Abstract
This chapter analyzes disclosures on anti-money laundering made by the largest banks in Germany, France, and the United Kingdom. Directive 2014/95/EU has transformed the way banks with more than 500 employees disclose non-financial information. The findings show that between 2013 and 2017 compliance has increased, while understandability has remained the same. Despite the fact that a common regulation is applied, this research highlights differences and similarities in disclosures of non-financial information among banks. It adds an overview of the non-financial reporting in the banking sector to the literature, which is not limited to a specific country.
TopIntroduction
As Rousseau once said, reports are meant to be “the eyes of the public” (Rousseau, 1772).
Since the financial crisis of 2008, the reputation of the financial sector has been damaged enormously. There has been a loss of trust on the part of stakeholders as well as gigantic financial losses. As Groenfeldt (2017) pointed out, trust is always central to the debate on the banking industry. Therefore, it is an indispensable area to study, even almost fourteen years after the crisis. This is specially to evaluate what they were willing to report at the time in order to increase transparency and understandability and what they must report nowadays in order to comply with the new regulation.
The annual report has been an important source of information about the financial position of a company, its economic performance, and changes in its financial position. The general purpose of financial reporting is to provide financial information about the entity to potential investors, lenders, and other creditors (IASB, 2008). The annual reports include financial information and non-financial information. Financial information had played a key role in companies’ annual reports. However, non-financial information has been gaining attention, interest, and importance (Accountancy Europe, 2017)1. A possible reason is the growing demand not only from shareholders but also from other stakeholders for more information about non-financial data to better comprehend the company and to deal with expectations regarding the future. This information relates to environmental and social issues, as well as risk management and corporate governance issues among others, therefore facilitating the task of informed choices (EY, 2016).
Given the inadequacy of capacity of value creation, the Global Integrated Report (GRI) was published, and the European Union (EU) issued Directive No. 2014/95/EU about the disclosure of non-financial information. The Directive emphasizes the need for improving company disclosure by adding non-financial information to which the various stakeholders give importance, to increase the understandability and comparability of the information disclosed among companies and across countries. Larger EU companies, which are those with more than 500 employees (the “larger companies”), must apply the 2014 EU Directive from the year 2017 onwards.
This paper is therefore timely. It looks at the disclosure of non-financial information by eight European banks from France, Germany and the United Kingdom which represents 62% of the total assets of the top 3 largest banks in Europe. It analyses the framework for disclosure, the compliance level interns of the EU regulation and some characteristics of the information disclosed by banks, namely understandability and comparability.
The study focuses on the largest European banks in Germany, France and the U.K., which are obliged to comply with the new regulation. Moreover, these banks need to comply with the new disclosure inserted into national legislation by the year 2018.
Begina (2016) and Venturelli, Caputo, Cosma, Leopizzi and Pizzi (2017) studied non-financial information in the context of Directive 2014/95/EU. Both studies focus on specific countries, respectively Italy and Greece, and both compare the national vs international situation. This paper is not limited to a specific country and adds to the literature by providing an overview of non-financial reporting in the banking sector in three additional countries: France, Germany, and the UK.
Key Terms in this Chapter
Mandatory Disclosures: Under Directive 2014/95/EU, large companies must publish information related to environmental matters, social matters and treatment of employees, respect for human rights, anti-corruption, and bribery. They also must disclose information about governance diversity regarding gender, age, professional and educational background of members in company boards.
Non-Financial Information (NFRD): NFRD is the Directive 2014/95/EU. This EU law set rules on mandatory reporting of non-financial and diversity information, such as disclose information on the way they operate and manage social and environmental challenges by public-interest entities (PIE). This Directive amends the Accounting Directive, that is Directive 2013/34/EU. EU rules on non-financial reporting currently apply to listed companies, banks, insurance companies, and large public-interest companies with more than 500 employees. NFRD can be used as a framework for stakeholders, such as investors, policy makers, and consumers, evaluate the non-financial performance of companies, and so it pushes companies to behave more responsible when doing business. The Corporate Sustainability Reporting Directive (CSRD) adapted in April 2021 by the European Commission would amend the NFRD.
Anti-Money Laundering (AML): AML refers to the activities that financial institutions must comply with legal requirements to actively monitor customers transactions and report suspicious activities. Such activities are taken to prevent and combat money laundering, terrorism financing and other financial crimes AML includes procedures, regulations, and laws intended to prevent criminals from disguising illegally obtained funds as legitimate income. act. An AML compliance program should focus not only on the effectiveness of internal systems and controls developed to detect money laundering, but also on the risk assessment of customer activities.
Public Interest Entity (PIE): The definition of PIE is stated in the Directives 2013/34/EU on accounting (the Accounting Directive) and 2014/56/EU on statutory audits (the Audit Directive). PIE are (i) entities governed by the law of an European Union Member State whose transferable securities are admitted to trading on a regulated market of any Member State; (ii) credit institutions; (iii) insurance undertakings, or (iv) entities designated by Member States as public-interest entities, for instance undertakings that are of significant public relevance because of the nature of their business, their size or the number of their employees; incidentally, application of this fourth criterion varies significantly across Member States. On 17 June 2016, new rules on statutory audit became applicable across the EU. The new rules and key measures laid down in the EU Audit Reform apply exclusively to PIE defined as stated above.
Know Your Clients (KYC): KYC refers to the rules used by banks to verify the identity of their customers. Like AML, KYC is used by banks to secure financial institutions.