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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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Last but not least, the 2011 Warsmann amendment allowed subsidiary companies not to publish the report whenever their social, environmental and societal impact was included in the parent company’s consolidated report – allowing a lack of transparency for the direct impact of subsidiaries’ activity in development countries and tax havens.86 Despite two negative opinions emitted by the Conseil d’Etat (Council of State) successively in May 2011 and during spring 2012, the government discreetly passed the enforcement decree in April 2012.87 Before the promulgation of the decree, business lobbies obtained to raise the thresholds of implementations to companies posting more than €100m revenue – against €43m originally - and employing 500 persons or more. In June 2012 the FCRSE appealed the decision to enforce the decree before the Conseil d’Etat. The complaint was eventually dismissed in March 2014.88 The provisions of Grenelle II were not fully functional until the government passed an implementation decree in May 2013 specifying the role of the audit firm in controlling the report for the 2014 fiscal year.89 It took more than three years for an ambitious bill to turn into a slightly restrictive piece of legislation. Yet the original breakthroughs of Grenelle II inspired the European Union in implementing a similar directive, which was adopted in October 2014 and should be incorporated into French law by 2017.

-37Although the core provision of this so-called CSR directive, namely the issuance of a non-financial report, is already implemented in France, the FCRSE campaigned for the adoption of an ambitious directive to reform Grenelle II through the European Coalition for Corporate Justice (ECCJ), the EU level equivalent of the French platform. After three years of parliamentary debates that were heavily influenced by business lobbies, NGOs described the bill as a missed opportunity.90 Although the FCRSE hailed the inclusion of a due diligence provision forcing companies to be accountable for the activities of their subsidiaries, suppliers and subcontractors particularly regarding their respect to human rights, the platform criticized the numerous restrictions of the final directive in respect to the draft proposal. 91 The bill originally aimed at providing extra-financial information regarding the activities of 18.000 European companies.92 Eventually the range of companies was restricted to utility companies, i.e. listed companies, banks and insurance companies, of 500 employees or more and posting annual revenues equal or higher to € 40 million, thus affecting only 6.000 companies across the EU. The bill includes many provisions that were deemed controversial in Grenelle II such as the exemption of subsidiaries from public disclosure when their activities are included in a consolidated report. Other controversial measures include the comply-or-explain provision and the safe harbour provision that enable companies not to disclose information whenever they justify it and particularly when they judge the disclosure harmful to their competitiveness.

Finally, as opposed to Grenelle II, the CSR directive does not make it compulsory for companies to audit the content of their report by an independent firm, nor does it set sanctions in case the report is not issued.93 With the incorporation of the directive into French law by 2017, the FCRSE is campaigning to go one step further and ambitiously reform Grenelle II by lifting some of its controversial measures including the exemption of subsidiaries from public disclosure, the comply-or-explain provision or the safe harbour provision. Moreover, the platform is advocating to make it compulsory for companies’ subcontractors and suppliers as well as simplified joint stock companies to publicly disclose a non-financial report. Finally the FCRSE is willing to impose sectorial clear indicators to enable a more transparent comparison.94

4.3 Results of the policy assessment The results of the assessment of the relevant themes of the Fair Finance Guide methodology are summarized in Table 9.

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-38Assessing the behaviour of banks in transparency and accountability issues, the research showed that all five French banks described their Environmental Social Risk Management System (ESRMS), be it in different degrees. Four of the banks (BNP Paribas, Credit Agricole, Credit Mutuel, Societé Generale) use ESG-screening to select companies to invest in.

However, the exact implementation of such responsible investment policies remains unclear.

Even less banks use engagement (only Credit Mutuel) or voting (only Credit Mutuel) to influence the companies invested in. None of the banks publish an exclusion list of companies that are excluded from loans and other investments. Three of the five banks, namely BNP Paribas, BPCE and Credit Agricole, have their ESRMS audited by an external party, making it more reliable.

All banks publish a sustainability report in line with the GRI level G4 Sustainability Reporting Guidelines. However, not all issues of these Guidelines are covered by the banks. As such, only two out of five banks (BNP Paribas and Societé Generale) report according to the full Financial Sector Supplement (FSSS) and also only two (BNP Paribas and Credit Mutuel) publish a breakdown of outstanding investments by region, size and industry. Again two out of five banks (BPCE and Credit Agricole) additionally display this data in a cross-table based on the Standard Industrial Organisation. As French law Grenelle II complies French banks to audit their sustainability report by an external party, all of the banks’ sustainability reports are verified externally.

Regarding the engagement of banks with companies on social and environmental topics, only BNP Paribas and Societé Generale report on this consultation. None of the banks reports the names of these companies, but three out of five banks (BNP Paribas, Credit Agricole and Societé Generale) do publish the number of companies contacted. Disclosing the names of companies, projects, states or funds invested in is something none of the banks appear to do, not even if such projects are granted more than € 1 million credit. Lastly, none of the banks has an internal grievance mechanism for stakeholders and social organisations, and neither did any bank state they would abide by decisions of an independent grievance mechanism.

Relating to Taxes & Corruption, the research shows that all five French banks already publish part of their financial data on country-by-country basis, as required by the current French law.

Although this type of reporting only entails data on subsidiaries, turnover and workforce and is thus less strict than the assessment element, points are given. The reason for this is that the French Bank law complies the banks to report on the wealth they create and the taxes they pay in each country, including in tax havens. As requested by the law, this information should be released in two steps, firstly from December 2014 subsidiaries, turnover (revenues) and number of employees, secondly from January to July 2015 taxes paid, profits and potential subsidies. As such, in their 2013 annual report most banks only included information on revenues and workforce, leaving costs, profits and tax payments to governments unpublished.

Furthermore, none of the banks commit publicly to require companies invested in to adhere to country-by country reporting or to integrate any other criteria on taxes and corruption in their procurement and operational policies. Neither do the banks assessed mention whether they ask any information on the beneficial owner or owners of companies invested in.

Offering, promising, giving and requiring, either directly or indirectly, bribes and other undue advantages in order to acquire and to maintain assignments and other undue advantages, is regarded unacceptable by four of the banks, namely BNP Paribas, BPCE, Credit Agricole and Societé Generale. Three banks (BNP Paribas, Credit Agricole and Societé Generale) apply this principle also to the companies they invest in.

-39Regarding presence in tax havens and the provision of financial services to companies in tax havens, none of the five French banks provided reliable statements on abstaining from having subsidiaries without substance in tax havens, or on abstaining from providing financial services to companies in tax havens. With regard to advising companies to set up international corporate structures with the main purpose to avoid taxes, only Societé Generale provides operates a policy in its Group Code of Conduct that promotes this element.

These findings go in line with research already done by CCFD-Solidaire in 2012, which demonstrated that despite official announcements about banks’ withdrawal from these non-transparent territories, the number of subsidiaries of French banks (the only information then available) in such territories did not shrink between 2010 and 2012 but even grew in some cases. 95 Two years later, bolstered by more exhaustive data, the Plateforme Paradis Fiscaux et Judiciaires came to the same conclusion: the presence of French banks in tax havens is still anything but trivial or insignificant, whether you use the Tax Justice Network’s list or that of the US Government Accountability Office (GAO). 96 The proof of this situation can be found in seven key points listed by the Plateforme Paradis

Fiscaux et Judiciaires:

1. More than a third of French banks’ foreign subsidiaries are in secrecy jurisdictions;

2. 26% of French banks’ international business, or a total of € 13.7 billion, is generated in “tax haven” countries;

3. Specialization by French banks in investment solutions, structured finance or asset management in tax havens;

4. Offshore employees are, on average, twice as productive as others;

5. The Grand Duchy is the favourite tax haven of French banks;

6. Explaining offshoring in the Cayman Islands;

7. Tax havens are more attractive than emerging economies.

4.4 Best practices

In Transparency & Accountability, a best practice is provided by BPCE, being the only bank to disclose the names of all current and recently closed project finance deals and project related corporate finance deals, including the information required by the Equator Principles III. This relates to assessment element 5 in Transparency & Accountability.

A best practice in Taxes & Corruption is provided by Societé Generale. As the only bank of five, in their group wide Tax Code of Conduct they clearly state they do not provide assistance or encouragement to clients to breach tax laws and regulations. This complies with assessment element 2 in Taxes & Corruption. However, it must be said that the Plateforme Paradis Fiscaux et Judiciaires research shows that also Societé Generale is active in tax havens.

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5.1 Government policy In the wake of Indonesia’s reformasi era in the early 2000’s, the ‘good governance’ paradigm, which principles are transparency, accountability, participation, rule of law, and so on, became development buzzwords in Indonesia. Good governance had mostly been associated with public sector governance, since Indonesia had just been in transition from a corrupt authoritarian government to a newly democratic government. It is in this era that Indonesia established a number of public institutions to monitor public sector’s governance such as Indonesian Ombudsman Commission (established in 2000 and legislated in 2008), Indonesian Corruption Eradication Commission (2002) and legalised Anti Corruption Laws (1999 and

2001) as well as Law on Public Information Openness (2008), among others.

For the financial sector, regulations regarding transparency can mostly be seen in the context of more exposure of Indonesian financial sector towards foreign investments, in which the government sees that better Good Corporate Governance (GCG) of companies in this sector – especially financial reporting transparency - will attract more foreign investments to Indonesia after the crisis. The de-regulation of the industry in 1988 had caused banking industry to grow almost uncontrollably since then. As a result, the banking industry was the one that was hit hardest by the Asian monetary crisis in 1998. Learning from that crisis, Indonesian Central Bank (BI) started to tighten regulations on GCG to disciplining the industry. As for non-financial transparency, most regulations are pertaining to consumer protection, such as transparency in lending rate, benefits, risks and costs of products and services, among others.

This sub-section elaborates on two levels of regulatory frameworks. The first framework concerns state level laws which are pointed out in Table 10. Besides the Banking Law that particularly regulates all banking aspects, other laws described here are mostly related to GCG of private companies in particular. The second framework concerns laws and regulations of financial authorities in Indonesia, such as the Central Bank or Bank Indonesia (until 2012) and the Financial Service Authority, -FSA or OJK (since 2013). These laws and regulations regarding bank’s financial transparency have all been issued after the huge banks bail out in early 2000’s.

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5.2 Current debate The following issues are related to banking transparency as being discussed recently in Indonesia.

As a background, Indonesia has a new government in place since October 2014, and the current debates around transparency of banks mostly revolve around the efforts to increase tax revenues for the new government to fund its development policies and programs. The new government promises to build infrastructure for transportation, energy, to ensure food security and so on, wherein Indonesia lags behind, but the state budget to finance those projects is limited. Therefore the government is seeking to boost revenues from taxation, which contributes to more than three fourth of the state budget113.

-46Bank confidentiality is everything in relation to information about customers and their deposits.

According to the Banking Law, bank confidentiality does not apply for:

a. Tax purposes;

b. Bank account settlement that have been submitted to the Bureau of State Receivables and Auction (BUPLN) / Receivable State Affairs Committee (PUPN);

c. The interests of justice in criminal cases;

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