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Afghanistan

6. Financial Sector

Capital Markets and Portfolio Investment

Afghanistan is in principle welcoming toward foreign portfolio investment, but financial institutions and markets are at an early stage of development. Afghanistan does not have a stock market. There are no limitations of foreign investors obtaining credit. The banking sector generally only provides short term loans.

Money and Banking System

Most Afghans remain outside the formal banking sectorAfghans continue to rely on an informal trust-based process referred to as Hawala to access finance and transfer money, due in part to religious acceptance, unfamiliarity with a formal banking system and limited access to banks in rural areas. Three of the four major mobile network operators – Etisalat, AWCC, and Roshan – offer limited mobile money servicesFurther, the Afghan government plans to launch mobile money salary payments in the Ministry of Labor. If successful, the government plans to expand mobile money payments to the ministries of Education and Interior Affairs.

Still, finance is Afghanistan’s second-largest service industry behind telecommunications and is potentially an important driver of private investment and economic growth. There are 15 commercial banks were operating in Afghanistan, with total assets of approximately USD 4.48 billion. There are three state banks: Bank-e Millie Afghan (Afghan National Bank), Pashtany Bank, and New Kabul Bank (formerly the privately owned Kabul Bank), and there are also branch offices of foreign banks, including Alfalah Bank (Pakistan), Habib Bank of Pakistan, and National Bank of Pakistan.

Banking remains highly centralized, with a considerable majority of total loans made in Kabul. Bank lending is undermined by the legal and regulatory infrastructure that impedes the enforcement of property rights and development of collateral, though a banking reform law passed in 2015 could improve conditions. The aggregate loan-to-deposit ratio for the banking sector is approximately 11 percent, and most banks concentrate on fee-based services and short-term credit to well-known customers. The difficulty of accessing credit through banks and other formal financial institutions makes existing firms dependent on family funds and retained earnings, limits opportunities for entrepreneurialism, and reinforces dependence on the informal financial sector.

Formal credit to the private sector stands at less than 10 percent of GDP, significantly lower than other countries in the region. Afghanistan ranks 101 out of 189 economies for ease of obtaining credit in the World Bank’s Doing Business 2017. Afghan entrepreneurs complain interest rates for commercial loans from local banks are high, averaging around 15.5 percent. In response to this situation, investment funds, leasing, micro-financing and SME-financing companies have entered the market. USAID is working with the Afghan government and the banking sector to promote improved access to finance and the expansion of financial inclusion.

Afghanistan has lost many correspondent banking relationships in the past few years. The full extent of impact has yet to be quantified, but the unmeasured effects have been a loss in the ease of basic international transactions.

The Afghan central bank Da Afghanistan Bank (DAB) has made improvements in monitoring and supervising the banking sector, following the 2010 Kabul Bank crisis. President Ghani also took steps to hold those responsible accountable. The Afghan Government has a plan to recover assets from perpetrators of the large-scale bank fraud, though progress on its implementation remains slow.

Foreigners who would like to establish a bank account in Afghanistan are required to hold a valid passport and visa or work permit. Non-resident customers are subject to enhanced due diligence in an effort to combat money laundering and terrorism finance.

Foreign Exchange and Remittances

Foreign Exchange

Private investors have the right to transfer capital and profits out of Afghanistan, including for off-shore loan debt service. There are no restrictions on converting, remitting, or transferring funds associated with investment, such as dividends, return on capital, interest and principal on private foreign debt, lease payments, or royalties and management fees, into a freely usable currency at a legal market clearing rate. The PIL states that an investor may freely transfer investment dividends or proceeds from the sale of an approved enterprise abroad.

Major transactions in Afghanistan, such as sale of autos or property, are frequently conducted in dollars or in the currency of neighboring countries. Afghanistan does not maintain a dual-exchange-rate policy, currency controls, capital controls, or any other restrictions on the free flow of funds abroad. Afghanistan uses a managed floating exchange rate regime under which the exchange rate is determined by market forces. It is illegal to transport more than AFN 1,000,000 (approximately USD 17,200) or the foreign currency equivalent out of Afghanistan via land or air; amounts over AFN 500,000 (approximately USD 8,600), but beneath AFN 1,000,000, must be declared. Enforcement is reported to be inconsistent.

Remittance Policies

Access to foreign exchange for investment is not restricted by any law or regulation. There are large, yet informal, foreign exchange markets in major cities and provinces where U.S. dollars, British pounds, and euros are readily available. Entities wishing to buy and sell foreign exchange in Afghanistan must register with the central bank, Da Afghanistan Bank, but thousands of Hawalas continue to practice their trade. Non-official money service providers often cite the lack of enforcement in the currency exchange sector, and the resulting competitive disadvantage to licensed exchangers, as a disincentive to becoming licensed.

In mid-2014, due in part to Afghanistan’s failure to pass Financial Action Task Force (FATF)-compliant Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) laws in a timely manner, some international correspondent banks began closing USD accounts held for Afghan banks abroad, which increased costs and processing times for inbound and outbound international funds transfers. Currently there is only one bank in Afghanistan with a correspondent relationship with a bank that has a U.S. branch. Since then, Afghanistan has taken steps towards improving its AML/CFT regime.

Sovereign Wealth Funds

Afghanistan does not have a sovereign wealth fund.

France and Monaco

6. Financial Sector

Capital Markets and Portfolio Investment

There are no administrative restrictions on portfolio investment in France, and there is an effective regulatory system in place to facilitate portfolio investment. France’s open financial market allows foreign firms easy access to a variety of financial products both in France and internationally. France continues to modernize its marketplace; as markets expand, foreign and domestic portfolio investment has become increasingly important. As in most EU countries, French listed companies are required to meet international accounting standards. Some aspects of French legal, regulatory and accounting regimes are less transparent than U.S. systems, but they are consistent with international norms.

Euronext Paris (also known as Paris Bourse), the primary French stock exchange, created Alternext, a 21st century alternative for small and medium-sized companies to list on an unregulated market (based on the legal definition of the European investment services directive), with more consumer protection than the Marché Libre still used by a couple hundred small businesses for their first stock listing. A company seeking a listing on Alternext must have a sponsor with status granted by NYSE-Euronext, and prepare a French language prospectus for a permit from the Autorité des Marchés Financiers (AMF or Financial Markets Authority), the French equivalent of the U.S. Securities and Exchange Commission. Small and medium-size enterprises (SMEs) may also list on EnterNext, a new subsidiary of the Euronext Group.

France continues to modernize its marketplace; as markets expand, foreign and domestic portfolio investment has become increasingly important. As in most EU countries, French listed companies are required to meet international accounting standards. Some aspects of French legal, regulatory and accounting regimes are less transparent than U.S. systems, but they are consistent with international norms. Foreign banks are allowed to establish branches and operations in France and are subject to international prudential measures.

France’s banking system recovered gradually from the 2008-2009 global financial crises. French banks are now largely healthy. The assets of France’s largest banks totaled EUR 6.3 trillion (USD 8.5 trillion) in 2015. Foreign investors have access to all classic financing instruments, including short-, medium-, and long-term loans, short- and medium-term credit facilities, and secured and non-secured overdrafts offered by commercial banks. They assist in public offerings of shares and corporate debt, as well as mergers, acquisitions and takeovers, and offer hedging services against interest rate and currency fluctuations. Foreign companies have access to all banking services. Although subsidies are available for home mortgages and small business financing, most loans are provided at market rates.

Foreign Exchange and Remittances

Foreign Exchange

There are no restrictions or limitations placed on foreign investors in converting, transferring, or repatriating funds associated with an investment. Funds associated with any investment may be freely converted from euro into U.S. dollars or any other world currency. France is one of nineteen countries (known collectively as the Eurozone) that use the euro currency. Exchange rate policy for the euro is handled by the European Central Bank, located in Frankfurt, Germany. The euro has been trading in a range from USD 1.2 to USD 1.067 between January 1, 2015 and March 31, 2017.

Remittance Policies

France’s investment remittance policies are stable and transparent. All inward and outward payments must be made through approved banking intermediaries by bank transfers. There is no restriction on the repatriation of capital. Similarly, there are no restrictions on transfers of profits, interest, royalties, or service fees. Foreign-controlled French businesses are required to have a resident French bank account and are subject to the same regulations as other French legal entities. The use of foreign bank accounts by residents is permitted.

For purposes of controlling exchange, the French government considers foreigners as residents from the time they arrive in France. French and foreign residents are subject to the same rules; they are entitled to open an account in a foreign currency with a bank established in France, and to establish accounts abroad. They must report all foreign accounts on their annual income tax returns, and money earned in France may be transferred abroad.

France is a founding member of the OECD-based Financial Action Task Force (FATF, a 34-nation intergovernmental body). As reported in the Department of State’s France Report on Terrorism, the French government has a comprehensive anti-money laundering/counterterrorist financing (AML/CTF) regime and is an active partner in international efforts to control money laundering and terrorist financing. Tracfin, the French government’s financial intelligence unit, is active within international organizations, and has signed new bilateral agreements with foreign countries.

Sovereign Wealth Funds

France has no sovereign wealth fund per se (none that use that nomenclature), but does operate funds with similar intent. The Public Investment Bank (Banque Publique d’Investissement – BPI, now known as Bpifrance). Bpifrance’s role is to support small and-medium term enterprises (SMEs), larger enterprises (Entreprises de Taille Intermedaire) and innovating businesses. The government strategy is defined at the national level and aims to fit with local strategies. Bpifrance also provides export insurance. All investment made by Bpifrance is domestic. Bpifrance may hold direct stakes in companies, hold indirect stakes via generalist or sectorial funds, venture capital, development or transfer capital. It has taken minority stakes in firms and 250 investment funds, including 90 local investment funds that invest in businesses.

Germany

6. Financial Sector

Capital Markets and Portfolio Investment

As an EU member state with a well-developed financial sector, Germany welcomes foreign portfolio investment and has an effective regulatory system. Germany has a very open economy, routinely ranking among the top countries in the world for exports and inward and outward foreign direct investment. As a member of the Eurozone, Germany does not have sole national authority over international payments, which are a shared task of the Eurosystem, comprised ofthe European Central Bank and the national central banks of the 19 member states that are part of the eurozone, including the German Central Bank (Bundesbank). There are no restrictions on capital movements into or out of Germany, based on European law. However, in February 2017, Germany, France and Italy requested the European Commission to review the possibility of EU member states being given the ability to block foreign investment on the grounds of reciprocity. Global investors see Germany as a safe place to invest, as the real economy continues to outperform other EU countries and German sovereign bonds retain their “safe haven” status.

Listed companies and market participants in Germany must comply with the Securities Trading Act, which bans insider trading and market manipulation. Compliance is monitored by the Federal Financial Supervisory Authority (BaFin) while oversight of stock exchanges is the responsibility of the state governments in Germany (with BaFin taking on any international responsibility). Investment fund management in Germany is regulated by the Capital Investment Code (KAGB), which entered into force on July 22, 2013. The KAGB represents the implementation of additional financial market regulatory reforms, committed to in the aftermath of the global financial crisis. The law went beyond the minimum requirements of the relevant EU directives and represents a comprehensive overhaul of all existing investment-related regulations in Germany with the aim of creating a system of rules to protect investors while also maintaining systemic financial stability.

Money and Banking System

Although corporate financing via capital markets is on the rise, Germany’s financial system remains mostly bank-based. Bank loans are still the predominant form of funding for firms, particularly the small and medium sized enterprises of Germany’s famed Mittelstand. Credit is available at market-determined rates to both domestic and foreign investors, and a variety of credit instruments are available. Legal, regulatory and accounting systems are generally transparent and consistent with international banking norms. Germany has a universal banking system regulated by federal authorities, and there have been no reports of a shortage of credit in the German economy. Since 2010, Germany has banned some forms of speculative trading, most importantly “naked short selling.” In 2013, Germany passed a law requiring banks to separate riskier activities such as proprietary trading into a legally separate, fully capitalized unit that has no guarantee or access to financing from the deposit-taking part of the bank.

Germany supports a worldwide financial transaction tax and is pursuing the introduction of such a tax along with several other Eurozone countries.

Germany has a modern banking sector, but is often considered “over-banked,” as evidenced by ongoing consolidation and low profit margins. The country’s so-called “three-pillar” banking system is made up of private commercial banks, cooperative banks, and the public banks (savings banks, or Sparkassen, and the regional state-owned banks, or Landesbanken). The private bank sector is dominated by Deutsche Bank and Commerzbank, with a balance sheet total of €1.709 billion and €558 billion respectively (2015 figures). Commerzbank received €18 billion in financial assistance from the federal government in 2009, which gave the government a 25% stake in the bank (now reduced to 15.6%). Germany’s regional state-owned banks were among the hardest hit by the global financial crisis and continue to face major challenges to their business models. The federal government is currently in the process of winding down several so-called “bad banks” composed of toxic assets of failed banks WestLB (now Portigon AG) and Hypo Real Estate.

Foreign Exchange and Remittances

Foreign Exchange

As a member of the Eurozone, Germany uses the euro as its currency, along with 18 other European Union countries. The Eurozone has no restrictions on the transfer or conversion of its currency, and the exchange rate is freely determined in the foreign exchange market.

Germany honors independence of the bloc’s central bank (ECB) and does not engage in currency manipulation. In a February 2017 report, the European Commission (EC) concluded Germany’s persistently high current account surplus widened further in 2016 and is projected to remain above 8% of GDP until 2018. While falling prices of oil and other raw materials and the depreciation of the euro explain a substantial part of this increase in 2015-2016, the high level and persistence of the surplus reflects an excess of savings over investment relating to a number of structural, regulatory, and fiscal factors. German policymakers argue the large surplus is the result of market forces rather than active government policies.

Germany is a member of the OECD-based Financial Action Task Force (FATF) and is committed to further strengthening its national system for the prevention, detection and suppression of money laundering and terrorist financing. According to a February 22, 2017 press release from the Federal Finance Ministry, Germany’s Financial Intelligence Unit (FIU) will be restructured and given more staff. So far, the FIU was with the Federal Criminal Police (Bundeskriminalamt –BKA), which falls under the Federal Ministry of the Interior’s remit. It will be transferred to the General Customs Directorate, i.e to the Federal Ministry of Finance. At the same time, their tasks and competencies are redefined taking into account the provisions of the Fourth EU Money Laundering Directive. One focus will be on operational and strategic analysis. The government published draft legislation to implement the Fourth EU Money Laundering Directive, the European Funds Transfers Regulation (Geldtransfer-Verordnung) and the restructuring of the FIU is expected to enter into force on 26 June 2017 (The Act will amend the German Money Laundering Act (Geldwäschegesetz – GwG) and a number of further laws).

There is no difficulty in obtaining foreign exchange.

Remittance Policies

There are no restrictions or delays on investment remittances or the inflow or outflow of profits.

However, according to the Finance Ministry, the issue of remittances will play a key role during the German G20 presidency. Remittances sent by migrants to their home countries are very important for many families in developing countries, including in Africa. In the context of the fight against money laundering and terrorist financing, however, the G20 is working to improve the infrastructure for remittances without compromising the standards for combating money laundering and terrorist financing. The G20’s FATF and an FSB working group will prepare proposals in this respect in cooperation with the Global Partnership for Financial Inclusion. The goal of the German G20 presidency is to provide the FATF with the necessary resources and organize it structurally in such a way that it can continue to effectively perform its tasks, which have continued to grow over the years, in the area of combating money laundering and terrorist financing.

Sovereign Wealth Funds

The German government does not currently have a sovereign wealth fund or an asset management bureau. Following German reunification, the federal government set up a public agency to manage the privatization of assets held by the former East Germany. In 2000, the agency, known as TLG Immobilien, underwent a strategic reorientation from a privatization-focused agency to a profit-focused active portfolio manager of commercial and residential property. In 2012, the federal government sold TLG Immobilien to private investors.

Italy

6. Financial Sector

Capital Markets and Portfolio Investment

The GOI welcomes foreign portfolio investments, which are generally subject to the same reporting and disclosure requirements as domestic transactions. Financial resources flow relatively freely in Italian financial markets and capital is allocated mostly on market terms. Foreign participation in Italian capital markets is not restricted. In practice, many of Italy’s largest publicly-traded companies have foreign owners among their primary shareholders. While foreign investors may obtain capital in local markets and have access to a variety of credit instruments, access to equity capital is difficult. Italy has a relatively underdeveloped capital market and businesses have a long-standing preference for credit financing. The limited venture capital available is usually provided by established commercial banks and a handful of venture capital funds.

Italy’s regulatory system adequately encourages and facilitates portfolio investment. Italy’s financial markets are regulated by the Italian securities regulator (CONSOB), Italy’s central bank (the Bank of Italy) and the Institute for the Supervision of Insurance (IVASS). CONSOB supervises and regulates Italy’s securities markets (e.g., the Milan Stock Exchange). The European Central Bank (ECB) assumed direct supervisory responsibilities for the 15 largest Italian banks in 2015 and indirect supervision for less significant Italian banks through the Bank of Italy (https://www.bankingsupervision.europa.eu/home/html/index.en.html ). IVASS supervises and regulates insurance companies. Liquidity in the primary markets (e.g., the Milan exchanges) is sufficient to enter and exit sizeable positions, though Italian capital markets are small by international standards. Liquidity may be limited for certain less-frequently traded investments (e.g., bonds traded on the secondary and OTC markets). Liquidity measures, turnover and trading information for the Milan Stock market can be found here: http://www.borsaitaliana.it/borsaitaliana/statistiche/statistiche.en.htm  .

Italian policies generally facilitate the flow of financial resources to markets. Dividends and royalties paid to non-Italians may be subject to a withholding tax, unless covered by a tax treaty. Dividends paid to permanent establishments of non-resident corporations in Italy are not subject to the withholding tax. A full list of countries subject to tax treaties can be found on the Revenue Agency website:
https://www.agenziaentrate.gov.it/wps/portal/english/revenue_agency .

In 2009, the United States and Italy enacted an income tax agreement to prevent double-taxation of each other’s nationals and firms, and to improve information sharing between tax authorities.

In January 2014 Italy and the United States signed an intergovernmental agreement to implement provisions of the U.S. law known as FATCA (Foreign Account Tax Compliance Act). The FATCA intergovernmental agreement (IGA) allows for the automatic exchange of information between tax authorities and reflects an agreement negotiated between the United States and five European Union countries (France, Germany, Italy, Spain, and the United Kingdom). The automatic exchange of information takes place on the basis of reciprocity, and includes accounts held in the United States by persons resident in Italy and those held in Italy by U.S. citizens and residents. FATCA officially entered into force in Italy on July 8, 2015.

In 2016, the GOI also signed a tax information exchange agreement (TIEA) with Costa Rica.

Italy imposed a financial transactions tax (FTT, a.k.a. Tobin Tax) beginning in 2013. Financial trading is taxed at 0.1 percent in regulated markets and 0.2 percent in unregulated markets. The FTT applies to daily balances rather than to each transaction. The FTT applies to trade in derivatives, with fees ranging from €0.025 to €200. Also, high-frequency trading is subject to a 0.02 percent tax on trades occurring every 0.5 seconds or faster (e.g., automated trading). The FTT does not apply to “market makers,” pension and small-cap funds, transactions involving donations or inheritances, purchases of derivatives to cover exchange/interest-rate/raw-materials (commodity market) risks, and financial instruments for companies with a capitalization of less than €500 million.

The GOI has sought to curb widespread tax evasion by improving enforcement and changing popular attitudes. GOI actions include a public communications effort to reduce tolerance of tax evasion; increased and very visible financial police controls on businesses (e.g., raids on businesses in vacation spots at peak holiday periods); and audits requiring individuals to document their income. The GOI is also engaged in limiting tax avoidance. In 2014, Italy’s Parliament approved the enabling legislation for a package of tax reforms, many of which entered into force in 2015. The tax reforms aim to institutionalize OECD best practices to encourage taxpayer compliance, including by reducing the administrative burden for taxpayers through the increased use of technology such as e-filing, pre-completed tax returns, and automated screenings of tax returns for errors and omissions prior to a formal audit. The reforms also offer additional certainty for taxpayers through programs such as cooperative compliance and advance tax rulings (i.e., binding opinions on tax treatment of transactions in advance) for prospective investors.

The GOI and the Bank of Italy have accepted and respect IMF obligations, including Article VIII.

Credit is allocated on market terms, with foreign investors eligible to receive credit in Italy. In general, credit in Italy remains largely bank-driven. In practice, foreigners may encounter limited access to finance, as Italian banks may be reluctant to lend to prospective borrowers (even Italians) absent a preexisting relationship. Although a wide array of credit instruments are available, bank credit remains constrained following the financial crisis. Credit conditions have begun to loosen in 2016.

Money and Banking System

Despite isolated problems at individual Italian banks, the banking system remains sound and capital ratios exceed regulatory thresholds. However, Italian banks’ profit margins have suffered since 2011 as a result of tightening European supervisory standards and requirements to increase banks’ capital. The recession brought a pronounced worsening of the quality of banks’ assets, which further dampens banks’ profitability. The ratio of non-performing loans (NPLs) on total outstanding loans increased significantly, especially for lending to non-financial firms. NPLs have more than doubled since the crisis to reach €200 billion, accounting for 10.5 percent of all loans as of January 2017. The BOI expects NPLs to peak in 2017. The GOI is also taking steps to facilitate acquisitions of NPLs by outside investors, including soliciting investment from foreign investors. In December 2016, the GOI created a €20 billion bank rescue fund to assist struggling Italian banks in need of liquidity or capital support. Italy’s fourth-largest bank, Monte dei Paschi di Siena (MPS), became the first bank to avail itself of this fund in January.

Italy’s central bank, the Bank of Italy (BOI), is a member of the Eurosystem and the European Central Bank (ECB). In addition to ECB supervision of larger Italian banks, BOI maintains strict supervisory standards. The Italian banking system weathered the 2007-2013 financial crisis without resorting to government intervention.

Weak demand and risk aversion by banks continue to constrain lending, with banks tightening lending criteria. The latest business surveys show that credit conditions are easing, but availability of credit remains constrained, especially for smaller firms. Bank loans to households returned to growth at the end of 2015, while Italian bank lending to businesses returned to growth in 2016.

The banking system in Italy has consolidated significantly since the financial crisis, but there is still an overabundance of Italian banks. The GOI is taking steps to encourage further consolidation and to facilitate acquisitions by outside investors. As of September 2016, there were 641 banks in Italy, five fewer than a year earlier. The Italian banking sector remains overly concentrated on physical bank branches for delivering services, further contributing to sector-wide inefficiency and low profitability. Electronic banking is available in Italy, but adoption remains below Eurozone averages and non-cash transactions are relatively uncommon.

The London Stock Exchange owns Italy’s only stock exchange: the Milan Stock Exchange (Borsa Italiana). The exchange is relatively small — 387 listed companies and a market capitalization of only 31.8 percent of GDP as of January 1, 2017. Although the exchange remains primarily a source of capital for larger Italian firms, Borsa Italiana created “AIM Italia” in 2012 as an alternative exchange with streamlined filing and reporting requirements to encourage SMEs to seek equity financing. Additionally, the GOI recognizes that Italian firms remain overly reliant on bank financing, and has initiated some programs to encourage alternative forms of financing, including venture capital and corporate bonds.

The Italian Companies and Stock Exchange Commission (CONSOB), is the Italian securities regulatory body: www.consob.it .

Most non-insurance investment products are marketed by banks, and tend to be debt instruments. Italian retail investors are conservative, valuing the safety of government bonds over most other investment vehicles. Less than ten percent of Italian households own Italian company stocks directly. Several banks have established private banking divisions to cater to high-net-worth individuals with a broad array of investment choices, including equities and mutual funds.

There are no restrictions on foreigners engaging in portfolio investment in Italy. Financial services companies incorporated in another EU member state may offer investment services and products in Italy without establishing a local presence.

Any investor (Italian or foreign) acquiring a stake in excess of two percent of a publicly traded Italian corporation must inform CONSOB, but does not need its approval. Any Italian or foreign investor seeking to acquire or increase its stake in an Italian bank equal to or greater than ten percent must receive prior authorization from the Bank of Italy (BOI). Acquisitions of holdings that would change the controlling interest of a banking group must be communicated to the BOI at least 30 days in advance of the closing of the transactions. Approval and advance authorization by the Italian Insurance Supervisory Authority IVASS are required for any significant acquisition in ownership, portfolio transfer, or merger of insurers or reinsurers. Regulators retain the discretion to reject proposed acquisitions on prudential grounds (e.g., insufficient capital in the merged entity).

Foreign Exchange and Remittances

Foreign Exchange

In accordance with EU directives, Italy has no foreign exchange controls. There are no restrictions on currency transfers; there are only reporting requirements. Banks are required to report any transaction over €1,000 due to money laundering and terrorism financing concerns. Profits, payments, and currency transfers may be freely repatriated. Residents and non-residents may hold foreign exchange accounts. In 2016, the GOI raised the limit on cash payments for goods or services to €3,000. Payments above this amount must be made electronically. Enforcement remains uneven. The rule exempts e-money services, banks, and other financial institutions, but not payment services companies.

Italy is a member of the European Monetary Union (EMU), with the euro as its official currency. Exchange rates are floating.

Remittance Policies

There are no limitations on remittances, though transactions above €1,000 must be reported.

According to the Financial Action Task Force, Italy has a strong legal and institutional framework to fight money laundering and terrorist financing and authorities have a good understanding of the risks the country faces. There are areas where improvements are needed such as its money laundering investigative and prosecutorial action on risks associated with self-laundering, standalone money laundering, and foreign predicate offences, and the abuse of legal persons.

Sovereign Wealth Funds

The state-owned national development bank Cassa Depositi e Prestiti (CDP) launched a strategic wealth fund in 2011, now called CDP Equity (formerly Fondo Strategico Italiano – FSI). As of 2016, CDP Equity had €3.5 billion in capital, with €2.3 billion of this invested in nine portfolio companies. CDP Equity generally adopts a passive role by purchasing minority interests as a non-managerial investor. It does not hold a majority stake in any of its portfolio companies. CDP Equity invests solely in Italian companies with the goal of furthering the expansion of companies in growth sectors. CDP Equity provides information on its funding, investment policies, criteria, and procedures on its website (http://en.cdpequity.it/ ). CDP Equity is open to capital investments from outside institutional investors, including foreign investors. As of 2016, CDP Equity has signed co-investment agreements with Qatar Holding, the Kuwait Investment Authority (KIA), China Investment Corporation (CIC), RDIF (a Russian fund), and the Korea Investment Corporation. CDP Equity is a member of the International Working Group of Sovereign Wealth Funds and follows the Santiago Principles.

United Kingdom

6. Financial Sector

Capital Markets and Portfolio Investment

The City of London houses one of the largest and most comprehensive financial centers globally. London offers all forms of financial services: commercial banking, investment banking, insurance, venture capital, private equity, stock and currency brokers, fund managers, commodity dealers, accounting and legal services, as well as electronic clearing and settlement systems and bank payments systems. London is highly regarded by investors because of its solid regulatory, legal, and tax environments, a supportive market infrastructure, and a dynamic, highly skilled workforce.

The UK government is generally hospitable toward foreign portfolio investment. Government policies are intended to facilitate the free flow of capital and to support the flow of resources in product and services markets. Foreign investors are able to obtain credit in local markets at normal market terms, and a wide range of credit instruments are available. The principles underlying legal, regulatory, and accounting systems are transparent, and they are consistent with international standards. In all cases, regulations have been published and are applied on a non-discriminatory basis by the PRA.

The London Stock Exchange is one of the most active equity markets in the world. London’s markets have the advantage of bridging the gap between the day’s trading in the Asian markets and the opening of the U.S. market. This bridge effect is also evident as many Russian and Central European companies have used London stock exchanges to tap global capital markets. The Alternative Investment Market (AIM), established in 1995 as a sub-market of the London Stock Exchange, is specifically designed for smaller, growing companies. The AIM has a more flexible regulatory system than the Main Market and has no minimum market capitalization requirements. Since its launch, the AIM has raised approximately USD 38 billion (GBP 24 billion) for more than 2,200 companies.

Money and Banking System

The UK banking sector is the largest in Europe. According to TheCityUK, more than 150 financial services firms from the EU are based in the UK. EU banks in the UK hold USD 2.3 trillion (GBP 1.4 trillion) in assets, which is 17 percent of total bank assets in the UK. The financial and related professional services industry contributed approximately 12.6 percent of total UK GDP in 2013, employed around 1.16 million people, and contributed USD 1.1 trillion (GBP 650 billion) in tax receipts (which is 11.7 percent of total UK tax receipts). While banks remained concerned that excessive regulation in the wake of the financial crisis could drive business and talent away from London, the UK is expected to maintain its position as a top financial hub.

The Bank of England serves as the central bank of the UK by maintaining monetary and fiscal stability. According to Bank of England guidelines, foreign banking institutions are legally permitted to establish operations in the UK as subsidiaries or branches. Responsibilities for the prudential supervision of a non-European Economic Area (EEA) branch are split between the parent’s Home State Supervisors (HSS) and the Bank of England’s Prudential Regulation Authority (PRA). But the PRA expects the whole firm to meet the PRA’s Threshold Conditions. The PRA has set out its approach to supervising branches and its appetite for allowing international banks to operate as branches in the United Kingdom in documents that can be found online: http://www.bankofengland.co.uk/pra/Pages/default.aspx . In particular, the PRA expects new non-EEA branches to focus on wholesale banking and to do so at a level that has no potential adverse impact to the UK economy. The FCA is the conduct regulator for all banks operating in the United Kingdom. For non-EEA branches the FCA’s Threshold Conditions and conduct of business rules apply, including areas such as anti-money laundering. Eligible deposits placed in non-EEA branches may be covered by the UK deposit guarantee program and therefore non-EEA branches may be subject to regulations concerning UK depositor protection.

There are no legal restrictions that prohibit non-UK residents from opening a business bank account. However, most banks will not accept applications from overseas due to fraud concerns and the additional administration costs. To open a personal bank account, an individual must at minimum present an internationally recognized proof of identification and prove residency in the UK.

UK banks were particularly hard-hit by the global financial crisis. Large-scale lay-offs were common and mergers, nationalizations, and bank failures have left a consolidated playing field. In 2011, Northern Rock, wholly nationalized by the government during the financial crisis, was sold back to the private sector. In 2008, the Government also announced a series of “bank rescue measures” including taking large equity stakes in two key banks, the Royal Bank of Scotland and Lloyds Banking Group. Government stakes are managed at arm’s-length by UK Financial Investments (UKFI) and are approved by the European Commission to comply with state intervention rules. The UK took a 40 percent stake in Lloyds but has since sold off some GBP 9 (USD 13.95) billion worth of Lloyds shares, reducing its holdings to less than 22 percent. The UK Government currently holds about 81 percent of the Royal Bank of Scotland.

At this time, the UK has the strongest financial services sector in the EU by reason of history, time-zone, language, legal system, critical mass of skillsets, expertise in professional services and London’s cultural appeal. The UK’s withdrawal from the EU will impact the financial services sector and poses some risk to global financial stability. A period of prolonged uncertainty could increase sterling volatility, the risk-premia on assets, cost and availability of financing, as well as relationships with EU-based financial institutions.

Foreign Exchange and Remittances

Foreign Exchange

The British pound sterling (GBP) is a free-floating currency with no restrictions on its transfer or conversion. Exchange controls restricting the transfer of funds associated with an investment into or out of the UK are not exercised.

The Finance Act 2004 repealed the old rules governing thin capitalization, which allowed companies to assess their borrowing capacity on a consolidated basis. Under the new rules, companies which have borrowed from a UK-based or overseas parent need to show that the loan could have been made on a stand-alone basis or face possible transfer pricing penalties. These rules were not established to limit currency transfers, but rather to limit attempts by multinational enterprises to present what is in substance an equity investment as a debt investment to obtain more favorable tax treatment.

Remittance Policies

Not applicable.

Sovereign Wealth Funds

The United Kingdom does not maintain a national wealth fund. Although there have at time been calls to turn The Crown Estate – created in 1760 by Parliament as a means of funding the British monarchy – into a wealth fund, there are no current plans in motion. Moreover, with assets of just under USD 12 billion, The Crown Estate would be small in relation to other national funds.

Investment Climate Statements
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U.S. Department of State

The Lessons of 1989: Freedom and Our Future