The European Parliament secures bank transparency

Added 14 Mar 2013

Members of the European Parliament (MEPs) secured a big step towards the financial transparency needed to combat tax dodging last week when they made EU Finance Ministers agree on country-by-country reporting for EU banks from 2014. This represents a major victory after years of campaigning by Eurodad members and allies. The deal under the EU’s Capital Requirement Directive is timely and it can – and should – influence the final agreement on the Accounting Directive, where country-by-country reporting is still on the table.

MEPs requested urgent action on this issue in an open letter to EU Finance Ministers, and their persistence paid off. The European Parliament is on a roll, enjoying its most influential week since the Lisbon Treaty gave it ‘co-decision’ authority over EU laws,” wrote the Financial Times.

Under the Capital Requirement Directive (CRD IV), the EU will require banks to disclose profits made, taxes paid and subsidies received, as well as turnover and number of employees for each country where they operate. This information will be included in the banks’ audited annual reports. From 2014, the information will be disclosed to the European Commission (EC). From 2015, the data will be made public, unless the EC finds significant economic disadvantages when carrying out an impact assessment, in which case they can propose a delay.

Last week’s agreement is referred to as a ‘political agreement’ that has to be approved by EU Member States and by the whole European Parliament, where a vote is expected in mid April.

Towards full country-by-country reporting

Thanks to strong pressure from civil society organisations, including Eurodad and our members, EU lawmakers have discussed country-by-country reporting extensively over the last year in negotiations over the Accounting Directive.

Importantly, the deal made under the CRD IV goes further than the provisional agreements of the Accounting Directive in requiring disclosure of financial data. Whereas the Accounting Directive will require disclosure of tax payments to governments, the CRD IV will require disclosure of profits made, taxes paid and subsidies received on a country-by-country basis, as well as turnover and number of employees. This is crucial. Knowing how much tax a company pays to the government in each country is good, but it does not reveal where real activity takes place and hence where value is made. This is basic information required to determine whether a company is paying its fair share of taxes. Country level disclosure of financial data is key to revealing tax dodging practices, which cost developing countries hundreds of billions of dollars every year.

In addition, the CRD IV requires data to be published in the banks’ annual reports. This means the data will be audited, which is not the case under the Accounting Directive.

Spill-over ensuring coherence?

Coherence in EU law will require the CRD IV agreement to spill over into the final negotiations of the Accounting Directive. At a very minimum, the new agreement should convince EU Member States that the review clause of the Accounting Directive must include country-by-country reporting

  • beyond logging and extractive industries, and
  • beyond payments to governments.
This would mean that the questions will be up for new discussions in the legislative review.

Investment figures demonstrate why extending the requirement beyond extractive and logging industries is important. In 2010, green field investments (start-ups) in the five sectors proposed by the European Parliament for inclusion in the Accounting Directive were worth $235bn: the biggest sector was extractive and logging industries with $76bn; followed by communications ($72bn); the financial and banking industries ($46bn); and construction ($41bn). On average, 63% of these flows targeted developing countries.

When voting on the Accounting Directive, MEPs suggested that payments to governments should be disclosed at country level in the banking, construction and telecommunication sectors, in addition to extractive and logging sectors. Member States have been dragging their feet, and the final agreement may not reflect the MEPs’ sensible suggestions.

MEPs deserve congratulations for securing fast action on bank transparency. Now Member States are under pressure to act coherently and extend these transparency requirements to other sectors when finalising the details of the Accounting Directive.