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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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-4The four European FFG chapters underline the opportunities that translating the European

Directive into national laws present for campaigners on transparency. They also warn of missed opportunities, resistance by the financial sector, and laxity in enforcement. The translation of the European Directive to compliant national laws, as the chapter on Belgium points out, is not automatic and instant but gradual and could have significant gaps. The Belgian and French contributions also decry the absence of standardized reporting set by the EU as per the CRD IV Directive, which they stress is crucial. The contribution from France, the country which has been at the forefront of demanding banks to submit to CbCR, emphasizes that despite the progress signified by CRD IV, endless scandals involving banks in tax evasion underline that “additional measures need to be adopted, now more than ever, to ensure that financial institutions are accountable to society at large”.

The French FFG contribution also raises the questions of what information? and for whom?

While previously unavailable country-by-country information on what banks do, including in tax havens, their annual revenue, and the number of their employees in each jurisdiction, became public in 2014, this was far from complete. All banks domiciled in EU member states are required to disclose further country-by-country data on their profits, the tax they pay, and potential public subsidies they receive in 2015, which requires extensive analysis to judge the substantive consequences of the CRD IV Directive and how the loopholes can be closed and the opportunities expanded. FFG coalitions will take this challenge on and intend to report on the implications and consequences of the CbCR of banks in their countries.

CbCR is also of significance to countries outside the European Union. All non-OECD G20 countries, which include Brazil and Indonesia, committed to the BEPS Action Plan and participate on an equal footing with OECD countries. The OECD/G20 recommends that the first CbC Reports be required to be filed for MNE fiscal years beginning on or after 1 January 2016.

The debate on banks and financial transparency in Indonesia is dominated by bank secrecy as related to tax (non)payment by wealthy individuals and businesses. The chapter on Indonesia describes how the drive by tax authorities to effectively end the use of bank secrecy laws, which have hitherto enabled tax avoidance and evasion, is forcing public discussion and scrutiny of banks’ transparency responsibilities. Indonesian banks are required by law to collect tax due on the interest earned by their clients. To date, they reported on those tax payments in a lump sum, rather than report details of tax payments for each of their clients, which the new tax regulation requires. Banks are resisting the tax regulation and are clinging to their interpretation of bank secrecy laws. The mood in this regard is perhaps captured by an op-ed piece in the Jakarta Post, written by two officials of the Finance Ministry: “This is certainly a bad time for Indonesia to start being a tax haven country. We are clearly out of date internationally in doing so. The G20 Summit even declared that since five years ago ‘the era of banking secrecy is over’”.2 As to sustainability reporting by banks, the launch of the Roadmap to Sustainable Finance by the Indonesia Financial Services Authority (OJK) at the end of 2014 has the stated aim of increasing the oversight and coordination of sustainable finance implementation. The Roadmap requires financial institutions to adopt risk management policies for the social and environmental aspects of their activities and to publish annual sustainability reports in which they assess how they balance pro-growth, pro-jobs, pro-poor, and pro-environment in all their activities. This provides an important opportunity for civil society and other stakeholders to further the agenda of sustainable finance and responsible banking, and to ensure that reporting by financial institutions reflects this drive.

-5Japan, where the financial sector is not best known for volunteering transparency, is also witnessing different challenges to banks on their possible role in tax abuses. As an OECD country, Japan is also subject to the CbCR stipulations of BEPS. The government and the financial sector in Japan are both involved in processes to produce “non-binding” (voluntary) principles on sustainability, which recalls debates elsewhere centring on voluntary versus mandatory measures.

Brazil, a powerhouse in Latin America, is very much subsumed by internal debates on transparency in the country, especially as the noise surrounding the Petrobras corruption scandal, with links to the ruling PT Party, rises to fever pitch. The scandal strengthens voices calling for increased transparency and stronger institutions, building on already existing laws and transparency instruments in Brazil, most notably the 2000 Fiscal Responsibility Law and the 2011 Access to Information Law. While appreciating the value of those laws and instruments, The Brazil chapter also pinpoints their limitations. Most of the transparency instruments “have a reactive principle”, Brazil scores only better than China in Transparency International’s comparison of emerging market multinationals 3, and earlier this year the President vetoed two articles in the Budget Law that would have increased the transparency of public funds, including state-owned banks.

One important question that is additionally raised by the Brazil contribution is the extent to which voluntary self-reporting by banks on the social and environmental impacts of their investments and loans provides reliable and significant data on meeting international standards. The Brazilian Bank Federation has its own Self-Regulation System (SARB) since 2007, which developed a framework in 2014 for the development and implementation of a socio-environmental responsibility policy by its members. The Brazilian Stock Exchange developed a questionnaire-based Corporate Sustainability Index (ISE) which is now in its tenth year, with a portfolio composed of 40 companies drawn from 19 sectors, including some of Brazil’s largest banks. 34 of the companies covered in this year’s ISE have authorized the publication of their questionnaires (as compared to 22 last year), which the ISE hailed as a “significant increase” in companies’ transparency. How far do those self-reporting mechanisms go and do they show a tendency toward higher transparency and stricter adherence to international standards and norms? The chapter on Brazil in this publication concludes that for Brazilian banks, those that are state-owned as well as private ones, “there is opacity, mainly on the social and environmental aspects of financed projects, corporations and equity investments”.

The Belgium chapter tackles those very same questions regarding voluntary versus regulatory by welcoming the European Commission’s Directive on Disclosure of Non-Financial and Diversity Information, issued at the end of 2014, which expands the scope of non-financial reporting and emphasizes external verification (but does not make it compulsory).

“Self-regulation may be helpful, but only legally binding regulations are able to enforce minimum norms with regards to non-financial reporting for the financial industry as a whole”, is the conclusion from the FFG in Belgium. In France, which may very well have provided the inspiration for this European Commission Directive, civil society has been driving efforts to bring about legislation on non-financial reporting since 2004, through the Forum Citoyen pour la Responsabilité Sociale des Entreprises. The chapter from France is instructive regarding the dynamics and set-backs of such legislative efforts, especially as detailed provisions and requirements are worked out. It is also of interest in seeing how national legislation and European Commission Directives interact, where advanced national laws can help shape and give body to European directives, and where they can be strengthened by them.

-6Results policy assessment Consumers and citizens are keen to know what consequences business activities can have for their life and which risks they are exposed to. Companies should therefore be fully transparent, allowing individuals to inform themselves. Moreover, companies should be prepared to be accountable for their activities and to listen to the expectations and concerns of other stakeholders. Besides transparency and accountability being a moral duty, it can also offer companies advantages like trust, early prevention resistance and decreased corruption practices.

These principles are similar for financial institutions. Moreover, contrary to other companies, through their investments and financing activities, financial institutions play an important role in virtually all economic industries. To this effect, financial institutions not only have to inform the public about their own activities, but they also have to be transparent to the greatest extent possible about the companies, projects and governments in which they invest. Therefore Fair Finance Guide investigates to which extent financial institutions report about their activities.

This publication describes and analyses the results of the policy assessment of financial institutions researched by the seven coalitions that are part of the Fair Finance Guide network.

Two of its most relevant themes were selected, Transparency & Accountability and Taxes & Corruption. The assessment elements were extended with additional informative question for more details. All elements are presented in Appendix 1 The research is based on reporting year 2013, as this report was written in the first quarter of 2015 and based on the results of the policy assessments done in the second half year of 2014ii. A number of banks, but certainly not all, have released their new annual reports about 2014 during April 2015. These annual reports sometimes include improvements related to transparency. Although FFGI would like to use the most recent information possible for its research and would like to applaud banks that have made improvements, it was deemed impossible to use the latest reports available, because of the scope of this research, the importance of a fair comparison, and for practical reasons.

The results of the assessment by all countries regarding the theme Transparency & Accountability are summarized in Table 1.

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ii Full policy assessments are done by six of the seven coalitions within the network. The Netherlands, which was the forerunner of Fair Finance Guide International, will start using the international methodology for its update in September 2015. For the purpose of this research it has analysed the bank’s policies and annual reports on the theme Transparency & Accountability and Taxes and Corruption.

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1.2.1 Policies and risk management Transparent banks are expected to publish their responsible investment and finance policy as part of their so-called Environmental Social Risk Management System (ESRMS). Besides the principles banks base their investment decisions on, banks may describe how they ensure that investments meet the conditions set in its policies (assessment element 1 of Transparency and Accountability). In Brazil, France, the Netherlands and Sweden all banks describe their ESRMS, albeit in different degrees of detail. In Indonesia and Belgium only some of the banks publish their ESRMS (respectively seven out of eleven and six out of nine). In Japan, SMTH describes ESRMS for most of all operations, and MUFG, Mizuho and SMFG describe ESRMS for project finance operations. In none of the countries all banks had their ESRMSs audited by a third party (assessment element 2). As such, in cases where an ESRMS exists but where no external audit is conducted, the designated operationalisation of such an ESRMS may be less reliable.

Fair Finance Guide expects financial institutions to report on their non-financial indicators and activities through a report annually. Financial institutions could integrate this with their financial statements or write a separate CSR or Sustainability Report. The publication of Sustainability Reports could follow the reporting guidelines of GRI and its Financial Services Sector Supplement (FSSS, as requested in assessment element 11) or even write it in accordance with the G4 Framework (element 12). All countries found that banks report about CSR, but not all do that in accordance with the GRI G4 guidelines and verify the results. Only in the Netherlands all banks assessed comply to element 12 and, except for one Dutch bank, all of these reports have also been verified externally. In Japan and France the GRI G4 but not necessarily all of the indicators from the FSSS is followed in Sustainability Reports (respectively by three out of six and by two out of five banks). External verification occurred in France at all but one of the banks, while in Japan this occurred at none of the banks.

-8In Brazil all banks published sustainability reports in line with GRI G4 and only one out of six reports was not verified externally and in Sweden five out of seven banks followed the GRI4 and FSSS in their Sustainability Reports and all were verified externally. Among Indonesian banks only two out of eleven published their Sustainability Report according to GRI4 but neither of these two additionally did so in line with FSSS. In Belgium all banks publish a sustainability report, albeit with varying degrees of detail. Only some of them are set up in accordance with GRI G4 guidelines and also some are verified externally.

An important issue to notice is that in several cases, Sustainability Reports mention that the report has been verified externally, but not to which extent this has happened. Moreover, when reading the accountants assurance statement, the verification often only appears to apply to certain parts and not to all of the report. This is misleading information and may harm the reliability of the report.

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