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Compliance with anti-money laundering rules – especially with regard to PEPs – remains worryingly low. A World Bank report in 2010 found that only 2 per cent out of 124 assessed jurisdictionsx were fully compliant with existing standards on PEPs. 202 ix “Malus” provisions allow employers to reduce the amount of deferred, and therefore as yet unpaid, compensation due to an individual, while “clawback” mechanisms permit them to demand reimbursement of compensation that has already been paid to an individual.
x Among OECD countries, data from 2005-2011 reveal a non-compliance rate of 56%, with no country being fully compliant.
-78There are several measures that would assist banks in complying with their due diligence duties. Firstly, a public register of beneficial ownership information on companies would help banks in performing their due diligence duties. The UK already has relevant legislation in place. Furthermore, the EU has introduced a central register as part of its Anti-Money Laundering Directive which will be accessible to law enforcement and financial institutions as well as civil society organisations and journalists that can prove a “public interest” for their access request.203 Furthermore, in the case of PEPs it would be effective to reverse the burden of proof requiring them to prove that the source of their funds is legitimate in order to qualify as a client.
To avoid the compliance officer from becoming the scapegoat for a senior management decision, it is also important to ensure that senior management approval is required to establish a business relationship with a PEP (or continuing it with a customer who becomes a PEP). Furthermore, it is effective to appoint one senior management person to oversee PEP regulations and periodically review PEP clients.
10.2 The most effective stick?
However, perhaps the most effective stick to changing bankers’ behaviour lies outside the industry. Governments need to ensure that there is no impunity for unethical behaviour and that bankers are held accountable for their wrongdoings. While the fines imposed on the industry for misconduct since 2009 currently amount to US$ 232 billion and are expected to rise above US$ 300 billion by 2016, they are clearly not sufficient in achieving the desired effect of changing behaviour. In the end, the biggest incentive for honest behaviour might be the prospect of facing a day in court – or even longer in jail. In the foreign exchange rate manipulation case, JPMorgan Chase, Citigroup, Deutsche Bank, Barclays and UBS have each disclosed that they are under criminal investigation by the US Department of Justice relating to conspiracy to manipulate foreign currency rates. Hopefully this will result in sanctions that act as a deterrent for unethical behaviour.
-79Transparency in Banking – Delivering a Sustainable Chapter 11 Banking Scorecard David Korslund Global Alliance for Banking on Values A sustainable real economy meeting the long-term needs of society requires a sustainable financial system. Stakeholders in the financial system should be able to transparently assess the extent to which a bank has a sustainability focused business model as well as the impact of this focus on the bank’s financial returns and its risk profile.
In September 2014, the Global Alliance for Banking on Values committed at the Clinton Global Initiative to create over five years a Sustainable Banking Scorecard that would not only provide banks with a tool for increasing the sustainability focus of their strategies and operating models but also allow stakeholders to make choices among banks. The Sustainable Banking Scorecard, based on the Principles of Sustainable Banking, is a tool for bank self-assessment and improvement and would also allow external stakeholder assessment of a bank's sustainability profile.
11.1 What will the Scorecard deliver?
The Scorecard will deliver an industry standard assessment of an institution’s sustainability focus. It will provide banks with a tool to improve delivery of a sustainable banking agenda, and will provide transparent and public information to support choices by all stakeholders, especially clients and investors. The Scorecard will allow stakeholders to channel their business activity to those banks most aligned with their values regarding sustainability.
The Global Alliance was founded in 2009 and as of December 2013 had 25 members with nearly $100 billion in assets under management. The members are socially progressive and innovative banks focused on delivering sustainable economic development and environmental improvement throughout the world. Although they operate in many different markets and with a variety of business models, all have at the core of their activities a focus on the Principles of Sustainable Banking.
Figure 1 Characteristics banks Global Alliance
-80These Principles were developed as part of research undertaken by the Global Alliance and funded in part by the Rockefeller Foundation to look at the capital requirements and returns for sustainability focused banks. This research identified not only these core Principles but also the need for substantial capital to support the growth of these banks. Furthermore the research, initially released in March 2012 and updated most recently in October 2014, 204 provides support for the investment case for sustainability focused banks with higher returns and lower volatility than delivered by the largest banks in the world.
Although all the Principles are important, the triple bottom line principle is critical with its focus on economically and sustainably delivering banking products and services to clients meeting
the needs of:
People – social empowerment Planet – environmental regeneration, and Prosperity – economic resiliency The structure of the Scorecard is a holistic approach for assessing a bank’s business model for compliance with the Principles. The Scorecard uses a combination of Basic Requirements, Quantitative Factors, and Qualitative Elements to derive a relative Sustainability Score.
Members of the Global Alliance have been piloting the Scorecard over the last year and it is expected to move from its current “beta” version to V1.0 in the near future. One member, Triodos, is already including its Scorecard as part of its public reporting. 205
For banks, the critical issue relative to their sustainability focus is the extent to which they dedicate their management of money at risk, on and off balance sheet, to the real economy and within that segment to meeting triple bottom line needs. As a result, 65% of the Scorecard’s Quantitative Factors focus on these elements.
For most banks current financial accounting and internal management reporting systems do not capture this information. Developing standards and systems for addressing this information gap should be a critical task for the industry with support needed from organisations such as the Global Reporting Initiative and the Sustainability Accounting Standards Board.
-81For many of the Global Alliance members this effort is facilitated by their historic focus on providing stakeholders with transparent insight into their activities with a focus on sustainability. Many member banks go so far as to provide detailed lists of clients allowing stakeholders to see where money is put to work. Two good examples of this transparency can be seen at Triodos Bank and Alternative Bank Schweiz that provides a complete listing of their loans to all shareholders as part of their annual report.
Increasing the transparency and sustainability of banks will be critical to developing a sustainable real economy. The efforts of the Global Alliance to develop a Sustainable Banking Scorecard should be an important element of moving forward on this critical issue.
-82Chapter 12 Automatic information exchange: is the G20 set to fail on this?
John Christensen Tax Justice Network One important aspect of the recent revelations regarding the extensive involvement of the HSBC bank’s Swiss arm in tax evasion has not drawn much public comment: the advice that HSBC in Switzerland provided its clients on dodging taxes arose from increased pressure, from both the EU and the USA, for Swiss banks to automatically share client information with tax authorities in other countries. 206 Recognising that tax evading clients could no longer rely on Switzerland’s fabled banking secrecy laws, HSBC was recommending new ways for clients to avoid detection. 207 While this illustrates the criminal banking culture at HSBC, it also demonstrates the powerful deterrent effect that automatic tax information exchange (ATIE) has against tax evasion.
12.1 Deterrent Effect?
Since 2003 the Tax Justice Network has been calling for ATIE to be adopted as the effective international standard. The alternative standard, devised by the Organisation for Economic Co-operation and Development (OECD) in consultation with tax havens, involves a process called “tax information upon request”, which operates on the following lines: using either an existing double tax treaty or a bilateral tax information exchange agreement, country A can request information from the Court of country B, subject to country A providing sufficient evidence to back its claim that one of its citizens is holding undisclosed wealth at a bank in country B.208 It won’t surprise anyone that this system has proven wholly ineffective as a means of detecting tax evaders. Worse, it had no deterrent effect whatsoever, since the likelihood that the authorities of country A would have the necessary evidence to present to the court of country B was low to zero, especially since the courts of most tax havens are seldom willing to cooperate.
The strength of ATIE lies with its deterrent effect. When people are aware that the details of any wealth they hold offshore will be automatically shared with the tax authorities of their home country, they are less likely to be tempted to evade taxes by not declaring the income from that wealth. This deterrent effect is backed by strong evidence from the USA.
For many years we have been told by senior OECD officials that there was no political support for a global standard for ATIE, despite the chronic underperformance of the OECD’s “on-request” model. The turning point came in 2012 when Indian Prime Minister Manmohan Singh explicitly requested the G20 countries to adopt ATIE. In April 2013, the G20 Finance Ministers and Central Bank Governors endorsed ATIE as the effective standard for information exchange, and the G8 presidency requested the OECD to prepare recommendations for how to implement ATIE at the global level.
The Common Reporting Standard for ATIE outlined by the OECD in 2014 will not replace the preceding upon-request standard but aims to complement it, while addressing some of its obvious shortcomings. 209 It has been designed to run in parallel with other bilateral or regional arrangements for ATIE, such as the U.S. Foreign Account Tax Compliance Act (FATCA) and the EU Savings Tax Directive (EUSTD). However, while we must welcome the OECD’s Common Reporting Standard as a step towards an effective global standard for cross-border cooperation on tackling tax evasion, we have no illusions about this being the final nail in the coffin for secrecy jurisdictions.
-83Weaknesses To begin with, unscrupulous individuals will still be able to hide behind opaque legal arrangements, such as shell companies, foundations and trusts, by claiming that their income is derived from business - rather than investments - or by dividing ownership among at least four people. This latter loophole arises because only those owning more than 25 percent of a company will be required to identify themselves as beneficial owners. Many secrecy jurisdictions, the British Virgin Islands (BVI) being a prime example, have no requirement for the identity of the real, warm-blooded owners of companies registered on the islands to identify themselves. This provides an almost impenetrable wall of secrecy for tax evaders to hide behind, and is a key attraction to many of the rich people who use the BVI. It probably didn’t surprise anyone when the authorities on the BVI signalled in early 2015 that they had chosen to reject British Prime Minister David Cameron’s request for a registry of beneficial ownership.
Other secrecy jurisdictions have likewise refused to create public registries of company ownership details, thereby throwing a huge barrier in the way of international cooperation. The British government must now choose between over-riding the BVIs refusal, which it has the power to do, or to backtrack on Cameron’s commitment to lead the world in introducing ownership registries.
A further limitation arises because only financial assets are currently covered by the proposed Common Reporting Standard, which excludes real estate, private jets, yachts and works of art (the latter being an increasingly popular asset class for stashing wealth offshore in newly established art freeports in Geneva, London, Luxembourg and Singapore). Inexplicably, safe deposit boxes are also excluded from the standard. To make matters worse, a de minimis threshold has been set at US$250,000 which removes any reporting requirement for some accounts opened prior to 2016, allowing tax dodgers plenty of time to rearrange their affairs.
What’s more, information can only be used to tackle tax evasion, but not to investigate money-laundering or corruption. Previous attempts at strengthening international tax rules have shown that even the tiniest of loopholes are certain to be exploited by tax dodgers and money-launderers.