IDEffective Insolvency and Creditor Rights Systems
According to R. Harmer and N. Cooper, writing for the European Bank for Reconstruction and Development (EBRD) in 2003 and updated in 2004, Estonia's national legislation has a medium overall degree of compliance with the international standards articulated by a number of international organizations, including the World Bank. The EBRD assessment is based on the Bankruptcy Act (2003) of Estonia, which underwent changes in 2004, 2005, and 2006. According to the EBRD's assessment, Estonia's bankruptcy procedures display a number of positive aspects. However, Harmer and Cooper found that improvements could still be made in several areas, particularly with regard to the rehabilitation processes. The EBRD assessment is based solely on the content of the insolvency law. It has not evaluated or assessed the effectiveness or practical operation and application of those laws, nor has it evaluated institutional capacity to apply the law. The 2006 EBRD Commercial Laws of Estonia, on the other hand, does mention the issue of "effectiveness" of the insolvency regime in Estonia. Citing the results of the 2004 EBRD Legal Indicator Survey on Insolvency, the 2006 report concludes that the system is more creditor-oriented, which is likely to result in the debtors' perception of the system as slow and expensive. In December 2008, Estonia enacted a new Restructuring Act which, according to Karin Sorainen (writing for the Sorainen Law Updates), is modeled on the U.S. Chapter 11 approach, as well as on the German Insolvenzordnung and the Finnish Saneerauslaki. The new Act is intended to help financially troubled firms avoid liquidation and optimize the possibility of retaining their reputation and the trust of their creditors.
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NCInternational Financial Reporting Standards
The 2007 KPMG Investment Guide for Baltic States explains that, pursuant to the 2003 Accounting Act, Estonian companies may choose to apply either Estonian Accounting Standards (RTJs) or International Financial Reporting Standards (IFRSs). KPMG states that RTJs generally require less disclosure than IFRSs and are primarily designed for application by small and medium sized entities. Therefore, differences between RTJs and IFRSs occur, and some areas are not covered at all. These include accounting for joint ventures, employee benefits, retirement benefit plans, and income taxes. The World Bank, in its 2004 Report on the Observance of Standards and Codes (ROSC) on Accounting and Auditing, states that Estonian public interest companies, such as credit institutions, financial holding companies, mixed-activity holding companies, insurers, and companies whose shares or other securities are traded on a stock exchange in Estonia or other European Union member states are required to prepare their consolidated and legal entity financial statements pursuant to IFRSs beginning January 1, 2005. Estonia thus goes beyond the requirements of the EC Regulation No 1606/2002, which obliges all EU-listed companies to prepare consolidated accounts following IFRSs.
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ENPrinciples of Corporate Governance
In its 2004 Corporate Governance Sector Assessment, the EBRD concluded that Estonian corporate governance legislation is in "medium compliance" with the Organization for Economic Cooperation and Development Principles of Corporate Governance. According to a 2006 EBRD Commercial Law Assessment, the institutional environment in Estonia is considered sound, with an impartial and generally experienced and competent court system. Legal procedures and measures are generally clear and enforceable, although it is considered easy for a defendant to delay proceedings. Furthermore, corporate information is reliable and statutory auditors are fairly independent from shareholders. However, shortcomings exist in terms of redress and disclosure of information, as well as in the definition of responsibilities for the management board. Procedures for obtaining disclosure are usually lengthy and complex, and the enforceability of disclosure is weak. Per the 2006 EBRD Assessment, the Commercial Code represents the primary legislation for corporate governance. It was last amended in January 2007 and the major amendments were regarded by a 2007 EBRD report as the most significant developments affecting corporate governance in Estonia at the time. Also, the Corporate Governance Recommendations, based on the comply or explain principle, entered into force on January 1, 2006, and aimed to enhance corporate governance and transparency. The code is generally compliant with the OECD Principles.
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IDInternational Standards on Auditing
A 2007 KPMG Investment Guide states that, pursuant to the Commercial Code in Estonia, audits are mandatory for all public limited companies. Private limited companies must be audited only if their share capital exceeds EEK 400,000 or if the audit is prescribed by law or the respective articles of association. In a 2005 self-assessment prepared by the Estonian Auditing Board, it was pointed out that only banks and insurance companies are required to have their financial statements audited in accordance with International Standards on Auditing (ISAs). According to the 2004 World Bank Report on the Observance of Standards and Codes on Accounting and Auditing, in Estonia the audits of all other companies must be carried out pursuant to Estonian Auditing Guidelines, which are based on ISAs. The World Bank states, however, that the Guidelines were seriously deficient for any regulatory role. Since Estonia is a member of the European Union, it must implement European Commission (EC) Directive 2006/43, which requires all statutory audits to be carried out on the basis of ISAs by June 29, 2010, when harmonization in all Member States will be mandatory. According to a compliance scoreboard provided by the European Commission website, Estonia is expected to fully transpose the above-mentioned Directive into its national legislation in 2009.
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ENAnti-Money Laundering/Combating Terrorist Financing Standard
The Financial Action Task Force (FATF), in its 2007-2008 Annual Report names Estonia as one of the jurisdictions that has committed to implementing the FATF's 40+9 recommendations. In 2008, the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL) released the findings of the mutual evaluation they conducted on Estonia's Anti Money Laundering (AML) and Combating the Financing of Terrorism (CFT) regime against the Financial Action Task Force's (FATF) 40+9 recommendations. According to the findings of this report, Estonia has a sound legal and institutional AML/CFT regime. The assessment based this finding on the 2007 Money Laundering and Terrorist Financing Prevention Act (MLTFPA). The assessment does acknowledge that it is too early to properly assess the effectiveness of the new Law but notes that the Law was enacted with an aim to harmonize Estonian legislation with the requirements of the Third European Union Directive, which according to several accounts incorporates all of the FATF's recommendations. The report found that Estonia either complies or largely complies with a majority of the FATF recommendations and is non-compliant with only one. Estonia broadly defines the offense of money laundering; applies an all crimes approach to predicate offenses; and incorporates attempt, aiding and abetting, facilitating, and counseling the commission of money laundering. The Estonian Financial Intelligence Unit, housed within the Criminal Investigation Department of the Police Board, is a member of the Egmont Group.
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CPCore Principles for Systemically Important Payment Systems
The 2008 Financial Stability Report by the Bank of Estonia (BoE) mentions three systemically important payment systems in the country, the Settlement System of Ordinary Payments (ESTA) for domestic payments, the Real-Time Gross Settlement System (EP RTGS) for express domestic transfers, and TARGET-Eesti for pan-European euro payments. The report notes that these systems have been structured in such a way so as to minimize risks. In 2000, the IMF released a Report on the Observance of Standards and Codes (ROSC) addressing the compliance of Estonia's payment systems with the Committee on Payment and Settlement Systems' Core Principles for Systemically Important Payment Systems (CPSIPS). At the time of the IMF report, Estonia's payment system was being overhauled and the Interbank Payment System (IBPS) was being established. According to the report, the IBPS was expected to fully observe international standards. A 2002 IMF report noted that the IBPS comprises the EP RTGS and ESTA systems. On May 19, 2008, Estonia joined the Trans-European Automated Real-Time Gross Settlement Express Transfers (TARGET2) system. Estonia was not linked to TARGET2's predecessor system, TARGET as the country was not then part of the EU and unlike several other TARGET2 member countries the commencement of the new system in Estonia did not result in the replacement of the old RTGS system, EP RTGS. However, there is little information assessing TARGET2s compliance with the CPSIPS except for a statement in a 2008 European Central Bank (ECB) report on TARGET2, in which it indicates that the system is expected to fully observe all the CPSIPS. Despite the lack of information on TARGET2, it is generally believed that the system is an improvement over its predecessor and its component systems.
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