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

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

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

Understanding the legal frameworks in each country

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

Effective resource allocation

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

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

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

Respecting banking secrecy

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

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

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

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

Respecting data privacy and protection obligations

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

Coordination with local regulatory authorities

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

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

Engaging an external advisory team

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

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

Managing documentation and record-keeping

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

Considering whistleblower protections

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

Considering technology and cyber security

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

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

Cultural sensitivity and language

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

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

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

Confidentiality and communication strategy

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

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

Originally published by Financier Worldwide.

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