This record is a partial extract of the original cable. The full text of the original cable is not available.

091150Z Feb 06

UNCLAS SECTION 01 OF 04 ROME 000384 
 
SIPDIS 
 
SENSITIVE 
 
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
SUBJECT: ITALY,S PARLIAMENT PASSES "SARBANES-OXLEY". 
 
REF: A. 05 ROME 3195 
 
     ¶B. 05 ROME 1043 
     ¶C. 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.  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.  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.  The return of Tremonti as Finance Minister last fall 
(reftel A), 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.  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 the 
BOI,s Superior Council, made up of thirteen members chosen 
by the BOI branches located capital of Italy's thirteen 
largest regions for five years.  For this reason is currently 
made up of people chosen in the Fazio era.  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.  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 institutions8 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.  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.  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.  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.  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.  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 institutions. 
 
Of Note:  Law Tidbits 
--------------------- 
 
¶12.  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.  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.  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.  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.   The bill, creates (see reftel B and C) a new category 
of crime called "Nocumento8.  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.  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.  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.  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.  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.  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. 
SPOGLI