This document is an excerpt from the EUR-Lex website
Corporate and financial malpractice
The aim of this Communication is to provide a holistic approach on how to reduce the risk of financial and corporate malpractice covering also taxation and law enforcement.
There are four lines of "defence" against corporate malpractice: internal control in a company, independent third parties, and supervision and enforcement.
Communication from the Commission to the Council and the European Parliament of 27 September 2004 on preventing and combating corporate and financial malpractice [COM(2004) 611 final - Not published in the Official Journal].
This Communication is the Commission's response to the Enron and Parmalat financial scandals that caused immense disruption to capital markets. The Commission is aware that there is an effective EU framework for dealing effectively with most of the financial issues raised, viz. the Financial Services Action Plan (FSAP) and the existing action plans (COM(2003) 284), and it sets out in this Communication a holistic strategy covering financial services, internal issues, justice and tax policy.
The Commission identifies four lines of "defence" against corporate malpractice that focus on a series of measures involving matters ranging from the internal control in a company, through auditors and supervision to measures necessary to comply with the law.
First line of defence - internal control in a company and corporate governance
Boards of companies have fiduciary obligations towards the company itself and its shareholders as well as obligations towards stakeholders at large.
Before the end of 2004 the Commission will take the following measures:
The Commission will look into:
Second line of defence - independent third parties
The second line of defence is made up, above all, of the auditors, but accounting firms, banks, investment bankers and lawyers, as well as rating agencies and financial analysts, also have an important role to play. At this control level, transactions must be transparent and conflicts of interest reduced to a minimum.
In this connection, the Commission has presented a proposal for a directive on statutory audit of annual accounts and consolidated accounts (COM(2004) 177 final). The proposal provides for:
In the area of customs cooperation, the EU acquired two important legislative instruments in 2005:
The Commission will look more closely at financial analysts and credit rating agencies as regards:
Third line of defence - supervision
Member States play a key role in enforcing EU legislation regarding supervision and public scrutiny.
In October 2005 the EU Council reached a political agreement on the proposal for a directive on statutory audit (COM(2004) 177 final) that requires adequately funded, effective and independent public supervision for all statutory auditors and audit firms.
More than one authority is involved in supervising the institutions operating on financial markets. In the Commission's view, it is important to develop deeper cooperation between sectors:
The Commission envisages a clear division of labour between the national level and the European level of supervision, and one that favours the latter in the event of cross-border transactions. As part of more wide-ranging cooperation between these two levels, the Commission would like to see improved transparency of tax systems by facilitating access to, and the exchange of, information. The possibility of using a single direct tax identification number for companies will be looked into.
In order to improve administrative cooperation, the Communication sets out the following practical measures:
The Commission and the Member States are developing concrete proposals targeted at cases of tax fraud and avoidance involving complex and opaque structures.
Outside the EU, far greater transparency and exchange of information with third countries as well as with dependent or associated territories should be promoted. For this, better consistency is essential in defining EU policies towards cooperative and non-cooperative tax havens.
The Communication states that:
Fourth line of defence - law enforcement
This line of defence is concerned mainly with police forces and the judicial authorities responsible for investigations and prosecutions that may have both a preventive and a repressive effect. The Commission has attempted to provide the Member States with more effective legal instruments to combat financial crime. These are:
At EU level, the Commission has identified a number of improvements that need to be made:
The Commission would like to see Member States establish specialised national bodies that could cooperate at European level with a view to effective identification, freezing, seizing and confiscation of laundered proceeds.
The Communication fits into the general framework laid down by the Financial Services Action Programme (FSAP) and the Action Plan modernising company law and enhancing corporate governance (COM(2003) 284), which lay down the political foundations at Community level. The Communication stresses that these action plans should not be changed but, instead, should be implemented in a timely manner and by ensuring effective control of the application of legislation.
Last updated: 01.02.2006