cultures resulting from these differences, as well as because of the place of particular norms in the internal hierarchy of those organisations.⁹

One of the reasons why all corporations, including financial institutions, create their own global norms is the need to ensure consistency across their activities, despite the differences that characterise individual markets.¹⁰ All corporations, including large financial institutions, strive to create conditions for the uniform and therefore coherent development for their operations, among others, in the area of corporate governance and compliance.¹¹ The latter area is especially worthy of attention due to its growing importance and dynamic development, and it is the subject of analyses carried out in this book.

Compliance risk management is understood as the management of risk, due to a corporation not entirety conforming its activities to the binding norms in their environment.¹² It has developed mostly in companies operating in the regulated sectors (finance, financial institutions, insurance, pharmaceuticals, energy). It is noteworthy that the development of compliance in other areas (automotive industry, biotechnology, passenger transport, environmental industries) has also become more and more noticeable in recent years. Each of these areas is characterised by the need to take action to ensure compliance of their operations with the requirements resulting from their respective normative environment.¹³ Legislators have a duty to take this new dynamic phenomenon into account and the theory of law, including the theory of norms, to examine it and their impact on the effectiveness of the law.

The normative environment of financial institutions consists both of legal regulations resulting from the law-making activity of states, and the international organisations empowered to issue the regulations, which define the formal framework of their activity, as well as non-legal norms, including in particular the regulations of administrative supervisory authorities. The normative environment of financial institutions, as understood in this book, are also administrative decisions resulting from the proceedings against them, self-regulations issued by the industry organisations of which they are members, and other norms resulting from self-regulatory activity of financial institutions.¹⁴

The complexity resulting from their legal and regulatory environment, as well as from the different weight of issues in the area of compliance, and from different scopes of regulations concerning the activity of financial institutions, results in the creation of their own meta-norms. The nature of them differs from each other. These differences, taken together with the place these norms occupy in the hierarchy, and the objectives they are intended to serve, constitute the basic criteria for distinguishing the different types of norms.¹⁵

According to these criteria, four basic types of compliance norms can be distinguished, with the proviso that their nature may differ from one financial institution to another and that, apart from the basic types listed here, there are also other types of norms, more broadly characterised in the following part of this book. It should be noted here that the division listed below concern the types of compliance norms and not normative acts that may contain such norms. Apart from specifying individual types of compliance norms, the same notions are also used to designate internal normative acts, which may include both compliance norms and other types of statements, including statements that are not of a directive nature.¹⁶ These four types of compliance norms are principles, rules, recommendations and guidelines.

a.

Principles are understood as binding internal norms within the compliance system of a given corporation, which in this system occupy an overriding, directional position in relation to other norms, and play a role of setting the framework for all actions that should be taken.

b.

Rules, on the other hand, set out the desired behaviour in such a way that the addressees can only either fulfil the obligation imposed on them or breach it if a situation other than that indicated takes place.

c.

Recommendations are the compliancenorms, most often formulated as a result of controls, reviews or audits, which require actions to be taken, as a result of which the state of compliance with the applicable law or supervisory regulations is restored.

d.

Guidelines indicate the desired pattern of conduct, determined as a result of the way in which corporations interpret and apply applicable laws or supervisory regulations.

There are eleven basic ways of grouping compliance norms, which can be distinguished based on the criterion of weight and object matter regulated. These are: norms, principles, rules, policies, strategies, codes of conduct, manuals, instructions, recommendations, guidelines and regulations for direct application. As a result, the extent that they act as a binding force on the entities to which they are addressed also varies. The creation of compliance norms takes place in a dynamic legal, regulatory and economic environment and in areas of very different jurisdictions, i.e. the legal cultures in which international financial institutions corporations operate.¹⁷ What is more, the expectations of financial institutions expressed by their own stakeholders other than legislators and regulators, such as shareholders, employees, customers, the general public, non-governmental interest groups, etc., are also different.

Compliance norms created in such complex circumstances, which at the same time take into account the dynamics of changes in the environment and the expectations formulated towards the financial institution, are characterised by three common features. First of all, they create their own autarkic systems.¹⁸ Secondly, the feature that characterises compliance norms is that the process of creating parts of them often takes place spontaneously.¹⁹ Thirdly, as a result of the spontaneous creation of parts of the compliance norms, the non-unified terminology used in them is largely the result of this methodological disorder. The description and analysis of these norms in terms of a general theory, as well as the links between them, the interaction between them, and the effects of the wider and dynamically changing legal and regulatory environment of financial institutions, including cultural differences characteristic for a diverse area of their operations, is therefore the aim of this book.²⁰

2 Methodology

The book examines the relation between compliance norms and the wider legal, social, economic, cultural and axiological environment within which they are located. The theses of this work emerged from observations concerning the interrelation between the regularity environment and compliance norms and was derived from detailed research into the operation of financial institutions, and observations concerning the wider economic space, in which they operate.²¹ This allows for a richer illustration of the phenomena and relations occurring within financial institutions, and to check the hypotheses put forward in this book.

The compliance normative regulations of financial institutions, and their practical application also vary due to differences in the legal cultures typical of different geographical areas. This was also the subject of research described in this book. The book describes of what financial institutions do and what in the ideal situations they should do in order to assure the coherent system of compliance norms. The text provides the analysis which is led from the point of view which repeatedly is called as a ‘legal theory perspective’ or ‘general theory of norms’ perspective. There is a variety of methods of analysis that could have been proposed here. This in particular refers to this part of the business law which relates to compliance norms.

Often, in the common law academic tradition it is expected the researchers ask about interdependencies between the letter of the laws (including the soft laws and internal companies’ norms) and its spirit, primary intentions of the law-makers, the goals the norms are intended to achieve. They also analyse the impact of these norms on the business activities and how they influence the corporate practice. There is a multitude of questions that could be asked solely to this last problem. Starting from the governance practices, conduct towards the markets and the clients, internal employees’ relations, attitude to discovered irregularities, etc. The book in various ways addresses these questions and to various degrees provides examples of how these norms function in practice. The book refers to different problems—starting from norm-setting, through their implementing and interpreting, looking at the complexities deriving from the internationality of financial institutions, regulatory pressures up to the impact these norms do have on individuals, markets, societies and the companies themselves. The book only to a limited extend focuses on explaining why norms took their form and whether their shape is a result of a particular interest groups lobbying. But it does refer in relevant places across the text to the norm-setting processes.

The practice of norm-setting activities carried out by multinational corporations, including financial institutions in particular, has been developing for some time. It is also the subject of working arrangements between entities of a similar nature. This phenomenon has been noticed by market regulators, NGOs representing the interests of customers and opinion-forming think-tanks. Despite this, and undoubtedly contrary to the juridical character of the compliance norms, it is still relatively under researched area.

The emergence in the international arena of compliance norms relating to the complex system of economic and financial dependence is a sustained trend that is becoming more and more widespread. This phenomenon should be permanently included into research concerning legal theory. Furthermore, it also illustrates the problem when law and other disciplines, including economics, management, political science and other social sciences, as well as descriptive ethics, intersect with each other.

Due to the internal nature of compliance norms, and the fact that these studies covered specific institutions with robust confidentiality regimes,financial institutions, information on the process of creating these norms, but also on the guidelines relating to the scope of their application, are often available only to a very limited extent. This was an important element that had to be taken into account, when the research hypotheses of the work presented in the book were formulated, as it imposed limitations on the study.²²

The practice of corporations’ norms-setting activities described in the book was narrowed down to one particular type of business actor: the financial institution, for during the period from the end of the twentieth to the beginning of the twenty-first century. The scope of the book is also limited to law-making activities informed by the West’s legal culture, in the sense that it is not limited to one country but multiple jurisdictions.²³

3 Assumptions

The analysis undertaken in this book is based on the statement that regardless of the sources of universally and internally binding law described in legal doctrine, the phenomenon of conducting quasi-law-making activities by corporations—international business institutions—is becoming more and more obvious. The first and main hypothesis for this book is therefore the statement that within the activities of modern corporations, including financial institutions, new types of abstract norms are being created, namely compliance norms which, although they are similar to legal norms, they have so far been insufficiently described by the theory of law. Consequently, the second hypothesis is that as a result of these activities there are whole sets of norms with different degrees of interconnections, which regulate the activities of entities and behaviours of persons linked or not linked with these corporate norm-makers. In the case of this book, the hypotheses are put forward ex post, as they constitute generalised conclusions drawn from the facts observed from the practice of functioning of international financial corporations.

The above-mentioned hypotheses are answers to the primary and secondary questions, detailed problematic questions, which relate to causal relations and other relations that are examined below. The working hypotheses that appear in the course of research correspond to the issues related to the research topic of the book and take the form of answers to the research questions listed below. They were formulated in order to examine the research gathered for this book. In the following part of the book, however, they are general statements that are illustrated by examples. Some of these working questions arose directly from the main research hypotheses presented above, and others are indirectly related to them. They represent aspects of the issues analysed in this book, and illustrate the complexities resulting from the analysis of the data. These questions are divided into five groups that are presented below.

These questions relate to the origins of self-regulation by corporations, including financial institutions, whose aim is to ensure that they operate in accordance with the normative systems applicable to them, understood more broadly than just legal regulations. Although the book does not focus on the reasons for the development of compliance norms, the answer given indirectly in the book to the questions concerning the reasons for why such a phenomenon occurred is important for research aimed at what the compliance norms created by financial institutions today are. These answers, explaining the source, but also the manner of the implementation and the content of compliance regulations, indicate, on the one hand, the social expectations (expressed in legal and supervisory norms) towards financial institutions, and on the other hand, the numerous irregularities detected in the functioning of these institutions. Among the questions that arise during the analysis of contemporary phenomena that are the sources of compliance norms, four basic questions come to the fore:

a.

Why are compliancenorms being created at all?

b.

Does the development of compliancenorms result from specific needs relating to social expectations and, at the same time, arise from the need to fill gaps in the existing legislation?

c.

Is the phenomenon of creating compliancenorms really so new, or can one observe its origins in medieval trade guilds that persist still in today’s corporations?²⁴

d.

Can this phenomenon to be traced back to the expansion of the regulatory sphere and the emergence of new spheres of society in which legislators do not yet have a strong enough presence to prevent the emergence of irregularities in the functioning of financial institutions?²⁵

Compliance norms do not only play the role of ensuring that operations measured by financial institutions conform correctly with the law. But they also relate to social expectations, by imposing certain behaviours and prohibiting others, and as such they constitute a form of self-restriction imposed by financial corporations on themselves in areas where the law and supervisory regulations are silent. This is particularly the case with regard to those issues where legislators are lagging behind in responding to changing economic circumstances, and the complex types of global transactions. This raises three questions about compliance norms:

a.

What is the role of the current compliancenorms?²⁶

b.

If compliancenorms are created because of the need to fill gaps in existing legislation, what are these gaps and what needs are covered by the creation of such norms?

c.

Do regulatory and supervisory deficiencies need to be addressed by compliancenorms because legislators are not keeping pace with the pace of change today?

These are key questions from the point of view of the research described in this book. They refer to the scope of norms, i.e. to those issues which, in various aspects, are the subject of the analysis presented here. Below are four questions belonging to this group:

a.

Which areas are regulated by financial institutionscompliancenorms, and which entities are subject to such regulations?

b.

Do they form unified systems of norms, or a loosely bound system, or are they unrelated and do not form part of the larger regulatory elements for financial institutions?²⁷

c.

What sets of norms do compliancenorms comprise of and what sets of compliance norms should be created by financial institutions issuing such regulations (deontological codes of conduct, gatherings of rules of ethics, prudential norms, etc.)?²⁸

d.

Is the scope of the provisions of these norms being extended to cover new business areas of financial institutions and other corporations over time?

The primary reason for creating compliance norms is to ensure that financial institutions operate in compliance with legal norms. In practice, however, one can get the impression that the scope of compliance norms is becoming wider and wider. and corporations are creating their own norms, which relate to new issues that are not necessarily already regulated by the law. The book contains examples that relate to the following six questions:

a.

Do compliancenorms supersede fixed, publicly established elements of legal systems, occupying ever wider fields, or merely supplement existing legal provisions without replacing them at all?

b.

Can a conflict be observed in this connection: legal versus non-legal norms, although it is similar to them, are legal norms compatible with corporate norms?

c.

If such a conflict exists, how is it settled in practice?

d.

What attitude do financial institutions adopt, and what attitude should be adopted by publicly empowered lawmakers towards this phenomenon?

e.

Is there a conflict between public lawmakers and quasi-lawmakers? And, if so, is it manifested in the discrepancies between the public and private regulations?

f.

Do the addressees of compliancenorms, including in particular consumers but also entire communities, benefit, or perhaps lose out, from the fact that the norms affecting their rights and obligations are set by entities which are not public law-makers?²⁹

One of the justifications for the creation of compliance norms is that while there is not a global legislator, economic corporations, with their geographical reach, and their mutual economic interdependencies, together with the related social and economic processes that occur—are all global. However, although these phenomena are subject to globalisation, the understanding of norms, and so the way they are interpreted remain culturally determined. This book seeks to consider these issues through research aimed at answering the following two questions:

a.

What is the impact on the interpretation and application of compliancenorms of the different legal cultures in which corporations operate?

b.

Is there a conflict in the way in which the same rules are applied, due to a different understanding of the same rules depending on cultural legal differences, and how are such conflicts possibly resolved?

4 The Problem Significance

In order to illustrate how many serious problems of both a theoretical and practical nature appear in the financial industry contemporarily in relation to compliance norms, five examples were selected. They demonstrate the difficulties that arise from the expectation that intra-corporate compliance norms will be applied regardless of the legal norms governing the same issues in different jurisdictions. Such expectations are formulated both in relation to international financial institutions structures, but it is also similar in other types of international corporations. In order to facilitate comparison, the same organisational structure has been employed for all of the examples, by first by presenting the circumstances (reasons) that gave rise to the need for compliance norms, then the resulting complications, in order to finally show the possible solutions for their resolution.

The first very typical situation in which there are often problems consist of discrepancies between the compliance norms that were established by corporations, and the domestic norms of law is the so-called matrix organisational structure. This is where a separate system that runs in parallel to the official one, which is different from the structures regulated by the local commercial companies’ laws, internal company statutes and organisational regulations.³⁰ This results in the imposing of certain additional reporting lines, that are binding within the corporation, on top of the established business dependencies, whose task is to ensure the direct subordination of employees of one organisation to persons from outside the organisation, most often employed in the headquarter. As a result of the introduction of such informal organisational subordination, day-to-day decisions concerning the activities of a given institution are de facto taken in centres located outside the formal bodies responsible for financial institution management.³¹ Such situations are the not the exception, but are rather the rule in international financial institutions, in which it is these informal structures, and not the hierarchical arrangements in accordance with national legal norms, that are decisive for making the most important decisions.

However, these corporate decision-making power structures can cause practical complications. These issues have different dimensions—from the employee’s legal status (for example, this concerns decisions relating to the way of providing work, evaluation of its results, principles of remuneration and bonuses, etc.), through to the organisational (for example, issues of mutual settlements of costs that are borne by individual entities, prioritisation of individual tasks, etc.), to the fundamental one concerning giving appropriate attention to the individual interests of a given company (an example may be the situation where decisions concerning the operation of a given financial institution do not take into account what serves its best interests). However, it is of fundamental importance that such problematic corporate governance is contrary to both legal norms and the guidelines of regulators responsible for ensuring that the operation of their subordinate institutions are controlled correctly.³²

In this type of situation, there is in principle no solution, which, on the one hand, would make it possible to reconcile the interests of the entire corporation as formulated by various compliance norms, whose task in this case is precisely to ensure the consistency of the entire capital group, and, on the other hand, would guarantee that the financial institution would operate in accordance with the legal and regulatory norms in force in a given area. The most common solution to this issue is based on the use of double reporting lines. These consist of an informal obligation for financial institution employees to accept the principle that, regardless of the formal hierarchy of an entity, there is for them a parallel informal subordination of the senior positions in the corporate hierarchy, which performs the role of superiors for them. These so-called ‘functional’ or ‘dotted reporting lines’ exist alongside the formal reporting lines resulting from norms interpreted by local law (‘solid’ or ‘entity-based reporting lines’). Such a solution has many drawbacks, all of which are of a similar nature, since they presuppose the introduction of a solution that is clearly at odds with the overall legal and regulatory environment in force in a given jurisdiction. Among the uncertainties that arise from such a solution is, for example, that of a situation where risk management issues are transferred to a centre outside the financial institution, or where high-risk business decisions, or decisions in general, are made outside it. They can be classified as management decisions for the whole entire institution, which are strictly reserved for the competence of its management body.

Another, completely different, situation described in this book, which raises just as many legal doubts and therefore deserves detailed studies, is the frequently occurring practice that there is an expectation that information will be transferred between entities within the corporation, regardless of the secrecy regimes in force in particular jurisdictions. These secrecy regimes also apply to other financial institutions, which are formally third parties despite being part of the same group.³³ The nature of this information may, of course, vary and may have completely different purposes. Starting from the need to collect the transaction data of clients, which would be necessary for making business decisions outside the structure of the financial institution, through to the personal data of these clients, but also of employees, to data on the final beneficiaries of individual entities involved in cooperation with this institution.³⁴ It should be noted that, depending on the perspective of the problem, there are, of course, important arguments, particularly clearly visible from the perspective of the interests of the whole corporation, which argue in favour of recognising such expectations as legitimate.³⁵ This is precisely the advantage that large financial institutions have over the smaller ones, that they have among their capabilities, apart from other things, access to a multi-source extensive database of information. However, this does not change the fact that local laws do not usually allow for the freedom of such movements involving information legally protected by qualified forms of confidentiality.

This issue can be examined from a range of perspectives. It can be considered that the dissemination of information in the case of a large international financial organisation is not only useful, economically advantageous for making knowledge-based decisions, but also necessary to ensure its proper functioning, as it may reduce various types of risks (including, for example, the risk of external and internal fraud, the risk of infiltration by people involved in money laundering, etc.). In this context, compliance activities consisting of launching processes and creating uniform intra-corporate norms aimed at ensuring the sharing of this type of information should be considered understandable and justified. On the other hand, however, there are no valid legal arguments that would prove inapplicable to corporations’ norms that define the obligations to ensure the security of data held by financial institutions.³⁶

As in the previous example, it is very difficult to unequivocally determine how to eliminate the conflict between corporate compliance norms and the local norms of law. In practice, any solutions used in similar situations usually consist of accepting compromise solutions, usually related to making certain concessions in order to take into account the requirements of the whole corporation, with a partial limitation of the scope of the data provided in relation to the originally formulated expectations in this respect. However, depending on the type of data concerned, there are also sometimes steps which, albeit in part, sanction the financial institution’s non-compliance with legal norms, such as the collection of stakeholder approvals (although in many situations, obtaining consent alone does still not mean restoring compliance, since such consent may not necessarily have to be taken under conditions of full freedom, etc.). The long list of outstanding legal issues arising in connection with issues relating to the flow of protected information between theoretically third parties within a corporation proves the complexity of this type of subject matter.³⁷

Yet another situation that gives rise to legal dilemmas which are difficult to resolve is the fact that there are compliance norms which require financial institutions to comply with the principle of full tax transparency, including in particular the prohibition of tax avoidance. The following factors may be taken into account when deciding whether a financial institution should comply with the principle of full tax transparency. Investors clearly expect that the tax efficiency and appropriate organisational structuring of the whole corporation will ensure the highest return on their investments. This can result in an understandable collision between the demand for tax transparency and the expectation of maximum economic efficiency.

Complications have arisen in such a situation when a corporation declares publicly that it is transparent, to avoid taking any action that might give rise to the suspicion that their purpose or nature may be related to an evasion of their obligations related to a fair settlement and payment of any public law contributions. Moreover, the obligations declared by financial institutions, not only towards tax authorities, but also towards investors, public opinion of employees, etc., impose obligations on the organisation undertaking such activities, but also on its clients, correspondent financial institutions and other cooperating entities. It is therefore a desirable effect of compliance norms, that its scope extends far beyond the circle of entities directly related to internal financial institutions regulations.

However, there is other side to this issue, that causes further complications in the area of tax obligations. This concerns the clear expectations of markets and investors in this regard. These expectations are based on the use of all legally available solutions labelled as the optimisation of tax liabilities. In a simplified way, the aim is to take advantage of the opportunities offered by the simultaneous presence on many international markets, where tax obligations are often shaped differently, and thus by skilfully constructing organisational structures and the interdependencies between them, so that the total final amount and method of settling tax liabilities are more advantageous than their total amount would have had such opportunities not been taken into account.

An imperfect, but often employed solution is the preparation, by financial institutions of special documentation, the content of which assumes an absolute obligation to comply with the tax transparency declared by a given corporation, which are offered to clients and associates to sign. In specific situations where the refusal by third parties to undertake such obligations could result in financial losses, expose the financial institution to the risk of penalties or other sanctions, or there would be a risk of reputation damages, it is not uncommon practice to terminate relations with such clients.

Similar in nature to those above, are those issues regarding the operation of compliance regulations within the corporation, which require the exit from the existing business relations, as well as not concluding certain types of transactions with certain types of entities, which could carry risks, other than market or credit risks, at a level unacceptable to the corporation. Situations of this kind are special in that such expectations are often formulated in relation to entities for which the risk may be quite subtle and difficult to measure objectively, while for subjective reasons it is defined as being contrary to the interests of the financial institution.³⁸ Some of these reasons are, of course clear (for example, transactions such as arms trade, financing trade with embargoed countries, etc.), which make it possible intuitively assume the validity of such regulations. However, there are other transactions which financial compliance norms may prohibit, even though their conclusion would not incur a reputation risk at all. In this book the notion of reputation risk will be defined as an action that will have an adverse effect on the institution’s public image.³⁹ An example is the prohibition of accounts for diplomatic missions and the financing of US dollar transactions in which one of the parties has its registered office or residence in sanctioned countries.

Naturally, such an approach is difficult to justify on the basis of objective criteria. I may also give rise to significant doubts on the part of investors and employees expecting financial institutions to take action to grow. It is clear that a selective and, at the same time, unclear approach to customers and transactions can lead to a loss of competitive advantage and, over time, of market share and expected profits, even though, in principle, the institution is predisposed to finance such transactions, which it avoids in this case, given the global scope of its activities. What is more, especially in the case of these vague criteria, which are the basis for creating compliance regulations that are to be imposed no specific transactions, there may even be accusations based on the suspicion of discriminatory practices by financial institutions due to the lack of such prohibitions in legal norms.⁴⁰

In this type of situation, there are generally no compromise solutions that would allow for the reconciliation of compliance guidelines requiring an institution from refraining from specific actions, and the norms of law in force locally, which do not formulate such prohibitions. Of course, from the practical point of view, this problem can be considered relatively easy to solve by simply recognising that since a given financial institution can make autonomous decision to act on special compliance regulations that obligate it not to establish certain economic relations, the lack of such a ban in legal norms resulting from mandatory legal regulations does not exclude the possibility of freely shaping the business model conducted by the financial institution precisely by establishing such internally binding bans. However, this is not such a one-dimensional situation in the sense that the theoretical absence of contradictions between certain prohibitions and the absence of such prohibitions, and thus the very absence of exclusion of these regulations means that they do not contradict each other only in so far as, as they do not belong to the same normative order, as they are different in nature. On the one hand, these are ‘only’ norms of compliance, and on the other hand, ‘as much as’ norms of law.⁴¹ However, the observation of economic reality most often leads to the conclusion that stakeholders do not necessarily perceive this difference as a non-contradiction.

An example that can be classified as a kind of complications described here, between internal regulations created by corporations and norms of law binding locally, is a situation in which the source of these corporate norms are guidelines issued by regulators of some countries requiring certain actions in foreign jurisdictions other than those expected by domestic regulators in that jurisdiction.⁴²

This kind of cross-border activity by some regulators is even accompanied by an omission to inform the regulators from a given country about it. Such situations frequently occur in the operating conditions of international corporations, especially those which have their main decision-making centres in jurisdictions where regulators are particularly active. This is often the case when they are headquartered in the main financial centres, where many corporations are based, that regulators are generally very much involved in activities aimed at ensuring control of financial institutions.⁴³ This control often takes the form of requirements which are not known in other, less advanced markets. At the same time, these regulators reserve the privilege of controlling all corporate activity, including those which takes place in its structures present in other jurisdictions. In order to ensure compliance with these regulatory requirements, corporations impose obligations on their subsidiaries in other countries that are unknown in these markets.

The complications resulting from this state of affairs relate primarily to the fact that, without a valid authorisation, the power of some regulators in relation to others, where regulators from jurisdictions with more advanced methods of control and regulation of multinational corporations operate, is widening. This is usually done by means of intra-corporate norms created by the compliance function, which in this case performs the function transmitting regulatory obligations from the home markets where the financial institutions‘ headquarters are located. These compliance norms from parent companies are passed on to subordinate companies, but also to companies that do not belong to the ownership structure, but to companies, which cooperate with the corporation or its subordinate companies. These obligations may range from capital requirements, through to business continuity obligations in the event of unforeseen events, orders to provide the regulator with information relating both to the financial institutions themselves and to the entities they serve, etc. The obligations in question may range from capital requirements to the obligation to ensure business continuity in the event of unforeseen events. Their distinguishing feature in the context of the problem described here is the source of their origin located in another jurisdiction and, at the same time, the lack of a similar obligation in the country in which the corporations recommend their use.⁴⁴

Looking at how such a problem is being addressed, it should be noted that the practical approach is to comply with the recommendations of compliance norms, recognising that such recommendations do not adversely affect the day-to-day operations of the financial institution. However, the specific scope of such additional obligations is usually not communicated to the local regulator, except when explicitly requested to do so. The interpretation of whether additional obligations imposed on local financial institutions by foreign regulators may adversely affect their operations is difficult to determine as it depends on how broadly defined the categories of what is and what is not disadvantageous. Outside the scope of these considerations, remain obligations that would require operating contrary to local law. However, it is worth pointing out that even such norms, in which a financial institution would face tasks requiring additional resources in order to achieve compliance with conditions which would not exist if it were not for the requirements of a foreign regulator, could be considered unfavourable for the local financial institution.

These issues, like the other problems mentioned above, create legal and ethical dilemmas, that can be considered from a practical point of view. These examples show that the sources of these problems are often the globalisation of economic processes and the associated cross-border scope of intra-corporate regulation. On the other hand, if we analyse these problems from the theoretical-legal position, it opens interesting areas of research that are worthy of exploring.

5 The Current State of Research

Particular attention was paid in the research to the analysis of the relevant literature, and more specifically to findings relating to comparative issues. This applies in particular to those norms that arise in relation to financial issues. These more theoretical studies have been enriched with conclusions derived from detailed studies of several hundred reliable primary sources of information.⁴⁵ These materials include:

a.

a set of published internal regulations, including financial institutions’ compliance regulations;

b.

classified documents constituting internal sets of compliancenorms and accompanying interpretative guidelines;

c.

working documents of international business associations;

d.

guidelines of financial market regulators; and

e.

thematic analyses, reports, white and green papers.

Writing this book in this manner, i.e. with references to practical examples taken from modern legal transactions and an attempt to classify them in relation to normative theoretical and legal issues, would not have been possible without the accumulated knowledge and experience gained in the course of work in a corporate legal practice. The theses presented in this book were also possible thanks to the observations made for many years as the person responsible for the management of the legal as well as compliance areas, and co-participating in the management of entire financial institutions. This experience also included participation in numerous intra-corporate and industry forum discussions on