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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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-16Current debate In recent years, public awareness has risen with regard to the complex mechanisms of (legal) tax avoidance within which financial institutions often play a key role. As providers of financial services are instrumental in setting up, in maintaining and in facilitating tax evasion circuits, it is of crucial importance to further enhance banking transparency, in order to minimize potential social risks. These risks do not only relate to fiscal losses, as financial institutions manage to minimize fiscal contributions of profitable enterprises and wealthy individuals. Since tax evasion circuits also enable financial institutions to escape other sorts of (non-fiscal) regulatory oversight, they also constitute a threat to financial stability at large. In recent years, these threats have been discussed in particular with regard to the so-called ‘shadow banking’ sector, which global size is estimated at a stunning 75,000 billion dollar, and through which regular financial institutions manage to obfuscate both their funding lines and their investment practices.15 At the level of the European level, the reality of tax evasion is starting to be confronted, at least partially, with country by country reporting. The CRD IV, however, still contains a few limitations. Most regrettably, European member states (such as Belgium) are left with the responsibility to report upon transparency performance of ‘their’ financial institutions, within their national jurisdictions. Therefore, reporting with regard to banking transparency will not be fully homogenized throughout the European Union at the short term. Consequently, intra-European comparison will remain a hazardous task. That is why several European NGO’s that have specialized in tax avoidance issues (in Belgium: 11.11.11.) demand the European Commission to homogenize country-by-country-reporting soon, at the level of the strictest regulatory frameworks available.16 In Belgium the clauses with regard to country-by-country reporting in the CRD IV have been specified further within the new Banking Law (April 26, 2014). Under Belgian law, financial institutions are now required to report all jurisdictions within which they operate, how much revenues they generate within each of these jurisdictions, and how much employees they have engaged in each of them. Alas, however, the Belgian banking law does not require banks to report the names of all entities in third countries (even though this prerequisite is part of the CRD IV). Therefore in practice, Belgian banks are only required to report on the most important entities in third countries and can still continue to obfuscate some of their subsidiaries. Also, the Belgian banking law does not yet require financial institutions to report on taxes paid and subsidies received. Since the latter stipulation requires a revision of existing legislation with regard to the annual reports of financial institutions, Belgian NGO’s urge the Belgian legislator to make this legislation with regard to annual reporting compliant with the principles of the CRD IV.17 Apart from tax transparency, civil society has also become increasingly vigilant in recent years with regard to external social and ecological effects of lending practices and financial investment decisions by financial institutions. In Belgium, these concerns have materialized most powerfully with regard to ‘controversial investments’ of big banks, especially with regard to weapons, as big and small NGO’s such as Handicap International, Pax Christi and FairFin have campaigned vigorously on this topic. Especially the Belgian legal ban on cluster munition-related investments (in effect since June 9, 2006) is widely considered as the most important legal victory of this coalition of NGO’s. In recent years, follow-up campaigns with regard to climate-related financial investments, with regard to ‘food speculation’ and with regard to the human rights-related impacts of investment practices, have helped to broaden the scope of ‘sustainability’ concerns with regard to the financial sector.18 19

-17Simultaneously, and increasingly since the financial crisis, financial institutions have been intensifying their reporting with regard to Corporate Social Responsibility (a concept that dates back from the 1990s and that has increasingly become the common denominator under which financial institutions subsume, categorize and manage the ‘reputational risks’ that may stem from investment decisions). In this respect, the proliferation of Sustainability Reports, CSR departments and so-called Environmental and Social Risk Management systems can be understood as the industry’s main response to the most successful public awareness campaigns of banking-oriented coalitions of NGO’s. In order to guarantee maximal real effects of these CSR frameworks, Belgian NGO’s strive for the incorporation of this sustainability-related reporting within the general legal framework of annual reporting by financial institutions. While self-regulation may be helpful, only legally binding regulations are able to enforce minimum norms with regard to non-financial reporting for the financial industry as a whole. And whereas this regulation needs to be sufficient stringent, in order to guarantee real progress in investment ‘decency’, it also needs to be sufficiently straightforward in order to enable small banks in particular to implement new legislation.





Therefore, the European Commission’s Directive on Disclosure of Non-Financial and Diversity Information (6 December 2014) is welcomed by Belgian NGO’s as a necessary, though insufficient first step towards the amplification of reliable and substantial CSR reporting. As the Directive is developed as an amendment to the previous Accounting Directive (June 26, 2103) that applies to all publicly listed companies, the Commission rightly suggests that transparency with regard to non-financial reporting needs to be subject to the same degree of external verification as all other parts of annual reporting. Also, the Directive rightly tackles CSR reporting from a relatively broad angle, as it considers non-financial reporting to cover ‘information on policies, risks and outcomes such as environmental matters, social and employee aspects, respect for human rights, anticorruption and bribery issues, and diversity in their board of directors’.20 However, when it comes to legislative detail, these ‘risk issues’ are elaborated in the Directive at a relatively superficial level. In particular, the Directive does not sufficiently break down the potentially ‘marketing-driven’ logic that thrives many CSR policies and ESRM systems today.

Whereas the Directive encourages companies to align with the UN Global Compact and the OECD Guidelines for Multinational Enterprises, strict regulation for the implementation of the principles inherent to these guidelines is lacking. Also, the Directive ‘leaves significant flexibility for companies to disclose relevant information in the way that they consider most useful’ – as said in the explanatory notes of the Directive. It is also remarkable that not a single word is dedicated to the presumed effectiveness of non-financial reporting with regard to the preservation of the social and ecological interests of the actual subjects affected by unsustainable business practices. In this regard, the Directive taps into the business logic of managing reputational risk and completely overlooks the potential change in business practices that should be envisaged by sound CSR reporting and policies.21

-18At the Belgian level, law makers have not been able to overcome the shortcomings of the European Directive with regard to non-financial reporting. Even worse: Belgian legislation has not yet made a start with implementing the potentially positive principles of the Directive at all. 22 Whereas several European countries have developed a national legal framework in order to regulate non-financial reporting long before the Commission’s Directive (the UK in 2006 updated in 2013; Sweden in 2007; Spain in 2011; Denmark in 2011 and France in 2012), Belgian parliament has not yet initiated law making process. Therefore, Belgian NGO’s (and the Fair Finance Guide in particular) stress for an urgent implementation of the Directive’s minimum norms with regard to non-financial reporting. At the same time, we urge for the deepening of non-financial regulation in the tracks of the early legislation with regard to ‘controversial’ investments in 2006. In particular, we urge law makers to push not only for full transparency with regard to the social and ecological externalities of financial investment practices. We also urge them to push strict exclusion norms with regard to the most harmful sorts of investments (ecologically and socially), at the example of the 2006 ban on cluster munition-related investments.

2.3 Results of the policy assessment The results of the assessment of the two most relevant themes of the Fair Finance Guide methodology are summarized in Table 4.

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With regard to transparency, BNP Paribas, ING, Deutsche Bank, Van Lanschot, VDK and Triodos Bank disclose an Environmental and Social Risk mechanism which applies to investments. However, there is a large difference in the degree of insight the external reader gets into the decision making process. Van Lanschot's description is the most elaborate and is the only bank with a public list of excluded companies. KBC does have a ESRM mechanism, but it does not refer to investments and Belfius does not have one at all. Triodos Bank, on the other hand, is the only bank which publishes the names of the companies it invests in on its website. All banks have some kind of sustainability report, but not all of them are externally verified or take into account GRI guidelines. None of the banks have an internal grievance mechanism for third party stakeholders.

Country by country reporting has become obligatory in the EU in 2015. Banks in Belgium, but also in the Netherlands, France and Germany (where the head offices of ING, Triodos, Van Lanschot, BNP Paribas and Deutsche Bank are located) are required to do country by country reporting for the annual reporting of 2014. Regarding corruption, all banks except for Van Lanschot have a policy on tackling internal corruption. With the exception of Van Lanschot there is no bank that has a specific policy to prevent corruption at suppliers and subcontractors of companies they invest in.

-19Best practices The assessment results show us that the ratings on taxes and corruption do not necessarily match those on transparency, as leaders of one theme are among the laggards on the other theme. However, best examples are Triodos Bank and Van Lanschot and VDK. VDK scores strong on taxes, mostly because it has no subsidiaries outside Belgium. Van Lansschot is the only bank publishing a list of excluded companies and Triodos Bank is the only bank which publishes the names of the companies it invests in on its website.

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3.1 Government policy The following regulations regarding transparency are relevant for the Brazilian financial sector.

It is important to highlight that Laws and Regulations specifically directed to state controlled institutions/companies are relevant to two of the banks that we analyse - Banco do Brasil and Caixa Economica Federal. See Table 5 for an overview.

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3.2 Current debate Since 2000, with the Fiscal Responsibility Law and the creation of the Office of the Inspector General of the Union (CGU), in 2003, the Brazilian Government has been investing in policies and instruments to improve public financial institutions and companies’ transparency and control instruments against corruption. In 2005, the year that the “Mensalão” caseiv became public, the transparency debate heated up, especially related to the public sphere.35 Cases like “Mensalão” resulted in public pressure on more transparency, monitoring, and control instruments to combat corruption. The Brazilian government reacted through initiatives that focus on increasing public access to government expenses and general information. The Access to Information Law (enacted in 2011) is one example. To comply with this law, public institutions had to invest in instruments and processes to become more transparent and provide any citizen with any information they would like to require about a certain public institution or company.36 Another example is the recent corruption case of Petrobrasv, sparked by “Operação Lava Jato” from Brazilian Federal Bureau (PF) in March 2014. In this corruption case, the PF discovered that executives of private companies (construction, contractors and others) allegedly paid bribes to Petrobras corporate executives. These, in turn, diverted the money to pay for politicians’ election campaigns.37 The laws and instruments described above have a significant impact on the banking system, especially on state-controlled banks such as Banco do Brasil and Caixa Econômica Federal.

Since these institutions are state owned, they must follow some of the transparency requirements demanded by those laws such as providing information required to citizens and inform that they do not business with companies that were convicted of bribery. However, most of these transparency instruments have a “reactive principle”. In other words, citizens only have access to information if they request it.38 iv Mensalão” was a vote-buying case of corruption in which the ruling party “Partido dos Trabalhadores” (PT) paid a number of Congressmen R$ 30,000 (around US$12,000 at the time) every month in order to incentivize them to vote for legislation in favor of the party.

v Brazilian state-owned oil and gas company



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