On 10 January 2018, the Trade and Industry Appeals Tribunal (CBb) issued an important ruling on the exercise of supervisory powers by a Dutch supervisor at a company established abroad. The CBb is of the opinion that there is no question of the “extraterritorial” exercise of supervisory powers because the supervisory powers in this case relate to an investigation into a possible violation of the Dutch Financial Supervision Act (FSA) and that this investigation has no effect outside the Dutch legal order, meaning that the sovereignty of another state is not infringed. Therefore, according to the CBb, the supervisory authority in this case was authorised to request information from a foreign company or institution.
As far as we are concerned, this opinion is open to question, because in so doing the CBb appears to be circumventing the principle of territoriality. In this case, there was no legal basis for the exercise of powers abroad. Nor had the country in question given its explicit consent. In this case, the principle of territoriality means that the exercise of powers -including supervisory powers – abroad is not permitted. On 10 January 2018, the CBb also rendered a decision in connection with this case concerning the order imposed on the co-managing directors of branches established in the Netherlands under a penalty payment in connection with the breach of the duty of cooperation due to an alleged violation of the FSA. We will not discuss this ruling in this blog post.
The Dutch Central Bank (DNB) carried out an investigation into a foreign exchange bureau based in Suriname. DNB suspected that the exchange office had been operating the business as a payment service provider, without having the required license under the FSA. This concerned an alleged violation of Section 2:3f of the FSA, which at the time stipulated that anyone with a registered office outside the EU is prohibited from carrying out the business of payment services in the Netherlands. As part of its investigation, DNB initially imposed a request for information. Because the company did not provide DNB with the requested information, DNB subsequently imposed an order for a penalty payment on the company.
Court ruling: principle of territoriality opposes acts of supervision abroad
At first instance, and in line with established case law and literature, the Rotterdam District Court ruled that DNB was not entitled to impose either this request for information or an order for a penalty payment on the foreign company. In short, on the basis of the principle of territoriality, it is not permitted to exercise supervisory powers abroad if there is no legal basis for doing so or if the country in question has not given explicit permission to do so. Such a legal basis or permission was lacking in this case, resulting in DNB not being allowed to exercise its powers in Suriname, according to the court.
Judgment of the CBb: there is no question of carrying out research outside the Netherlands, and therefore no violation of the territoriality principle.
Unlike the District Court of Rotterdam, the CBb ruled that DNB did not violate the principle of territoriality in imposing the request for information and the order for a penalty payment. The CBb considered that DNB’s investigation took place in the Netherlands, not in Suriname, and was only aimed at activities of the Surinamese company in the Netherlands. The CBb therefore did not consider it relevant that supervision is exercised against a company established abroad. Moreover, according to the CBb, the request for information and the order for a penalty payment related to a possible violation of the FSA in the Netherlands; that is, a violation of a Dutch domestic legislation, as a result of which these supervisory acts “have no effect outside the Dutch legal order”. The CBb therefore ruled that there was thus no infringement of Suriname’s sovereignty. There would have been no extraterritorial exercise of supervisory powers.
The prevailing doctrine in literature and case law is that Dutch supervisors cannot, in principle, exercise their supervisory and enforcement powers outside the Netherlands. The general principle is that the sovereignty of states precludes the adoption of measures to enforce rules with extraterritorial effect. This principle – known as the principle of territoriality – means that a Dutch supervisory authority may only exercise powers abroad if there is a legal basis for doing so or if the country in question has given its permission to do so.
In our view, the CBb’s opinion in this case is difficult to reconcile with the principle of territoriality. The CBb’s reasoning that there is no question of extraterritorial exercise of supervisory powers by the DNB is open to discussion. First, the CBb’s consideration that the supervisory acts in question “have no effect outside the Dutch legal order” seems artificial. After all, the request for information and the order under penalty payment were addressed to the company established in Suriname. The information requested would likely be made available by parties involved in Suriname, and in the event of forfeiting an order under a penalty payment, it would be the Surinamese entity that would have to pay this sum of money. Consequently, DNB’s supervisory actions do have an effect abroad. It is precisely in such situations that the principle of territoriality applies: the performance of supervisory acts abroad requires either a legal basis or the explicit consent from the state.
The CBb’s argument that DNB exercised its supervisory powers in the context of an investigation carried out in the Netherlands is also unconvincing. It may be the case that a supervisory authority carries out the investigation from the Netherlands; however, this does not mean that the investigation exclusively takes place in the Netherlands. The entity in question was established in Suriname, so the DNB investigation automatically also focused on Suriname. The judgment of the Rotterdam District Court in the first instance, that DNB’s investigation (also) took place in Suriname, is therefore more in keeping with how a supervisory act works for a foreign entity in practice. After all, the practical consequences of the investigation were felt in Suriname, not in the Netherlands. The exercise of supervisory powers must be assessed separately, regardless of the question to which the investigation
relates. This observation is shared in literature (see O. Jansen, Over de grens? On the territoriality of enforcement supervision in administrative law, Tijdschrift voor Toezicht, 2016/4.6, among others).
Consequences for practice
If the CBb’s opinion were to be complied with, each supervisory authority could, in future, organise its investigations in such a way that all investigative acts would be carried out from the Netherlands, in which case the principle of territoriality would no longer be an obstacle to the performance of supervisory acts abroad. The CBb surely could not have envisaged this conclusion. In such a case, the numerous bilateral treaties in the field of transnational cooperation would no longer have an essential function.
In addition, there is also the question of whether Dutch supervisors can enforce investigative acts if, for example, the foreign company or institution does not comply with an intelligence request or similar claim. If a penalty payment is forfeited, how can a supervisor ensure that the amount forfeited is actually paid? This CBb decision does not automatically lead to DNB suddenly obtaining the ability to collect from the exchange bureau established in Suriname any penalty payments that may have been forfeited. There must also be an explicit legal basis for the collection of penalty payments and administrative fines (e.g. a bilateral treaty).
In short: in our opinion, the decision of the CBb of 10 January 2018 is difficult to reconcile with the principle of territoriality and with the prevailing doctrine in the judiciary and literature so far. It is therefore questionable whether this judgment should be regarded as a one-day flight of fancy, or whether it is the beginning of a new consistent line that will also be followed by the other highest administrative courts.
Date: June 2018
Authors: Christien Saris & Phinney Disseldorp