US embassy cable - 05ROME1043

UNCLAS  ROME 001043 
 
SIPDIS 
 
 
DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA 
PARIS FOR USOECD 
TREAS FOR HULL 
STATE PASS CEA 
FRANKFURT FOR WALLAR 
USDOC 4212/ITA/MAC/OEURA/CPD/DDEFALCO 
 
E.O. 12958:  N/A 
TAGS: ECON, EFIN, ELAB, PGOV, IT, KPRP 
SUBJECT: ITALIAN CHAMBER OF DEPUTIES APPROVES BILL TO 
IMPROVE FINANCIAL MARKETS OVERSIGHT 
 
REF: A) 04 ROME 406; B) 04 ROME 2630 
 
SUMMARY 
------- 
 
1.  On March 4, the Chamber of Deputies approved, and sent 
to the Senate for consideration, the reform of Italy's 
fragmented financial markets oversight system.  The 
government promised the reform one year ago in the wake of 
the Parmalat scandal.  The current bill addresses conflict 
of interest between banks and companies; requires banks to 
provide a prospectus for the bonds they sell; and 
strengthens Italy's securities market and company audit 
regulator, Consob.  The bill makes a half-hearted attempt on 
accounting fraud, but not enough to address EU concerns over 
a 2001 law weakening accounting fraud sanctions.  A separate 
bill implementing the EU Market Abuse Directive, already 
approved by the Chamber of Deputies, could be approved by 
the Senate in April.  This bill does not address accounting 
fraud.  End Summary. 
 
One Year Later - A Step Closer to Reform 
---------------------------------------- 
 
2. On March 4, the Chamber of Deputies approved the reform 
of Italy's fragmented financial markets oversight system and 
sent the bill to the Senate for consideration.  Political 
disputes delayed approval of the bill, originally presented 
to Parliament in February 2004 by then-Finance Minister 
Tremonti.  The initial dispute was between Central Bank (CB) 
Governor Fazio and Tremonti, who sought to clip the CB's 
regulatory powers and limit Fazio's Governor-for-life term. 
Fazio came out on top, when Tremonti was forced to resign 
over other matters in summer 2004 (Ref B). 
 
Central Bank Powers Intact 
-------------------------- 
 
3. The Chamber of Deputies-approved text is largely 
consistent with that approved in committee, with the 
important exception of leaving untouched the powers of the 
Central Bank.  The bill is consistent with the government's 
position that the term of the CB governor should not be 
addressed within the market oversight reform and that the CB 
should retain oversight of competition (anti-trust) policy 
in the banking sector.  The Senate is also expected to leave 
the CB authority untouched, when the Senate takes up the 
bill. 
 
Securities Market Regulator Strengthened 
---------------------------------------- 
 
4. The bill provides tough oversight on conflict of interest 
between banks and companies and requires banks to provide 
potential retail investors with a prospectus for bonds the 
banks sell.  Consob, Italy's securities market regulator, 
gains powers in the supervision of auditing firms, while the 
financial police (Guardia di Finanza) will work more closely 
with Consob.  The bill introduces a new category of crime - 
"nocumento" - fraud affecting a number of investors greater 
than 0.5 percent of Italy's population (about 289,000) or 
investment holdings greater than 0.5 percent of GDP (about 
USD 7.5 billion).  The bill also puts limits on the credit 
that banks can extend to major shareholders (75 percent of 
the value of the shares the investor owns) and requires that 
company boards include an outside member who represents 
minority shareholders. 
 
Little New on Accounting Fraud; 
EU Still Likely to Act. 
------------------------------- 
 
5. The bill raises the maximum sentence for false accounting 
from one-and-one-half to two years.  However, there is still 
no penalty for company directors and board members who 
prepare, approve, or disseminate false balance sheets 
involving an amount below five percent of the company's pre- 
tax profits, despite the opposition's efforts to include 
such provisions.  (Note: The Berlusconi government passed a 
 
 
law in 2002, which eased penalties for certain types of 
corporate accounting fraud and made it harder to prosecute 
such offenses.  At that time, PM Berlusconi was facing 
criminal charges for false accounting; but the case was 
suspended after the law passed.  End Note.) 
 
6. The European Court of Justice (ECJ), however, has Italy's 
law on corporate fraud in its sights.  Specifically, after 
the government loosened accounting fraud rules in 2002, the 
ECJ reviewed the claim that the law violates EU statutes. 
The Advocate General (AG) to the ECJ issued an opinion in 
October 2004 that sections of the 2002 law are incompatible 
with EU legislation.  The ECJ should rule on the case in the 
first half of 2005.  Historically, in four out of five 
cases, ECJ rulings have agreed with the AG opinion.  In sum, 
the new bill makes a half-hearted attempt on accounting 
fraud, but not enough to address EU concerns over the 2002 
law.  It seems reasonable to assume that EU institutions 
would also review any new legal provisions on accounting 
fraud, too. 
 
Next Steps 
---------- 
 
7. On March 16, the Senate Finance and Industry Committees 
jointly took up the market oversight bill passed by the 
Chamber of Deputies.  Among changes expected in the Senate 
are the restoration of pension fund oversight to Covip, the 
pension regulator, and the creation of a bond-risk rating 
system to inform investors better.  Any changes to the bill 
means it would then return to the Chamber of Deputies for 
reconsideration.  Senate Committee Chairmen hope to have 
approval by the full Parliament prior to the August recess. 
 
Slow Implementation of EU Market Abuse Law 
------------------------------------------ 
 
8. The Senate has not yet approved a separate bill 
transposing the EU directive on market abuse into Italian 
law, which was approved by the Chamber of Deputies on 
December 2, 2004.  The EU deadline for member states to 
adopt the EU directive was October 12, 2004.  According to 
Senate schedules, floor debate on the bill should start 
April 5, with possible approval by end-April.  The law 
strengthens Consob by increasing 1) staff (from 450 to 600), 
2) investigative powers (to require magistrates/law 
enforcement to cooperate with regulators more), and 3) 
sentences, to up to six years for some financial crimes 
(except accounting fraud).  The bill also gives Consob 
access to the Centrale dei Rischi, the Central Bank archive 
of confidential accounting documents from financial 
institutions.  The bill as passed by the Chamber of Deputies 
would effectively implement the EU market abuse directive. 
 
Market Oversight Reform, EU Market Abuse Laws a Package 
--------------------------------------------- ---------- 
 
9. Taken together, the Security Market Reform bill and the 
bill to transform the EU Market Abuse Directive into 
national law, if passed and adequately enforced, 
substantively improve Italy's securities market oversight. 
Provisions in the two laws are mutually reinforcing.  For 
example, to effectively exercise the new authorities in the 
Oversight Reform law, Consob will need the increased 
staffing authorized in the EU Market Abuse law.  Indeed, 
elements of the global reform package originally proposed by 
former-Finance Minister Tremonti can be found in each of the 
two laws.  However, insufficient penalties for corporate 
fraud are still a weakness in Italian legislation.  EU 
pressure on Italy could help close this loophole. 
 
Comment 
------- 
 
10. To be fully effective, Italy's security market oversight 
reform should both create a set of coherent laws and 
regulations, as well as ensure that regulators have the 
authority, independence, skills, and resources to enforce 
the rules.  The final package of laws will make an important 
 
 
contribution toward this ideal, but its real impact can only 
be measured by the vigor with which regulatory authorities 
enforce the law to prevent market abuse and corporate fraud. 
End Comment. 
 
Sembler 
 
 
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	2005ROME01043 - Classification: UNCLASSIFIED