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European Union Banking Regulation


            A more recent development in the process of cross-jurisdictional banking has been the emergence of treaties and joint agreements allowing banks and their regulators to reach across borders to conduct banking business without the need to necessarily establish an independent, autonomous branch.  In the US, the advent of interstate banking has broken down many of those historic barriers.  The emergence of the European Union has also provided a model for the agreed rules that allow these cross-jurisdictional banking operations.

The different structures in the banking and financial services industry in the member states of the EU, together with their different regulatory regimes, has created a substantial impairment to the cross-border provision of services by financial institutions of one member state in other member states.  The Second Banking Co-ordination Directive no. 89/646/EEC of 15 December 1989 is intended to remove such barriers to entry by providing a "passport" to banking activities.  Subject to certain requirements, if a credit institution is authorized to carry on banking activities in its home state, then such institution should be allowed to carry on the same activities throughout the EU. The Directive is based on the idea of a single banking license, valid in all EU member states. Credit institutions wishing to establish a branch or to provide services in a member state other than their home state will no longer be required to obtain a separate authorization form the host state. All EU member states are supposed to have implemented the Directive by 1 January 1993.

            Directive 97/5/EC of the European Parliament and Council, dated January 27, 1997, regulated the cross-border transfers of funds among Member States of the European Union. Member States were required to implement these regulations by adopting them into their respective national law.

            In view of the significant increase in the amount and value of cross-border payments made through bank transfers, the Directive, and the corresponding new laws in each Member State, aimed to create a legal framework so that both individuals and businesses can carry out their transfers inside the European Union quickly, economically, and in a reliable manner.  The provisions of the Directive are only applicable to transfers made in Euros or any other currency of the Member States of the EU, but they do not apply to transfers in other currencies (such as US Dollars, Japanese Yens or Swiss Francs).

            The Directive only applies to transfers for maximum amounts of 50,000 Euros, which equals roughly US$52,000.  This limitation carries forward the Directive’s objective of facilitating cross-border transfers particularly to individuals and small and medium enterprises. Due to its consumer protection basis, the provisions of the Directive will not be applicable where the transfer has been initiated by a credit entity, financial entity, or any other entity that carries out cross-border transfers within the frame of its business.

            The Directive further applies only to cross-border transfers among Member States of the EU and carried out inside the EU itself, i.e., all those transaction initiated by an applicant through an entity of a Member State and aimed at putting a certain amount of money at the disposal of a beneficiary with an entity located in another Member State.  Consequently, transfers made inside the territory on the same Member State are not subject to the Directive.

            The Directive sets out certain minimum requirements on information that the entities must deliver to their actual and potential customers as regards the conditions of the described transactions. Before carrying out or receiving a cross-border transfer, the entity must have notified the client of the period of time until the funds are credited (or debited, as the case may be) in the beneficiary’s account, the calculation methods for all costs and commissions payable by the customer, the value date applied by the entity, means available to the customer to file claims, and the exchange rates used. Such information must be presented in a manner that is easily comprehensible to the client.

            According to the Directive, after making or receiving a cross-border transfer, the entity shall furnished detailed information on the transaction which must include, at least, a reference that allows the customer to identify the transfer, the initial sum, the amount of costs and expenses at the customer’s charge, the value date applied and, if necessary, the exchange rate used. Unlike the information described in the previous paragraph, the customer may waive receiving such information, although due to its importance such waiver should occur rarely in practice.

            The Directive requires the entity to carry out the cross-border transfer within the time period agreed with the applicant. If there is no express agreement, the applicant’s entity must carry out the transfer such that the funds are credited to the account of the beneficiary’s entity on the fifth banking day following the date of acceptance of the transfer order. If this term is not complied with, then the applicant’s entity must indemnify the beneficiary by paying an interest on the delay. If the delay is attributable to an intermediary entity, then this entity will have to indemnify the applicant’s entity.

            In a similar manner, the beneficiary’s entity must put the funds at the disposal of the beneficiary within the agreed period of time or, absent an agreement, at the end of the banking day which follows the date on which the funds have been credited to the account of the beneficiary’s entity. Non-compliance with this term also originates an indemnification obligation of the beneficiary’s entity.

            In principle, and unless otherwise instructed by the applicant, the costs related with the cross-border transfer are to be borne by the applicant. Therefore, all intervening entities are obliged to execute the transfer for its total amount. Where the applicant’s entity has made an unauthorized deduction on the amount of the transfer, such entity must, at its cost, transfer to the beneficiary the amount deducted or pay such sum to the applicant. Similar obligations are established in the event that the deduction has been made by an intermediary entity or by the beneficiary’s entity.

            The Directive and its corresponding implementing Acts intend to provide consumers with mechanisms to protect themselves from the mistakes and abuses that the entities which intervene in cross-border transfers of funds sometimes commit.  Such a framework must be worked out for cross-border transfers over the Internet if electronic commerce between and among foreign states is to flow with certainty and reliability.