Climate case against ING: what does it mean for monetary policy?

 

Annelieke Mooij, Assistant Professor, Tilburg University

Photo credit: Sandro Halank, via Wikimedia Commons

The Dutch climate organization “milieudefensie” had threatened to start a case against the Dutch ING bank. The 14th of February 2024 the ING has responded that it will not give in into the demands of the climate organization. Hence making it highly likely that the climate policy of the ING will face legal challenges. Prima facie the case seems without EU relevance as it concerns a national climate organization suing a national bank. Though the case may seem to lack European relevance, the opposite is true. The decision by the Dutch judiciary may have serious European consequences. In particular for the Monetary Union and may even bypass the independence of the ECB.

Milieudefensie v. ING

The climate organization (plaintiff) asks the court to order the ING to take four concrete steps. The first is to align its climate policy with the target of 1.5C as stipulated by the Paris Agreement. The second demand is that the ING reduces its own emissions by 48%CO2 and 42% CO2e by 2030. Third that it stops financing large corporate clients who have adverse climate impacts. The fourth and final demand is that ING engages in discussion with the plaintiff about how to substantiate these demands. The demands made by the plaintiff are serious claims. Raising the question of the likelihood these demands are met by the Dutch court.

Whilst the court summons is not yet finalized it is likely that the plaintiff will refer to two earlier cases. The first is to an earlier case won against the Dutch state. In the Urgenda case the Dutch Supreme Court ruled that the state had to reduce its emissions in accordance with the Paris Agreement. The Supreme Court did not state how the state had to comply, simply that it had to comply. The case gave a strong message to the state that it had the obligation to meet the climate agreements. Urgenda provided the foundation for the second case.

The second case that the plaintiff will likely reference is that of Milieudefensie v. Shell. This case still has an appeal pending. The case concerned the climate responsibilities of Dutch oil concern Shell. The judiciary decided that Royal Dutch Shell (RDS) was responsible for the emission reductions of the global shell activities. In this capacity it had to reduce its global emissions by 45% by 2030 in comparison to 2019 levels. This was considered a revolutionary case as it is one of the first where the judiciary recognized climate duties against a legal person.  The legal foundation was article 6:162 of the Dutch Civil Code, this article is a form of tort law. The court considered that the emission reduction plans of Shell were not concrete enough. Shell thereby violated an unwritten duty of care. Prima facie the case against ING therefore looks strong. There are, however, two obstacles to overcome.

The first minor challenge is that of the impact of ING’s financial products on their clients. In the case against Shell the court considered that the mother company RDS determined the policy of the entire group (paraf. 4.4.4). It therefore had the influence to change the companies’ policies and directions. Arguably a bank can have a similar steering influence upon the direction of its clients. In particular the ING may refuse loans intended to buy polluting machines. On the other hand banks can approve loans for investment in greener operations. Loans can thereby have a powerful impact upon the direction of a consumer. Operating credit on the other hand will have a less likely impact on the course of a business. To demand that all financing is discontinued to corporate clients who do not have a climate plan provides a broad interpretation to the duty of care of the banking sector. In particular, as the Dutch judge will have to weigh the right to a clean environment against the right to operate a business.

The second difficulty is that unlike RDS, ING’s emissions (in)directly result from a varied investment portfolio. As stated by the response of ING measuring merely the emissions can lead to a negative climate result. An increased investment in heat pumps, increases the emission portfolio of ING but can decrease global emissions. The emissions in the Shell case were the direct result of the company’s own activities. Redirecting its efforts from fossil fuels to sustainable energy will have a positive impact upon the fight against climate change. In length of this argument Ferrari and Landi argue with regard to central banks that investments should be made not by simply investing in the lowest emitters.  Instead of this so-called “best-in-universe” approach, banks should invest in companies that do well within their substitute production group. The so-called best-in-class method of investment. Through this approach global demand can be shifted to green products. Therefore unlike the Shell case the court will have to decide between a blanket reduction of emissions which may have a negative environmental impact, or a best-in-class approach. The difficulty is that the court will then have to provide instructions not on what goals to achieve but rather on how to achieve emission reductions. The methods of achievement has been something the court has refrained from doing in both Shell and Urgenda. The decision on methodology may have a large impact on the future European Central Bank’s purchasing programmes.

 

Impact on the Monetary Union

The right to (private) life codified in the European Convention for Human Rights (ECHR) played a significant role in these cases. Article 52(3) of the EU Charter states that the ECHR provides a minimum level of protection. The CJEU may therefore award a higher level of protection but not lower than the ECHR. The interpretation of the ECHR therefore has a large influence on the fundamental rights protected within the EU Charter of Fundamental Rights.

The judgements of national judges are not binding for the European Court on the Convention of Human Rights (ECtHR). However, when there appears to be a consensus among the majority of members the ECtHR considers there is common ground. The existence of common ground decreases the margin of appreciation for the member states. The case of Urgenda directly involved an appeal to human rights against the state, specifically the right to life (article 2) and private life (article 8). Similar cases have been successfully tried in Ireland and France. The ECtHR is yet to rule on the climate change cases that are pending. There however seems a likelihood of a positive outcome for the plaintiffs. The CJEU will have to consider the scope of these cases and can decide on the same or a higher standard of protection. There is, however, a difference with the case of ING.

The cases against the states directly invoked human rights. In the Shell case the Dutch judge only indirectly applied the fundamental rights when interpreting the duty of care. It will likely do the same in the case of ING. This provides a less strong signal about common ground to the ECtHR that the right to a clean environment includes specific obligations for banks and other legal persons. It will take more national judges to reach similar judgements to provide the ECtHR with to conviction that there is common ground. The court in the Shell case, however, included the in its considerations the UN Guiding principles. These principles create a large common understanding throughout the ECHR members. The states obligation to enforce direct obligations for legal persons through its courts are likely to be accepted by the ECtHR.   If so it cannot be ignored especially by the largest bank in the EU; the European Central Bank (ECB).

The ECB has a tiered mandate. Its primary objective is to obtain price stability which has been defined as keeping inflation under but close to two percent on the medium term. To achieve this goal the Treaty on the Functioning of the European Union (TFEU) has granted the ECB with a high level of independence. This means that neither the EU or national legislators cannot determine or influence how the ECB executes its monetary policy. The ECB is therefore likely to argue that it cannot be influenced as to how it conducts is monetary policy even with regard to climate change. The ECB, however, is not immune from other primary or secondary legislation. In the Olaf case the CJEU considered that the ECB falls within the EU legal framework. Its independence only protects the ECB against political influence when it conducts monetary policy.

In addition to its primary mandate the ECB has a secondary mandate to abide by. This mandate includes “[…]the sustainable development of the Earth”. The ECB has to comply with its secondary mandate if it does not violate its primary mandate. Currently this is interpreted by the ECB to mean that when the ECB has a choice in how to achieve its price stability objectives, the secondary mandate is guiding. The secondary mandate, however, has various goals. Some of these goals can be achieved simultaneously but some are independent or even substitute goals. This makes it currently difficult to pinpoint to the legal obligations of the ECB from the secondary mandate. When it comes to climate change, however, the ECB considers itself bound by the Paris Agreement. In addition the ECB has to abide by the EU Charter of Fundamental Rights. It is however unclear what precise duties these treaties bring to the ECB when it carries out its private sector funding programmes. The ECB states that it is trying to decarbonize its corporate sector portfolio’s by using a method called tilting. The green bonds in the sector are given preference to the brown bonds. The difficulty is that when green bonds run out the ECB will continue by purchasing brown bonds if it considers this necessary for its monetary aim. The case of Milieudefensie v. ING, can provide clear guidance with regard to the ECB’s fundamental right climate responsibilities in its corporate sector programmes.  The Dutch court’s reasoning can provide the balance between a bank’s obligations to climate against the right to operate a business. This reasoning can be incorporated by the ECB.

The ECB makes choices with regard to how (intense) to pursue price stability. These choices should be guided by human rights such as climate change and economic needs. The ING decision can create a guiding framework on how to balance these different interests. However before such guidelines can be considered binding more national cases need to be tried, or the ING case would have to reach the ECtHR. Still quite a road to be travelled.

Accessing the EU’s Financial Services Market in the Event of a No-deal Brexit

Bartlomiej Kulpa, LLM (Twitter: @KulpaBart)

Introduction

Since Boris Johnson took the helm as British Prime Minister, a no-deal Brexit has become the most likely scenario. The UK-based financial services firms are waiting to hear if they will be able to serve clients in the EU 27, and if so, on what basis. Currently, the UK-based financial services firms rely on the so-called passporting rights. According to The Economist, 5,476 financial services firms based in Britain used 336,421 European passports to sell their products in the EU in 2016. By comparison, approximately 8,000 financial services firms based in the EEA used 23,535 European passports to sell their products in the UK. This proves that the removal of passporting rights as well as uncertainty over what will replace them amount to an existential threat.

The Concept of a European Passport             

A European passport is a right granted under the Single Financial Market Directives, such as MiFID II (The Markets in Financial Instruments Directive 2014/65/EU), to an EEA institution licenced in an EEA Member State. The European passport enables financial services firms to act on a cross-border basis within the EEA. If Britain leaves the EU without a Brexit deal, the UK-based financial services firms will lose the passporting rights and consequently full access to the single market. In other words, they will be treated as third country financial services firms.  

   

Articles 34 and 35 of MiFID II form the legal basis for the passporting rights. Article 34 provides for freedom to provide investment services and activities in another Member State if such investment services and activities are authorised by the competent authorities of a home Member State. As regards Article 35, that allows financial services firms to provide services in another Member State through the right of establishment of a branch provided that such services are authorised by the competent authorities of the home Member State. Pursuant to Articles 34 and 35, a financial services firm must notify the competent authorities of the home Member State of its intention to provide services in another Member State. In other words, the financial services firm must apply for a licence. Subsequently, the competent authorities of the home Member State inform the competent authorities of a host Member State of the financial services firm’s intention to serve clients in the latter.    

  

There is no doubt that the advantages of the concept of a European passport easily outweigh the disadvantages. Firstly, one licence enables financial services firms to obtain access to 31 countries which have a population of over 500 million consumers (this will be reduced after a Brexit). From a legal point of view, this means that a financial services firm that has been granted a European passport is not required to obtain a domestic licence in every Member State. Secondly, the concept of a European passport helps to keep business costs down. Thirdly, the concept of a European passport is free from political influence. Fourthly, the range of clients and investors is not limited in scope. In other words, the concept of a European passport does not only apply to professional investors but also to retail investors. Lastly, a home Member State regulator cannot revoke the European passport and the European passport is granted for a period of time with no fixed limit.

Further, it should be noted that the concept of a European passport does not have the qualities to be described as a single European passport. If it qualified as the single European passport, then financial services firms would be allowed to undertake cross-border activities throughout the EEA without taking any further actions. A good example of a single administrative act with EEA-wide effect is a European trademark granted by the European Union Intellectual Property Office (EUIPO).

The Equivalence Regimes       

The EU has operated the equivalence regimes (also known as the third country regime or TCR) in relation to financial services firms based outside of the single market under the relevant Single Financial Market Directives and Regulations, the USA being the prime example, for some years. In accordance with Articles 46-49 of MiFIR (The Markets in Financial Instruments Regulation (EU) No 600/2014), the equivalence regime is based on an equivalence decision made by the European Commission (EC) and the register of third country financial services firms kept by the European Securities and Markets Authority (ESMA). As regards the former, the EC’s equivalence decision states whether, firstly, the prudential and business conduct requirements that are legally binding in a third country have equivalent effect under EU law and whether, secondly, the legal and supervisory arrangements of the third country ensure that financial services firms authorised by the competent authorities of that third country comply with the legally binding prudential and business conduct requirements. Once the EC has made the equivalence decision in favour of a particular third country, financial services firms based in that third country need to register, within a transitional period of three years under Article 54 of MiFIR, with the ESMA. As a result, third country financial services firms are able to operate as a European hub. It should be noted that Member States shall not impose any additional requirements on such firms and shall not treat them more favourably than firms based in the EU.       

Moreover, it should be emphasised that the equivalence regime enables third country financial services firms to provide investment services and activities only to eligible counterparties and professional clients. This means that, unlike the concept of a European passport, the equivalence regime does not apply to retail clients. What is more, the EC can revoke an equivalence decision at any time if divergences between a regulatory framework of a third country and the regulatory framework of the EU appear.

One could argue that in the event of a no-deal Brexit the equivalence regime would be more attractive for smaller financial services firms. As practice proves, multinational financial services behemoths, which have used Britain as the gateway to the single market, have already relocated to the EU 27 or are in the process of setting up offices there as part of their Brexit strategy.

As far as the resolution of disputes is concerned, third country financial services firms shall, before providing any services or activities to the EU-based clients, offer to submit any disputes relating to the aforementioned services or activities to the jurisdiction of a court or arbitral tribunal in one of the Member States (Article 46(6) of MiFIR). In other words, such firms shall offer a forum in the EU where their right to conduct litigation could be exercised. If Britain were to access the single market via the equivalence regime in the event of a no-deal Brexit, then the English courts would not have any jurisdiction over disputes relating to such services or activities. In practice, this would result in London facing a struggle to retain its position as a global centre for securities litigation.         

Although the equivalence regime would allow the UK-based financial services firms to access, in the event of a no-deal Brexit, the single market, the equivalence regime suffers from a few drawbacks. Firstly, the equivalence regime is a unilateral mechanism. To put it simply, it only depends on the EU whether it recognises as equivalent the regulatory standards of a third country. Secondly, since an equivalence decision is made by a political body, namely the EC, various political factors can impact the equivalence assessment. Thirdly, the EC’s equivalence decision cannot be reviewed by a court.

        

The European Passport Light

The next issue that merits attention is the so-called ‘European passport light’ as set out in Article 47(3) of MiFIR. A third country financial services firm can rely on the European passport light if the following conditions have been met: (i) the EC has made an equivalence decision in favour of a particular third country; and (ii) the third country financial services firm has been granted the authorisation to establish a branch in one of the Member States pursuant to Article 39 of MiFID II. As a result, the third country financial services firm will be able to provide services and activities to eligible counterparties and professional clients in other Member States without the requirement to establish a new branch for each additional Member State. In the same way as the equivalence regime, the European passport light does not apply to retail clients. However, unlike the equivalence regime, the European passport light is not based on the requirement to register with the ESMA.         

  

The MiFID II Own Initiative Principle

Article 42 of MiFID II creates an exception to a Member State’s imposition of an authorisation requirement, which is enshrined in Article 39 of MiFID II, for a third country financial services firm where that firm provides investment services or activities at the exclusive initiative of a retail or professional client. The MiFID II Own Initiative Principle is coterminous with the reverse solicitation test. Compared to the equivalence regime, the MiFID II Own Initiative Principle applies to retail as well as professional clients. However, from a practical point of view, the MiFID II Own Initiative Principle does not seem to be useful for big financial services firms that intend to actively gain a market share. Furthermore, any marketing to EU-based clients triggers the EU rules for providing financial services and consequently the need for obtaining an EU licence.    

  

Conclusion

It seems that the equivalence regime is the only workable arrangement that could replace the concept of a European passport in the event of a no-deal Brexit. Unless the UK government creates ‘Singapore upon Thames’, the process of making a decision whether post-Brexit Britain’s regulatory regime is deemed to be equivalent should be relatively straightforward. However, one should remember that the equivalence regime does not apply to retail clients and the EC can revoke an equivalence decision at any time. Therefore, the equivalence regime would not fill the gaps created after the cessation of the application of a European passport to the UK-based financial services firms.

Further reading:

M Lehmann and D A Zetzsche, Brexit and the Consequences for Commercial and Financial Relations between the EU and the UK, 20 September 2016. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2841333;

H Nemeczek and S Pitz, The Impact of Brexit on Cross-Border Business of UK Credit Institutions and Investment Firms with German Clients, 1 February 2017. Available at: https://ssrn.com/abstract=2948944;

The Economist, London’s reign as the world’s capital of capital is at risk, 29 June 2019. Available at: https://www.economist.com/finance-and-economics/2019/06/29/londons-reign-as-the-worlds-capital-of-capital-is-at-risk.              

Barnard & Peers: chapter 14, chapter 27

Photo credit: via Wikicommons, photo taken by Andy F

Money laundering, customer due diligence and data protection: the CJEU's judgment in Safe Interenvios

Marcin Kotula, Legal Officer at the European Commission

The views expressed are purely those of the author and may not in any circumstances be regarded as stating an official position of the European Commission

Background

The recent judgment of the CJEU in the case of Safe Interenvios was triggered by a preliminary reference from the Provincial Court in Barcelona (Audiencia Provincial). The Court in Barcelona submitted to the CJEU a number of questions related to the interpretation of the third Anti-Money Laundering Directive 2005/60/EC (AML Directive, since replaced by the fourth money laundering Directive, discussed here).

In the case in question, Safe, a company which falls under the definition of a "financial institution" within the meaning of the AML Directive and of a "payment institution" within the meaning of the Payment Services Directive 2007/64 (PSD) has been transferring the funds of its customers abroad through the accounts it held with 3 banks, BBVA, Sabadell and Liberbank. The transfers were to be carried out by agents who were accordingly authorised by Safe and verified by the Bank of Spain (Banco de España). After discovering irregularities regarding Safe's agents the banks, acting under Spanish Law 10/2010 on the prevention of money laundering and terrorist financing^[1] which transposes the AML Directive in Spain requested various information from Safe. When Safe did not provide them with the requested information the banks closed its accounts. Before closing Safe's account BBVA informed SEPBLAC^[2] that Safe might be involved in money laundering activities.

Safe challenged the closure of its accounts before the Commercial Court in Barcelona (Juzgado de lo Mercantil) arguing that the banks have also been transferring funds abroad and that insofar they have been competing with Safe on the same market. In consequence, according to Safe, the closure of accounts was an act of unfair competition. Safe argued further that the information requested by the banks which related to Safe's customers as well as to the origin and destination of the funds could not have been provided without breaching the data protection legislation.

Safe's challenge was largely unsuccessful as the Commercial Court in Barcelona did not find a specific infringement of competition law by none of the banks. It concluded that BBVA closed Safe's account on the basis of checks which showed that nearly a quarter of transactions were not carried out by agents authorised by Safe and verified by the Bank of Spain. As for the closure of accounts by Sabadell and Liberbank, the court in Barcelona partly ruled in Safe's favour concluding that these two banks failed to properly set out the reasons for their closures.

Subsequently Safe, Sabadell and Liberbank appealed against that judgment to the Provincial Court in Barcelona which submitted the preliminary questions to the CJEU. 

The CJEU was asked, first, whether customer due diligence measures, laid down in the AML Directive to respond to the risks of money laundering and terrorist financing, could be applied by a credit institution (in the case at hand, a bank) to a financial/payment institution such as Safe, given that financial/payment institutions are already subject to supervision by competent authorities under the PSD and the AML Directive. The CJEU was then additionally asked what type of customer due diligence measures (standard, simplified or enhanced) could be applied in such a scenario and which circumstances could trigger the application of those measures. Finally, the national court asked if the measures and the provision of certain information requested by the banks from Safe are in line with EU competition law (Safe claimed that the banks compete with it on the payment services market) and with EU data protection law (according to Safe, the banks requested the identification data of its customers and of the recipients of the funds which Safe transferred).

The AML Directive sets out the legal framework for measures aimed at preventing and combatting money laundering and terrorist financing. Its provisions are to a great extent inspired by the recommendations of the Financial Action Task Force (FATF), the main international body in the area of combatting money laundering and terrorist financing.  Article 3 of the AML Directive defines which institutions and professions are to apply the anti-money laundering measures. The list in Article 3 includes credit institutions such as banks and financial institutions such as Safe. Chapter II of the AML Directive, which deals with customer due diligence, distinguishes between 3 types of such diligence, i.e. simplified, standard and enhanced.

As far as standard due diligence is concerned, Articles 7 and 8 of the AML Directive describe in which circumstances due diligence should be applied and what measures this might involve. The latter provision underlines that the extent the due diligence measures can be determined on a risk-sensitive basis depending on the type of customer, business relationship, product or transaction.

Article 9 of the AML Directive specifies the checks that need to be undertaken before the establishment of a business relationship or the carrying-out of a transaction. It also indicates when a business relationship must be terminated or a transaction cannot be carried out.

Article 11 sets out the simplified customer due diligence measures which inter alia apply in situations where the customers are credit institutions or financial institutions. Such customers are already covered by the scope of Article 2 of the AML Directive and need to apply due diligence measures towards their own customers. Enhanced customer due diligence is dealt with in Article 13.

Pursuant to Article 37 of the AML Directive the compliance with the requirements of the Directive by the institutions and persons that need to apply it is supervised by competent authorities. Credit institutions and payment institutions are also covered by the PSD.

Payment institutions get authorised to provide payment services by competent authorities designated by the Member States. These authorities are also empowered to supervise the compliance with the requirements that are applicable to payment service providers.

The CJEU's analysis

The CJEU first dealt with the question if financial institutions such as Safe can be the addressees of standard or enhanced customer due diligence measures despite the derogation in Article 11 of the AML Directive which foresees the application of simplified due diligence measures towards financial institutions.

The Court underlined that Article 11 of the AML Directive does not derogate from Article 7(c) under which standard customer diligence measures must be applied when there is a suspicion of money laundering or terrorist financing. Thus, a national provision which authorises the application of standard due diligence measures vis-à-vis financial institutions in such circumstances of suspicion is compatible with the Directive.

In a similar vein, Article 11 of the AML Directive does not derogate from Article 13 thereof. The latter requires enhanced customer due diligence measures to be applied in situations where the risk of money laundering or terrorist financing is higher. Paragraphs (2) to (4) of Article 13 contain a non-exhaustive list of such situations which by their nature present a higher risk. Whilst this list does not include the transfer of funds abroad the Member States have a margin of discretion in applying a risk-based approach and identifying other situations which are, by their nature, associated with a greater risk of money laundering or terrorist financing. In the case at hand, the transfer of funds abroad was included by the Spanish legislator in Law 10/2010 (Article 11) as one of the higher-risk situations which trigger enhanced customer due diligence.

The CJEU then dealt with Article 9 of Spanish Law 10/2010 which on the one hand allows the non-application of standard customer due diligence towards financial institutions but on the other hand empowers the Minister of Economic Affairs and Finance to exclude the application of simplified due diligence towards certain customers. On this point, the CJEU noted that the AML Directive only lays down the minimum level of EU harmonisation with Article 5 of the Directive envisaging the possibility of adopting or retaining in force stricter provisions in the EU Member States. This conclusion was supported by an earlier CJEU judgment in Jyske Bank Gibraltar. The stricter provisions which can apply in the Member States need to serve the purpose of strengthening the fight against money laundering and terrorist financing. They may thus also relate to additional situations which, according to the Member State, present a risk of money laundering or terrorist financing  even if the AML Directive does not prescribe any type of customer due diligence for those situations.

The second group of questions before the CJEU related to the extent of powers which credit institutions may exercise in the context of customer due diligence and to the relation between those powers and the powers of the supervisory authorities under Article 37 of the AML Directive and under Article 21 of the PSD. Here, the Court noted that an institution covered by the AML Directive cannot establish a business relationship or carry out a transaction through its account or must terminate an existing business relationship when it is unable to obtain the various items of information that are defined  in Article 8 of the Directive. These items include the verification of the customer's and the beneficial owner's identity (in the latter case pursuant to a risk-based approach) as well as the information on the purpose and intended nature of the business relationship. The inability of the institution to obtain these types of information might be due to the customers' refusal to cooperate (as in the case at hand) or to other factors.

The CJEU went on to identify the limitations that need to be applied when taking a measure such as the termination of a business relationship or the refusal to carry out a transaction through the bank account. The measure must be proportionate to the risk of money laundering or terrorist financing and thus cannot be taken in the absence of sufficient information which point out to that risk.

The Court then stated that the powers exercised in the context of customer due diligence and the supervisory powers of the competent authorities under the AML Directive and the PSD are rather to be seen as separate and complementary. In consequence, a credit institution may take account of the due diligence measures which its customer had to apply towards its own customers but the extent of the credit institution's due diligence measures in such a scenario must be appropriate to the risk of money laundering and terrorist financing. In addition, a credit institution must in that case neither compromise the supervisory tasks of the competent institutions under the PSD nor replace those supervisory authorities.

Next, the CJEU spelled out the conditions in which the national legislation can authorise or require standard or enhanced customer due diligence measures towards a financial institution. The CJEU's reply to the first group of questions indicated already that such measures can be applied vis-à-vis financial institutions pursuant to Article 13 of the AML Directive (enhanced due diligence) and Article 5 (stricter provisions). In this part of the judgment however the Court examined how the Member States (when prescribing such measures) or the credit institutions (when authorised by the Member State to apply such measures) can exercise the powers under Article 5 and 13.

The CJEU started by recalling its case-law on the freedom to provide services and on the permissible restrictions of that freedom (Art. 56 TFEU). It reminded that in Jyske Bank Gibraltar the prevention of and fight against money laundering and terrorist financing was recognised as a legitimate public interest objective which could justify a barrier to the freedom to provide services. It then turned to the question if Article 11 of Spanish Law 10/2010 which identifies the transfer of money abroad as a situation which always presents a higher risk of money laundering and terrorist financing (and in consequence triggers enhanced customer due diligence) is appropriate for attaining this legitimate public interest objective. In that regard, the Court stressed that both the national legislator (when prescribing standard or enhanced due diligence measures towards a financial institution) and the credit institutions (when authorised by the Member State to apply such measures) must carry out a complete risk assessment prior to deciding on the measures to take. Such measures must furthermore be proportionate to the risk so identified. The final element of this part of the CJEU's judgment was thus dedicated to the proportionality of Article 11 of Spanish Law 10/2010. Here, the Court concluded that the restriction of the freedom to provide services laid down in Article 11 would be proportionate if no less restrictive means were available and if the restriction was compatible with the fundamental rights and freedoms under the Treaties and the Charter e.g. with the right to protection of personal data (Article 8 of the Charter) and with the principle of free competition. Whilst, in principle, leaving the protection of personal data aspects for the last part of the judgment the Court found that a less restrictive measure was available in this case. In the case at hand the Spanish legislator generally presumed that all transfers of money abroad present a higher risk of money laundering and terrorist financing whereas it could have provided a possibility of rebutting that presumption in individual cases which objectively do not present such a risk.

The last group of preliminary questions put before the CJEU focussed on the compatibility of the enhanced due diligence measures with the EU data protection law, as set out in the Data Protection Directive (Directive 95/46). The Provincial Court in Barcelona asked if Safe can be obliged to provide the banks with the identification data of its customers and in particular those from whom the transferred funds originated as well as with the identification data of the recipients of the funds. In the reply to the previous group of questions the CJEU has already indicated that the due diligence measures taken pursuant to Articles 5 and 13 of the AML Directive need to be compatible with Article 8 of the Charter, i.e. with the right to the protection of personal data. The reply to the last group of questions could have thus elaborated on this statement and clarified which personal data of the customers and recipients can be validly requested by credit institutions. However, in the case at hand BBVA denied that it requested the identification data of Safe's customers and of the recipients of the funds. It merely requested the identification data of Safe's agents who used BBVA's accounts. Moreover, the CJEU found the last group of questions not to be sufficiently precise because they only referred generally to the Data Protection Directive without specifying any of its provisions which could be relevant in this context. The part of the preliminary questions which related to the Data Protection Directive was therefore considered inadmissible.  

Comments

The replies of the CJEU to the preliminary questions point out in the direction of giving a certain degree of flexibility to the national legislators and to the institutions and persons which apply customer due diligence measures. On the other hand, the measures prescribed or authorised by the national authorities and the measures applied in individual cases by banks and other institutions and persons covered by the AML Directive need to be preceded by comprehensive risk assessments. Those risk assessments should lead to the definition of measures which are appropriate to the identified level of risk. The measures can vary depending on the type of customer, business relationship, product or transaction.

This kind of well-balanced approach seems in line with the objectives of the AML Directive and with the CJEU's case-law which recognised preventing and combatting money laundering and terrorist financing as an overriding reason in the public interest.

The CJEU added a further safeguard at the later stages of the judgment: the proportionality of the customer due diligence measures depends not only on the results of the risk assessment but also on their compliance with the fundamental rights and freedoms and general principles of law. The Court specifically mentions the principle of free competition and the right to the protection of personal data enshrined in Article 8 of the Charter.

In Safe the CJEU did not however provide any specific indications on the issue which personal data can be requested from the customer in the context of due diligence measures and in which circumstances. This was so because the last group of preliminary questions was based on facts which were disputed in the proceedings and eventually this last group was declared inadmissible by the Court.

The AML Directive does not really address the matter how the measures it designs relate to the protection of personal data. In fact, there is only one point in the text of the Directive which touches upon that issue. It is Recital 33 which refers to the applicability of national data protection laws and of the international transfers rules of the Data Protection Directive in the context of the transmission of information to the Financial Intelligence Units (FIUs) and the disclosure of information about such a transmission.

On the other hand, the new fourth Anti-Money Laundering Directive 2015/849 is much more outspoken in this respect. Its Chapter V implicitly states that Article 7(e) of the Data Protection Directive constitutes the legal basis for processing personal data for the purpose of the prevention of money laundering and terrorist financing by recognising, in Article 43, that such processing is a matter of public interest. The same Chapter deals also with the issue of the information that needs to be provided to the customer before establishing a business relationship or carrying out an occasional transaction. Finally, it lays down more precise indications with regard to the transmission of information to FIUs and to the disclosure of that fact to the customers. According to Article 41(4) this issue should be regulated in national laws which must strike the balance between the access of the customer to the personal data and the interests of the proper functioning of the anti-money laundering procedures and investigations.

The provisions on the different kinds of customer due diligence are also more precise in the new Directive. There is no longer a derogation from standard due diligence for financial institutions. The Directive is now accompanied by three annexes. The first of these annexes contains a non-exhaustive list of risk variables that shall be taken into account when determining the extent of customer due diligence measures. The second annex includes a non-exhaustive list of factors which point out to a potentially lower risk of money laundering and terrorist financing, i.e. the degree of risk that might trigger the application of simplified customer due diligence. Finally, the third annex is a non-exhaustive list of factors suggesting a higher degree of risk which requires the application of enhanced customer due diligence. Generally speaking, the factors included in the three annexes relate to types of customers, geographic areas, and particular products, services, transactions or delivery channels. In addition, Articles 17 and 18 of Directive 2015/849 envisage guidelines on the risk factors and the measures to be taken in situations of simplified customer due diligence and enhanced customer due diligence respectively. Such guidelines shall be issued by ESAs, i.e. the European Supervisory Authorities (EBA, EIOPA and ESMA) by 26 June 2017.

Photo credit: gfintegrity.org

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[1] Ley 10/2010 de prevención del blanqueo de capitales y de la financiación del terrorismo.

[2] The Executive Service of the Commission for the Prevention of Money Laundering and Financial Crime of the Bank of Spain - Servicio Ejecutivo de la Comisión de Prevención de Blanqueo de Capitales e Infracciones Monetarias del Banco de España.

The legal challenge to ECB restrictions on Greek bank accounts – and how you can help

Steve Peers

Many EU citizens have watched with sympathy and concern as Greek citizens have been limited to withdrawing €60 a day in the last two weeks. This restriction results from a restriction imposed by the European Central Bank (ECB) on the emergency liquidity assistance which it provides to Greek banks.  

Apart from the human impact, there are grave legal, political and economic doubts about the ECB’s action. One of the central purposes of a central bank is to function as a lender of last resort to banks – and the ECB is signally failing to do that here. Also, the ECB’s actions give the impression that it is trying to influence the Greek political debate on austerity and membership of the Eurozone – a role which is well outside the Bank’s remit. The banking restrictions obviously damage the Greek economy, and so limit its ability to pay back its creditors in future.  They have nothing to do with the Bank’s task of fighting inflation, and they undermine its broader role in supporting the EU’s economic growth. (For a fuller critique, see here (paywalled); on the legal background, see here). Arguably these restrictions – or further restrictions which the ECB might impose – could lead toward a de facto ‘Grexit’ from monetary union, which is ruled out by EU law (see my discussion here).

It’s possible to challenge the ECB’s actions via the national courts, which can refer the issue to the CJEU, such as in the recent Gauweiler case (discussed here). They can also be challenged in the EU courts, such as in the UK’s recent successful challenge (discussed here). The case law takes a broad view of what ECB acts can be challenged, except where it acts as part of the ‘Troika’ which negotiates bailout conditions, when neither the Bank nor the Commission can be challenged in the EU courts. But the ECB’s restriction of assistance to Greek banks did not fall within the scope of its role in the Troika.

National governments such as Greece can go directly to the EU courts to challenge ECB actions. Other challengers besides the EU institutions would have satisfy standing rules: ‘direct and individual concern’, or (if they are challenging a non-legislative act which does not entail implementing measures) ‘direct concern’. Arguably it would be easy for a Greek bank to satisfy those rules.

In the absence of a legal challenge from a Greek bank or the Greek government, an individual depositor has brought a legal challenge to the ECB’s recent actions before the EU General Court. You can find the full text of the claim here. The ECB might restore assistance if there is a deal in the near future, but it is still worth challenging its actions, so it cannot do this (or threaten to do it) in future.

Obviously there is a possible problem with standing, although a parallel challenge could be brought in the Greek courts. The plaintiff welcomes any advice or support – contact info@alcimos.com. Or you can leave comments on this blog post.

Barnard & Peers: chapter 19

Photo credit: www.2oceansvibe.com

Capping bankers' bonuses: a step too far for the EU?

Steve Peers

Bankers are never going to win a popularity contest. The collapse of international financial markets which started in 2008 and has led to austerity across Europe has been widely blamed on lax regulation of banks and irresponsible behaviour by bankers. It has led to a huge overhaul of EU banking regulation, including the transfer of banking supervision to the European Central Bank, new rules on bank bail-outs, and provision for criminal law sanctions against bankers involved in market abuse (discussed here). EU law has gone further still, and adopted rules which cap the amount of bonuses paid to bankers.

The United Kingdom, home to the biggest financial services industry in the EU, has had reservations about some of these new laws. It has opted out of some of them (the market abuse rules, the banking supervision rules and aspects of the bank bail-out rules), and has challenged others in the CJEU. Earlier this year, its challenge to the ban on ‘short-selling’ failed in the Court (see discussion here), and today’s Advocate-General’s opinion suggests that its challenge to the restrictions on bankers’ bonuses should fail too.

These restrictions are found in the EU’s revised rules on capital requirements and the authorisation to take up banking services, which are set out in a parallel Regulation and Directive adopted in 2013. In effect, they require that bankers’ bonuses cannot usually be more than the amount of their ordinary annual salary. By way of exception, the bonuses can be double the amount of the banker’s ordinary annual salary, if bank shareholders agree pursuant to a special procedure.

Advocate-General’s Opinion

The UK raised six main complaints against the bonuses rules: lack of competence by the EU to regulate pay; infringement of the principles of subsidiarity and proportionality; violation of the principle of legal certainty; illegal delegation of power to an EU agency (the European Banking Authority); breach of EU rules on data protection and privacy, due to the potential disclosure of the pay received by bankers; and a breach of the principles of customary international law, due to the extraterritorial effect of the rules. Advocate-General Jaaskinen argues that all five complaints be rejected.

First of all, the Advocate-General argues that Article 53 TFEU (the legal base for this measure) is correct, because that legal base can extend to banking regulation generally, not just the promotion of the freedom of establishment for banks. The pay cap does not constitute a ‘social policy’ measure, since it does not regulate the basic salary paid to bankers, which is the basis for calculating any additional bonus.

Secondly, data protection rules are not violated, because the disclosure of bankers’ pay is only discretionary, not mandatory. In the event that Member States make a request for such disclosure, they would then be bound by EU data protection law.

Thirdly, conferring powers upon the EU agency is not illegal, because the powers do not concern the essential elements of the legislation, and the EU Banking Authority does not adopt the measures itself, but merely recommends their adoption to the Commission.  Fourthly, the principle of legal certainty is not infringed by applying the new rules to pre-existing employment contracts. Fifthly, the principles of proportionality and subsidiarity are not violated, because the creation of a uniform system of risk management was better achieved at EU level, rather than national level, and the EU institutions have great discretion to assess how these principles apply. Finally, the UK has not made out its argument that customary international law rules out the extraterritorial application of such limits.

Comments

This case is not about whether limiting bankers’ bonuses is a good idea. Rather it concerns whether it is legal for the EU to limit them. If the EU lacks such power, there would in principle nothing to prevent Member States from limiting bankers’ bonuses individually, if they wished. The argument about whether to do so would then be held at a national level, rather than the EU level.

Some of the UK’s complaints are clearly unconvincing.  As the Advocate-General suggests, the argument about international law is not fully fleshed out or convincing. The legal certainty argument fails to consider that employment law regulation usually impacts upon existing contracts; this is justifiable in light of the public-interest principles underlying the very nature of employment law. Anyway, bonuses are inherently variable. As for the data protection argument, the Opinion largely follows what the CJEU established already in EP v Council (family reunion): if EU law provides for options for Member States, the compatibility of those options with human rights law should be judged when and if Member States exercise those options. In any event, prior case law on data protection and salary disclosure does not set out an absolute ban on release (see Satamedia, for instance).

The UK’s other arguments are rather stronger. While it is true to say that the EU’s banking agency does not actually take the final decision relating to implementation of the bonus cap, it does more than simply provide expert advice on this issue. The Commission must then either act on this advice or do nothing at all: so it does not have full discretion to adopt the delegated acts (see the complex decision-making system set up by the Regulation establishing the Banking Authority). This process is fundamentally questionable because it blurs the accountability for the decision being taken (and moreover, it is too convoluted to be transparent).   

As for proportionality and subsidiarity, certainly the events of the last six years have demonstrably indicated that a more decentralised system of managing banking risks was ineffective. Hopefully the EU-wide measures will be more successful, but in any event the nature of the subject-matter calls for an EU-wide response, in light of the level of integration between European financial markets and the potential cross-border impact of bank failures. But that isn’t the point: the UK is not challenging the entirety of the capital requirements rules, but only some of the handful of provisions which regulate bankers’ bonuses. In fact, it is not challenging those provisions which prevent bankers from receiving bonuses as a consequence of risky behaviour, but only those provisions which regulate bonuses regardless of bankers’ actions. So the opinion should instead have asked whether these provisions meet the requirements of the subsidiarity principle. It is hard to see how they do.

This brings us to the biggest problem with the Opinion: the argument that the legal base on freedom of establishment can regulate bankers’ bonuses. The legal base point here can only be understood by viewing the Treaty as a whole. It has separate provisions on social policy, which include a ban on EU regulation of pay (Article 153 TFEU). The general internal market power (Article 114 TFEU) specifically states that it ‘shall not apply to’ measures ‘relating to the rights and interests of employed persons’. The Treaty drafters’ intention was clearly to provide for lex specialis rules relating to regulation of pay.

The ban on EU regulation of pay has been clarified in the case-law of the CJEU. In the Impact judgment, for instance, it ruled that the EU could not regulate the level or components of pay, but it could establish non-discrimination rules relating to pay as regards categories of workers. Similarly, the working time directive provides for holiday pay, but does not regulate the level or components of pay which a worker normally receives (which then constitute the basis on which the holiday pay is calculated).

Following the logic of these precedents, it is true to say that the capital requirements legislation does not set the level of bankers’ pay, on the basis of which the bonuses are capped. But it does regulate the components of pay, by determining how much of the total amount of pay can be variable. The Advocate-General’s reasoning would mean that the EU would be free to regulate at least some aspects of workers’ pay in any area of law subject to special rules in the Treaty, rather than the general internal market legal base. So the EU could regulate aspects of the pay of farmers, fishermen, transport workers and anyone in other service industries.

It could reasonably be argued that aspects of pay in these other fields can exceptionally be regulated by EU law where that is an essential component of the regulatory framework. This could be the case in banking, for instance if the overall amount of pay could damage the existence of the bank or bonuses were linked to risky behaviour. The legislation does have rules on these issues, but the UK has not challenged them. So it follows that the opinion is fundamentally unconvincing on the legal base point.

In light of the financial crisis, there are many good reasons to regulate banks more effectively, and it would not be shocking if Member States wanted to react to understandable public anger at the huge cost of bank bail-outs by limiting bankers’ income. But resentment at bankers’ pay, even it is entirely justified, cannot authorise the EU to exercise powers which any reasonable interpretation of the Treaties suggests that it just does not have.


Postscript (November 21st): Like any Advocate-General's opinion, this view is non-binding, although a number of British journalists and politicians forgot this when the opinion was released. In any event, the point is moot since, following publication of the opinion, the UK's Chancellor decided to drop the legal challenge. His official reason was to save taxpayers' money, but this is not convincing since a large majority of the legal fees will surely already have been incurred, and there is still a chance to get them reimbursed if the UK wins the case. A victory for the UK would have not have been improbable, given that the CJEU did not follow this Advocate-General's views in the last major banking law case (concerning the ban on short-selling), and that the analysis of the legal basis point is not very convincing. 

 

Barnard & Peers: chapter 14, chapter 19

 

The UK’s Failed Challenge to the Financial Transaction Tax: Keep Calm and Wait

By Steve Peers

‘In capitalist countries, the bank robs YOU’. Rightly or wrongly, this phrase sums up the reaction of many EU citizens (as well as many of those outside the EU) to the bank bailouts and austerity of the last few years. The reaction to these concerns has been a series of populist measures by the EU – a restriction on short-selling (upheld by the CJEU), criminal penalties for market abuse, and a possible financial transactions tax (FTT).

As widely expected, the CJEU today ruled against the UK’s legal challenge to the plans of a group of EU Member States to impose an FTT. In the form proposed by the European Commission, the FTT could possibly do significant damage to the UK’s financial industry, based in the City of London. So at first sight, the failure of the UK’s legal challenge today looks like a significant setback to the City. However, in reality it is no such thing, since the UK will still be able to bring a separate legal challenge to the FTT, if and when it is finally adopted – and such a challenge would have a much better chance of being successful.

Background

Far from being a ‘one size fits all’ template, for many years EU law has provided for a number of different possibilities for some Member States to go ahead and adopt EU measures without all Member States participating. This is known in EU jargon as ‘differentiated integration’.

The best known of these possibilities are the rules on the EU’s single currency (along with some related rules on bailouts and economic governance) and on EU Justice and Home Affairs Law. But also there is a lesser known possibility for some Member States to go ahead without the others in any area of EU law, known as ‘enhanced cooperation’.

This possibility was first introduced by the Treaty of Amsterdam (in force 1999), but it was subject to strict rules, such as a de facto veto for each Member State. To make it easier for these rules to be used, particularly in light of the planned large enlargement of the EU, they were amended by the Treaty of Nice (in force 2003). They were amended again by the Treaty of Lisbon (in force 2009), and they have been used in practice three times since that point.

The first use of the enhanced cooperation rules was to adopt a Regulation on the choice of law in divorce in 2010. This proved uncontroversial. Secondly, the EU agreed in 2011 to create a unitary patent for a large number of Member States. Spain and Italy could not agree to the details of this proposal, since they wanted equal status for their languages. They brought a legal challenge to the Council’s decision to authorise enhanced cooperation in this case, but the Court of Justice of the European Union (CJEU) dismissed this challenge in 2013.

The third use of the enhanced cooperation procedure was to authorise a group of Member States to adopt an FTT. As noted already, the UK’s challenge to the decision authorising the FTT was dismissed today.

So why is the UK’s failure today not really a significant setback? The reason is that enhanced cooperation is a two-step procedure. First of all, the EU Council authorises a group of Member States to go ahead in a particular area. These authorisation decisions do not go into any detail about the law concerned. Secondly, the EU institutions then negotiate the details of the legislation which will apply to the participating Member States. This is known as the measure ‘implementing’ enhanced cooperation.

When the enhanced cooperation procedure was used for the first time (as regards choice of law in divorce), the Council very quickly agreed on the measure implementing enhanced cooperation. However, on the second occasion when this procedure was used (the unitary patent), it took nearly two years for the EU to adopt the legislation implementing enhanced cooperation. This was due to a need to agree these implementing rules with the European Parliament, as well as very difficult talks between Member States on a separate treaty creating a Unified Patent Court, particularly because it was hard to agree (among other things) where that Court would be located.

Similarly, although the Commission proposed legislation to set up an FTT back in 2011, and tabled a revised version of this proposal in 2013, once the EU authorised enhanced cooperation as regards the FTT, the participating Member States clearly appear to have difficulties reaching agreement on this proposal (each of the participating Member States has a veto).

Certainly, the Commission proposal is objectionable from the UK’s point of view. It provides not only for taxing transactions which take place in the financial markets of the participating Member States (reasonably enough), but also for taxing transactions which take place in the financial markets of non-participating Member States – as long as one of the parties to the transaction is located in a participating Member State. To this end, the proposal would deem a British bank to be a French bank (for instance) in certain circumstances.

There is a very good argument that this proposal violates the EU’s rules on free trade in the internal market, and interferes with the taxation powers which would normally belong to the UK and other participating Member States. The EU Treaties require any enhanced cooperation to be consistent with those rules. Indeed, it is widely known that the EU Council legal service believes that, for these reasons, the Commission’s proposal would be illegal – if it were in fact adopted.

While the CJEU today rejected those arguments at this stage of the process, this was simply because the final shape of the FTT has not yet been decided. It is entirely possible that the participating Member States might not agree on an FTT at all, or that they might agree on an FTT which does not contain such elements.

Even if they do agree to adopt the Commission’s proposal, the UK will be able to challenge that Directive when the time comes. Similarly, some of Spain’s detailed arguments against the legality of the unitary patent have been raised in a second legal challenge (still pending) which that country has brought against the legality of the EU measures implementing enhanced cooperation in this field.

Conclusion

If the UK had been successful today, it would have ended any prospect of an FTT for the time being. Its failure keeps the prospect of an FTT alive. But because the Court of Justice rightly did not rule on the merits of the UK’s case against the Commission proposal – simply because that proposal has not yet been adopted – the UK has only lost a minor skirmish, not the war.

The mere fact of bringing this legal challenge has made it clear to the participating Member States that the UK will vigorously defend its legal position, and may therefore have contributed to their difficulties in agreeing to the Commission proposal. And the government’s legal action, although unsuccessful, may yet play some role in ensuring that an FTT, if one is finally agreed, does not have an extraterritorial scope.

Without extraterritorial features, an FTT would of course not raise as much money. Then again, the UK could also reduce its budget deficit if it could (for instance) collect a toll from drivers on German motorways, or tax all the cheese bought in France. The absurdity of these scenarios shows why a future British legal challenge to the final FTT, if such a challenge is necessary, would have a much greater chance of success.


Barnard & Peers: chapter 5, chapter 14