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

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.