2.1.3 Criminal category

To this category, belong norms, which concentrated on protection of banking sector from the criminalization:

· Money laundering and terrorism financing

· Bribery and corruption

· Tax evasion

An example of such categoryis recommendations issued by FATF (Financial Action Task Force on Money Laundering). Member countries of this task force try to develop relevant legislation and to establish proper controls to minimize risk and prevent financial system from being used by criminal groups.

Another example is anti-bribery and corruption legislation,which implies international cooperation mainly on governmental levels between countries to identify assets derived from potential acts of bribery or corruption.And finally, fight with tax evasion started by USA with introduction of FATCA has become a new reality for banks since 2010.

Summarizing the regulations in this category: they are the one hand to fight universal offenses; on the other hand crimes and level of responsibility are not same by countries. The norms from criminal category can be difficult to follow when they serve to different interests. Most likely, they are conflict interests of different countries.

2.1.4 Political category

To this category belong regulations passed by a sovereign state to serve or to protect its interests and the interests of its people. There are number of requirements to follow within this category such as:

· Organization requirement

· Security requirements

· Economic and sectorial sanctions

Countries are to dictate in which forms banks can be organised on its territory, where and how they should maintain their data or other specific requirements. There is another big part of regulations related to economic sanctions and sectorial sanctions. In a world with so many countries equipped with weapons of mass destruction,other types of force must balance national interests. Economic and financial influencing has become very common with invention of so-called sanctions. Considerable part of world wealth is managed by banks or passing trough them, no wonder many governmentsare tempted to create more and more regulation obliging banks following the national interests of one country or another. Here again, the conflict will appear when is one bank is targeted for service of different interests.

2.1.5 Mode

The mode of the norm is the approach used in the regulation. Some norms restrict activities, for example dealing with sanctioned countries or people (restrictive mode), or working a given product in certain situations. Others prescribe particular actions i.e. submitting of different types of reports (financial information, information about particular transactions) on regular based (tax authorities, central bank or others), which can be classified as norms in “prescriptive” mode.

The last mode, constructive is a mode giving overall guidance to the regulated entities or markets, not using restrictions or prescriptions but flexible advises giving the initiative and space for banks to apply the norm in most suitable manner. So, as it was mentioned, by mode norms can be divided into 3 groups:

· Restrictive

· Prescriptive

· Constructive

Obviously, the most dangerous is requirement with restrictive mode, although prescription (depending on what is prescribed) can contradict with other requirements, which restrict exactly the same.



2.1.6 Geographical scale

All existing regulations can be divided into two big groups:

· National

· Extraterritorial

National regulation covers banks located in the jurisdiction if regulation itself. Extraterritorial regulation has much broader scope: it can cover several countries different from the country where the relation is created without taking into consideration the regulatory regimes of the countries where they interest are crossing.

2.2 Components of regulatory conflicts

From the regulatory components discussed above there are components that can put bank in conflicting situation with higher probability than others.

If we score each value in each component, according to the score model below, we can see that indeed the biggest contributions to the risk that regulation can conflict with others significantly increases in following cases:

· extraterritorial applicability

· political needs servicing

· restrictive nature

Table 3

The model is an example how compliance officers may approach to the risk assessment of regulations their banks are in scope of. The idea behind is simple: based in their experience the experts can assign weigh for each component which it total give one. Then inside of each component each of identified values within one component (list is not exhaustive, can be extended) is scored one more time. After that it is easier to compare different types of regulations by total scoring, although it's quite approximate.

2.3 Conflict patterns

Let's analyse which regulatory conflicts are hidden in this simple model of American-Swiss-Russian banking business.

The Office of the Comptroller of the currency (OCC) was established in 1863 for supervision of national banks. According to its official website it “charters, regulates, and supervises all national banks and federal savings associations as well as federal branches and agencies of foreign banks. The OCC is an independent bureau of the U.S. Department of the Treasury. The mission of this regulator is to ensure that national banks and federal savings associations operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations.” The Office of the Comptroller of the Currency, URL: www.occ.govIn other words the main goal of this regulator is to make national banks be safe and stable to have a healthy banking system. There are some sign of similar approach is Russian regulation. Bank or Russia distinguish “systematically important credit organizations” from the rest and establishes special regulatory regime for them.

2.3.1 Scope of USA

To understand which regulatory risks are associated with OCC let's study scope of regulation, possible enforcements and recent examples of the enforcements applied to the banks.

According to United States code OCC can apply enforcement actions to national banks and affiliated parties. The regulator can issue cease and desist orders stating the findings and prescribing further actions to fix the identified issues like. For example, OCC issued Cease and desist consent order dated 14 January 2014 Against JPMorgan Chase, N.A., related to Bank Secrecy Act/Anti-Money Laundering. In November 2014, penalty order related to “unsafe practices” in FX Trading, imposed penalty $ 350,000,000 on JPMorgan Chase, N.A., Citibank N.A. and other banks accused in currency benchmarks manipulation. The OCC has a wide range of other actions like agreements, notices, directives. For the affiliated OCC can issue a notice, cease and desist orders on individuals, penalties on individuals and others.

Another powerful body in U.S. Department of the Treasury acting under “Presidential national emergency powers” is OFAC - The Office of Foreign Assets ControlThe Office of Foreign Assets Control (OFAC) of the US Department of the Treasury, URL: http://www.treasury.gov/about/organizational-structure/offices/Pages/Office-of-Foreign-Assets-Control.aspx. This office is in charge of administration and enforcement of economic and trade sanctions. In case of treat to national security USA may impose sanctions against targeted individuals, countries regimes, particular activities (narcotics trafficking, development a weapon of mass destruction, terrorists attack). In times of wars USA used assets freeze and transactions control to prevent illegal repatriation of funds from occupied territories. Today there are sanctions against countries (Iran and Syria; sanctions Cuba are now in the process of being waived), against terrorism and against narcotics trafficking. Recently, appeared the Russia/Ukraine sanctions. Depending on sanction regimes, banks can be required to freeze assets, reject, block, and cancel transactions.

In case of violations OFAC can issue settlement agreement. In June 2014 OFAC and BNP Paribas (France) signed agreement confirming that up 10 2012 Branches of BNP Paribas in Geneva and Paris were processing “thousands of transactions” to or trough US financial institutions omitting important information in SWIFT messages. Those important information contained references to sanctioned parties. The bank was using code words instead of real names of sanctioned parties. As a result, bank was fined for $ 8.97 bln, and will have one year ban for dollar clearing (see above, Part. 1.2.1. U.S. Department of Treasury's office of Foreign Assets Control vs. BNP Paribas).

The examples discussed above give the high level idea of the scale of US regulations and consequences for non-compliance.

2.3.2 Scope of Russia

Is the situation is different in Russian Federation? First of all, in Russia, the regulator is one for many financial institutions: Bank of Russia, since September 1, 2013 is also called the “mega regulator” of Russian financial market.

Founded in 1990 Bank of Russia is a “young” regulator in comparison with OCC that exists since 1863. Bank of Russia regulates all aspects of banking activity starting from liquidity norms, capital adequacy financial ratios and ending with control of compliance the anti money laundering federal legislation. In USA, for example, Federal reserve bank existing since 1913 is responsible for monetary policy, while a separate regulatory body OCC asses and controls national banks.

So far regulation and penalties imposed by Bank of Russia are very different from its western peers since banking system or Russia has a short history of living in open economy, first of all. Another possible explanation is cultural aspect: since 1990s numerous banks have been created, so called “pocket” banks served the interests of limited group of people or companies. Modern Russian banking system received this “heritage” and it's up to Bank of Russia to clean up the system. Huge fines and consent orders lie in USA so far are not applicable actions. Instead the regulator uses more severe actions.

Bank of Russia revoked more than 80 licenses for banking activity during 2014. Among main reasons there are insufficiency of capital and violation of money laundering legislation. For the banks with potential to address the issues Russian regulator may issue notifications and prescribe to fix violation or its consequences. In case violations repeat, next measures will be stricter up to license revocation or transactions banning.

2.3.3 Scope of Switzerland

In Switzerland, like in USA, regulation and monetary policy are separated. Swiss Financial Market Supervisory Authority (FINMA) issues guidelines on financial market regulation for Swiss-based banks and cooperates with other state authorities in case of issues.

In Switzerland there is a tradition of self-regulation. It has an important role in regulation of banking activity as well. Since banks are closer to the business, there are more flexible and more reactive. Swiss Bankers Association signed a Due Diligence Agreement - Agreement on the Swiss banks' code of conduct with regard to the exercise of due diligence (CDB -“convention relative à l'obligation de diligence des banques”) between Swiss banks. The agreement establishes market-accepted best practices in due diligence. The regulator uses the requirements in this documents as benchmark and may even penalize the bank for non-compliance.

The most recent and the most serious fines were related to foreign exchange benchmarks manipulation. FINMA and other authorities, including OCC imposed significant fines on world-known financial institutions in November 2014. The penalties and names for the banks are presented in table below.

The amounts of penalties to be paid to regulators for foreign exchange manipulationCitigroup, JPMorgan Pay Most in $4.3 Billion FX Rig Cases, 2014:

URL: http://www.bloomberg.com/news/articles/2014-11-12/banks-to-pay-3-3-billion-in-fx-manipulation-probe.



Table 4



Conclusion part 2

This part was an the attempt to rangewide number of regulations we observe today by common characteristics i.e. by category, mode and geography. This exercise reveals “components” pointing at the reasons of contradictions which still exist today. The scoring model is quite simple but reflects at least the methodology which can be implied in banks for fast analysis of regulatory environment. In the next part the more detailed guidance is to be provided which consist of general recommendations and the way model can be used on practice.



Part 3. Guidance

Current regulatory environment for international banks is extremely dynamic and new legislation and norms appear so rapidly that it sometimes seems difficult, if not impossible, to anticipate exactly how new regulations may affect the banking activity and which issues banks may be faced with.

In such changing environment, how to prepare for, how todeal with regulatory conflicts? What actions shouldcompliance professionals systematically take, when faced with the conflict pattern?

Hereby it is presented recommendations, to help compliance managers understanding the complexity of conflicting regulations.

3.1 General recommendations

The recommendations provided below are general and can be applied to currently known issues as well as to possible issues in future. These measures are to minimize the negative consequences for the banks in case of non-compliance due to conflicts in regulations:

1. Make sure you are well informed.

2. Grow the culture of escalation.

3. Collect evidences and document cases.

4. Implement regulatory governance.

5. Use risk-based approach.

6. Price the risk.

Below those actions will be discussed in more details.

3.1.1 Be informed

The first recommendation is to be informed, if possible in advance.Timely, relevant information on regulatory risks can save a lot of money. For this reason, we consider that permanent regulatory monitoring is a key task of the compliance function.Compliance managers should of course be aware of new regulatory obligations and sanctions. Ideally, they should also know about the causes of competitors' compliance issues, and keep up-to-date with best compliance practices.

The first source of information is often open: websites of official government agencies, specialized newsletters, press reviews, etc. It should be structured to make sure that all key topics and issues are properly covered.Famous consulting firms provide this service in the form of surveys and overviews of regulatory environment in the circumstances of growing demand for such information. Ernst & Young has professional stream “Global Regulatory Network” which is to help clients to adapt to «regulatory challenges»Ernst&Young regulatory watch: www.ey.com/globalregulatorynetwork. Indeed the regulation became uneasy for financial sector.

The second source of information comes from insidersand can usually be obtained from peers, through participation in associations and working groups.In most of the developed countries, the regulators are open for discussion since the regulated entities are usually closer to the practice and current trends than their regulators. The regulators admit that these are more theoretical than practical organizations.

In the table below there are banking associations for USA, Russian Federation and Switzerland. There are to protect the interest of bankers in respective countries.

The participation in such associations is extremely important. Banks may separately identify the same conflicts but to make the issue known it's much more effective to declare a consolidated position rough the association.



Table 5

Country	Banking association	Website
USA	American Bankers Association (ABA)	www.aba.com
Russia	ARB (Association of Russian Banks)	www.arb.ru
Switzerland	1) Swiss Bankers Association 2) The Association of Foreign Banks in Switzerland	www.foreignbanks.ch

One of the most important functions of such organization is to have regular meetings with key regulators and legislators to share the concerns, discuss upcoming projects and exchange the feedbacks about existing practices and regulatory projects which are to be introduced.

Another way to secure information is through direct participation in working groups elaborating new legislation, if such opportunity exits. This implies to participate in committees involving experts and representatives of the legislative body. Here below are the parliamentary commissions in charge of preparing the financial regulations in the USA, Switzerland, and the Russian Federation:

Table 6

Country	Parliamentary committee	Website
USA	The United states Committee of finance	http://www.finance.senate.gov/legislation/
Russia	State Duma Committee on financial markets	http://www.komitet2-12.km.duma.gov.ru/site.xp/049056.html
Switzerland	Federal assembly, Finance Committees FC	http://www.parlament.ch/e/organe-mitglieder/kommissionen/aufsichtskommissionen/finanzkommissionen/Pages/default.aspx

3.1.2 Promote the culture of escalation

Banks may have (ornot) the “escalation culture”. As written above in recommendation # 1, the most relevant alert signalsoften come fromexperts involved in operations at the level of specialist. To make sure that the alerts of the in-house “whistle blowers” are noticed, channelled, and analysed in due time, banks are to promote the escalation of the risks, and to provide the tools for it.

Promoting a culture of escalation can be done trough the training (online or face-to-face). The training should communicate the milestones of corporate culture and basic relevant knowledge:

a) Regulatory environment applicable to this particular bank. This part of the training should contain at least key regulators under which supervision bank is working. Here, extraterritorial and local regulators and spheres of their regulation should be discussed with the links to the sources (web-site of the regulators). The information about key regulations should be available at internal resources.

b) Identification of regulatory conflicts and contradictions may exit. This part of the training should demonstrate on examples how the conflicts may appear. The illustrations are to give clear understanding that conflicts are possible, how and when they can appear.

c) Communicate the responsibility for conflicts identification. This part is to tell to the experts that it is part of their job to inform management about all types of the serious regulatory inconsistencesthat may cause a potential risk for the entity.

d) Provide with an effective tool for the escalation. As possible solution it can be: regular questionnaire to the head of departments, or special committee where all new regulations are discussed and all appearing conflicts are discussed from the very beginning and than tracked for some final stage of regulatory risk acceptance or resolution.

3.1.3 Collect evidence and document conflicts

Where this is no possibility to comply fully with all regulation, save the evidences, document properly and make it known to very high level of top management.

For the purposes of internal or external audits therecords and evidences about all regulatory conflicts identified. Keeping the evidences in structured manner is important also due to constant staff rotation. The records should contain:

· Brief but clear regulatory conflict summary;

· Potential risks (with precise reference to laws or regulatory documents);

· Which department has identified the conflict;

· When, where and with which quorum the conflict was discussed;

· Documentation of the decision which may include:

a) additional research for possible solutions (responsible people should be named,and budget if applicable);

b) escalation to the next level of top management;

c) escalation to banking associations;

d) escalation to regulators directly;

e) de-risking strategy (stop offering particular product, or stop working particular group of clients or particular jurisdictions);

f) clear guidance on actions and escalation chain when conflicts appear (if conflict appear given event).

3.1.4 Implement regulatory governance

Regulatory environment is quite complex at the moment and continue to be more and more complicated. In modern international commercial bank the most difficult decisions are usually made at different types of committees for several obvious reasons:

1) Commercial banks conducting international activity are usually organizations with significant number of employees, complex corporate hierarchy and corporate structure.

2) There is no single decision maker. Each manager is responsible for his own limited field of work.

3) When decision is made by several managers likely more aspects are taken into account due, decision is more competent.

With such dynamically developing regulations as we observe today it is helpful to have special committee devoted to recent updates of legislation and how bank is to comply with it.For example, Basel Committee on Banking Supervision recommends having a compliance committee, where compliance with regulation should be discussed. Basel Committee recommendations: http://www.bis.org/publ/bcbs294.htm

If such committee already exits, one of the topics in agenda should be devoted to the discussion about which conflicts and difficulties bank might face after new legislation is effective. Also at this committee on regular basis (one or twice a year is an optimal frequency) all departments are to submit the attestation that they escalated all known conflicts to the committee. Based on this exercise bank management will be able to map of potential existing and potential regulatory conflicts.

3.1.5 Use risk-based approach

Risk based approach has been recently promoted by several organizations.

For example, the Financial Action Task Force (FATF), inter-governmental organization advising governments on effective combatting money laundering and terrorism financing recommends risk-based for banking sector. General idea is to mobilize more resources and efforts to the risker countries, clients and products FATF recommendations, URL:http://www.fatf-gafi.org/documents/documents/risk-based-approach-banking-sector.html.

Another example of risk-based approach can be found in “Principles for effective supervisory colleges” issued by Basel Committee on Banking Supervision in June 2014 Basel Committee recommendations, URLhttp://www.bis.org/publ/bcbs276.htm. Those principals advise that regulators should also used risk-based approach in their supervision activity: for example the systematically important banks (SIB) due its important should have an higher level of attention from the supervisor, also the supervision should be enhanced for the banks with the higher risk of money laundering, prudential risk any other type or risk.

For the situation of regulatory conflicts risk based approach can be also applied. When several regulations contradict each other according to risk based-based approach bank should take into account the composition of the following factors:

a) The violation of which regulation will lead to bigger fines;

b) The violation of which regulation is associated with higher reputational risk;

c) The violation of which regulation is associated with higher risk of activity ban;

d) The violation of which regulation may be followed by banking licencerevocations.

Based on the answers the committee or top management is to decide on the actions and risk acceptance.

3.1.6 Price the risk

Risk premiums can be applied not only for credit products, where the higher level of risk of the borrower is associated with higher rate of the loan.Risk pricing is known concept. It can be applied to the regulatory framework. Banks, at last are the commercial organizations, they exit to earn money. If particular groups of the clients, products, markets or services cause additional regulatory risk, their fee for such service should include the price for the potential risk.

3.2 Recommendations in model application on example

Let's consider the case of international commercial bank, part of one financial group, presented in 3 jurisdictions i.e. USA, Switzerland and Russia.

3.2.1 Geographic organization

Legal entity in USA will be “Bank N.A.” Russian subsidiary will be “Bank AO”. Swiss branch will be “Bank S.A.” Those forms are one from the table below:



Table 7. Forms of international banking organizations:

With overseas presence:	Without incorporation of entities overseas
Representative office	Using correspondent relationship
Branch	Membership in international systems (SWIFT)
Agency	Shell banks
Subsidiary

Legal entities and regulatory areas are presented at picture:

Picture 2

Each entity is a subject of local regulation or a combination of local and overseas regulation.

According to the Russian legislation, i.e. Federal Law No. 395-1, dated December 2, 1990, “On Banks and Banking Activities” Russian banking system is represented by Bank of Russia, credit organization (banks) and representative offices of foreign banks. Credit organizations (banks) are to be Russian legal entities, registered and licensed in proper way. According to the order of Central bank of Russia N 02-437, dated 7 October 1997 about establishment and activity of representative offices of foreign banks, representative offices have representative and consulting function, they don't have a banking license. So the international banks are to be registered as subsidiaries with foreign entity as a shareholder:

Picture 3

In Switzerland there are two options for foreign banks to have a banking business: foreign-controlled banks organized under Swiss law and Swiss branches of foreign banks according to AFBS, The Association of Foreign Banks in SwitzerlandThe Association of Foreign Banks in Switzerland: URL: http://www.foreignbanks.ch.. Let's consider our Swiss office as subsidiary as well, since it's the most widespread form of international financials groups represented in Switzerland i.e according to AFBS data 66 out of 121 Swiss Foreign banks are subsidiaries of a foreign bank.

American entity will be considered same type as one of the biggest international financial groups (like J.P.Mogran Chase or Citigroup, for example) regulated by OCC, national banks regulator. According to formal definition provided by OCC at its official website “National banks and federal savings associations are chartered and regulated by the Office of the Comptroller of the Currency.” OCC also regulates subsidiaries of the national banks. The list of national and subsidiaries regulated is publically available.



3.2.2 Regulatory bodies

In order to understand which regulatory bodies regulate the activity of chosen entities the information by countries is consolidated in the form of the table below:

Table 8

	Russia	USA	Switzerland
Supervision of banking activity	Bank of Russia	Office of the Comptroller of the Currency (“OCC“) - primary banking regulator. The Office of Foreign Assets Control (OFAC)	Swiss Financial Market Supervisory Authority (FINMA)
Lender of last resort. Financial market stability control, economic growth	Bank of Russia	Federal Reserve System (FRS)	Swiss National Bank (SNB)
Financial crimes investigation body	Federal service of financial monitoring (FSFM or Rosfinmonitoring)	Financial Crimes Enforcement Network (FinCEN)	Money Laundering Reporting Office Switzerland (MROS)
Legislators (federal level)	State Duma, laws are approved by Federal Council and President.	Prepared by Congress, approved by Senate and signed by President.	Laws are Proposed by Federal Council, The Federal Assembly of the Swiss Confederation
Self-regulated organizations	ARB (Association of Russian Banks)	American Bankers Association (ABA)	Swiss Bankers Association, The Association of Foreign Banks in Switzerland

The table includes main regulatory bodies, lenders of last resort, key legislators and self-regulated organizations as a bridge between banker and regulators, controlling cash flow. The table is a high level overview sufficient for the purposes of this model. The regulation is so complicated today, that for example, only In USA the list of regulators includes 11 bodies:



Table 9 Federal Financial regulators and organizations.

Source: The Congressional Research Service (CRS).

They are to control the following rules to be in place and respected:

Table 10

Sources: Source: Banking Regulation versus Securities Regulation, Franklin Allen and Richard Herring, Wharton Financial Institutions Center, 2001.

3.2.3 Key banking regulations

In spite of the differences of jurisdictions, the overall structure of banking legislation and regulations is quite similar in terms of the functions (please refer to Appendix Key banking regulations in USA, Russia and Switzerland).

3.2.4 Step by step

Step one is to verify how far the regulatory power goes: for the subsidiaries located in Russia and Switzerland there will be 2 regulators: regulator of mother company (OCC) and local ones.

Next step is to verify what each regulator covers.All regulators are responsible for the banks compliance with law and safety and soundness of financial system. No obvious issues are seen at the moment. Information on regulators for USA, Russia is available in Appendixes US regulators, Russian regulator, Swiss regulator.

Step three: identification of the list of laws and requirements against which regulator is going to supervise the bank and its activity. Information is available at official website of regulatory bodies.

Step four: laws are to analyzed and decomposed into components i.e. category, mode and geographical scale.

Step five: scoring each regulation according to the model.

The benefit of the model is that it will give an overview of how safe or unsafe the position of subsidiaries is. It is useful for the top-managers who have limited time for going into details and analyzing the cases of regulatory issues. For the particular case considered and current reality, the regulator of parent company is stronger from several perspectives:

Reputational perspective: any violation will known to the worldwide audience, while violation of local regulation will likely affect only local market;

Financial perspective: fines imposed to the group as hole are higher than just localized penalty;

Power perspective: due to the broader scale of its influence, OCC can have potentially more impact on bank operations in other countries. For example some products offering is to be limited in several countries, not in one, so the potential loss can be multiplied by number of countries where bank is present.

Conclusion part 3

In the current situation when new legislation appears faster than ever before and when efforts for compliance are bigger than ever, the quick assessment made at early stages can be beneficial both for compliance manager and CEO of the bank.

Current process in banks depends on organization. In some banks each department follows legislation updates related to their field of responsibility and try to comply as soon as they can with available tools and knowledge.

In banks, which are more concerned about compliance with the law, there is a compliance officer following all updates, and making sure that units responsible for implementation identified all new requirements. On regular basis there is process initiated, for example, monthly to reconcile the implementation status and escalate issues.

The recommendations provided are related to general organizational solutions such as culture promotion, training delivery, keeping records. Also, there are several advises helpful in decision making: an option to price the risk and cost of compliance into product, use risk-based approach and choosing non-compliance with less dangerous regulator. The scoring model is suggested to be filled for each new regulation appearing and presented to the CEO at committee. It is quickand comprehensive assessment of regulatory risks than long explanations in English among committee members who are likely from different countries with different backgrounds and mother tongues.

In any case, the role of compliance is to initiate and lead the process, which helps the banks to clarify the interests at stake, and try to make a decision best compromise taking into consideration all possible points of view.



General conclusions

This paper is an attempt to rationalize the rise ofextra-territorial regulatory conflicts resulting from the massive productions of AML regulations bylocal and regional regulators.

Extra-territorial regulatory conflicts: a reality of modern globalization

In the first part, the review of the existing research on this topic showed that the problem of extra-territorial conflicts of financial regulation is still largely uncovered. International audit firms are only beginning to define it as a specific field of expertise, and the level awareness about this problem among regulators is still very low.Even compliance specialists in international banks are sometimes not familiar with the notion of conflicting extra-territorial regulations. The issue is too recent; there is a lack of conceptual tools to comprehend and to appreciate it properly.

Meanwhile, the review of AML regulations in the USA, Switzerland and Russian federation shows that AML regulations exclusively serve local or regional concerns and that their international implications are mostly restrictive, as regulators compete with each other for extra-territorial influence. Global organizations evolve in multipolar world with multiple powers issuing in parallel different regulations and permanently crossing each other. The issue of inconsistences and contradiction among new regulations resulting into extra-territorial is not enough discussed. From this perspective, international AML regulation is a battlefield, where economic rivalry between nations comes into expression. Beyond diplomatic issues, there is a need for more international coordination among professionals and regulators to streamline their compliance standards. Perhaps this study could be extended into a reflexion on how to coordinate AML regulation reforms and cooperation between leading regulators?



For a typology of regulatory conflicts

In the second part, our research identifies typical patterns, that can easily explained by the contradiction between the global category of business activities, and the local or regional character of regulation, when a bank cannot comply simultaneously with all AML regulations and is obliged to trade-off between them. It shows how the majority of the extra-territorial conflicts can actually be reduced to a number of basic patterns and fitted into a typology. By introducing the of concept regulatory conflict as combination of typical components, our research contributed to forge a tool that may be useful to the compliance and audit professional. Perhaps, this typology of extra-territorial conflict patterns could be developed further, and improved in the future, to reach a more effective form that would be useful to influence the work of regulators and decision makers?

Conflicting regulations: the challenge for compliance

In the third part, this paper provides guidance to AML compliance professionals, on how to address a case of potentially conflicting regulations, while preserving the continuity of business.Regulations are quickly evolving and require a permanent watch and adaption. It requires a sophisticated organization to identify where and how this increasingly complex reality create conflicts and what are the risks and treats for business in different categorys: legal, tax, criminal, civil, reputational, etc. In its task of debugging conflicts, the role of the compliance function isn't limited to following a procedure; it also includes analysing the problem and exposing its implications in terms of business - not just to avoid a potential conflict, but also to point it out, and to expose it clearly. In other words, extra-territorial regulatory conflicts exist, they are part of regulation, they cannot always be avoided, and solutions should always be found on a practical level.

Compliance as part of strategic risk management

Along the three parts, this paper develops a general concept of the compliance function, where the ability to comprehend the complexity of the international regulatory environment is key. In this perspective, compliance is not just a simpleoperational function; it requires judgment and appreciation of business implications. Compliance efficiency is highly correlated to the ability to address multi categorical regulatory issues in a complex of business environment. Elaborating further, one could say that, in the very task of enhancing and explicating regulatory conflict patterns, compliance is a part of strategic risk management.



Bibliography

Regulations

1. Civil Code of Russian Federation, part II,section IV, Chapter 45, art. 856 bank responsibility for inappropriate execution of transactions on account; art.857 “Bank secrecy”.

2. Federal Law No. 395-1, dated December 2, 1990, “On Banks and Banking Activities”.

3. Federal Law No. 152-FZ, dated 27.07.2006, on “Personal data”.

4. Order of Central bank of Russia N 02-437, dated 7 October 1997 about establishment and activity of representative offices of foreign banks.

5. Order of Bank of Russia 3174-U dated 16 January 2014 About definition of list of systematically important credit organizations.

6. Bank for International Settlements, Corporate governance principles for banks - consultative document, October 2014

7. Bank for International Settlements, Revised good practice principles for supervisory colleges - consultative document, January 2014

8. Bank for International Settlements, 84^th Annual report, 1 April 2013-31 March 2014

9. The Financial action task force, the Guidance for risk-based approach. The banking sector, October 2014

Regulatory enforcements

10. Settlement agreement between the U.S. Department of Treasury's office of Foreign Assets Control and BNP Paribas SA, 2014

11. Deferred prosecution agreement between The U.S. Department of Justice Tax division and UBS AG, 2009

12. Consent order pursuant to banking law between the New York State Department of Financial Service and Credit Suisse AG, 2014

Books

13. International and foreign financial regulation: institutions, deals, infrastructure: book in 2 parts/ redacted by Shamraev A. Moscow, KNORUS, 20014. Part 2. 640 pages.

Articles

14. Edward V. Murphy, Congressional Research service report, 2015 “Who Regulates Whom and How? An Overview of U.S. Financial Regulatory Policy for Banking and Securities Markets.”

15. Beckett G. Cantley, The Brigham Young University International Law & Management Review (ILMR), 2011 “The UBS case: The U.S. attack on Swiss banking sovereignty”

16. John Ellicott, StetsonUniversity Law Review, Foreign blocking measures vol.XXVII, 1998, “Between a rock and a hard place: how multinational companies address-conflicts between US sanctions and foreign blocking measures”

17. Congressional Research Service, U.S. Sanctions on Russia: Economic Implications, February 4, 2015

18. JuditTemesvary, “The Role of Regulatory Arbitrage in US Banks' International Lending Flows: Bank-Level Evidence”, FIW working paper 151, March 2015

19. Hufbauer, Elliott, Cyrus and Winston, Peterson Institute for Economics Studies, 1997, "US Economic Sanctions: Their Impact on Trade, Jobs, and Wages”.

20. Ernst&Young, Global regulatory network, Executive Briefing, 21.01.2015.

21. Defi pour la transparence/Challenge for transparency publication by KPMG, 2014.



Appendixes

Appendix 1. Acronyms

OCC - The Office of the Comptroller of the Currency

OECD - Organization for Economic Co-operation and Development

OFAC - The Office of Foreign Assets Control

CFTC - U.S. Commodity Futures Trading Commission

FCA - Britain's Financial Conduct Authority

SWIFT - Society for Worldwide Interbank Financial Telecommunication

FATCA - Foreign Account Tax Compliance Act

FATF - the Financial Action Task Force

CHIPS - Clearing House Interbank Payment System

SIB - systematically important bank



Appendix 2. History of economical sanctions

The history of sanctions started in 19^th century in US. First sanctions were against Great Britain at the times of the war in 1812. Later the sanctions were used to prevent unlawful repatriation of the assets from the countries invaded by Nazi during World War II.

After that during the Cold war U.S. took a control over exported goods and technologies. Going further the control was also extended to the “reexport” by other countries control. Although there was not a “juridical ground” for such type of actions.

History knows the example when extraterritorial sanctions related to reexport were cancelled: under pressure of European governments US withdrew the “Soviet gas pipeline sanctions” in 1982 which tried to restrict supply of equipment for gas pipeline from USSR to Europe.

Initially embargos were applied to war times but then extended to the usual times. Later, in 1963 famous and still existing embargo against business with Cuba was introduced. There is a conflict of regulations “legal obligations” when Canada and UK forbidden to refuse business with Cuba to the companies incorporated in that countries, although they might be at the same time so-called “persons subject to the jurisdiction of the United States” via ownership or control. John Ellicott, Between a rock and a hard place: how multinational companies address-conflicts between US sanctions and foreign blocking measures: URL: http://www.stetson.edu/law/lawreview/media/between-a-rock-and-a-hard-place-how-multinational-companies-address-conflicts-between-u-s-sanctions-and-foreign-blocking-measures.pdf.

Appendix 3. Cost of non-compliance for banks

In annual survey by Thomson Reuters “Cost of compliance” for 2014, 75% of compliance professionals all over the world expressed that they expect increasing volumes of the information coming from regulator and 72% expect that focus on managing regulatory is to increase in nearest future as well.Thomson Reuters, Cost of Compliance 2014, http://accelus.thomsonreuters.com/sites/default/files/GRC00814.pdf

Picture 4

At the same time as the amounts of fines imposed on international financial groups becoming more and more significant, especially since the US sub-prime crisis. The amounts of penalties have reached enormous amounts and absorb a growing share of banks profit every year. Thomson Reuters agency consolidated fines for US Sanction breach since 2004Thomson Reuters, Fines for banks that breached U.S. sanctions: URL: http://accelus.thomsonreuters.com/fr/infographic/fines-banks-breached-us-sanctions:

Picture 5

In a similar study, at the end of 2014 the British newspaper “The Guardian” published an articles where the amount of fines paid by biggest international banks for breaching different types of regulations between 2009 and 2013The Guardian, Banks pay out £166bn over six years: a history of banking misdeeds and fines, URL: http://www.theguardian.com/business/2014/nov/12/banks-fined-200bn-six-years-history-banking-penalties-libor-forex. The amount in the article is very impressive. It is 166 bln GBP or 178 billion USD paid between 2009 and 2013. The reasons for fines were various: related to toxic mortgage and mortgage-backed securities, market manipulations, transactions with sanctioned countries and money laundering.

Picture 6

Source: the Guardian

According to annual reports of JP Morgan Chase net profit for the same period was: 87.28 bln USDJP Morgan Chase and Co, annual report 2014: URL: http://www.jpmorganchase.com/corporate/annual-report/2014/ar-downloads.htm. Basically the company with over 250 000 employees paid every third dollar from the profit as a fine.

In research by KPMG provisions of 15 biggest European banks in 2013 was about 24 billion EUR for fines and regulatory claims, with 43 billion EUR of income before taxes. In 2011 the same banks had provisions for about 6 billion EUR against 61 billion EUR. Generally speaking, the estimated share of financial results grew from 10% up to 55%Defi pour la transparence/Challenge for transparency publication by KPMG: URL: https://www.kpmg.com/FR/fr/IssuesAndInsights/ArticlesPublications/Documents/Defi-pour-la-transparence-2014.pdf.

Provisions for fines due to non-compliance with various national and Sanctions implementation is extremely hot top recently, since the contribution of regulatory risks to the financial performance of the bank often remains under evaluated and is sometimes difficult to forecast hardly forecasted.



Appendix 4. Overall goals of banking regulations

Regardless the regulatory architecture all banking regulation has more or less similar goals and they try to cover similar risks.

“Financial institutions support and foster economic growth by intermediating savings and allocating them to productive activities. These functions are also their inherent sources of financial fragility. Regulation plays a key role in reducing the scope of financial fragility and limiting the costs of financial instability. Hence, a well-designed regulatory framework can actually lead to faster average economic growth over time.” Speech by Mr VítorConstâncio, Vice-President of the European Central Bank, at the 24th Annual Hyman P. Minsky Conference "Is financial reregulation holding back finance for the global recovery?", Washington DC, 16 April 2015:

URL: http://www.bis.org/review/r150417a.htm?utm_source=BIS+-+All+categories+-+daily&utm_campaign=dfa3458454-RSS_EMAIL_CAMPAIGN_RSS_ALL_CATEGORIES&utm_medium=email&utm_term=0_9691579743-dfa3458454-91975129

In order to reach this goal banking regulation according has to respond to the risks present in banking system by establishing the following policies:

1. Asset restriction policy

2. Capital adequacy policy

3. Conduct of business rules policy

4. Competition policy (anti-trust)

5. Conflict of interests rules

6. Investment requirements

7. Customer suitability rules

8. Deposit Insurance

9. Fit and proper entry tests

10. Limits on interests on deposits and loans

11. Liquidity requirements

12. Reporting last transactions

13. Reserve requirements

14. Restrictions on geographic reach

15. Restriction on services/product lines

Not all of them are applicable in all jurisdictions but they demonstrate they main directions for regulators.



Appendix 5. US regulators: OCC, SEC, CFTC, CFBP, FSOC, OFAC

US market has a quite complex regulatory architecture. On the example of US regulatory architecture, the regulation of financial firms and services is orgEdward V. Murphy. Who Regulates Whom and How? An Overview of U.S. Financial Regulatory Policy for Banking and Securities Markets. 2015: URL:https://www.fas.org/sgp/crs/misc/R43087.pdfanized through several ways: national banks (OCC), markets

Office of the Controller of the Currency (OCC)

In the USA, the Office of the Controller of the Currency (OCC) regulates national banks; there is a separate regulation of Government-sponsored enterprises. This way of regulation can face either with overlaps (when one firm belongs at the same time to several types by its charter, them primary regulatory is chosen), or with gaps (when bank does not belong to any of the regulated types by charter).

For example, OCC, declares that it is to ensure that the institutions under its supervision i.e. national banks of USA, federal savings associations, federal agencies and branches of foreign banks operate “in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations.” Also it promotes “diverse banking system that benefits consumers, communities, business and U.S. economy”.

Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC)

In USA there is a number of regulators like this: the US market of bond and stock is regulated by The Securities and Exchange Commission (SEC); trading of commodity futures is regulated by the Commodity Futures Trading Commission (CFTC). Trading at New York Stock exchange (NYSE) and Chicago Mercantile Exchange (CME) is under federal financial regulation as 2 biggest hosts arranging the trades. The potential difficulties and issues with such type of regulation are caused by fast development of products and technologies used on the markets. In such environment controls and rules can be out-dated and corresponding with the market reality.

Consumer Financial Protection Bureau (CFPB)

It is based on the approach that regardless the type of institution or host some deals falls under specific regulation. Based on US example again: Consumer Financial Protection Bureau (CFPB) is in charge of loans to consumers. Since same goals can be achieved through different financial instruments, here there is always a space for “optimization” of regulatory load and avoid particular regulation.

Financial Stability Oversight Council (FSOC)