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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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1.2.2 Disclosure on investments Disclosing names of companies and governments invested in (element 3 of the theme Transparency and Accountability) is an issue not many banks have set into practice yet, although it can provide valuable insight in sensitive sectors and fields the bank might be active in. In Brazil banks are required to publish this information through a website of the Securities and Exchange Commission (CVM). In France and Japan none of the banks provide this information, while in Belgium, Indonesia, The Netherlands and Sweden a sparse two or three of all banks in those countries do so. The same applies for mentioning and describing all companies to which a bank has granted more than €1 million credit (element 4), although this time none of the Brazilian banks provide this information, together with France, Japan and Sweden. Both Belgium and the Netherlands assess Triodos Bank, which discloses the names of all companies that have received a loan. ASN Bank, assessed by the Netherlands does the same.

Fair Finance Guide also ask banks to disclose the names of all current and recently closed project finance deals and project related corporate finance deals (element 5). This is slightly different from the requirements of the Equator Principles (EP), an initiative often adopted by the banks assessed. The EP require an overview of the deals and a breakdown according to the results of the risk analysis, but not the names of the projects. Therefore, banks often report according to the EP’s, but none of them also mention the names of the projects.

If banks do not wish to publish the names of the companies, governments and projects they invest in or finance, they could give more detailed information about their portfolio as an alternative. Assessment elements 6 and 7 therefore look at the investment breakdown in the annual reports. About half of the banks give a visual presentation of financial activities by region, size and/or industry (element 6). In Japan all banks comply to this. In Belgium, Indonesia and the Netherlands a majority of the banks complies and in Brazil half of the banks.

In France two out of five comply though in Sweden only two out of seven provide the information as required. When banks are asked to provide even more detailed information, preferably in the form of a cross-table, less positive results come out. Although in Belgium and Japan, all banks comply to this request, in Indonesia, the Netherlands and France only half or less than half of the countries do so, while in Brazil only one and in Sweden none of the banks provide the information requested in a cross-table.

-9Reporting on engagement and voting Another issue through which banks could enhance their level of transparency is by publishing the names and number of companies the bank had interactions with on social and environmental topics, including the results of that engagement. This is assessed through assessment element 8 and 9. The results indicate that it is easier for banks to provide the number of these companies than their names. Banks consider their dialogues with companies as confidential. Banks argue that publishing names of companies they engage with will negatively impact the results. As such, banks in Brazil, France and Japan do not provide names at all while in Belgium and Indonesia only one out of eight and one out of eleven provide names of companies engaged with. In Sweden and the Netherlands, two out of seven and two out of ten banks do so. We have also seen banks only reporting the results of a dialogue that is finalised or giving a few examples of engagement.

Regarding the publication of the number of companies engaged with, the Netherlands, Sweden and France do quite a good job with half of their banks complying to this request.

Respectively eight out of ten, five out of seven and four out six banks publish the number of companies engaged in, including the results of the engagement. In Belgium three out of eight banks and in Brazil two out of six banks publish this number, but Indonesia and Japan all only found one bank publishing the number of companies engaged in. Most often this information is only provided about the companies the banks invest in, not the ones they grant loans to.

To what extent banks try to engage companies on social and environmental issues can also be derived from their voting behaviour. Fair Finance Guide therefore also experts financial institutions to report about the results of that activity, resulting in assessment element 10. It assesses whether banks publish a summary of their voting behaviour. Especially for this research we have also checked which banks publish their full voting record. Scores from banks of the countries assessed vary. As such, in Belgium, Japan and the Netherlands the majority of banks assessed report about their voting behaviour, while in Indonesia, and Sweden only one and in Brazil none of the banks report on it. In France, only one out of five banks publishes its full voting record and another one publishes a summary of their voting record.

1.2.4 Stakeholder dialogue Besides publishing their engagement with companies, banks could enhance their level of transparency further by reporting on their consultation with civil society organisations and other stakeholders. This is hence requested through assessment element 14. In over half of the countries (Brazil, Belgium, Japan and the Netherlands), a majority of the banks publish this information. In Brazil and Belgium respectively five out of six banks and six out of eight banks publish this information, while in Japan and the Netherlands respectively three out of five and seven out of ten banks do so. In Indonesia and France a minority of the banks report on their consultation with civil society organisations and other stakeholders. In Sweden, banks are often not granted scores for this element because their report lacks information on this dialogue. Either the stakeholders are not described or the topics and results of the dialogue are left out.

-10In order to accommodate local communities and other stakeholders that may be affected by a company the bank invests in, it is important that banks introduce an internal grievances procedure for those affected and for civil society organisations that defend wider social and environmental interests. Additionally, banks may thereafter abide by the decision of an independent grievance mechanism for those stakeholders. Assessment elements 15 and 16 reflect upon these issues. Regrettably, an independent grievance mechanism is absent in all financial sectors of the countries involved in this study, and many banks even lack an internal grievance mechanism. In Sweden only one out of seven banks has established a grievance mechanism. Among Brazilian, Indonesian and Dutch banks though, the grievance mechanism for external stakeholders is slightly more usual. Often these banks invite external stakeholders to use the customer’s helpdesk to send their questions and complaints.

1.2.5 Reporting on tax related issues The theme Taxes & Corruption is considered relevant for this publication as well. A banks’ transparency level can be sought in the extent to which they report their revenues, costs, profit and tax payments to governments country-by-country. For each society tax revenues are essential to finance public provisions. A fair system of taxation contributes more to the development of a society than other revenues. As companies benefit from the public provisions in the countries where they operate they have the responsibility to pay tax in every country and to be open about it. Yet, a lot of internationally operating financial institutions, companies and rich private clients benefit from international differences in tax percentages and loop holes in national tax legislation to significantly reduce their overall tax burden. These activities, also called aggressive tax planning, are done using, amongst others, shell companies in tax havens. A lot of international financial institutions have branches in tax havens to help their clients and to limit their own tax payments. This type of behaviour is contrary to Corporate Social Responsibility principles. One can expect from responsibly operating financial institutions that they do not deliberately assist clients in avoiding taxes and that they do not avoid taxes themselves.

In order to provide insight in plausible relocation of revenues to tax havens or to avoid or evade tax payments a financial institution should report its tax payments country-by-country. Fair Finance Guide furthermore questions whether financial institutions provide a complete overview of its structure of ownership, including all its subsidiaries and participations. It observes if financial institutions make clear which services their subsidiaries and participations offer in tax havens. This theme also looks at the investment and finance policies of financial institutions regarding disclosure of taxes, ownership information, anti-corruption policy and participation in lobby-activities. However, the analysis in this section focuses on the elements relevant for transparency and accountability.

The results of the assessment by all countries regarding the theme Taxes & Corruption are summarized in Table 2.

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Through EU Capital Requirements Directive EU countries have been obliged to implement legislation on the country-by-country reporting of tax payments, but this has not come into effect in all countries yet. In France and the Netherlands, financial institutions are expected to report country-by-country from 1 January 2014.iii In Belgium and Sweden the Directive will come to effect from 2016 onwards. Hence, not all European banks had fully integrated this data in their publications and scores still vary. Some Belgian and Swedish banks do report country-by-country but not on all topics expected or not on all countries operated in. Banks often report the most important countries and combine the information of other countries in regions, which is of course less specific and transparent.

iii The research and analysis of this study is based on Annual Reports 2013. At that time French and Dutch banks were not yet obliged, by law, to report country-by-country on tax payments, but are expected to do so in their Annual Reports 2014, they have all received the score for Taxes & Corruption element 1 (“For each country in which the financial institution operates, it reports country-by-country on its revenues, costs, profit and tax payments to governments”) beforehand.

-12Four out of six Brazilian banks apply country-by-country reporting. Notably, these are all European banks active in Brazil which plausibly explains this finding as the reports studied are group financial statements. In Indonesia five out of eleven banks (Mandiri, CIMB-Niaga, Danamon, OCBC NISP, and HSBC) apply country-by-country reporting, while In Japan none of the banks do so.

Transparent banks are expected to publish their responsible investment and finance policy as part of their environmental and social risk management system. Having policies with regard to tax havens can result in points through assessment elements four and five of Taxes and Corruption. Banks are hence requested to provide the public with a policy statement in which they state they do not own subsidiaries in tax havens unless these have substance, and that they will not provide financial services to companies that reside in tax havens, unless they have substance. Preferably, in order to support such statements, banks may additionally inform the public on their structure of ownership and on the exact services they offer in tax havens.

Countries in which none of the banks state they do not own subsidiaries in tax havens unless these have substance are France, Indonesia and Japan. In Belgium, the Netherlands and Sweden only a minority of the banks have a policy statement on their activities in tax havens.

While we observe some banks with statements about tax planning and activities in tax havens, banks hardly pay attention to this topic in their investment and finance policies. In Belgium hence only one bank has a policy for companies on tax issues and in the Netherlands three out of ten banks has such a policy.

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Since the financial crisis, civil society has been lobbying to enhance transparency in the financial sector. One of the issues they most strongly urged for, also at European level, has been country-by-country reporting on tax payments, which would provide an insight in the substance of financial operations in tax havens and hence in potential tax evading behaviour.

At the European Union, especially France insisted on drawing EU regulation for this issue.4 For years though, country-by-country reporting was rejected because of the exorbitant costs and constraints it would place on the private sector. In addition, the European Commission was hesitant about publishing this data. 5 Nevertheless, in 2013 the EU Capital Requirements Directive was put into practice, which requires all financial institutions in EU member states to publish financial information for each country the institution is active in from January 2015 onwards.6

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In Belgium, main regulation with regard to banking transparency since the financial crisis has evolved at two different levels.

With regard to tax transparency, in the first place, new regulation has materialized within the framework of the European Commission’s Capital Requirements Directive (CRD IV –July 17, 2013). This directive required banks for the first time to deliver proper country-by-country-reporting. The new Belgian banking law (April 26, 2014), in the second place, has further specified this country-by-country reporting.

With regard to non-financial reporting, in the second place, new regulation stems from the European Commission’s Directive on Disclosure of Non-Financial and Diversity Information (6 December 2014), with a focus upon environmental risks, labor and human rights in particular.

Untill now, these criteria have not yet been specified further in Belgian banking law or in any other national regulation.

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