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DePaul Business Law JournalFall/Winter 1994

Note*143 TOWARDS THE NEXT PHASE IN INTERNATIONAL BANKING REGULATION

Thomas F. Mcinerney III

Copyright © 1994 DePaul University; Thomas F. Mcinerney III

I. Introduction

International banking activity has grown in both volume and speed. Individuals and corporations movetrillions of dollars across borders with incredible ease. The speed of these transactions makes regulation in-creasingly difficult. International banking has become a mainstay, rather than an exceptional part of com-merce, as almost one-third of total bank assets are international in character. [FN1] Although not widely dis-cussed, evidence suggests that international banking is no longer the exclusive province of the developedWest with developing countries now the source and destination for international movement of funds. [FN2]Unfortunately, the current regulatory system is inadequate to deal with these new challenges. Notwithstand-ing recent reforms in the United States and Europe, destabilizing activity will continue, due in part to thelack of binding, uniform laws in all countries with international banks.

*144 The risks inherent in international banking fall into roughly three categories: 1) systemic risk--therisk that the world's entire banking system could collapse in the event of a significant bank failure, 2) safetyand solvency risks, through imprudent lending or trading activity, and 3) risks to depositors, through thelack of adequate bank insurance. [FN3] In addition to imprudent and destabilizing risks, the inefficiencies inthe current regulatory regime may render the banking system unable to prevent significant illegal activitiessuch as money laundering.

A widely followed scandal involving the Bank of Credit and Commerce International (BCCI) awakenedthe international community to the severity of the risks posed by regulatory gaps in international commerce.Through widespread fraud, deception and money laundering, [FN4] BCCI was able to conceal its insolvencyfor a number of years, eventually resulting in the failure of a $20 billion bank. BCCI cloaked its fraud underthe auspices of a large number of branch banks throughout the world, including the United States, WesternEurope, and the Middle East. [FN5] In all, BCCI operated in seventy-six countries. [FN6] By exploiting thegaps in the regulatory regimes of its hosts, BCCI was able to escape regulation and elude authorities for dec-ades. Eventually, the fraud was exposed. As a result of BCCI's illegal activities, various actors suffered civiland criminal penalties, and its assets were seized by United States Regulators on the basis of "long-term,widespread fraud." [FN7] The lack of comprehensive regulation over much of *145 BCCI's operations pre-vented earlier diagnosis and led to its insolvency with sustained losses estimated at $10 billion. [FN8] Theproblems associated with the BCCI breakup can be explained away as simply the result of serious fraud,which is understandably difficult to overcome. An analysis suggests, however, that inadequate supervisionover BCCI's international activities may have contributed to its failure. [FN9]

Recent measures intended to deal with the problems in the current system have been limited. Thesemeasures suffer from two chief defects. First, the measures tend to be suggestive rather than legally binding.Second, when defining the relevant standards, the measures exclude many countries from active participa-tion. Without significant changes allowing for stronger controls, the potential for the recurrence of a BCCI-

7 DPLBLJ 143 7 DePaul Bus. L.J. 143(Cite as: 7 DePaul Bus. L.J. 143)

© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

type scandal remains undiminished. The costs associated with these risks are not limited to losses resultingfrom insolvencies, but also involve costs incurred through violations of criminal law.

This article will attempt to outline a possible response to the existing inadequate supervisory landscape.It endorses many of the current reform policies, yet seeks to create a wider, multilateral solution. The articleproposes going beyond prior tentative and ad hoc endeavors. It will not focus on any particular case study,but will refer to various historical events as examples where appropriate. In so doing, the article proceeds inthree main stages. First, the article provides an analysis of the current system of regulation of internationalbanks. Second, it considers enhanced regulations and possible areas of improvement. Finally, the articleprovides an analysis of the relevant principles of public international law and possible grounds on which tobuild an international legal framework.

II. Background

Under the current system of international banking regulation, host countries, or countries allowing for-eign banks to do business within *146 their borders, have primary responsibility to regulate banks and con-trol criminal activities. [FN10] The system suffers from the defect of overlapping supervisory roles betweenhost and home countries. Such overlap diminishes the overall effectiveness of regulation and creates littleguidance for regulators. [FN11] This article will analyze the unilateral efforts of host countries. It will thenassess international regulatory controls which are designed to "patch up" the holes left by the ambiguous andincomplete assignment of responsibility in the current system.

A. Current Regulation of International Banking Activities

The International Banking Act of 1978 [FN12] controls the operation of foreign banks in the UnitedStates. [FN13] Under the dual system of regulation between federal and state governments, both the FederalReserve and state banking authorities must approve the establishment of foreign bank offices incorporatedunder state law. [FN14] In addition to these institutional constraints arising from federalism, regulation ofbanks is split further within the federal government itself. [FN15] Indeed, the Federal Reserve Bank, the Of-fice of Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) all shareauthority to examine foreign banks operating in the United States. [FN16] Although Congress charges theFederal Reserve Bank with conducting general supervision of foreign banks in the United States, the FederalReserve's mandate allows it to rely upon evaluations done *147 by the OCC, the FDIC and state regulators.[FN17] These sometimes complementary and sometimes conflicting supervisory responsibilities may pre-vent full regulation of a single bank even within the United States. [FN18] The difficulties of regulating in-ternational banks are only exacerbated by the split responsibilities of the regulatory authorities. This splitmay enable foreign banks operating within the United States to avoid regulation.

In spite of these significant complications, the possibility of comprehensive domestic regulation has in-creased due to the development of the Society for Worldwide Interbank Telecommunications (SWIFT) andClearing House for International Payments Systems (CHIPS) systems in New York. SWIFT and CHIPS areclosed circuit, computerized systems which banks may use to send payment communications. These entitiesmay provide an additional fulcrum for domestic regulators to apply when seeking to uncover illegal anddestabilizing transfers of funds. [FN19] Moreover, the fact that these systems are located in the UnitedStates creates some leverage over other countries seeking to use the system. [FN20] The existence of elec-tronic systems like SWIFT and CHIPS goes some way towards reducing the opacity of financial corpora-tions and may decrease the risks associated with international banking.

The United States Congress responded to the BCCI crisis by enacting the Banking Reform Act of 1991(Act). [FN21] The bill requires increased monitoring of foreign banks, as well as increased capital reserves.



[FN22] Under the Act, banks are required to: 1) provide deposit insurance for all deposits under $100,000,2) secure approval of the United States Federal Reserve Bank before opening a branch, while allowing theFederal Reserve the ability to examine and close such *148 branches, and 3) to report loans that are securedby 25 percent of an insured depository institution's capital. [FN23] The Act also imposes a criminal penaltyfor violations of the International Banking Act of 1978, and increases civil penalties for filing false or mis-leading reports. [FN24] Although valuable, this new regulation may represent another in a long series of in-cremental attempts by the United States, in response to a crisis, to regulate foreign banks. [FN25] Nonethe-less, the Act appears to minimize the federal/state regulatory dichotomy while increasing the scope and mag-nitude of sanctions regulators may employ.

In addition to these measures, the United States has entered into certain bilateral agreements which mayhave improved its ability to control the use of banks as havens for criminal activity. The United States hasnegotiated a number of treaties with foreign governments which provide for mutual assistance in internation-al penal matters, applicable to the criminal investigations of banks. The United States is currently party toseventeen treaties to provide mutual legal assistance [FN26] (MLAT) with foreign governments. [FN27] TheUnited States negotiated its first such treaty with Switzerland in an attempt to track down illicit bankingtransactions. [FN28] Although the treaty allows for *149 mutual assistance in many areas, a large number ofpractices and offenses are outside the scope of the agreement. [FN29] Nevertheless, this treaty has provenhelpful in providing information and producing convictions for certain offenders. [FN30]

Although MLATs assist in obtaining some convictions, they provide only a bilateral framework for ad-dressing these concerns. As the BCCI case demonstrates, numerous holes can develop in this framework, es-pecially if a country is not one of the seventeen with which the United States has a treaty. Moreover, theMLAT framework functions only as effectively as the individual state parties desire. Because internationalbanking crimes, arguably, affect all nations, the international community may be best suited to deal with theproblem. Nonetheless, the existence of MLATs does help to bolster the power of domestic regulators to pre-vent destabilizing and criminal activities.

B. European Initiatives

As the European states move towards unification and a single market, they have begun to create a uni-form, international regulatory system. The European Economic Community (EEC) adopted a significant pro-gram of cross-border banking liberalization through the Second Banking Directive, [FN31] which will per-mit banks within the EEC to have free access to all member states. [FN32] The creation of the single *150EEC banking market will of course require basic uniformity of supervisory standards. [FN33] Although theEEC is a closed system, its overlap and coordination with the Basle Committee (G-10 States) points to abroader, more international influence. [FN34]

Given the widely divergent practices among the EEC members, the common banking market is seen asan emerging institution, developing over a period of time. [FN35] The EEC banking supervisory system maybe reduced to three main tasks: 1) harmonization of capital requirements and monitoring of liquidity, 2) mu-tual recognition by domestic supervisory authorities of the duty to promote harmonization, and 3) allowinghome country control through coordination of domestic efforts. [FN36] Both elements (2) and (3) may leadto similar problems as has domestic regulation in the United States; enforcement is predicated on homecountry efforts, thus creating the potential for ineffective regulation when home and host countries fail tocommunicate. Nevertheless, the potential for gaps arising as a result of cross-border branching was first ad-dressed by the First Council Directive, which requires all branches of a single bank to be monitored on aconsolidated basis. [FN37] Moreover, banks operating outside of the home country may be able to act withde facto impunity for illicit and destabilizing transactions, insofar as the host country supervisors may beless interested in prosecuting fraud or promoting stabilization in another country.



*151 The structure of the EEC banking system requires banks seeking to establish new branches abroadto receive the authorization (licensing) of the host country prior to entry. [FN38] Under the First CouncilDirective, three conditions must be met prior to licensing. First, the bank must possess its own funds.Second, it must possess adequate minimum funds of its own. And last, there must be at least two managerialpersons to supervise the bank's activities in the host country. [FN39] Host countries are empowered to mon-itor the banks after they become operational. The host country should establish capital and solvency ratiosapplicable to the banks to ensure prudential banking practices. [FN40] Member states must cooperate andcoordinate their efforts in monitoring the bank.

(M)ember states shall supply one another with all information concerning the management and owner-ship of such credit institutions that is likely to facilitate their supervision and the examination of theconditions for their authorization and all information likely to facilitate the monitoring of their liquidityand solvency. [FN41]

Banks which fail to meet the capital requirements of the host country, or which have fraudulently obtainedauthorization are subject to recision of authorization. [FN42] Finally, the First Council Directive sets up anadvisory committee charged with ensuring that the EEC banking system functions properly. [FN43]

The Second Council Directive builds on the previous framework and further enhances the European reg-ulatory system. The main achievement of the Second Council Directive is the establishment of a singlebanking license, valid throughout the EEC. [FN44] This new system squarely places responsibility on thehome state for ensuring the financial soundness of the bank abroad. [FN45] Moreover, the home state mustensure that each bank has "sound administration and accounting procedures *152 and internal control mech-anisms." [FN46] The First Council Directive was also amended to require host countries and home countriesto share "(A)ll information likely to facilitate the monitoring of such institutions, in particular with regard toliquidity, solvency, deposit guarantees, the limiting of large exposures, administrative and accounting pro-cedures and internal control mechanisms." [FN47]

Nevertheless, host states retain responsibility over liquidity supervision with the competent authoritiesin the home state, until more adequate coordination can develop. [FN48] Such a provision may seem some-what disjointed given the responsibility of the home state for adequate internal controls. Upon further reflec-tion, however, it fits within the host country's responsibility over domestic monetary policy. The foreignbank is equally subject to host country monetary policy. [FN49] Important to the system is the notion of "mu-tual recognition" of foreign banks across the EEC. [FN50] This system requires a member state to deny au-thorization or rescind current authorization for banks "clearly" attempting to evade regulation in one countrybecause of expectations of lesser regulation in another market. [FN51]

The Second Council Directive tackles the important and intractable *153 dilemma of creating uniformcapitalization standards. Initially, authorization requires banks to have minimum capital of $5 million ECU[FN52], which suffices for any additional licensing in other member states. [FN53] The capitalization mustnot fall below the level required for initial authorization. [FN54] Note that none of the capital requirementsprohibit member states from establishing higher capitalization requirements. [FN55] Finally, non-EEC banksmay also avail themselves of the right of mutual recognition of licenses, subject to reciprocal privileges forEEC banks, in the home country of the foreign bank. [FN56]

In addition, in 1992, the EEC adopted a Directive on the Consolidated Supervision of holding compan-ies. [FN57] Articles 10(1) and 10(2) of the Directive repealed the 1983 Directive on Consolidated Supervi-sion. [FN58] Under the Directive, holding companies which are not banks, but which have subsidiary finan-cial institutions, are regulated under the banking laws. [FN59] The Directive accomplished a number ofgoals, the most important of which was to provide an accurate assessment of the risks inherent in a holdingcompany, compared to the risks inherent in subsidiary banks. [FN60] Under the new regulation, banking



laws regulate a holding company if it owns 20 percent of the voting rights of a subsidiary. [FN61] Obvi-ously, efforts such as this can only decrease loopholes which allow banking conglomerates to evade seriousregulation.

Separate developments in the Council of Europe, may assist in tracking illicit banking activities throughits Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime. [FN62] UnderArticle 6 of the Convention, all parties to the Convention must make "Laundering Offenses" domesticcrimes. [FN63] This provision, although *154 not a part of the EEC system, may foster greater cooperationbetween the EEC states which are members of the Council to control illicit banking activity.

Although the EEC agreements constitute a move toward comprehensive international regulatory stand-ards, these agreements function only within the framework of the member states. [FN64] Nations outside ofthe EEC must rely on bilateral efforts. [FN65] Given the exclusive nature of the EEC system, efforts to regu-late truly destabilizing activities may not succeed. Nevertheless, the influence of the EEC model can be con-sidered significant because it provides guidance to overcome the dilemma resulting from the need for liber-alization of banking services laws and the countervailing need for regulation to prevent destabilizing trans-actions.

Much of the EEC framework can be used to help identify possible guidelines for an international re-sponse. [FN66] In the end, closing the gaps posed by domestic and regional enforcement may require a moreinternational effort. One must remember that the EEC system, although binding international law, is a closedsystem. Even the Basle Accord and United States policy favoring home country supervision or *155 consol-idated reporting bind only those few states partaking in or recognizing the merits of the endeavors. Futureefforts must focus on bringing new members into the framework. Western banks maintain significant tieswith countries outside of the industrialized world. Much of the flow of capital during the last 20 years hasbeen from lenders in the industrialized world to borrowers in the lesser developed world. [FN67] Indeed,capital flight from the lesser developed world has also infused many Western banks. [FN68] Dealing withthis massive capital flow requires more than a regional or bilateral approach.

C. International Regulatory Initiatives

Currently, two main fora exist to promote international cooperation and regulation of banks. First, theBank for International Settlements (BIS), an organization of central banks, promotes cooperation by ensur-ing the stability of the international monetary system. [FN69] Second, the Basle Committee on Banking Su-pervision [FN70], although affiliated with the BIS, provides additional normative direction to central banksand governments to progressively develop a system of consolidated supervision. [FN71] Although other in-ternational bodies play a marginal role in supervision, the BIS and Basle Committee represent the most sig-nificant efforts to date. [FN72]

*156 1. BIS System

The BIS is composed of the G-10 central banks and the central banks of Australia, Canada, Japan, SouthAfrica and 22 other countries. [FN73] No developing countries are members. [FN74] The bankers meetmonthly to discuss national and international economics. [FN75] BIS's functions can be broken down intothree main areas: 1) assisting in arranging financing during periods of crisis, [FN76] 2) providing a forumfor central bankers, [FN77] and 3) compiling information regarding data on assets and liabilities to amelior-ate mismatching of maturities. [FN78] Although not organized primarily as a lender of last resort, the BIShas made efforts to ameliorate some of the difficulties posed by the failures of the Herstatt bank in Germanyand the BCCI scandal. The BIS has also been active in standard setting, reaching an accord on capital stand-ards in 1988. [FN79] Although the Basle Committee has turned away from lender of last resort issues,



[FN80] the BIS has increasingly begun to specialize in such issues.

BIS's standard setting activities provide persuasive authority, but are not binding and are not consideredtreaties under international law. [FN81] Moreover, the BIS, as a loose network of central banks, has oper-ated chiefly in the realm of monetary policy, [FN82] thus failing to *157 adequately consider the problemsof illicit and destabilizing banking activities. Given BIS's primary concern with monetary rather than super-visory issues - compared to the Basle Committee's primary focus on and action in supervision - the BasleCommittee, not BIS, will likely provide the basis for further regulatory efforts.

2. Basle Committee

The Basle Committee has overlapping membership and personnel with the BIS, but the Basle Commit-tee has focused its efforts on destabilizing and illicit international banking transactions. The Basle Commit-tee was formed in 1974 and has centered its activities on international supervision of banking. [FN83] TheCommittee's first achievement was the Basle Concordat of 1975, which enunciated the overriding principlethat "no foreign banking establishment (should) escape supervision." [FN84] Regulatory authority under theConcordat specifies that "the supervision of foreign banks should be the joint responsibility of the home andhost authorit(ies)." [FN85] It was at this time that the Basle Committee made the decision to forego the cre-ation of an international supervisory agency. [FN86] Additionally, the Concordat encouraged non-membersof the agreement to follow Concordat guidelines [FN87] to achieve maximum uniformity.

a. 1975 Concordat

The chief provisions of the 1975 Concordat concerned: 1) liquidity, 2) solvency, and 3) foreign ex-change positions. The Concordat provided for liquidity by following local practices, including monetarypolicy. Hence, responsibility fell squarely on the host authorities. [FN88] Parent banks were instructed tomaintain control over the liquidity of *158 branches, which also involved the parent authorities. [FN89]Solvency issues overlap liquidity issues to some degree, and accordingly were subject to similar constraints.Supervision under the 1975 Concordat varied based on the type of institution involved, (i.e. joint ventures,branches, and subsidiaries). [FN90] Foreign subsidiaries were to be primarily subject to the host authorities,while foreign branches were seen as "indistinguishable from the parent bank as a whole." [FN91] The divi-sion between branch banking, which was considered a part of the parent bank, and the subsidiary or jointventure, which was considered a separate corporation, runs throughout the 1975 Concordat. [FN92] Finally,the 1975 Concordat divided regulation of foreign exchange positions between prudential supervision(generally, the home country's responsibility), and other matters (i.e. balance of payments, and market or-der), which principally concerned the host country. [FN93]

The 1975 Concordat finally provided for transfers of information between the parent and host authorit-ies, and encouraged members to modify restrictions, such as secrecy laws, to permit such information ex-changes for prudential purposes. [FN94] Moreover, the 1975 Concordat provided that parent authoritiesshould be granted leave to inspect foreign subsidiaries of domestic banks, under reciprocal agreements.[FN95] Host countries that did not allow such inspections needed to make arrangements with parent author-ities to conduct the investigations pursuant to the parent's requests. [FN96]

Although a positive step towards coordinated supervision, the 1975 Concordat did not solve all of theproblems posed by international banking activities. Many issues remained unaddressed, thus prompting a re-vision eight years later.

b. 1983 Revised Concordat

In response to gaps in the 1975 Concordat, the Basle Committee adopted a revised concordat in 1983



(Revised Concordat) promoting *159 consolidated supervision. [FN97] Specifically, two overriding prin-ciples were enunciated, "first, that no foreign banking establishment should escape supervision; secondly,that the supervision should be adequate." [FN98]

The chief ideas advanced by the Revised Concordat create a "dual key" approach to international super-vision, which allow both the host and home states to supervise an international bank. [FN99] Also importantis the Revised Concordat's placing primary responsibility on the home state to control a domestic bank oper-ating in international markets. [FN100] As in the 1975 Concordat, the revision identifies branches, subsidi-aries, and joint ventures as posing distinct risks, and requiring distinct regulatory responses. [FN101] TheRevised Concordat expanded this list of institutions by noting that holding companies, in some cases non-banks, can control banking institutions. [FN102]

As in the original agreement, the Revised Concordat places responsibility on the parent regulators to in-form host authorities of problems with the parent bank. [FN103] While local authorities may incur front-lineresponsibility, parent authorities must independently evaluate the soundness of the host authority's regula-tion and respond accordingly. [FN104] Host authorities must inform parents should they be unable toprovide adequate supervision. [FN105] Where supervision in the host state is inadequate, parent authoritiesshould endeavor to persuade the parent bank to close the foreign establishment. [FN106] In this way, it ap-pears that the Revised Concordat considers parent states as having some proprietary interest in the health,not only of the domestic bank, but of its foreign subsidiaries. Alternatively, where the host state has con-cerns about the adequacy of parent state supervision, the authority *160 should "(d)iscourage . . . or forbidthe operation in its territory of the foreign establishment." [FN107] This last proscription seems an effectivemeans of controlling the cross-border movement of risky banks.

Additionally, the Revised Concordat seeks to prevent structural features of international banking groups(e.g. holding companies) from facilitating the evasion of supervision through loose regulatory arrangements.[FN108] One suggested means for solving these structural impediments to regulation involves coordinatingthe various regulatory authorities having independent supervisory responsibilities. [FN109] In other words,if a chemical firm owned a banking subsidiary, the banking and environmental or other authorities shouldshare information and responsibilities.

Pursuant to the Revised Concordat, ensuring adequate regulation becomes the dual responsibility of theparent and host states. Host state authorities incur responsibility for ensuring prudent practices within theirdomestic markets, while the parent authorities must see the subsidiaries as part of a larger group. [FN110]Breathing a bit of specificity into the framework, the Revised Concordat notes that both parent and host reg-ulators must monitor the risk exposure and capital adequacy of the respective institutions based on consolid-ated analysis. [FN111] This may lead to extended parental responsibility, [FN112] presumably involving theconcomitant vices of extraterritorial application of domestic laws. Within the scope of cooperation, such ex-traterritoriality may not be offensive to the host state's sovereignty, however, given the lack of a legal docu-ment specifying the relevant law to be applied, disputes may arise. [FN113]

The Revised Concordat meets solvency concerns by placing chief responsibility with the host authorit-ies for subsidiaries within its jurisdiction, while requiring parental authorities to ensure the solvency of theparent bank based on consolidated supervision. [FN114] Similarly, host authorities must ensure the liquidityof the foreign banks within their jurisdiction, with the parent bearing responsibility for the liquidity of *161the entire group. [FN115] Finally, although both parent and host authorities should divide responsibilityover foreign exchange risk, the host authority may incur a greater responsibility given its proximity to thebank and its monitoring of the bank's daily activities. [FN116]

c. Convergence of Capital Adequacy Standards



In 1988, the Basle Committee adopted a non-binding document (Capital Adequacy Accord), creating an"agreed framework" for "measuring capital adequacy and the minimum standard to be achieved by nationalsupervisory authorities." [FN117] Under the document, bank capital was to be assessed under a two-tieredstructure broken into "core capital" and "supplementary capital." [FN118] Core capital included basic equitydefined in terms of issued and fully paid common stock and non-cumulative preferred stock. [FN119] Sup-plementary capital constituted less easily valued capital due to either differences in accounting practices,weakness in the underlying instruments or differences between historical costs and current value. [FN120]Generally speaking, the purpose of the document was to permit banks to hold no more than 50 percent in theform of supplementary capital. [FN121] Overall, the Capital Adequacy Accord requested that banks holdcapital reserves of 8 percent.

Subsequently, the Basle Committee revised the Capital Adequacy Accord, to liberalize the capital ad-equacy standards in terms of the bilateral netting of credit risks arising from certain financial instruments.[FN122] Although netting was a part of the original Accord, it was allowed only between banks holdingidentical financial instruments of the same maturity. [FN123] Under the new standards, banks may net all*162 bilateral commitments regardless of instrument or value. [FN124] The proposal also provides for mar-ket risk assessment of trading in debt, equities and foreign exchange. [FN125] As a result of this agreement,it is hoped that riskier banks will be subject to higher capital requirements. [FN126] Finally, the proposal oninterest rate risk does not create a clear standard but allows national authorities to assess higher capital re-quirements as a bank's exposure to interest rate risk increases. [FN127] Together these proposals represent amajor achievement in creating uniform capital requirements and regulatory standards.

In spite of the significant effects of the 1975 Concordat, 1983 Revised Concordat and the Capital Ad-equacy Accord, the BCCI scandal occurred partly due to the fact that the agreements do not legally bind theparties. [FN128]

d. Minimum Standards For the Supervision of International Banking Groups and Their Cross-Border Estab-lishments

In response to the BCCI scandal, the Basle Committee advanced the Minimum Standards for the Super-vision of International Banking Groups and their Cross-Border Establishments (Minimum Standards) on Ju-ly 6, 1992. [FN129] Nothing in the Minimum Standards displaces the original principles in the 1975 Con-cordat or 1983 Revised Concordat. [FN130] Nevertheless, the Minimum Standards represent a departurefrom the prior agreements, if not in terms of content, then at least by the urgency of its language. [FN131]Although it promoted minimum standards for supervision, the agreement did not employ minimum stand-ards for information exchanges because of the divergence of state *163 practice in this arena. [FN132] Thegroup recognized, however, that criminal or fraudulent activities create a special need to achieve coordina-tion among states. [FN133]

Presumably in response to the internecine activities of the BCCI network, the Minimum Standards re-cognize the need to distinguish between immediate and higher-level home-country authorities. [FN134] Insome situations, a banking subsidiary may be chartered in one country, yet seek to establish another bank inanother country. This first subsidiary may actually be owned by a banking group subject to home countryregulation and consolidated supervision in a third country. [FN135] Mirroring the EEC Second Council Dir-ective, the Minimum Standards recognize that the host-country authority must determine whether the homecountry has the necessary supervisory capacity, prior to allowing the bank to enter the host market. [FN136]This welcomed step may unfortunately entail the concomitant vice of creating a "fortress West" shieldedfrom potentially more dangerous activities occurring in the rest of the world. [FN137] Nonetheless, it mayprevent the spread of unregulated banks, which may provide an incentive for home countries to tighten do-mestic regulatory controls.



The Minimum Standards establish four principles which provide that 1) all international banks must besupervised by a capable home country supervisor, based on consolidation, [FN138] 2) both home and hostcountry supervisory authorities must give prior consent before the establishment of a cross-border bankingestablishment, [FN139] 3) supervisory authorities should have the right to gather information from thecross-border banks of which they are home country supervisors, [FN140] and 4) host countries should retainthe right to impose restrictions on banks which fail to meet the prudential concerns of the standards, and toprohibit the creation of the establishment of such banks if necessary. [FN141] This latter step has been adop-ted by the EEC, as well, and *164 seems necessary to provide effective control over the system.

Under the Minimum Standards, the home country must adopt certain minimum standards governing thebank, which must be performed competently. [FN142] While these efforts are well advised, they may not besufficient to deal with the complexities of cross-border banking and the tenacity of those seeking to subvertthe system. Putting the problems in perspective, Gerald Corrigan, Chairman of the Basle Committee ac-knowledged that the Minimum Standards will allow flexibility with the G-10 states through ad hoc arrange-ments designed to meet the individual needs of the states. [FN143] As an unintended consequence, however,such flexibility and ad hoc arrangements, limited to the G- 10 states, may perpetuate loopholes which allowillicit and potentially destabilizing activity to proceed unchecked in the rest of the world. In this context, theminimal number of participating states makes the efforts appear impotent. Although the efforts of the BasleCommittee have been exemplary, the existing agreements are mere "gentlemen's agreements" without anyenforcement modalities. [FN144]

3. Multilateral MLATs

The most significant effort to date to control money flow from illegal drug trafficking has been theUnited Nations Convention Against Illicit Trafficking Narcotic Drugs and Psychotropic Substances (DrugConvention). [FN145] Although not self-evidently applicable, the *165 Drug Convention may supply someneeded assistance in developing a truly multilateral solution to the problem of illicit bank activities.

The Drug Convention was sponsored in Vienna in 1988 in response to the growing problem of illicittraffic in drugs. [FN146] The Drug Convention was significant in that it explicitly acknowledged the linksbetween financial profits and the ability for the drug trade to flourish. [FN147] To target such illegal profits,the Drug Convention permits the seizure and forfeiture of any assets derived from, inter alia, the production,manufacture or delivery of any narcotic drug or psychotropic substance. [FN148]

Although not directly enforceable in the member states, signatories are required to adopt procedureswhich will enable the signatories' own authorities to "identify, seize and freeze" proceeds or property de-rived from illegal drug activities. [FN149] Moreover, the Drug Convention specifically precludes statesfrom denying mutual legal assistance, as required by the Convention, because of bank secrecy. [FN150]

In renouncing the applicability of bank secrecy laws in the search for illegal profits from drug traffick-ing, the Drug Convention establishes precedent which demonstrates the need for international legalguidelines. Indeed, successful regulation and prosecution of drug traffickers and banks assisting such per-sons in the international arena may require the authority of legally binding agreements. Clearly, the efficacyof any restrictions on illegal drugs can only be accomplished through international efforts, rather than meread hoc efforts replete with loopholes. Similar logic applies to banking safety as well. Although the urgencyof drug control may be considered greater than banking safety, the types of efforts banking cooperationwould require *166 are somewhat less taxing and may produce long-term economic stability.

III. Analysis



Prior to beginning any attempts at reform, the legal basis for any efforts must be clarified. Naturally,such a legal basis must derive from international law. In mapping an international legal framework for re-form, it is unwise to neglect the compelling interests each state has in ensuring the integrity and solvency ofits domestic banking system. Change must be predicated on the understanding that furthering these domesticinterests will require international cooperation and some basic unitary legal standards. [FN151] The prin-ciple of state sovereignty exacerbates the problems of achieving multi-state cooperation to prevent illegaland imprudent activities. [FN152] In addition, the controversial nature of citizenship, particularly for corpor-ations, may create new issues of international law which will most likely require agreement by the stateparties. [FN153] Accordingly, any realistic solution to the problems posed by international banking must en-deavor to achieve maximum agreement and inclusiveness, at least among the states most *167 active incross-border banking, to avoid legal conundrums.

A. International Legal Basis for a Solution

As a preliminary matter, the overriding primary rule of international law is the sovereignty and equalityof the state. [FN154] Three main principles inhere from the sovereignty of the state: 1) prima facie exclusivejurisdiction over territory and population within the state, 2) duty of non-intervention in other states' territ-ory, and 3) dependence of obligations arising under customary international law and treaties based on con-sent of the obligor. [FN155] The overriding standard of sovereignty can only be limited by consent, and insome extremely limited situations, by the operation of general principles of international law [FN156] or juscogens. [FN157] Accordingly, absent some actual agreement among states, public international law has littleto say concerning issues of international financial institutions or financial crimes. [FN158]

Nevertheless, states may, by treaty, commit to certain obligations and commit to implement certain reg-ulations or standards within their own jurisdiction. According to "prevailing opinion, the sovereign equalityof states excludes any automatic effect on third states. . . ." [FN159] In this way, states may de facto con-strict their sovereign powers. Yet, ultimately, these restrictions are contingent on states actually implement-ing the treaty or contractual norms through domestic legislation. [FN160] As such, the principles of non-interference in domestic *168 affairs and sovereign equality of states, can best be ensured, rather than lim-ited, through the creation of explicit norms and standards which each state commits to legally recognize andfollow. Such explicit standards, in the context of international banking, can prevent the overlap of jurisdic-tions and clarify supervisory duties divided between states.

The most likely source for defining the substantive international law to govern international bankingactivities would be an international convention, accompanied by a multilateral treaty. [FN161] Multilateraltreaties comport with the mandate of the United Nations International Law Commission which promotesinter alia the progressive development of international law through more precise definitions of legal norms.[FN162] A convention to specify and define norms pertaining to international banking would be well withinthe bounds of international legal practice, [FN163] and could provide the necessary forum for reform. *169It would represent the evolution and continuation of international cooperative efforts, as exemplified by theBasle Committee. [FN164] As with the Drug Convention, [FN165] this convention could bring all states to-gether to promote a uniform rather than piecemeal approach.

Beginning a convention of this sort need not overly politicize banking regulation. The expertise requiredto deal with the subject matter makes it highly likely that states would designate persons, perhaps centralbank representatives, to negotiate such a treaty and reach an informed consensus. Negotiation of a treaty it-self will not bind a participating state, as merely negotiating an agreement, is insufficient: a state must stillmanifest a desire to be bound for the treaty to enter into force. [FN166]

B. Towards a Solution



Obviously the need for international efforts to combat criminal and destabilizing banking activities iswell founded. The BCCI scandal demonstrated this fact. Unfortunately, current efforts have been directedtowards building on the previous system rather than branching out to attempt some new solution. Perhapsmost evident in the current situation is the lack of any truly international legal framework. [FN167] Theneed for more uniformity in legal regimes governing international banking transactions has been recognizedby the Basle Committee itself. [FN168] Indeed, the lack of a truly international approach prevents *170 theG-10 countries from minimizing country transfer risk, or credit risks posed by virtue of a country's structur-ally weaker banking system. [FN169] These risks present political difficulties, which the Basle Committeeproposal discusses. [FN170]

The political difficulties involved in creating an agreement among various states on supervisory stand-ards are heightened by intertwined issues of competitiveness. Naturally, the tighter the regulatory structure,the less attractive a country becomes for foreign banks. The Uruguay Round of trade negotiations concludedin 1993 without resolving issues of trade in services, which were decided by the state parties in the 1986Punta del Este Declaration. [FN171] The North-South split in discussions regarding trade in services mayexacerbate tensions involved in creating any uniform regulatory guidelines. [FN172] Nonetheless, as notedin a previous Basle Committee publication, international agreement is becoming more necessary prior to im-plementing domestic regulations, to "reduce competitive inequalities, which can arise when individual su-pervisory authorities introduce measures in isolation." [FN173]

The selective nature of the current approach by the industrialized West further illustrates the need for aprocess denominated on inclusion rather than exclusion. An approach which encompasses only ten or twelvestates cannot combat the possible destabilizing activities in other, less developed countries. Accordingly, fu-ture work should attempt a multilateral or international solution.

IV. Conclusion

The dramatic rise in international banking activity clearly warrants *171 new efforts to meet emergingchallenges. The rapid nature of banking transactions through electronic conveyances makes it quite difficultto accomplish adequate regulation. Under the current system, regulators tend to consider only the interest ofthe fully industrialized West, rather than newly industrializing countries. Indeed, such newly industrializingcountries often provide a haven for illegal banking activity. Clearly, an international regulatory response isneeded to create a better defined legal regime for international banking. Until recently, bankers have resistedthe need for international regulation. Nevertheless, an agreement need not stipulate standards for all of themyriad technical aspects of the banking industry. What is more important is establishing an inclusive systemcapable of assessing and determining responsibility and liability. Creating an international agreement to del-egate responsibility for international banking regulation will require consideration of both lender of last re-sort functions and regulatory concerns. This author hopes that the successes in areas such as money launder-ing can further cooperation in these additional areas as well.

[FN1]. Mary E. Footer, GATT and the Multilateral Regulation of Banking Services, 27 Int. Law. 343(1993). Indeed, as the author notes, in offshore banking centers, international transactions make up as muchas 90 percent of all transactions. See also Catherine L. Mann, U.S. International Transactions in 1993, 80Federal Reserve Bulletin 365, 377 (1994) (gross transactions in U.S. Treasury Securities by institutions inBermuda, the British West Indies and the Netherland Antillies rose from $300 billion in 1992 to $400 billionin 1993). In 1988, U.S. bank exposure to borrowers in the developing world amounted to $104 billion or37% of foreign exposure. The American Banker, Jan. 25, 1989, p.18. See also, Will Hutton, World in Needof a Grand Bargain, The Guardian, July 18, 1994, p.10 (cross border lending now exceeds a quarter of theindustrialized countries GDP); Note, The Bank of Credit and Commerce International Scandal: A warning



for Bank Regulators, 24 Law & Pol'y Int'l Bus., 1267 (1993) (assets of U.S. branches of foreign banks quad-rupled between 1980 and 1990 reaching $626 billion); Scott, infra note 3, at 491 (in addition to $626 billionin branches, $174 billion foreign bank assets are deposited in subsidiaries).

[FN2]. Id. at 359 (stating that "(t)owards the late 1970s, multinational banking institutions with a developingcountry origin accounted for about 20 percent of branches and 6 percent of subsidiaries worldwide. . ..(i)ndeed Indian commercial banks by 1984 had 141 branches operating in twenty-five countries.").

[FN3]. Hal S. Scott, Supervision of International Banking Post-BCCI, 8 Ga. St. U. L. Rev. 487 (1992).

[FN4]. Of the serious illegalities in which BCCI participated, the most significant was the formation of a"network" which involved an intricate money laundering arrangement. See Daniel M. Laifer, Putting the Su-per Bank in the Supervision of International Banking-Post BCCI, 60 Fordham L. Rev. 467, 484 (1992)(briefly discussing the extensive laundering activities which BCCI developed). BCCI laundered drug moneyby transferring funds to its affiliates in the United States, and transferring funds to Luxembourg, and eventu-ally London, where it was dispatched to one of its affiliates in another country in the form of a certificate ofdeposit. In total, BCCI laundered $32 million through its U.S. branches. Id.

[FN5]. Unlike most traditional international banks, BCCI had no home country. Scott, supra note 3, at 492.The lack of a home country seriously undermines international supervisory efforts because no single countrybears ultimate responsibility. BCCI Holdings operated as a holding company in Luxembourg, and ownedtwo subsidiary banks, BCCI S.A. and BCCI Overseas, incorporated respectively in Luxembourg and theCayman Islands. Id. Accordingly, there were two bank parents rather than one, and neither entity functionedprimarily in the country of incorporation. Id.

[FN6]. Scott B. MacDonald, Frontiers for International Money Regulation After BCCI: International Co-operation or Fragmentation? 86 Am. Soc'y Int'l L. Proc. 188, 191 (1992).

[FN7]. Bruce Zagaris, 86 Am. Soc'y Int'l L. Proc. 188, 191 (1992). See also, The BCCI Affair: Report to theForeign Relations Committee by Senators John Kerry and Hank Brown, S. Prt. 102-140 at 52 (Dec. 3, 1992)(hereinafter The BCCI Affair).

[FN8]. Id.

[FN9]. See generally Laifer, supra note 4, at 467 (discussing BCCI's failure due in part to inadequate inter-national supervision); see also Zagaris, supra note 7, at 601 (stating that current ad hoc arrangementsbetween the United States and foreign countries still impedes full disclosure of information); see also Mac-Donald, supra note 6, at 191 (stating BCCI scandal raises issues of transnational banking criminality and in-creasing risks from banking and trade liberalization). For an in depth treatment of the interrelation of inter-national crime, bank secrecy and banking regulation, see Crime and Secrecy: The Use of Offshore Banksand Companies, Hearings Before the Permanent Subcommittee on Investigations of the (Senate) Committeeon Governmental Affairs, 98th Cong., 1st Sess. (1983).

[FN10]. Under the current regulatory framework, host countries are charged with regulating foreign banks intheir country. Committee on Banking Regulations and Supervisory Practices, Revised Basle Concordat onPrinciples for the Supervision of Banks' Foreign Establishments, 22 I.L.M. 900, 903-4 (1983).

[FN11]. Laifer, supra note 4, at 487.

[FN12]. Pub. L. No. 95-369, 92 Stat. 607 (1978) (codified at 12 U.S.C. S 3101 (Supp. IV 1992)); see Hear-ings Before the Subcommittee on Financial Institutions Supervision, Regulation and Insurance of the Com-



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mittee on Banking, Finance and Urban Affairs of the House of Representatives, 95th Cong., 1st Sess., July12, 13, and 19, 1977 (discussing adoption of the bill).


[FN14]. International Banking Act of 1977, S 7(e) states:No foreign bank may, after the date of enactment of this Act, establish any branch or agency pursuant toState law and no foreign bank, group of foreign banks, or one or more foreign companies that control a for-eign bank may acquire control of a commercial lending company without first obtaining approval of theBoard of Governors of the Federal Reserve System.

[FN15]. Gail et al., The Foreign Bank Supervision Act of 1991: Expanding the Umbrella of "SupervisoryRegulation", 26 Int'l. Law. 993, 1000 (1992).

[FN16]. Id.

[FN17]. Laifer, supra note 4, at 477-478. Accordingly, permitting the Federal Reserve to rely on other regu-latory bodies, actually decreases the effectiveness of the supervision overall. Id.

[FN18]. See MacDonald, supra note 6, at 204 (stating that "in part, one of the reasons that BCCI was not in-vestigated earlier was the compartmentalization among U.S. Government agencies as well as other interna-tional foreign bank regulators.").

[FN19]. See Stephan Zamora, New Frontiers in the Regulation of International Money Movement in theWake of BCCI, Am. Soc'y Int'l L. Pro. 201, 202-03 (1992). The author discusses current studies on usingSWIFT as a control mechanism. Id. at 205.

[FN20]. See Id. at 204. (noting that the U.S. could refuse certain states the right to run payments through thesystems).

[FN21]. Federal Deposit Insurance Corporation Improvement Act of 1991, Pub. L. No. 102-242, 105 Stat.2236 (1991).

[FN22]. See generally, id. at 2286-2305; see also, Gail et al., supra note 15, at 1000 (summarizing the mainrequirements).

[FN23]. Gail et al., supra note 15, at 1000.

[FN24]. Federal Deposit Insurance Corporation Improvement Act of 1991, Pub. L. No. 102-242, 105 Stat.2236, 2303, S213, codified at 12 U.S.C.A. S3111:Criminal penaltyWhoever, with the intent to deceive, to gain financially, or to cause financial gain or loss to any person,knowingly violates any provision of this chapter or any regulation or order issued by the appropriate Federalbanking agency under this chapter shall be imprisoned not more than 5 years or fined not more than$1,000,000 for each day during which a violation continues, or both.Id.

[FN25]. Laifer, supra note 4, at 472. Nonetheless, evidence suggests that the Act may represent a newawareness of the need for international cooperation. Indeed an important addition to the regulation of inter-national banks is the explicit authorization allowing Federal regulators to cooperate with foreign super-visors. See Pub. L. No. 102-242, 105 Stat. 2294-95, S206, codified at 12 U.S.C.A. S3109. This provision re-quires United States regulators to determine first, that "disclosure (of information) is appropriate and will





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not prejudice the interests of the United States," and second, that prior to any disclosure of information, a"foreign authority (must agree) to maintain the confidentiality of such information to the extent possible un-der applicable law." Id. Such legislative initiatives are well considered. They demonstrate further possibilit-ies for cooperation among regulators.

[FN26]. "Mutual legal assistance" refers to treaties designed to allow foreign governments to assist one an-other in criminal investigations. James I. K. Knapp, Mutual Legal Assistance Treaties as a Way to PierceBank Secrecy, 20 Case W. Res. J. Int'l L. 405 (1988).

[FN27]. These countries are Jamaica, Uruguay, Spain, Argentina, Bahamas, Mexico, Canada, Switzerland,Belgium, United Kingdom, Italy, Colombia, Thailand, Turkey, the Netherlands, and Morocco. Note that pri-or to 1964, the United States did not have a MLAT. Bruno A. Ristau, Overview of International Judicial As-sistance, Int'l L. 526 (1990).

[FN28]. Id. (citing the Treaty on Mutual Assistance in Criminal Matters, United States-Switzerland, May 25,1973, 27 U.S.T. 2019, T.I.A.S. No. 8302 (entered into force Jan. 23, 1973)). See E. Nadelmann, Negoti-ations in Criminal Law Assistance Treaties, 33 Am. J. Comp. L. 467, 471 (1985) (noting that the secrecy ofthe Swiss system, combined with the sizeable market for international banking within Switzerland createdthe need for the MLATs).

[FN29]. Specifically, the treaty does not provide assistance for: extradition or arrest of accused or convictedpersons, execution of criminal judgments, political offenses, military laws, antitrust laws, and violations ofsecurities laws. Nadelmann, supra note 28, at 474-5. Given the significant overlap between securities andbanking laws, the absence of any reciprocal agreement with securities matters represents a sizeable loophole.

[FN30]. See, e.g., Mark Rich & Co. v. A.G., 707 F.2d 663 (2d Cir. 1983), cert. denied, 463 U.S. 1215(1983).

[FN31]. Council Directive 89/646 of 15 December 1989, 1989 O.J. (L 386) 1 (hereinafter Second CouncilDirective) (amending directive 77/780 detailing the coordination of laws, regulations and administrative pro-visions relating to credit institutions). Note that unlike regulations which are immediately effective withinthe member states of the EEC, a "directive" requires implementing legislation before the norm becomesbinding within the Member State's legal system. Michael Gruson and Wolfgang Feuring, The New BankingLaw of the European Community, 25 Int. L. 1 (1991). This type of legislation falls under the dualist cat-egory of international law. See infra, note 158.

[FN32]. Second Council Directive, supra note 31. This directive will allow banks to set up branches in otherstates. For a good explanation of current EEC legislative activities, see Gruson and Feuring, supra note 31,at 1 (stating that "(t)he Second Banking Directive will cause fundamental changes in the legal framework ofthe banking business in the EEC, and will profoundly affect both the way in which banks will be doing busi-ness in the EEC and the way in which non-EEC banks can enter the European market. The fundamental aimof the Second Banking Directive is to create a single EEC- wide banking market with no internal barriers tothe movement of banking services and the establishment of branches within the community.").

[FN33]. Gruson and Feuring, supra note 31, at 1.

[FN34]. See e.g., Banks May Have to Increase Cash to Cover for Market Risks, Fin. Times, May 1, 1993, at1 (stating "Mr. Corrigan, Chairman of the Basle Committee, said the Basle group would continue to seekagreement with securities regulators and the European Commission."). But see The Bottom Line, TheBanker, June 1993 (stating "Basle claims to favor a .stricter prudential standard for banks' than the EEC andalso proposes that banks be permitted, at the discretion of their national supervisors, to use an additional








form of short-term subordinated debt, or Tier Three capital, for the sole purpose of covering market risks. Itseems that the relationship between the EC and Basle committee has been driven by the Basle committeeheavyweights."). See infra note 73 (enumerating and describing the G-10 states).

[FN35]. See Council Directive 77/780 of 12 December 1977, 1977 O.J. (No. L 322) 1 (hereinafter FirstCouncil Directive) (detailing coordination of the laws, regulations and administrative provisions relating tothe business of credit institutions). Note that the First Council Directive has not been superseded by theSecond Directive and is still considered the primary source of EEC law regarding establishment of branchesby non-EEC banks. Gruson and Feuring, supra note 31, at 3.

[FN36]. Laifer, supra note 4, at 490-1.

[FN37]. First Council Directive, supra note 35, at art. 2(4)(a).

[FN38]. Id. at art. 3(1).

[FN39]. Id. at art. 3(2).

[FN40]. First Council Directive, supra note 35, at art. 6(1).

[FN41]. Id. at art. 7(1) (emphasis added).

[FN42]. Id. at art. 8(1)(b), (c).

[FN43]. Id. at art. 11.

[FN44]. See Second Council Directive, supra note 31, at preamble,(T)he approach which has been adopted is to achieve only the essential harmonization necessary and suffi-cient to secure the mutual recognition of authorization and of prudential supervision systems, making pos-sible the granting of a single license recognized throughout the community and the application of the prin-ciple of home member state prudential supervision.

[FN45]. Id. at art. 13(1).

[FN46]. Id. at art. 13(2).

[FN47]. Second Council Directive, supra note 31, at art. 14(1).

[FN48]. Id. at art. 14(2)-(3).

[FN49]. Id. at art. 14(2). But see Joseph J. Norton, Symposium: International Bank Supervision Post BCCI,26 Int. Law. 943, 944-45 (1992):The principle of home country regulation as espoused by the Basle Committee and the EEC Second Direct-ives should not be abandoned.Nevertheless, what BCCI makes clear is that home country supervision only makes sense where that juris-diction has (i) comparable supervisory standards, (ii) a capacity to implement and enforce such standards,and (iii) a deposit insurance or lender-of-last resort dimension, or both. As 1993 comes upon us, the EC au-thorities will undoubtedly rethink and refine the "mutual recognition" vehicle for convergence of nationalsupervisory standards . . .Id. The severity of the BCCI case makes clear that some rethinking concerning lender of last resort functionsmust occur in attempting to sort out which country--the host or home--should step up and take primary re-sponsibility for banks operating internationally. It is clear that home authorities must have substantial lever-



age and control over the international movement of domestic banks before they may take responsibility forthese banks' operations overseas. A framework like the EC and Basle accord among advanced industrial eco-nomies cannot compensate for the dangers posed by branching into inadequately regulated markets.

[FN50]. See Gruson and Feuring, supra note 31, at 4 (explaining that mutual recognition requires "(c)reditinstitutions in one Member State access to all Member States and creates an EEC-wide inter- Member bank-ing market.").

[FN51]. Second Council Directive, supra note 31, at preamble. This provision may be a good reference pointfor future international efforts, to discourage banks from seeking markets with the least effective regulators.

[FN52]. Second Council Directive, supra note 31, at art. 4(1).

[FN53]. Id. at art. 6(1).

[FN54]. Id. at art. 10(1).

[FN55]. Id. at preamble.

[FN56]. See Gruson and Feuring, supra note 31, at 16-17 (citing Second Council Directive, supra note 31, atart. 6(1), 18(1)).

[FN57]. Council Directive 92/30 on the Supervision of Credit Institutions on a Consolidated Basis, 1992O.J. (L 110) 52 (hereinafter Directive on Consolidated Supervision).

[FN58]. Suzette Rodriguez, Are Banks Within the European Community Adequately Supervised?, 17 B.C.Int'l Comp. L. Rev. 213 (1994).

[FN59]. Directive on Consolidated Supervision, supra note 57, at art. 1.

[FN60]. Rodriguez, supra note 58, at 216.

[FN61]. Directive on Consolidated Supervision, supra note 57, at Art. 1.

[FN62]. Council of Europe, Convention on Laundering, Search, Seizure, and Confiscation of the Proceeds ofCrime, 28 I.L.M. 493 (1989).

[FN63]. The Convention reads in relevant part:Each Party shall adopt such legislative and other measures as may be necessary to establish as offenses un-der its domestic law, when committed intentionally:a. the conversion or transfer of property, knowing that such property is proceeds, for the purpose of conceal-ing or disguising the illicit origin of the property or of assisting any person who person who is involved inthe commission of the predicate offence to evade the legal consequences of his actions;b. the concealment or disguise of the true nature, source, location, disposition, movement, rights with respectto, or ownership of, property, knowing that such property is proceeds; and subject to its constitutional prin-ciples of the basic concepts of its legal system:c. the acquisition, possession or use of property, knowing at the time of receipt that such property was pro-ceeds;d. participation in, association or conspiracy to commit, attempts to commit and aiding, abetting, facilitatingand counselling the commission of any of the offenses established in accordance with this article.Id. at 504.





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[FN64]. Id. The fact that BCCI-type crises have occurred despite the enhanced EEC framework suggests in-adequacies in the system as developed, even after the Second Council Directive. But see Rodriguez, supranote 58, at 217 (arguing that the Second Council Directive, providing for home country supervision, wouldbe adequate to prevent BCCI-type incidents in the future). Moreover, it is not even clear that safety andsoundness of international banks is of primary concern as European efforts to regulate banks may have beenpredicated on the creation of a European Central Bank. The Banco Ambrosiano Collapse and the Luxury ofNational Lenders of Last Resort with International Responsibilities, 22 N.Y.U. J. Int'l L. & Pol. 181, 200(1990).

[FN65]. Council of Europe, supra note 62, at 504.

[FN66]. Indeed, the Basle committee experience has shown such coordination with and reliance on the EECregulatory system. Norton, supra note 49, at 944- 45.

[FN67]. See supra notes 1-2 (discussing role of lesser developed countries in international banking prob-lems).

[FN68]. Note that this problem may discourage developing countries from joining an international bankinglegal regime, as such countries may fear facilitating capital flight. MacDonald, supra note 6, at 205.

[FN69]. For an explanation of the BIS system see James V. Hackney and Kim L. Shafer, The Regulation ofInternational Banking: An Assessment of International Institutions, 11 N.C.J. Int'l L. & Com. Reg. 474,486-87 (1986) (citing Report to Congress by the Secretary to the Treasury, the Chairman of the Board ofGovernors of the Federal Reserve System, and the Secretary of State on United States Membership in theBank for International Settlements 2-11 (1984)); see also 8 Encyclopedia of Public International Law342-43.

[FN70]. Note that the Basle Committee is sometimes referred to as the Cooke Committee for its formerChairman, Peter Cooke from the Bank of England. The Basle Committee conducts its meetings at the BISoffices in Switzerland and attempts to coordinate its activities with the central banking organization.

[FN71]. Basle Committee on Banking Regulations and Supervisory Practices, Revised Basle Concordat onPrinciples for the Supervision of Banks' Foreign Establishments, 22 I.L.M. 900 (1983) (hereinafter RevisedConcordat).

[FN72]. Note that the Institute for International Finance has been engaged in supervising the risks associatedwith international lending, but on a non-governmental basis. Surrey & Nash, Bankers Look Beyond the DebtCrisis: The Institute for International Finance, Inc., 23 Colum. J. Transnat'l. L. 111 (1984). The efforts ofthis organization have been directed principally towards the nature of sovereign risk. Hackney and Shafer,supra note 69, at 484. As a result the organization has neglected issues regarding illicit banking activities. Inaddition, the International Monetary Fund (IMF) and World Bank may be a source of untapped influenceover states' domestic banking regulation as both have various "conditionality criteria" prior to providing fin-ancial assistance to the requesting states. Hackney and Shafer, supra note 69, at 476- 479. Some commentat-ors suggest that both the World Bank and IMF could take a more active role in supervision. Zagaris, supranote 7, at 189.

[FN73]. Charles J. Siegman, The Bank for International Settlements and the Federal Reserve, 80 Federal Re-serve Bulletin 900, 903 (1994). The G-10 nations are the United States, the United Kingdom, Canada,France, Germany, Italy, the Netherlands, Belgium, Sweden, and Japan. Id. at 900. Note that both Switzer-land and Luxembourg are affiliated with the BIS as well. Scott, supra note 3, at 489; Hackney and Shafer,supra note 69, at 486-87.







[FN74]. Hackney and Shafer, supra note 69, at 487.

[FN75]. Id.

[FN76]. Hackney and Shafer, supra note 69, at 487. Among these activities are facilitation of balance ofpayments financing, facilitating medium-term letters of credit for the International Monetary Fund, and ar-ranging for bridge financing for countries with debt servicing problems.

[FN77]. Id.

[FN78]. Id. at 488.

[FN79]. Scott, supra note 3, at 489.

[FN80]. See Revised Concordat, supra note 71, at 901. (stating "The revised Concordat . . . emphasizes thatit is concerned only with supervisory responsibilities and not with those of lenders of last resort.").

[FN81]. Hackney and Shafer, supra note 69, at 486-87; see also, Helmut Coing, Bank for International Set-tlements, Encyclopedia of Public International Law 342-43 (1992).

[FN82]. Hackney and Shafer, supra note 69, at 487-88.

[FN83]. Revised Concordat, supra note 71, at 901.

[FN84]. Basle Committee on Banking Regulations and Supervisory Practices, Report on the Supervision ofBanks' Foreign Establishments, 1 (hereinafter Concordat).


[FN86]. Id. at 469-470. Part of the problem in forming any sort of international agency may be traced to thedifficulty of creating clearly delineated guidelines amenable to all of the participants. As noted in the 1975Concordat, "discussions showed that it is not possible to draw up clear-cut rules for determining exactlywhere the responsibility for supervision can best be placed in any particular situation." Concordat, supranote 84, at 2. In the intervening years, however, the trend has been towards continued international agree-ment and standard setting.

[FN87]. Concordat, supra note 84, at 2.

[FN88]. Id. at 3.

[FN89]. Id.

[FN90]. Id.

[FN91]. Id. at 4-5.

[FN92]. Concordat, supra note 84, at 2.

[FN93]. Id. at 4.

[FN94]. Id. at 5.

[FN95]. Id.



[FN96]. Id.


[FN98]. Id. at 903.


[FN100]. Id. But the Revised Concordat notes that such efforts may be difficult to achieve:Firstly, while there should be a presumption that host authorities are in a position to fulfill their supervisoryobligations adequately with respect to all foreign bank establishments operating in their territories, this maynot always be the case . . . secondly, problems may arise where the host authority considers that supervisionof the parent institutions of foreign bank establishments operating in its territory is inadequate or non-existent.Revised Concordat, supra note 71, at 903.


[FN102]. Id.

[FN103]. Id. at 903.

[FN104]. Id.

[FN105]. Id.

[FN106]. Id.

[FN107]. Id. at 904.

[FN108]. Id.


[FN110]. Id.

[FN111]. Id. at 905.

[FN112]. Id.

[FN113]. See Section IV, infra (discussing issues of sovereignty under public international law).


[FN115]. Id. at 907.

[FN116]. Id. at 908-9.

[FN117]. Committee on Banking Regulation and Supervisory Practices, International Convergence of Capit-al Measurement and Capital Standards 1 (1988) ("Capital Adequacy Accord"). See Peter C. Hayward, Pro-spects for International Cooperation by Bank Supervisors, 24 Int. Law. 787, 788 (1990) (discussing lack ofbinding force to Capital Adequacy Accord).

[FN118]. Capital Adequacy Standards, supra note 117, at 5.



[FN119]. Id. at 4.

[FN120]. Id. at 5-8.

[FN121]. Id. at 5.

[FN122]. Press Statement, Basle Committee on Banking Supervision, Released April 30, 1993. Netting ar-rangements allow for an assessment of interbank risk exposures which has become a much larger problemdue to the development of the over the counter derivatives markets. Bank of International Settlements, Re-port of the Committee on Interbank Netting Schemes of the Central Banks of the Group of Ten Countries(1990); Bank of International Settlements, Report on Netting Schemes S 6 (1989).

[FN123]. Regulators Propose New Bank Capital Adequacy Rules, The Reuter European Community Report(April 30, 1993).

[FN124]. Id.

[FN125]. Id.

[FN126]. Regulators Propose New Bank Capital Adequacy Rules, The Reuter European Community Report(April 30, 1993).

[FN127]. Id.

[FN128]. See, Note, The Bank of Credit and Commerce International Scandal: A Warning for Bank Regulat-ors, 24 Law & Pol'y Int'l Bus. 1267, 1268 (1993).

[FN129]. Basle Committee on Banking Supervision, Minimum Standards for the Supervision of Internation-al Banking Groups and Their Cross Border Establishments, 1 (1992) (hereinafter Minimum Standards).

[FN130]. Id.

[FN131]. The relevant portion reads, "(t)he supervisory authorities represented on the Basle Committee willbe taking the necessary steps to ensure that their own supervisory arrangements meet the standards as soonas possible." Id. at 2.

[FN132]. Id.

[FN133]. Id.

[FN134]. Basle Committee on Banking Supervision, Minimum Standards for the Supervision of Internation-al Banking Groups and Their Cross Border Establishments, 1 (1992) (hereinafter Minimum Standards).

[FN135]. Id.

[FN136]. Id. at 3.

[FN137]. MacDonald, supra note 6, at 193.

[FN138]. Basle Committee, supra note 129, at 3.

[FN139]. Id. at 4.

[FN140]. Id. at 5.



[FN141]. Id. at 6.

[FN142]. See Cynthia C. Liechtenstein, International Standards for Consolidated Supervision of FinancialConglomerates: Controlling Systemic Risk, 19 Brook. J. Int'l L. 136, 153 (1993) (summarizing the Minim-um Standards). The chief elements are:1) The home country authority must capably perform consolidated supervision.2) The establishment of the host-country .branch' should receive prior consent from the home country super-visor.3) The home country supervisors must have the right to gather information from cross- border establish-ments, i.e., secrecy laws must not get in the way of prudential supervision on a consolidated basis.4) Host country authorities must have the power to condition or prohibit entirely the foreign banking group'sentry into the host country if the minimum standards are not met.Id.

[FN143]. See E. Gerald Corrigan, Challenges Facing the International Community of Bank Supervisors, 17Fed. Reserve Bank N.Y. Q. Rev. 1, 1-3 (1992) (speaking before the 7th International Conference of BankSupervisors in Cannes, France, October 8, 1992).

[FN144]. Scott, supra note 3, at 490. Indeed, the Basle Committee, while having international personalty,does not have law making functions. At most the Committee functions in a dualist role, whereby recom-mendations it proposes may be subsequently enacted in the G-10 and through assimilation and coordination.Id.; Zagaris, supra note 7, at 206.

[FN145]. Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, 19 Dec. 1988,U.N. Doc. E/CN. 82/15, opened for signature 28 Feb. 1989, reprinted in, 28 I.L.M. 493 (1989). Note thatthere have been numerous regional efforts as well. See Bruce Zagaris and Elizabeth Kingma, Asset Forfeit-ure International and Foreign Law: An Emerging Regime, 5 Emory Int'l L. Rev. 445 (1991) (review ofEuropean and Caribbean efforts).

[FN146]. Id. at Preamble.

[FN147]. Specifically, the Preamble notes, "(a)ware that illicit traffic generates large financial profits andwealth enabling transnational criminal organizations to penetrate, contaminate, and corrupt the structures ofgovernment, legitimate commercial and financial business and society at all its levels. . . .". Id. at 498.

[FN148]. Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, supra note 145,at art. 3(a) and (c).

[FN149]. Id. at art. 5.

[FN150]. See Id. at art. 7(5) (stating "A party shall not decline to render mutual legal assistance under thisarticle on the ground of bank secrecy"). This statement of principle establishes some precedent for displa-cing certain secrecy concerns with more weighty solvency and prudential concerns.

[FN151]. The OECD has noted that the lack of uniformity in banking standards demonstrates the "financialfragility" of the current system. Footer, supra note 1, at 346.

[FN152]. Silvia B. Pinera-Vasquez, Extraterritorial Jurisdiction and International Banking: A Conflict of In-terests, 43 U. Miami L. Rev. 449 (1988).

[FN153]. See Barcelona Traction, Light and Power Company, Limited, Second Phase, Judgment, 1970 ICJReports 3-357 (refusing to allow host state to assert diplomatic protection of a corporation when national








state had adequate legal protections which were not applied); Nottebohm, Second Phase Judgment, 1955 ICJReports 4-65 (discussing diplomatic protection of a corporation as requiring a genuine link to the countryseeking to control the corporation). For an assessment of the current standard defining corporate nationality,see Gerhard von Glahn, Law Among Nations: An Introduction to Public International Law 217- 18 (1992)stating:In other words, regardless of the nominal seat or headquarters or the place of incorporation, a companybegan to be viewed (during World War I) as invested with the status of an enemy national if the persons incontrol of the enterprise resided in an enemy country or were found to be acting under the control or instruc-tions of enemy nations (shareholders, silent partners, directors, and so on). (citation omitted)On the whole, the "control test" appears to be a more precise devise through which the national character ofa business enterprise may be determined. Nevertheless, the older test of domicile is still utilized side by sidewith the newer test. Such concurrent use is not as capricious as it might first appear; the availability of twodevices or tests enables states to employ whichever appears most suitable at a given time when the questionof jurisdiction arises of protecting a business enterprise located in a foreign jurisdiction. . . . (i)t should bementioned that there are as yet few generally accepted rules in general international law as to the diplomaticprotection of corporate entities.Id. Such an assessment of the current state of the law on nationality demonstrates the need for stipulation bythe parties through an international agreement.

[FN154]. Ian Brownlie, Principles of Public International Law 287 (4th ed. 1990).

[FN155]. Id.

[FN156]. General principles of international law are principles which exert a weight in international legalmatters, yet are so generally accepted as to be almost taken for granted. Examples include, principles of con-sent, reciprocity, equality of states, etc. Id. at 19.

[FN157]. Jus cogens refers to certain "inalienable" or "non-derogable" principles of international law. Al-though not unequivocal or non-controversial, some basic examples of jus cogens are norms against geno-cide, racial discrimination, crimes against humanity, slavery, and piracy. Id. at 512-15. See also BarcelonaTraction, Light and Power Company, Limited, Second Phase, Judgment, supra note 153, at 32 (illustratingthe way in which the International Court of Justice drew a distinction between duties to particular stateversus duties to the international community as a whole: "(s)uch obligations derive, for example, in contem-porary international law, from the outlawing of acts of aggression, and of genocide, as also from the prin-ciples and rules concerning the basic rights of the human person, including protection from slavery and ra-cial discrimination"). Id.

[FN158]. An exception to this general rule would be issues of expropriation of foreign assets. Brownlie,supra note 153, at 531-32. This comment considers issues of expropriation and safety of assets invested inanother country separate and distinct from issues of prudence and integrity in the operation and supervisionof international banks.

[FN159]. Gennadil M. Danilenko, Law-Making in the International Community 58 (1993).

[FN160]. This notion of international law is sometimes referred to as the "dualist" model. Under the dualistmodel, international law and domestic (municipal) law are separate institutions. In other words, states arenot automatically subject to the constraints of international law, implementing legislation is required prior toincurring an obligation. T.C. Hartley, The Foundations of European Community Law (1991).

[FN161]. Typically, such treaties are negotiated by technical experts form the participating countries:Multilateral treaties between only a few states tend to renegotiated much the same way as bilateral treaties.



Treaties designed to have a large number of states parties are as a rule drafted at diplomatic conferenceswhere the participating states are represented by diplomatic delegations that include legal advisors. The con-ference will usually have before it various working papers or draft proposals, prepared by some states or in-ternational organizations in advance of the meeting. These documents serve as the basis for the negotiationsthat ultimately result in the text of a treaty. . . . The formal results of the conference are frequently summar-ized in a so-called Final Act, which usually contains the text of the treaty.Thomas Burgenthal and Harold Maier, Public International Law in a Nutshell 94 (1990). These types ofagreements fall under the broad heading of "international agreements." See Restatement (Third) of the For-eign Relations Law of the United States S301(1).

[FN162]. Oscar Schater, International Law in Theory and Practice 66 (1991). The virtues of codification arereadily apparent:(i)n place of the uncertain and slow process of custom, built upon instances that are necessarily contingentand limited, governments negotiate and collaborate in formulating rules and principles to meet perceivedneeds of the entire community of States. The text brings clarity and precision where there had been obscurityand doubt. Moreover, all governments have the opportunity to take part in the legislative process and to ex-press their consent or objection in accordance with their constitutional procedures.Id. (emphasis added) Such treaties are thus preferable both due to codification and to the inclusive nature ofthe proceedings.

[FN163]. See Vienna Convention on the Law of Treaties, U.N. Doc. A/Conf.39/27. (stating "(T)he prin-ciples of free consent and of good faith and the pacta sunt servanda are universally recognized."). This lan-guage demonstrates the legally binding effect of treaties. See also, Restatement (Third) of the Foreign Rela-tions Law of the United States SS102(1)(b) and 122(3) (stating "(i)nternational agreements create law for thestates parties thereto").

[FN164]. See Ernst-Ulrich Petersmann, Codes of Conduct, Encyclopedia of Public International Law 627-28(1984); see also Ernst-Ulrich Petersmann, International Economic Order, Encyclopedia of Public Interna-tional Law 337-339 (1984) (discussing the emergence of international legal standards from "codes of con-duct" and so-called "soft law").

[FN165]. Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, supra note 145,at 493.

[FN166]. Danilenko, supra note 159, at 51.

[FN167]. See Note, The Bank of Credit and Commerce International Scandal: A Warning for Bank Regulat-ors, 24 Law & Pol'y Int'l Bus. 1267, 1268 (1993) (stating "(T)here is no international body of law governingwhich country has primary responsibility for supervision and how that responsibility should be dis-charged.").

[FN168]. See, Bank for International Relations, Recent Developments in International Interbank Relations,Report of Working Group Established by Central Banks of the Group of Ten countries, 4 (1992). In the samedocument, the Working Group discusses the need to create "standard practices" and "agreed methods" to re-duce the potential for misunderstanding and confusion regarding the responsibilities of various actors in theinternational wholesale banking market. Id. at 35. See also Note, supra note 167, at 1267 ("BCCI's deceptiverecordkeeping practices were undetected because of the lack of uniform regulatory standards."). In the 1990Report of the Committee on Interbank Netting Schemes of the Central Banks of the Group of Ten Countries,the Bank for International Settlements also noted the difficulties arising from the lack of prescribed stand-ards governing choice of law and conflict of law standards, "cross-border netting arrangements raise choice-





of-law and conflict-of-law questions that cannot be easily resolved. Establishing a sound basis for the asser-tion of net exposures will, therefore, require thorough legal preparation by the participants in nettingschemes and by netting providers." Report of the Committee on Interbank Netting Schemes of the CentralBanks of the Group of Ten Countries, supra note 122, at 3.

[FN169]. Capital Adequacy Accord, supra note 117, at 11-13.

[FN170]. Id. The solution of creating a split risk-assessment scheme for OECD and non-OECD countries,while a pragmatic approach to a delicate situation, may exclude some important actors.

[FN171]. Footer, supra note 1, at 347.

[FN172]. See id. (noting that developing countries have been "vociferous" in resisting liberalization of tradein services as the developed countries would be the chief beneficiaries).

[FN173]. Bank for International Settlements, Committee on Banking Regulations and Supervisory Practices(Basle Committee), The Management of Banks' Off-Balance-Sheet Exposures: A Supervisory Perspective 1(1986), reprinted in 25 I.L.M. 981 (1986) (Introductory note by Cynthia C. Liechtenstein).

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