EU to target Caribbean havens following Parmalat scandal

Friday, February 13, 2004

BRUSSELS, Belgium: Following the Parmalat scandal, European Union regulators plan to take steps to improve financial supervision in offshore centres, many of which are tiny Caribbean centres that attract business through lax supervision, tax breaks, anonymity and little red tape.

According to a recent Reuters report, the European Commission will also target firms' activities in offshore centres to tighten corporate governance, EU Internal Market Commissioner Frits Bolkestein said on Wednesday.

Bolkestein, the EU's top financial regulator, said he was planning to force European Union firms to fully disclose their activities in jurisdictions where supervision is scarce.

"The role and regulatory control of off-shore centres needs to be tightened," Bolkestein told the European Parliament. "We are considering the options -- although this is not easy."

The Commission's action on offshore centres stems directly from the Parmalat affair, the latest of a string of corporate scandals that have emerged in companies on both side of the Atlantic such as Enron or Ahold .

Government officials and financial experts have pointed the finger at the lack of control in offshore centres after a probe into Italy's food firm Parmalat revealed that a four billion euro account held by its Cayman Islands unit Bonlat was fake.

The company was declared insolvent and its total debt is estimated at above $17.75 billion.

Offshore financial centres are facing growing scrutiny by international authorities with the Organisation for Economic Cooperation and Development targeting them to fight tax evasion and money laundering.

Bolkestein said upcoming new EU laws against money laundering might contain provisions to boost financial supervision in the offshore centres but gave no more details.

Italian Economy Minister Giulio Tremonti, who is pushing through a corporate governance reform in Italy, presented an initiative to boost supervision of company units based in offshore centres at last week's Group of Seven meeting.

"The apparent size of this fraud is staggering," Bolkestein said. "Scandal upon scandal will cumulatively weaken financial markets like a corrosive drip of a leaking fuel tank."

The Commission said its three-pronged action on corporate governance would include a proposal for "full disclosure in the company accounts of offshore Special Purpose Vehicles, including why the company uses these offshore structures and much stricter verification by the group auditor of their content."

Two further proposals will focus on strengthening the role and independence of non-executive board members and on making directors fully responsible for a company's accounts.

The three proposals, initially scheduled for September, are expected to be unveiled in the next few months, but no date has been set yet, a European Commission spokesman said.

In March the EU executive will present a proposal on auditors that will include stricter auditor rotation requirements, tougher sanctions, undivided group auditor responsibility for a company's accounts and obligatory independent audit committees for listed companies, he said.

The EU Parliament, which is due to adopt a resolution on Parmalat on Thursday, called on the Commission to force auditors to split their audit services from non-audit ones as part of its reform of the audit profession.

Bolkestein lashed out at the financial industry, saying its inability to self-regulate was leading to more regulation than possibly desired.

"We need some real industry leadership to stand up and take charge: to clear out the crooks, expose their unscrupulous practices and curb excessive greed," Bolkestein said.

"If industry leaders are not prepared to do this, then regulators will have to do much more than perhaps they or we would like."

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