Filling the Regulatory Gap: The Emerging Transnational Regulator

Abstract

When European or international corporations or financial institutions hear the term regulator, the European Union's powerful antitrust regulators who took on the likes of Microsoft come to mind. In addition to the EU, there are many domestic regulators in Europe, such as the Autorite des Marches Financiers (AMF) in France, the Financial Services Authority (FSA) in the United Kingdom, and the Financial Market Authority in Austria, that play critical regulatory roles in Europe. In the landmass of Europe alone, there are twenty-eight known domestic regulators among the member countries of the Federation of European Securities Exchanges. This regulatory architecture creates business challenges and costs for public companies doing business in Europe. Additionally, within the United States, regulators, such as those of the US Securities and Exchange Commission (SEC) and their enforcement division, also come to mind as powerful transnational regulators. The SEC has been the primary regulator of the US securities market for decades. This primacy, however, is not exclusive. Other secondary regulators make use of SEC enforcement actions to assist their regulatory efforts. The US banking agencies, for example, have adopted rules that make signing an SEC consent decree (which contains no admission of guilt) a presumptive disqualifier of an applicant who wishes to take control of an insured depository institution. Similarly, the Department of Defense (DoD) may debar a contractor from doing business with DoD for a variety of reasons linked to or independent of SEC enforcement action. (1) The agencies that govern and regulate essentially piggyback on each other's enforcement orders. While the reach of European and US regulators is extensive, it is not all-encompassing. European or US regulatory action has not, to date, found its mark in the international development sector. This sector, generally the domain of the international financial institutions (IFIs), most notably the World Bank, provides developmental financing throughout the world. The IFIs have, until recently, largely escaped the regulatory scrutiny placed upon private and multinational investment banks. It is not surprising then to find that IFI-financed transactions are replete with incidences of fraud and corruption by the governmental officials who administer the money received from the IFIs, the contractors who are given IFI-financed contracts to implement the purposes of the loan, and sometimes the officers and staff of the IFIs themselves. (2) This regulatory gap exists because development institutions are international in character and thus generally immune from domestic regulation. (3) To fill these gaps, the IFIs themselves have begun to emerge, some more than others, as regulators of the very monies they provide. The IFIs have begun to act like regulators as they come under increasing pressure from their majority shareholders (e.g., member governments), donors, and civil society to sanction companies found to have engaged in corrupt or fraudulent acts in contracts financed by an IFI and to take robust action against systemically corrupt governments. Concerns about the impact of significant corruption on loan effectiveness, transparency, accountability, ethics, and integrity underlie these initiatives, all of which are part of the broader public agenda of ensuring good governance of public and private institutions to ensure that public money is used for its intended purpose. (4) The scope and impact of IFI regulatory activity is only now beginning to take shape, and some companies are taking notice. One thing is clear, however, from the record of debarment actions taken against corporate and individual entities: the regulatory jurisdiction of these IFIs is transnational and not limited by nationality or place of business of the implicated entity. (5) Although more international businesses have come within the scope of IFIs, there are still many commercial entities that are unaware that they fall within the reach of an IFI's regulatory jurisdiction. …