International legal risk for banks and corporates

1 International legal risk for banks and corporates A production of the Allen & Overy Global Law Intelligence Unit Volume 1. April 2014 edition Allen & Overy 2014. International legal risk for banks and corporates | April 2014. 2 Allen & Overy 2014. International legal risk for banks and corporates | April 2014. International legal risk for banks and corporates April 2014 edition A production of the Allen & Overy Global Law Intelligence Unit by Philip R Wood QC (Hon). Head, Allen & Overy Global Law Intelligence Unit Special Global Counsel Visiting Professor in International Financial Law, University of Oxford Yorke Distinguished Visiting Fellow, University of Cambridge Visiting Professor, Queen Mary College, University of London Philip R Wood, 2014.

2 Allen & Overy LLP. Allen & Overy 2014 3. International legal risk for banks and corporates | April 2014. The law is our servant, not our master 4 Allen & Overy 2014. International legal risk for banks and corporates | April 2014. Preface This publication is intended to introduce a new approach to the subject of legal risk. My conviction is that the International legal risks facing banks and corporates nowadays are major and in many cases disproportionate and that there are grounds for believing that the situation could get worse. This is considered detrimental to the peoples of the world and their future well-being.

3 There is a second volume containing charts of colour-coded indexes about legal infrastructure, the role of law and the like across most countries. The charts are based on rankings compiled by third parties, such as the World bank and Transparency International . The charts were prepared by Melissa Hunt, project director at the Intelligence Unit. Naturally, the opinions expressed in this Intelligence Unit paper are not necessarily the views of my firm or its members. This edition is a limited circulation version to test views. There are a number of important areas which need to be developed in a subsequent edition.

4 I am grateful to those who commented on this text, including Heath Tarbert, James Partridge, David Wakeling and many others. Philip R Wood QC (Hon). Head of the Allen & Overy Global Law Intelligence Unit April 2014. Allen & Overy 2014 5. International legal risk for banks and corporates | April 2014. 6 Allen & Overy 2014. International legal risk for banks and corporates | April 2014. Table of contents Summary of main conclusions .. 9 Chapter 1 Introduction to legal 12 Chapter 2 What is the law for and why does it create risk? .. 17 Chapter 3 Why do banks and corporations attract legal risk? .. 23 Chapter 4 risks from the growth and complexity of 33 Chapter 5 Harmonisation and commoditisation.

5 55 Chapter 6 Managing and mitigating legal 67 Chapter 7 Understanding the legal risks of the families of jurisdictions .. 75 Chapter 8 Measuring legal risk by legal risk ratings .. 94 Chapter 9 Bankruptcy legal risks .. 101 Chapter 10 Regulatory legal risks .. 122 Chapter 11 Extraterritorial legal risks .. 132 Chapter 12 Contract legal risks .. 136 Chapter 13 Litigation risks .. 148 Chapter 14 Rule of law risks .. 153 Chapter 15 legal risk and the role of 162 Allen & Overy 2014 7. International legal risk for banks and corporates | April 2014. 8 Allen & Overy 2014. International legal risk for banks and corporates | April 2014.

6 Summary of main conclusions The following are some of the main conclusions of this work: There has been a massive increase in legal risk for banks and corporations over recent years. This increase results mainly from (1) the intensification of regulatory regimes (of which there are nearly 30), (2) the fact that nearly all of the world's 320 jurisdictions are now part of the world economy, (3) the increase in volatility of the law, (4) the tiering or layering of domestic legal systems, (5) the disparity in many countries between the written law and how it is applied, and (6) extraterritorial legal regimes. The increase in legal risk is disproportionate and unnecessary.

7 A situation where the law becomes an enemy, not an ally, is unjustifiable. It is unsatisfactory that banks and corporations have to assume the enormous burden of legal and similar expenses in order to mitigate legal risks or to fight oppressive litigation. Many people forecast a large increase in world GDP in coming decades, mainly in emerging countries, which should lead to a massive increase in the volume of transactions and in their value. The vast amounts of capital sloshing around will not go under the mattress but will go into banks and other corporations. This may well lead to greater prosperity but it also likely to lead to more crises and bankruptcies, more disputes and more litigation.

8 This could result in more law and hence greater legal risks a worsening of the legal environment from the point of view of banks and corporates . If this happens, the increase in GDP, the increase in transactions and the potential increase in crises would each drive an increase in the number of lawyers globally. They would in particular intensify the demand for International lawyers competent to advise on global risks . This could impact on the future size of law firms and in-house legal and compliance departments. The cost of legal services in this arena of wholesale International law would hinge, amongst other things, on the supply of lawyers able to carry out the above tasks.

9 The legal risks considered include (1) bankruptcy legal risks (2) regulatory legal risks , (3) extraterritorial legal risks (4) contract legal risks , (5) litigation risks and (6) rule of law risks . We identify some of the specific risks and outline methods of mitigation. In some cases it is not possible to mitigate the risks , except by closing down an otherwise useful line of business an absurd result. Notwithstanding the obvious advantages of harmonisation of the law and the commoditisation of transactions in terms of cost, time and efficiency, both harmonisation of law and standardisation of major wholesale transactions seem to be even further away than before.

10 This is so in spite of the ready Allen & Overy 2014 9. International legal risk for banks and corporates | April 2014. availability of technological solutions. This situation seems to be the result of the simultaneous impact of a legal revolution and an economic revolution, plus other factors. The rule of law applies just as much to the law applicable to money, banks and corporates as it does in other fields. The law is a universal religion which everybody believes in. It is the bedrock of our societies and survival. But the law will lose its appeal if it becomes a burden, if it becomes an instrument of oppression, if it manacles and fetters our legitimate freedoms.