Legal Considerations of Cross-border e-Forex Trading

01 August 2001

Trystan Tether

The technology to enter into cross border foreign exchange transactions over the Internet is now readily accessible and in widespread use. Traders can benefit from this technology by increasing the effective size of their markets, while consumers have the benefit of access to a highly competitive global market. But is the legal framework in which cross border e-Forex trading exists a source of concern? All the signals indicate that it is lagging behind the technological developments.

Take the well known quote of Attorney-General of the State of Minnesota, Hubert Humphrey III:

"Persons outside of Minnesota who transmit information via the Internet knowing that the information will be disseminated in Minnesota are subject to the jurisdiction of Minnesota courts for violations of state, criminal and civil laws."

There is a man who will not easily be persuaded that a person trading from the UK with a Minnesota person has only English law to worry about. Nearer to home, although the implementation of the EU Investment Services Directive has always been heralded as a major step in the creation of a single market for financial services in within the EU, it is widely recognised that there are still considerable regulatory and legal barriers to genuinely straightforward cross border contracting in this area. The above examples highlight that the law, unlike technology, has not developed as quickly as it could have to assist cross border foreign exchange trading. Some key legal issues for a foreign exchange business contemplating contracting with customers in another country can be classed

under the following headings:

Are there regulatory hurdles to contracting with persons in that jurisdiction?

Will our standard form contracts be fully effective with persons in that jurisdiction?

May we end up being sued, or having to sue, in a foreign jurisdiction if it all goes wrong?

Regulatory hurdles to contracting

In many jurisdictions, certain types of foreign exchange business are classified as a form of financial services which can only be carried on in that jurisdiction by an appropriately authorised person. An example of this is trades entered into for speculative purposes with no intended delivery of the currency amounts - known as "contracts for differences" in the UK. Also, by conducting foreign currency trades in particular jurisdictions, a foreign exchange trader may be required to establish procedures to prevent money laundering in that jurisdiction (such as customer identification, record keeping procedures and internal reporting procedures). Provisions of this kind in local laws can mean that across-border trade involves a criminal offence by the trader if it can be said that by making such a trade, the trader is carrying on business in the jurisdiction concerned. Additionally, "illegal" cross-border trades may be unenforceable by the trader, and the trader's own regulator may take a dim view of his breaching overseas laws. But is a foreign exchange trader actually doing business in a particular jurisdiction (and so required to be authorised and comply with money laundering regulations in that jurisdiction) just because he or she makes contracts with people who are resident there? Sadly, the answer to this is often not at all clear. For example, neither the UK's Financial Services Act nor the UK Money Laundering Regulations make any attempt to define exactly what is, and what is not, carrying on business in the UK for their purposes. Even the UK's recently enacted UK Financial Services and Markets Act 2000 only provides factors to be taken into account rather than comprehensive guidance on the issue. So, whether or not someone is conducting business in the UK for the purpose of being caught by UK regulation is a matter to be determined on the facts of each case. Traditional tests for where a business is being carried on have looked for a person s physical presence in the relevant jurisdiction. In an Internet world this criterion becomes less relevant. For instance, it is perfectly possible to carry on a lively Internet gambling business in the UK without ever setting foot here. In the future, the determination of where a business is being carried on will undoubtedly focus less on factors such as the physical location of relevant offices and more on a holistic approach, looking at such factors as whether there is an active solicitation of customers in a particular jurisdiction.Worse still, a foreign exchange trader may commit an offence in a particular jurisdiction even before contracting with persons resident there if the advertising of regulated services is restricted in that jurisdiction to authorised persons. There is considerable legal authority for the view that advertisements on a web site are issued in any country from which that web site can be accessed. In order to avoid problems under this heading, it will often be desirable to impose geographic restrictions on access to sites and to police those restrictions positively by ensuring that contracts are not entered into with persons who may have circumvented them. In some jurisdictions a contract entered into as a result of an unlawful advertisement maybe rendered unenforceable by that illegality.

Will a trader's standard form contract be effective with persons in foreign jurisdictions?

It is clearly very important for cross-border dealings that a foreign exchange contract contains an express choice of the governing law of the contract as the local law of the trader. An express choice of law will minimise the risk that another law will govern the trade. However, even such an express choice of law will not always protect a foreign exchange trader from laws of other jurisdictions. There are two reasons for this. First, some jurisdictions have certain "mandatory" laws the effect of which cannot be avoided when contracting with persons in the jurisdiction simply by choosing another governing law. For example, some jurisdictions have mandatory laws which, render certain provisions of contracts unenforceable if they are "unfair" or unduly onerous. Secondly, an express choice of the trader's home law may not save a contract if the relevant type of foreign exchange contract is unlawful in the jurisdiction concerned. For example, some types of foreign exchange contract may be seen in some jurisdictions as a form of "gaming" and this may render them either illegal (with potential criminal sanctions) or at least unenforceable. Once again, this can be a particular problem for foreign exchange contracts which are "contracts for differences", since some jurisdictions may interpret these as a bet on future currency movements.

May we end up being sued, or having to sue in a foreign jurisdiction if it all goes wrong?

A foreign exchange trader dealing only domestically will know that any disputes will be resolved by a legal system with which he is familiar. Ideally the trader will want to replicate this position when dealing cross-border. The first step in this process is ensuring that any cross-border contract contain a submission by the counter party to the jurisdiction of the trader's home courts and an agreement that any action against the trader will be brought in those courts. In commercial situations, such a submission and forum agreement will normally be respected so that a UK trader will, for example, be able to sue a US counter party in London. One key exception to this principal is that when dealing with "consumers" in certain situations, a submission by them to the courts of an overseas jurisdiction will be ineffective and they can only be sued in their home courts. Even for corporate counterparties, there can be complications. For example, although a trader's US counterparty may agree to actions being brought against it in the UK courts, if the counterparty has no assets in the UK, then there will be nothing against which a UK judgment can be immediately enforced. In these circumstances, the UK trader will probably have to take action in the US courts requesting their assistance in the enforcement of the UK judgment. At best this can mean the cost of two sets of proceedings. For this reasons, a trader may decide that it is actually better to forego its right to sue in its home courts and bring any actions in the courts of its counterparty's jurisdiction. All of that said, where the trader's and its counterparty's jurisdiction are both party to the Brussels Convention (as all countries in the EU are), this provides some relief against the problem identified above. For these countries, a judgement obtained in one country will be directly enforceable in the other, provided that the judgment does not contravene public policy considerations in the second jurisdiction. However, that last proviso can be important in relation to a jurisdiction where the form of foreign exchange trading on which judgment has been obtained is unlawful.

Conclusion

As the above demonstrates, dealing with counterparties in an overseas jurisdiction is not without its problems and the best advice that can be given is to limit dealings(particularly in relation to certain types of products) to counterparties in jurisdictions where appropriate due diligence has been carried out on the legal considerations. However, with appropriate due diligence and care, cross-border trading in most jurisdictions does not present any insurmountable barriers and may prove very profitable.

Written by Trystan Tether and Anthony Olsen. First published in e-Forex in August 2001.

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