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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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Banks already have numerous channels to provide credible disclosure. All banks describe satisfactorily their Environmental and Social Risk Management systems. Their ESG-screening to select companies to invest in and their responsible investment policies are mentioned in public documents.

-28Nevertheless, the low score of banks on the theme of ‘Transparency & Accountability’ reflects the lack of information provided about the companies, projects and governments in which they invest, even the major ones. Besides, banks publish annual reports, which are not in line with some indicators of GRI Supplement for Financial Services. For example, according to the GRI Index of Banco do Brasil report, it meets the GRI FS6, but external auditors do not assure such statement. The bank, along with Bradesco and HSBC Brasil, does not publish a complete breakdown of outstanding investments to region, size and industry.

It is interesting to note that annual reports of all banks include a clear overview of stakeholders and the results of their consultation, which indicates that they try to engage clients, employees, civil society and governments in activities to decide the materiality of their reports and to influence their behaviour. Nevertheless, their accountability and engagement would be improved if banks disclosed their detailed voting records, which is not made by any of the analysed banks. Moreover, none of the analysed banks have an independent grievance mechanism for social organisations and other stakeholders. In addition, only half of the banks (Banco do Brasil, Itaú, Santander) has an internal grievance mechanism that is not exclusive to bank clients, but is also meant for other stakeholders such as employees, NGOs, civil society and investors.

In the theme Taxes & Corruption, banks have not earned points by reporting revenues, costs, profits and tax payments on a country-by-country basis, since they only report such results for Brazil and selected foreign countries. Itaú, for example, has increased its presence in Latin America in the last years, and therefore should be disclosing detailed information on issues such as revenues, costs, profits and tax payments to governments on a country basis. HSBC is another example of non-transparent practices. The bank does not disclose relevant information on country-by-country either, not even in their global report. Moreover, Banco do Brasil, Bradesco, Caixa and Itaú do not have a clear policy on providing services which help companies to avoid taxes by international corporate structures in other countries.

Nevertheless, they do provide an overview of ownership structure, including their subsidiaries and participations.

In ‘Taxes & Corruption’, the assessment also considered elements regarding the content of investment policies.A bank should be transparent about these policies as well and this is rewarded in the methodology, that uses only publicly available documents, when banks provide sufficient information about the principles used as part of their investment decision making process. The results were not satisfactory. A relevant challenge is to improve policies regarding the companies in which they invest. It would ensure that they invest in companies that comply with tax laws and do not promote corrupt practices.

Santander scored better in ‘Taxes & Corruption’ due to their international policies. Banco do Brasil was the national bank with highest score once it reports anti-corruption practices in their responses to the Questionnaire of the Corporate Sustainability Index (ISE) of BM&FBOVESPA, the Brazilian stock exchange.

3.3 Best practices

On ‘Transparency & Accountability’, Itaú presents better policies when compared with national peers. Besides the disclosure of project finance deals and project related corporate finance deals – as required by the Equator Principles – Itaú publishes a breakdown of outstanding investments, detailed by region, size and industry. Besides the disclosure of outstanding investments, detailed by region, size and industry, Itaú publishes the number of companies with which there has been interaction on social and environment topics.

-29Moreover, Itaú’s annual report is in accordance with the GRI Supplement for Financial Services. It includes the number of companies with which there has been interaction on social and environment topics, including the results of this engagement. Another good practice is mentioning its communication channels used to receive feedback from all stakeholders.

Santander presents the best practice for ‘Taxes and Corruption’, due to the adoption of international standards by their head offices. It adopts the OECD Guidelines for Multinational Enterprises which means the bank commits to take immediate action when employees or suppliers are guilty of corruption or tax evasion. In turn, Santander has its own system of risk management to identify and monitor possible corruption cases. By adopting such policies and practices, financial institutions can discourage companies from taking advantage of corruption practices.

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4.1 Government policy 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.61 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.62 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.63 Other relevant EU Directives developed in this context but not yet put into practice by all the EU countries are the EU Directive on Non-Financial Reporting (2014/95/EU) and the EU Directive on Administrative Cooperation. The already existing Anti-Money Laundering Directive (AMLD) of 2005 is currently under proposal of amendment, so that information required by it becomes public for authorities and people with a legitimate interest such as journalists. 64 Table 7 provides an overview of the European regulations regarding transparency in the financial sector.

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For over ten years, civil society and especially the French Platform on Tax Havens (Plateforme Paradis Fiscaux et Judiciaires – PPFJ) have been demanding country-by-country reporting by companies.vii Demanding this type of reporting could namely meet three goals now forming an obstacle to transparency. First, it could act as a deterrent for companies that improperly and artificially offshore their profits. Secondly, it would allow tax-, as well as regulatory and legal authorities to identify companies most likely to avoid tax. Thirdly, it would allow investors, customers or company employees to more thoroughly measure the risks (geopolitical, legal, financial etc.) to which the group might be exposed.72 viiThe same requirement was introduced at European level in the CRD IV Directive adopted in 2013. But it has yet to be incorporated into domestic law in many countries.

-35However, the financial sector rejected country-by-country reporting (CBCR) for years, arguing of the important costs and constraints it would place on the private sector. Yet, through the requirements under the new French banking law as adopted in July 2013,73 France has now proved that it is possible to demand such information from the banks, without significant additional costs and constraints. In 2014, as a first step towards country-by-country reporting, French banks published information on their subsidiaries, turnover and workforce.74 At European level, there had long been doubts about whether these data were going to be available or not. The European Commission was hesitant about publishing them and brought in consultancy PricewaterhouseCoopers to carry out an impact study.

PricewaterhouseCoopers recognized that public reporting not only permitted combatting tax avoidance, but could also have positive effects on companies’ competitiveness and investments.75 This recognition was followed up by the Commission which published its report on 2 October 2014.76 From 2016, all European banks will have to publish this information on the wealth they create and the tax they pay for each country in which they operate.77 The information the French banks should publish this year is of course not sufficient for a complete understanding of these banks’ behaviour in the field of tax evasion and other transparency issues. Moreover, being the first year to report on this, no standard format for reporting had been developed yet, so that in some cases it can be difficult to compare banks.

Also, the lack of regulation on the scope of consolidation makes it easy for banks to ‘play’ with this data to keep certain issues from being published.78 In 2014 the public had access for the first time to a large number of indicators of French banks, including the nature of their activity, their annual revenue and their number of employees, on a country-by-country basis, providing a clearer picture of banks’ real activities, especially in tax havens. From 2015 onward, further indicators will have to be disclosed by banks at the EU level, on a country-by-country basis, including their profits, taxes and potential public subsidies. Yet, large scandals involving tax evasion such as Luxleaks79 or Swissleaks80 prove that additional measures need to be adopted, now more than ever, to ensure that financial institutions are accountable to society at large. PPFJ closely monitored banks’ first public disclosure and used the data to issue a report about bank activities in tax havens in 2014. 81 The platform is now campaigning to correct the flaws revealed after the first public disclosure, namely to force banks to post the report under an opposable format (web vs pdf), adopt a unique set of definitions for bank activities and push banks to disclose the activity of their entire subsidiaries whether they are consolidated or not.

In 2015, PPFJ will keep monitoring the public disclosure of an extended list of indicators and will campaign for political measures aiming to regulate the French bank presence in tax havens. While the European Bank’s CBCR reporting will be released in the last quarter of 2015, European civil society organizations’ campaigns should ensure to use this data in order to expose the presence of the European banks in tax havens and, moreover, advocate for the implementation of CBCR at the G20 level. Finally, in France, the platform is also willing to take accountability one step further by advocating for the extension of compulsory public disclosure to all private actors. PPFJ is also asking public authorities to take the lead by forcing companies with public funding to adopt reporting activities.

-36Besides tax transparency, France took precocious measures to improve companies’ CSR policies. As early as 2001 the French Parliament adopted the act on the Nouvelles Régulations Economiques (New Economic Regulations - NRE) 82 forcing listed companies to publicly disclose annually a non-financial report, including the social and environmental impact of their activities. Yet, during the decade, a large number of civil society organizations criticized the NRE not only for the restricted number of companies affected by the disclosing measures but also for the vague criteria of disclosure, the lack of control of the reports content by an independent audit and finally the lack of sanctions when the report was not properly disclosed.

In order to foster the reform of the NRE into an ambitious piece of legislation, NGOs and unions decided to gather in the Forum Citoyen pour la RSE (FCRSE) in 2004.83 Fruitful meetings between CSR stakeholders including the FCRSE, government officials, business organizations and local representatives resulted in the vote of an act known as Grenelle II in July 2010. The bill’s major breakthroughs, gathered in article 225, included the extension of compulsory reporting to non-listed companies (except for Ltds, Simplified Joint Stock Companies, General partnerships and Real Estate partnerships), the addition of new criteria in the report based on clearer indicators, the participation of stakeholders – including unions – in the construction of the report and a compulsory audit of the report’s content by an independent firm.84 Although the main French business associations such as MEDEF or AFEP took part in the discussions, they firmly opposed Grenelle II and lobbied extensively for two years to alter the content of the bill - delaying its promulgation.85 As a result, a certain number of amendments were passed from 2010 to 2011 and drastically reduced the impact of Article 225. According to the provisions of the 2010 Marini amendment, stakeholders were no longer involved in the construction of the report. The 2011 Huyghes amendments created two distinctive lists of disclosure for listed companies and non-listed companies – the latter being significantly shorter than the first one and delayed the implementation of Article 225’s provisions for a year.

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