ENEffective Insolvency and Creditor Rights Systems
A survey conducted by the European Bank for Reconstruction and Development (EBRD) in 2003 found that Croatia's Bankruptcy Law of 1997 (amended 2000) has a high overall degree of compliance with international standards for insolvency and creditors' rights systems, although several shortcomings were identified. The 2007 EBRD "Commercial Laws of Croatia" publication notes that a number of amendments to Croatia's bankruptcy and insolvency legislation had been passed in 2006, addressing some of the deficiencies previously identified. The changes redefine the tests for insolvency, improve the provisions covering requirements that third parties deliver debtor assets to the insolvency administrator, impose requirements on creditors to file claims within a set period of time, and alter the reimbursement arrangements for administrators so that proceedings need not be cancelled if the debtor runs out of funds to pay for the service. Creditor rights and provisions for the training and professionalization of insolvency administrators are also provided for. However, as far as the practical operation of Croatia's insolvency system is concerned, the 2007 EBRD "Strategy for Croatia" report commented on a large gap between the quality of legislation and the effectiveness of its implementation. According to the 2008 U.S. Department of Commerce report, the World Bank worked with Croatia to address the slowness of its insolvency proceedings, leading to the adoption of a new information and legal system. The Department of Commerce notes that Croatia has harmonized its legal framework with European Union regulations and the principles of the United Nations Commission on International Trade Law.
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NCInternational Financial Reporting Standards
In 2007, the World Bank issued a ROSC on accounting and auditing in Croatia, which was a follow up to an earlier ROSC evaluation in 2002. As noted in the 2007 ROSC, Croatia had made considerable progress in developing its regulatory framework for corporate sector financial reporting since the previous assessment. Most importantly, the requirement existing in 2002 that all companies use International Financial Reporting Standards (IFRSs) translated and published in the National Gazette has been limited by the Accounting Law of 2005 only to public interest entities, thus easing the reporting burden for small and medium size enterprises (SMEs). However, it was noted that the IFRSs applicable in Croatia are a 2004 version of the international standards since the translation process had been interrupted between 2000 and 2004. It was thus recommended to establish an ongoing translation and adoption process to ensure compliance with IFRSs. SMEs are now given an option to either apply IFRSs or follow the standards adopted by the Financial Reporting Council (FRC). These standards, according to the Deloitte IAS Plus website, represent a version of international standards in effect in 2000. However, at the time of the World Bank assessment, the FRC was in the process of drafting a separate set of standards suitable for the needs of SMEs based on IFRSs and relevant EU requirements. As far as the recommendations on improving enforcement of accounting requirements, in 2007 the World Bank noted the introduction of important institutional changes. However, it recommended further capacity building to monitor compliance with the accounting requirements. In addition, in line with the 2002 World Bank recommendations, Croatia continued to align its legislation with the EU acqui communitare, although some gaps still exist.
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ENPrinciples of Corporate Governance
Croatian corporate governance has been the subject of multiple World Bank and European Bank of Reconstruction and Development (EBRD) assessments. In its 2004 "Corporate Governance Sector Assessment Project," the EBRD accorded Croatia a rating of "Medium Compliance" with the OECD Principles of Corporate Governance. More recently, the 2008 World Bank ROSC, stated that Croatia had undertaken "substantial legal and regulatory changes" since previous World Bank assessment in 2001 and had improved its corporate governance framework and addressed shortcomings. These changes include introduction of the Acts on Takeovers and the Securities Markets, adoption of a voluntary corporate governance code, amendments to the Companies Act, and the creation in 2006 of a single supervisory agency, HANFA, for capital markets, insurance, and private pensions. However, substantial challenges remain, especially in areas of disclosure and transparency, protection of minority shareholders, and functioning of the board. The 2008 World Bank ROSC recommends that priority be given to a number of reforms, including: revising the company law to address conflicts of interest and to protect small shareholders during delisting; ensuring public availability of annual reports; effectively enforcing disclosure of related party transactions and indirect ownership; encouraging investment funds to become proponents of good governance; and strengthening the institutional capacity of HANFA.
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IDInternational Standards on Auditing
The World Bank ROSC on Accounting and Auditing in Croatia issued in 2007 was a follow up to an earlier ROSC evaluation in 2002. The earlier ROSC advocated for the drafting of a new law on auditing in addition to continuous translation and timely publication of mandated International Standards on Auditing (ISAs) as they are periodically revised by the International Auditing Assurances Board. As explained in the 2007 ROSC, the Auditing Act, which was adopted in line with the World Bank's recommendations in 2005, is broadly aligned with the European Union acquis communautaire and enhances the institutional framework for statutory audit. However, the report points out that as part of Croatia's EU accession the amended Fourth, Seventh and Eighth Company Law Directives still need to be incorporated into national legislation. Although at the time of the 2002 ROSC Croatia had fully translated and adopted all ISAs, the 2007 ROSC report notes that ISAs were subsequently revised, and the translation of the most recent version of ISAs had not yet been completed. However, at the time of the 2007 ROSC the Croatian Chamber of Auditors, which is responsible for the translation, publication, and implementation of auditing standards in Croatia, was in the process of translating the revised ISAs. The 2007 ROSC report also notes that in early July 2007 the IFAC's Code of Ethics for Professional Accountants was translated and adopted. The 2007 ROSC also called for speedier translation and adoption of ISAs until Croatia is granted EU membership, at which time the European Commission will take over responsibility. Obligatory annual audits are required for entities falling within set statutory parameters, while all other companies are audited pursuant to their own rules, i.e., the Memorandum of Incorporation or the Articles of Association.
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IDAnti-Money Laundering/Combating Terrorist Financing Standard
The Financial Action Task Force (FATF), in its 2007-2008 Annual Report names Croatia as one of the jurisdictions that has committed to implementing the FATF's 40+9 recommendations. The Council of Europe's Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL) conducted a mutual evaluation of Croatia's Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) system against the FATF's forty recommendations and nine special recommendations and published its findings in an April 2008 report, in which, it concluded that Croatia either did not comply or only partially complied with an overwhelming majority of the FATF's recommendations and special recommendations. The assessment found significant shortcomings, citing the numerous layers of legislation involving AML/CFT that result in cumbersome cross referencing in addition to weakness in the legal framework especially with regard to the scope of terrorist legislation. Similarly, regulations concerning customer due diligence and suspicious transaction reporting at financial institutions and Designated non-Financial Business and Professions were found to be wanting. Overall the report was less than positive, although it did indicate that since MONEVAL's last evaluation, in 2002, the country had taken some measures to improve its AML/CFT system. The country has a functioning Financial Intelligence Unit (FIU), the Anti-Money Laundering Department (AMLD) within the Ministry of Finance, although the MONEYVAL report notes that the AMLD does not possess any investigative powers instead its main function is to gather information. The AMLD is part of the Egmont group of Financial Intelligence Units.
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CPCore Principles for Systemically Important Payment Systems
Interbank settlements in Croatia are processed through the Croatian Large Value Payment System (CLVPS) and the National Clearing System (NCS) according to the 2008 annual report of the Croatian National Bank (CNB). In 2002, the International Monetary Fund in its Financial System Stability Assessment concluded that the Croatian Large Value Payment System (CLVPS) and the National Clearing System (NCS) - the systemically important payment systems in the country - broadly complied with the Committee on Payment and Settlement Systems' Core Principles. At the same time, the IMF revealed certain shortcomings that, however, posed no systemic risk. Further, the authorities indicated to the assessors that they would try and address some of the shortcomings presented by the IMF through the enactment of the then draft Payment System Law and the Law on the Financial Agency. Both of these laws were subsequently passed. In a 2004 follow-up assessment, the IMF identified the CLVPS as a modern, functional system that follows international best practices, procedures, and technology. The report found that the NCS also complies with international best practices, and noted that the payment systems framework had gone through a major reform process involving the institutional framework, payment structure, and transmission, resulting in the strengthening of the Croatian National Bank's oversight role. The 2008 IMF Financial System Stability Assessment Update confirms that the CLVPS "is a well-functioning real-time gross-settlement payment system operated by the CNB," and notes that "there are no known market infrastructure impediments to interbank trading."
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