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European Savings Tax
Directive (ESD)
What has Basel ii to do with the European Savings Tax Directive (ESD)? The Savings Tax Directive is important for the Home/Host supervisors relationship in order to have supervision on a consolidated basis (and to try to avoid future BCCIs). The roles of the Home and the Host supervisors are very carefully described in several Basel ii papers. Let’s see how things have developed Basel i In order to comply with Basel i, we simply had to allocate some capital for our risks. There was no operational risk, no legal risk, no anti-money laundering or tax related directives, not even corporate governance. In the Basel i paper we can not even find the words “management” or “board of directors” (having to do something for compliance). Basel ii Basel ii is very different. It is not a capital accord. We have three pillars: Pillar 1, minimum capital requirements; Pillar 2, self assessment and supervisory review; and Pillar 3, market discipline. Most financial institutions underestimate the importance of Pillar 2 and the new powers of their supervisors. In order to comply with Basel ii, we have to persuade the local supervisors that we meet the standards, we exercise due diligence, and we follow the Basel ii rules as they are interpreted by each country. We need controls for every risk we do not (or we must not) accept. It is obvious that there is an increasing focus by regulators on legal, fraud, and compliance issues. According to the Basel Committee “The most important types of operational risk involve breakdowns in internal controls and corporate governance” 1. The Basel Committee on Banking Supervision (BCBS), the International Association of Insurance Supervisors (IAIS) and the International Organization of Securities Commissions (IOSCO) are all committed now to fighting money laundering and the financing of terrorism. “To the extent that institutions in each sector are offering the same services, AML/CFT measures (Anti-Money Laundering/Combating the Financing of Terrorism ) and standards need to be reasonably consistent, otherwise there would be a tendency for criminal funds to flow to those institutions in those sectors operating under less stringent standards” “The AML/CFT elements common to all three financial sectors are essentially prescribed by the FATF’s 40 Recommendations and its subsequent eight special recommendations” The FATF has worked with the IMF and World Bank to develop a “Methodology for Assessing Compliance with Anti-Money Laundering and Combating the Financing of Terrorism Standards” (the Methodology). This Methodology is already being used as the basis for FATF and FATF-style mutual evaluations, as well as by the IMF and World Bank in the Financial Sector Assessment Program (FSAP) and by the IMF in the Offshore Financial Centre Assessment Program The FATF standards and the Methodology encompass the following aspects of AML/CFT: __ customer identification; __ ongoing monitoring of accounts and transactions; __ record-keeping and reporting of suspicious transactions; __ internal controls and audit; __ integrity standards; and __ cooperation between supervisors and other competent authorities. 2. The Basel Committee on Banking Supervision, in its Customer due diligence for banks (CDD) paper in October 2001 issued prudential guidance for CDD which are applicable to AML/CFT. This paper sets out standards and provides guidance for the development of appropriate practices by banks in this area. Adequate due diligence on new and existing customers is a key element. Banks must develop policies and procedures in key areas such as customer acceptance, customer identification, ongoing monitoring of high-risk accounts and risk management. For correspondent banking, “banks should fully understand the nature of the respondent bank’s management and business; should refuse to enter into or continue a correspondent banking relationships with foreign shell banks; and should pay particular attention when continuing correspondent banking relationships with respondent banks located in jurisdiction with poor know-your-customer standards” In addition to customer identification, the CDD paper provides recommendations for: __ The ongoing monitoring of accounts; __ Appropriate compliance and internal audit functions within the bank; __ Application of an accepted minimum standard of KYC policies and procedures on a global basis; __ Supervisory obligations and powers in the implementation of KYC in a cross-border context. Recommendations in the CDD paper have been incorporated into the Methodology, which has become the uniform basis for assessing the implementation of AML/CFT measures in all countries. 3. The Basel Committee on Banking Supervision, in February 2003, released a general guide to good practice on account opening and customer identification This document is aimed at assisting banks to develop an effective customer identification programme. The focus is documentation requirements and information items that should be gathered and verified for different types of bank customers, who may be natural persons or institutional customers. The Basel Committee on Banking Supervision in the guidance on consolidated know-your-customer risk management for a banking group. A consolidated approach allows for consistency in the identification and monitoring of customer accounts across business lines and geographical locations throughout the group. 4. The Basel Committee on Banking Supervision in August 2003 issued the Consolidated KYC Risk Management. The paper, which has since been revised to incorporate comments received from relevant stakeholders, examines the critical elements for effective management of KYC risks across the head office and all branches and subsidiaries. Key to this process is the development of a global risk management programme for KYC which incorporates consistent policies and procedures for the identification and monitoring of customer accounts on a groupwide basis across business lines and geographical locations. An important topic addressed in the revised version of the paper is the issue of legal impediments to information-sharing of customer account information. The comments by the industry on the consultation draft noted that some countries have rigorous bank secrecy or data protection laws that prevent, or can be interpreted as preventing, the transfer of information for risk management purposes. The revised paper stresses that it is essential that all jurisdictions that host foreign banks provide an appropriate legal framework which allows information for KYC risk management purposes to be passed to the head office/parent bank Furthermore, there should be no impediments to onsite visits by head office auditors, risk managers compliance officers, or home country supervisors, nor any restrictions on their ability to access all the local office’s records, including customers’ names and balances Head office staff granted such access should not be restricted from reporting such information back to head office 5. The Basel Committee on Banking Supervision's working group on cross-border banking (CBB) has ongoing relationships with AML and CFT assessors, the FATF and industry. The BCBS considers these relationships essential in furthering its objective of promoting and monitoring compliance with the principles it has developed. The BCBS also has contacts with agencies directly involved in AML and CFT investigation/enforcement actions, such as treasuries, judicial authorities and law enforcement agencies. A key Challenge: Many offshore centers have successfully managed to circumvent the European Savings Tax Directive. But, it was just the first battle. Now there are other challenges. For example, Basel ii, and the need for supervision on a consolidated basis. The need for co-operation among the Home and the Host supervisors. The need for "automatic" flow of information. |
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