Identifier
Created
Classification
Origin
06ROME449
2006-02-14 15:29:00
UNCLASSIFIED
Embassy Rome
Cable title:  

Italy's Parliament Passes "Sarbanes-Oxley".

Tags:  ECON EFIN ELAB PGOV IT KPRP EUN 
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UNCLAS SECTION 01 OF 04 ROME 000449 

SIPDIS

DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA
PARIS ALSO FOR USOECD
TREAS FOR HULL
STATE PASS CEA
USDOC 4212/ITA/MAC/OEURA/CPD/DDEFALCO

E.O. 12958: N/A
TAGS: ECON EFIN ELAB PGOV IT KPRP EUN
SUBJECT: Italy's Parliament Passes "Sarbanes-Oxley".

Ref: A. 05 ROME 1043

B. 04 ROME 406


UNCLAS SECTION 01 OF 04 ROME 000449

SIPDIS

DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA
PARIS ALSO FOR USOECD
TREAS FOR HULL
STATE PASS CEA
USDOC 4212/ITA/MAC/OEURA/CPD/DDEFALCO

E.O. 12958: N/A
TAGS: ECON EFIN ELAB PGOV IT KPRP EUN
SUBJECT: Italy's Parliament Passes "Sarbanes-Oxley".

Ref: A. 05 ROME 1043

B. 04 ROME 406



1. SUMMARY. On December 23 Italy's Senate passed the
financial market oversight reform bill, two years after the
massive Parmalat fraud scandal and just following the
resignation of Bank of Italy (BOI) Governor Fazio. The bill
leaves in place the five regulatory authorities: antitrust,
central bank, securities market, insurance, and pension
funds. The bill gives Italy's securities market regulator
(CONSOB) the authorizty to raid firms suspected of
securities violations, and to impound evidence. It also
cuts the BOI Governor's term from a life-time appointment to
six years, renewable once, and shifts the BOI's banking
competition oversight to CONSOB and Italy's antitrust
authority. The European Central Bank (ECB) has approved the
reform.


2. (SBU) Summary continued. The new law requires the
affected regulatory agencies to write and implement a total
of 35 new decrees and regulations in a period ranging from
six to 18 months; CONSOB is responsible for 19. The new law
integrates a law passed in April 2005 implementing the EU
market abuse directive, strengthening the powers, and
increasing the staffing of CONSOB. The bill also redefines
a new category of crime called "Nocumento" or mega-fraud,
which damages more than 0.1 percent of Italy's population
(roughly 575,000 people) or, investment holdings investment
holdings totaling 1.4 billion euro. Measures have already
been taken to delay implementation of the new bill and some
analysts believe that deputies passed the bill so they could
campaign as anti-corruption reformers in the upcoming
elections. Shifting authority among the five key
regulators, the crush of implementing regulation, and the
inevitable election-year slow down in administrative
activity means it will be many months before the new law
takes effect. END SUMMARY.

Two years of Political Disputes Wrap Up
--------------


3. (U) On December 23 Italy's Parliament approved the last

reform law of Italy's fragmented financial markets oversight
system; capping the official, tough, and outrageously
delayed GOI response to the 2003 Parmalat scandal. A
watered down version of the original bill presented to
Parliament by Finance Minister Giulio Tremonti in February
2004, the final package approved lacks the more aggressive
steps proposed by Tremonti to protect private savings from
corporate mismanagement, and to establish a single,
consolidated financial regulatory authority to supervise
banking and equity markets to pension and insurance plans,
similar to the United Kingdom's Financial Services Agency.
Tremonti's initial proposal appeared to have bipartisan
support, but divisions between the government and the
opposition quickly developed. The bill ran into trouble
since Tremonti planned to clip the BOI's regulatory powers
and impose a fixed term limit for the governor. Former
BOI's Governor Fazio at the time had allies both within and
outside the government coalition and as a result, the reform
bill stalled.

Bank of Italy's New Role
--------------


4. (U) The return of Tremonti as Finance Minister last
fall, following the resignation of Domenico Siniscalco, and
the accusations of manipulation of bank mergers leveled
against ex-Bank of Italy governor Fazio finally provided the
necessary impetus to pass the market reform bill. Notably
the bill sets a once renewable, six-year term for the new
BOI Governor, and gives the antitrust authority more
oversight over banking competition. The bill introduces
more transparency and consensus in BOI's decision-making
processes; before the reform authority at the BOI was held
exclusively by the governor, who was able to make all
decisions without transparency or a justification. The BOI
is also now required to report on its activities to
Parliament every six months.


5. (U) Under the new law the BOI governor is appointed by
Italy's President, on the recommendation of the Prime
Minister and the Finance Minister, who must first consult
BOI's thirteen-member Superior Council, made up Fazio
allies. This new procedure was used for the appointment of
the bank's new Governor, Mario Draghi. Previously the
bank's Superior Council exercised significantly more
discretion in selecting the new governor. Even within the
restricted BOI board made up four members (the governor, the
director general and two deputy directors general) that run
the bank, Draghi is surrounded by people of the Fazio era.
Any possible step toward the modernization of the BOI will
pass through the expected retirement of the current DG and
the appointment of a new DG coming from outside the bank.


6. (U) BOI's capital, now controlled by the same private
banks BOI regulates, will be transferred to public
institutions by 2009. The total value of BOI owned by
private banks is in dispute. The transfer of ownership to
an as yet undefined "public institutions" may lead to
greater political influence over BOI's operations; however
given that further details will be fleshed out in a new
regulation it is difficult to speculate how this will
unfold.


7. (U) The BOI will retain its oversight of banking system
stability, and will continue to investigate potential
conflicts of interest cases between banks and non-banking
companies. It will decide on a case by case basis the
allowable level of indebtedness by a bank's controlling
shareholders. The final version of the law eliminated a key
provision to limit credit given by a bank to any one of its
shareholders to three fourths of the value of the individual
shareholders shares. This measure had been designed to
discourage businesses from becoming bank shareholders to
receive preferential, non-market-based credit.


8. (U) General oversight for the banking industry,
specifically monitoring anti-trust behavior and other non-
competitive behavior, has been transferred from the Bank of
Italy to the antitrust authority, under the direction of
Antonio Catricala. One of the first consequences of the law
was the announcement of an investigation by the antitrust
authority on costs associated with checking accounts and ATM
services.

Securities Market/Corporate Governance Authority Wins
-------------- --------------


9. (U) The new bill will strengthen the position of Italy's
securities market and corporate governance authority,
CONSOB, headed by Lamberto Cardia. CONSOB now has oversight
of: 1) bond placement and circulation for bonds issued
abroad by Italian companies or their foreign subsidiaries;
2) transparency in capital transactions, and 3) conflict of
interest by senior management. For example, to issue bonds
abroad, firms will now need to submit information to CONSOB.
A firm's board of directors will be bound by CONSOB rules of
conduct for stock capital transactions, and senior
executives will be required to report any conflict of
interest.


10. (U) CONSOB will assume oversight of Italian companies
and credit institutions operating with offshore financial
institutions in tax havens. It will develop criteria by
which Italian firms, listed on Milan's stock market, and
financial institutions may retain authority over off-shore
institutions. CONSOB will also regulate stock options and
public company accounting oversight.


11. (U) CONSOB's authority had already been strengthened by
a bill signed into law in April 2005, which integrates an
existing EU directive on market abuse into Italian law. The
2005 bill increases CONSOB's staff, from 450 employees to
600 employees, gives CONSOB greater investigative powers,
and stiffens penalties for financial crimes to a maximum six
years in prison. The bill also gives CONSOB access to the
Centrale dei Rischi, the Central Bank archive of
confidential accounting documents from financial

SIPDIS
institutions.

Of Note: Law Tidbits
--------------

12. (U) The market reform law requires minority shareholder
representation on a firm's board of directors. The bill
confirms, but does not significantly change the powers of
COVIP, Italy's supervisory body for pension funds, and for
ISVAP, the supervisory body for private insurance, and
creates a ministerial advisory commission on savings. This
commission will consist of a President and two members, to
be named by the Prime Minister based upon recommendations by
the Ministers of Finance and Public Administration.
COMMENT: The exact work this commission will is unclear, as
its mandate appears to duplicate activities of other market
oversight institutions. END COMMENT.


13. (U) The bill is also designed to reduce the power of
Italy's banking foundations. In 2004, Italian banking
foundations disbursed 1.2 billion euro, while in the period
1993/2004 they disbursed 7.3 billion euro. The total assets
of Italian banking foundations or foundation of banking
origin were equal to 41 billion euro at end-2004. Despite
the banking reforms of the `90s, Italy's banking foundations
remain powerful, wealthy, and private institutions, with
members historically appointed by regional and local
government authorities. For example, Fondazione Monti
Paschi di Siena (MPS) owns 66% of MPS Bank, Italy's fifth
largest bank, worth 6.7 billion euro at current market
valuation. Regardless of a foundations share in a bank, the
new bill limits a foundation's voting to only 30 percent,
reducing its control over board decisions, and indirectly
encouraging the foundation diversify its investments, thus
making the capital available to other parts of the economy.


14. (U) The bill will allow financial market oversight
authorities to request assistance from the Guardia di
Finanza (GdF),Italy's financial police to conduct
investigations. Although the regulatory authorities can
currently request GdF assistance through a court order,
this bill establishes new, direct links between the
institutions and the GdF.

New Penalties for Financial Crimes
--------------


15. (U) The bill provides weaker-than- anticipated
regulation of fraudulent accounting practices. For example,
the maximum prison sentence for falsifying corporate
financial statements increased from one and half years to
just two years. The political opposition had introduced a
regulation increasing prison time to five years for
fraudulent accounting practices; however the final version
was considerably watered down. The new bill follows
existing law in that no penalties apply to company directors
and/or board members who prepare or disseminate fraudulent
balance sheets when the discrepancies fall below five
percent of a company's pre-tax profit.


16. (U) The bill, creates (see Reftels) a new category of
crime called "Nocumento". Nocumento is defined as
fraudulent accounting that adversely affects more than 0.1
percent of Italy's population (roughly 575,000 people)or
investment holdings totaling 1.4 billion euro. This crime
is punishable by a two-to-six year prison term.


Two Steps Forward, One Step Back
--------------


17. (U) The new market reform bill was meant to be
implemented January 12, 2006. However, a decree law
postponing the implementation of some parts of the bill is
now before Parliament, triggering a sixty day delay of the
law's implementation. The decree, if approved, will: 1)
postpone for an additional twelve months the enforcement of
CONSOB's new regulatory powers, and 2) create a four-month
transition period for the reform in the bond and insurance
sectors. In addition the banking foundations have begun
lobbying to postpone for twelve months the reduction in
their maximum voting powers to 30 percent.

What Do the Changes Mean?
--------------

18. (U) There still remain five market oversight
authorities - the Antitrust Authority, the BOI, CONSOB,
ISVAP, and COVIP, with a new, ill-defined ministerial level
advisory committee on savings. The BOI remains overstaffed,
with 8,000 employees, while CONSOB and the antitrust
authority have significantly increased power, yet remain
relatively understaffed.

Former Top Regulator Not Sanguine
--------------


19. (SBU) Guido Rossi, university professor, jurist, and
former president of CONSOB, has told the press that the new
financial market oversight reform bill is one of the worst
laws passed in the last thirty years. He said it was rushed
through as part of a strategy to force former BOI Governor
Antonio Fazio to resign. In addition, Rossi asserts, the
bill was watered down under pressure by center-right party
members in Parliament, perhaps in an effort to preserve the
2002 law that dismissed fraudulent accounting charges
against Prime Minister Berlusconi for his dealing with SME,
a former state-owned Italian food company. As a result of
the 2002 law, judges suspended that criminal case against
Berlusconi.

Oversight Authority Still Fractured/Overlapping
-------------- --


20. (SBU) While the new law may improve corporate
governance in Italy, it leaves intact a fragmented
regulatory structure with overlapping roles and confusing
bureaucracy. Critics note the law was passed during at a
time when of politicians facing re-election are anxious to
show tough action against financial criminals.

As Always, Devil in the Detail -- Implementing Regs
-------------- --------------


21. (U) The bill requires several regulations to be first
drafted and then implemented by the different regulatory
authorities. So, the verdict remains out as to whether the
law will achieve its original, long-awaited goal of
overhauling and strengthening Italy's securities market and
corporate governance oversight.