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«A case study of Fair Finance Guide International Transparency & Accountability in the Financial Sector A case study of Fair Finance Guide ...»

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Transparency & Accountability

in the Financial Sector

A case study of Fair Finance Guide International

Transparency & Accountability

in the Financial Sector

A case study of Fair Finance Guide International

Edited by:

Anniek Herder

Imad Sabi

Petra Schoof

Ted van Hees

With contributions by:

Frank van Aerschot, Evert Peeters, Lucas Salgado, Alexandre Naulot,

Victoria Fanggidae, Yuki Tanabe, Shigeru Tanaka, Peter Ras, Michel Riemersma, Jakob König and Jan Aart Scholte, Angela McClellan, David Korslund, John Christensen, Aldo Caliari, Martijn Lampert and Panos Papadongones Fair Finance Guide International is supported by the Swedish Agency for International Development 29 May 2015 Contents Preface

PART I Reports from the Seven Countries of FFGI on Transparency and Accountability

Chapter 1 Overview

Imad Sabi, Anniek Herder and Petra Schoof

1.1 Debates about financial transparency

1.2 Results policy assessment

Chapter 2 Results from Belgium

Evert Peeters and Frank van Aerschot

2.1 Government policy

2.2 Current debate

2.3 Results of the policy assessment

2.4 Best practices

Chapter 3 Results from Brazil

Lucas Salgado

3.1 Government policy

3.2 Current debate

3.3 Best practices

Chapter 4 Results from France

Alex Naulot, Michel Riemersma and Petra Schoof

4.1 Government policy

4.2 Current debate

4.3 Results of the policy assessment

4.4 Best practices

Chapter 5 Results from Indonesia

Victoria Fanggidae

5.1 Government policy

5.2 Current debate

5.3 Results of the policy assessment

5.4 Best practices

Chapter 6 Results from Japan

Shigeru Tanaka and Yuki Tanabe

6.1 Government policy

6.2 Current debate

6.3 Results of the policy assessment

6.4 Best practices

Chapter 7 Results from the Netherlands

Peter Ras, Michel Riemersma and Petra Schoof

7.1 Government policy

7.2 Results of the policy assessment

7.3 Best practices

Chapter 8 Results from Sweden

Jakob König

8.1 Government policy

8.2 Current debate

8.3 Results of the policy assessment

8.4 Best practices

PART II Perspectives on Transparency and Accountability

Chapter 9 Transparency: Sine Qua Non for Publicly Accountable Finance73 Jan Aart Scholte

9.1 What Transparency?

9.2 Conclusion

Re-Defining Success – Incentives for Cultural Change in Banks77 Chapter 10 Angela McClellan

10.1 Toward a culture of integrity in banks

10.2 The most effective stick?

Transparency in Banking – Delivering a Sustainable Banking Chapter 11 Scorecard

David Korslund

11.1 What will the Scorecard deliver?

Chapter 12 Automatic information exchange: is the G20 set to fail on this?83 John Christensen

12.1 Deterrent Effect?

12.2 Weaknesses

12.3 Conclusion

Chapter 13 Country-by-Country Reporting, Fair Tax and Transparency...... 86 Ted van Hees

13.1 Country-by-Country Reporting

OECD and the Arm’s Length Principle

13.2 13.3 Tax where TNCs are economically active!

13.4 Regulation of Reporting Country-by-Country

13.5 OECD, BEPS and tax transparency

13.6 Country-by Country Reporting by banks

13.7 Concluding remarks

Transparency of Banks’ Environmental, Social and Human Chapter 14 Rights - the Case of the United States

Aldo Caliari

Securities regulation and the issue of “materiality”


14.2 Shareholder resolutions

14.3 Conclusion

Chapter 15 Public Support for More Transparent Banking Practices around the Globe

Martijn Lampert and Panos Papadongonas

15.1 The general public as a key stakeholder in the future of banks.......... 94

15.2 Values segmentation and the perceived role of banks

15.3 Taking a deep dive into two important markets

15.4 Conclusions and opportunities

Appendix 1 Analysis Tool Policy Assessment


Preface By providing capital for all types of financial and economic activities, banks are primary actors and co-responsible for the impact of those activities on many aspects of people’s lives.

Promotion of sustainability and transparency of the financial sector, in casu banks, is crucial for making companies and their international supply chains more sustainable. Transparency and accountability of banks are therefore a major condition for informing not only governments but also the public, as this facilitates the independent assessment on a range of issues by the public, media, and academics.

Published shortly after the launch of Fair Finance Guide International (FFGI) interactive websites about banks’ socio-economic performance in seven countries (Belgium, Brazil, France, Indonesia, Japan, the Netherlands and Sweden i ), this publication focuses on a number of aspects relating to transparency and accountability and reporting about tax payments in the financial sector, and more specifically banks.

The research findings by FFGI coalitions in the seven countries on transparency and accountability of banks were considered suitable for further deepening of the topic, questioning whether differences between banks relate to differences between countries. To put this into a broader perspective, the coalition’s researchers have analysed the existing legislation and public debate in their countries. This has resulted in seven chapters, written by the researcher from the seven coalitions of the FFGI network. Each country describes the existing and upcoming laws and regulations regarding transparency and reporting in the financial sector (first section). The second section highlights the issues and concerns debated in society. The third section analyses the results of the policy assessment regarding the Fair Finance Guide themes Transparency & Accountability and Taxes & Corruption. Finally, the last section presents some good examples shown by banks on these topics.

We have asked a number of experts with different professional backgrounds and from different parts of the world to present us their perspective on transparency and accountability and tax related issues in the financial sector. Their articles can be found after the national chapters. We thank Jan Aart Scholte, Angela McClellan, David Korslund, John Christensen, Aldo Caliari, Martijn Lampert and Panos Papadongonas, for their excellent contributions.

Ted van Hees Coordinator and Chair Fair Finance Guide International i Hyperlinks to all national Fair Finance Guides can be found at the global website www.fairfinanceguide.org

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1.1 Debates about financial transparency As this report was being finalized, regulators on both sides of the Atlantic imposed fines totalling $5.6 billion on six major banks for rigging foreign exchange markets. The US Department of Justice described the behaviour of those responsible as “brazen flagrance”, while the FBI explicitly called it “criminal behaviour on a massive scale”. Record fines might have been imposed, but scepticism abounds regarding the efficacy of those punitive measures to change bank behaviour and to act as deterrents when recidivism appears to be the stronger tendency.

The Forex case follows that of Libor and the publication of the HSBC files on tax abuses. Do those scandals still not conclusively make the case for transparency and accountability in the financial sector? Are regulators and legislators drawing the right lessons and translating them into practical measures? Is the financial sector, and are banks, responding by improving their own standards, increasing disclosure, and opening up to the demands for more transparency, or is the culture of treating fines as a business cost still systemic and pervasive?

Fair Finance Guide International (FFGI) is a young network of civil society coalitions in seven countries that seeks to improve bank policies and practices: not only ensuring the do-no-harm principle in banks’ operations, but also in progressively raising the transparency and accountability of banks, and in improving their policies on sustainable development, poverty reduction and the promotion of human rights. All of this starts with bank transparency.

The chapters contributed by the seven FFG coalitions in this report seek to highlight debates on banks and financial transparency in their national contexts, wherein lies their richness. It is possible, however, to discern a number of common features that appear in different forms in all those national contexts. First is the debate around the merits and the limitations of voluntary reporting by the financial industry, and what kind of regulatory, that is obligatory, disclosure and reporting should be required of financial institutions when voluntary reporting is insufficient.

A second feature is centered on banks’ roles in possible facilitation of tax avoidance and evasion, an issue that captured the headlines earlier this year with the publication of the HSBC files. As processes such as the OECD and G20-led Base Erosion and Profit Shifting Project (BEPS) and the European Commission CRD IV Directive seek to tackle tax abuse, bringing country-by-country reporting obligations, tax transparency within the financial sector potentially advances in significant measures, but needs to be carefully followed and monitored in practice, in order to ensure the long-fought for breakthrough in this regard. A third common feature is that civil society activism and campaigning has been and continues to be a driving force for increased transparency of banks and the corporate sector as a whole, and for more substantive and meaningful democratic oversight of the financial sector. The country chapters give different examples of civil society campaigns and their concrete achievements, offering snapshots of what the Economist described as “the growing sophistication of NGOs” in the sphere of transparency. 1

-3In Sweden, high consumer awareness is reflected in greater public attention to the ethical and sustainability responsibilities of companies and financial institutions. The response to the launch of the first Fair Finance Guide assessment of Swedish bank policies testifies to this. In Sweden, Consumer Affairs and Financial Markets each merit a cabinet post (which are combined in the same Minister in the current left-of-center ruling coalition), a clear indication of the status of both sectors in the political arena. Debates on the transparency of the financial sector in Sweden also revolve around choices between different degrees of voluntary, industry-led standards and reporting, versus mandatory reporting and tighter regulation, as the way forward to achieve higher levels of transparency by the financial sector, including pension funds. After giving what is seen as sufficient time to the financial sector to respond to specific public demands and expectations on ethical standards and more transparency on engagement processes, the tendency is to consider mandatory reporting whenever the sector’s pace is seen as too slow or its disclosures too superficial, partial, or uninformative.

A similar tendency is also clearly seen in the Netherlands, where two Ministers (Finance, and Trade and Development Cooperation) have pledged to work toward a covenant on sustainability in the Dutch banking sector, following intensive efforts by civil society groups, led by the Fair Finance Guide coalition. A covenant, by definition, is a formal agreement of legal validity between different parties specifying commitments and prohibitions. The two Ministers would like such a sustainability covenant to be the result of negotiated and agreed talks between different stakeholders, including civil society. If no such contract is reached through dialogue, they hint, the one option that remains for them is regulation through legislation. This option is hinted it rather than strongly promoted, in what can be construed as a message to the financial sector: better be in control of transparency processes through further responsiveness and opening up rather than come under attack and face enforcement.

Dialogue in the Netherlands between civil society and the financial sector on transparency is quite advanced and could be a model for other countries. The Netherlands chapter in this publication describes the progress from the first case study on transparency published by the Fair Finance Guide in 2013 to a Ministry of Finance-intermediated learning meeting involving the Dutch Banking Association and the FFG coalition in 2014, to subsequent of Parliamentary debates and further deliberations between bank representatives and civil society. What will all this lead to? And what could the covenant called for by the two Ministers look like, and what gains would it represent in terms of more democratic oversight of the activities and responsibilities of the financial sector? All this is yet to be seen.

For all the positives that the Dutch case presents, in terms of the potentials and opportunities of well-intentioned dialogue between civil society, government, and the banking sector, the Netherlands does not fare too well in the intensive efforts to combat tax abuse, and some of its banks are implicated in this conduit role it plays to tax havens. This contradiction between the clear commitment of the Dutch political level to heightened transparency of the financial sectors, and its acceptance of and reluctance to annul the conditions which allow the Netherlands to play a tax evasion facilitating role, brings into sharp focus the role of banks in facilitating tax abuse, which the EU Directive on country-by-country reporting is aimed at combating. The chapters from France, Belgium, Sweden, and the Netherlands, the four European FFG members, all agree on the significance of the EU CRD IV Directive, which was passed in 2013, in insuring more transparency and the disclosure of more financial data by banks in the EU-member states. The link between combating tax abuse and increased bank transparency is also highlighted in the contributions by John Christensen on automatic information exchange and Ted van Hees on country-by-country reporting (CbCR).

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