## Recording of fines and penalties

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### SECTION I: THE ISSUE — Background and scope
- Cross-border fines and penalties imposed by courts of law or other government bodies are treated as miscellaneous current transfers in the secondary income account (BPM6, paragraph 12.54).
- Fines and penalties have become more frequent and sometimes very large, with cited settlements including:
  - $20.8 billion final settlement (BP Deepwater Horizon, 2015), including a $5.5 billion Clean Water Act penalty.
  - $2.95 billion settlement (Petrobrás, 2018) related to a corruption scandal.
  - $7.2 billion fine (Deutsche Bank, 2015) over mortgage-backed securities investigation.
- Multinational enterprises (MNEs) complicate identification of the institutional unit responsible for settling fines/penalties and the compilation of complete information (unit responsible, timing, amount, appeals).
- Time-of-recording guidance (BPM6, paragraph 12.18): record “when a legal claim to the funds is established,” which may be when a court renders judgment or an administrative ruling is published; appeals, provisions, contingent liabilities, corporate accounting recognition, and escrow deposits complicate recording and can create bilateral asymmetries.
- Conceptual classification:
  - Fines/penalties are conceptually similar to current taxes and to payments of compensation for injury or damages; classification between current or capital account depends on the nature of the payment (GFSM 2014 paragraph 6.123; BPM6 paragraphs 12.56 and 13.29).
  - GFSM 2014 defines fines and penalties as “compulsory current transfers imposed on units by courts of law or quasi-judicial bodies for violations of laws or administrative rules” (paragraph 5.142), consistent with BPM6 and 2008 SNA.

### SECTION I — Issues for discussion: Role of Multinational Enterprises and classification implications
- Difficulty of identifying liable MNE component:
  - Regulatory authorities may issue fines against nonresident direct investors or ultimate beneficial owners, resident subsidiaries, or assess joint liability between owners and a direct investment enterprise (DIE).
- Guidance materials:
  - GN catalogs scenarios (Annex I) and provides a decision tree (Annex II) to guide compilers on classification; scenarios apply in reverse when issuing entity is nonresident.
- Balance-of-payments implications by illustrative scenarios:
  - If a fine is imposed on the resident DIE (scenario 2), no cross-border current transfer is recorded (resident-to-resident), but DIE profits recorded in primary income could be affected.
  - If the DIE pays the fine using resources from direct investors (scenario 4), the fine remains resident-to-resident but results in a resident–nonresident financial account transaction recorded as direct investment.
- Measurement of direct investment income and COPC:
  - Direct investment income measured according to the Current Operating Performance Concept (COPC) in BMD4 (paragraph 208).
  - BMD4 Box A.6.2 lists extraordinary items to be excluded from COPC; fines and penalties are not listed explicitly.
  - Divergent compiler practices:
    - U.S. Bureau of Economic Analysis (BEA) allows fines/penalties to negatively impact DIE income (include in COPC).
    - U.K. Office for National Statistics (ONS) treats fines/penalties as extraordinary and excludes them from COPC.
  - Case studies and hypothetical scenarios for the United States (Annex III), United Kingdom (Annex IV), and Brazil (Annex V) illustrate differing treatments.
- National accounts implications:
  - When a fine is levied on a resident unit, it is recorded in the secondary distribution of income account with no direct impact on GDP or GNI.
  - If the resident unit is part of an MNE, impacts on GDP and GNI depend on whether the fine/penalty is recognized as COPC.
- M&A and contract-based penalties:
  - Fines/penalties established in contracts (not imposed by courts) and contingent on performance/legal outcomes may be interpreted as adjustments to the market price of an acquired enterprise and treated as direct investment (or portfolio investment if voting power is under 10 percent) rather than current transfers.

### SECTION I — Issues for discussion: Time of recording and practical considerations
- Accrual vs cash recording tensions:
  - Legal recognition suggests accrual recording after first decision, but appeals can overturn obligations; accrual recording may be premature.
  - Cash-basis recording ensures payment irreversibility but would create inconsistencies with balance of payments, national accounts, and government finance statistics.
- GFSM 2014 guidance:
  - Record fines/penalties “when the general government unit has an unconditional claim to the funds” (paragraph 5.144); if judgment is subject to appeal, record “when the appeal is resolved” (paragraph 3.85).
  - The “unconditional claim” clarification exists in GFSM 2014 but is missing from 2008 SNA and BPM6; aligning SNA and BPM with GFSM clarifications is desirable.
- Practical compiler action:
  - If a fine/penalty is accrued but not paid, record corresponding entry as other accounts receivable/payable.
  - Compilers must assess source data coverage and whether additional adjustments are necessary.

### SECTION I — Issues for discussion: Classification boundary between fines/penalties and compensation
- Large fines/penalties for major events can significantly affect a country’s current account; there is interest in treating significant fines/penalties as capital transfers to reduce volatility but conceptual definitions should guide recording.
- Payments labeled as fines/penalties may in substance compensate for damages; settlements often combine punitive penalties and compensation (example: Deepwater Horizon Clean Water Act penalty where “80 percent of the Clean Water Act penalty will go to help the Gulf recover”).
- Proposed distinctions:
  - Define fines/penalties as compulsory payments that are punitive in nature (intended to punish and/or deter).
  - Define compensation payments as compulsory payments intended to remedy specific harms (e.g., property damage, loss of income).
  - Under these definitions, amounts legally labeled as fines/penalties but intended to compensate for damages could be recorded as compensation payments for balance-of-payments purposes.
- Criterion for classifying major compensation payments as capital transfers:
  - Practical recommendation: payments intended to recover losses incurred over a multi-year period, or to replace an asset (financial or nonfinancial), meet the threshold for capital transfer classification—consistent with BPM6 paragraph 12.13 definition of a capital transfer.
  - GFSM 2014 already includes accumulated losses in the definition of major compensation payments (paragraph 3.16); BPM6 and 2008 SNA do not, indicating scope for closer alignment.
- For compensation payments involving MNEs:
  - Analogous scenarios for fines/penalties apply.
  - Major compensation payments involving MNEs should be classified out of the current account and included in other changes in volume and valuation within the direct investment account rather than impacting DI earnings.
- EDS 2013 guidance:
  - Penalties arising from commercial contracts: record the debt from the time the resident becomes liable under the contract (accrual basis) (EDS 2013 Appendix 1, part 2).
- Contingent contractual payments in M&A that adjust the market price of the acquired enterprise should be treated as direct investment (or portfolio investment if shareholding is below 10 percent) rather than current transfers.

---

### SECTION II: OUTCOMES — Review, revisions, and final recommendations
- Review process:
  - Draft GN with preliminary recommendations (definitions, time of recording, classification of compensation payments, impact on primary income) discussed at February 2021 IMF Committee on Balance of Payments Statistics.
  - Advisory Expert Group on National Accounts (AEG) broadly agreed with draft GN but no full consensus that fines/penalties involving DIEs should impact DIE earnings and primary income.
  - AEG requested more practical guidance on time of recording; further guidance to be provided in the next Compilation Guide.
  - GN revised to include a decision tree (Annex II) and case studies (Annexes III–V) showing differing current treatments involving MNEs.

- Final recommendations (Guidance Note):
  - Revise international standards to define a fine/penalty payment as one that is “punitive in nature” and clearly distinguish these payments from compensation payments intended to compensate for injury or damages.
  - Revise international standards to indicate that major compensation payments should be recorded as capital transfers if they are “intended to recover losses incurred over a multi-year period or to replace an asset (financial or nonfinancial).”
  - Clarify that fine/penalty transactions should not be recorded until the unit issuing the fine has an “unconditional claim to the funds” and clarify that if a judgment or ruling is subject to further appeal, an unconditional claim exists “when the appeal is resolved.”
    - BPM6/2008 SNA could be modified to state that corresponding entry to fines/penalties accrued but unpaid should be recorded as other accounts receivable/payable.
    - Note: MNEs may recognize liabilities in financial accounting before judgment finalization; for large fines/penalties with material impacts, compilers may need to adjust transactions to ensure appropriate period recording.
    - Further practical guidance to be provided in the next BPM7 Compilation Guide.
  - Where no agreement exists on whether fines/penalties should impact direct investment income when DIEs are responsible, compilers should determine inclusion of fines/penalties in COPC based on specific characteristics of the fine/penalty, including whether it is extraordinary; examples to be provided in the Compilation Guide.
    - Any clarification would need updates to BMD4 and GFSM 2014 for consistency.
  - Explicitly treat contingent fines and penalties in M&A contracts as updates to the market value of acquired enterprises—and therefore as direct investment (or portfolio investment) transactions, not transfers.
  - Add guidance for compilers to use public information (court documents, etc.) to identify fines/penalties and related direct investment transactions; include Annex I table and Annex II decision tree in BPM7 Compilation Guide.
  - Recommendations require additions/clarifications to BPM, SNA, and GFSM to maintain consistency; a preliminary list in Annex VI.

- Rejected proposals:
  - Changing recording from accrual to cash basis was rejected to avoid deviating from existing accrual standards and introducing inconsistencies.
  - Reclassifying certain fines/penalties from current to capital account was rejected; drafting team determined fine/penalty payments should be treated as current transfers because they are recorded as current income of the receiving general government unit.
  - Defining compensation payments as capital transfers by reference to “meant to alleviate negative externalities” was rejected as impractical; instead adopted the “recover losses incurred over a multi-year period or to replace an asset” criterion.
  - Initial proposal to clarify in BMD4/BPM6 that fines/penalties impact COPC was revised to indicate a broader review of COPC and income definitions may be needed.

### SECTION II — Decision tree and Annex I scenarios (summary)
- Decision tree (Annex II) added to help determine whether cross-border transactions (credits or debits) exist; applies symmetrically when issuing entity is resident or nonresident.
- If only a compensation payment exists (no fine/penalty), compilers follow decision tree as if a fine/penalty exists, then ignore concluding statements about classification of the fine/penalty part.
- Annex I scenarios (summary):
  - Scenario 1
    - Recorded as FP in Secondary Income: Yes
    - Indirectly Impacted Accounts: None
    - Notes: “Classic” cross-border FP scenario (unaffiliated nonresident entity named and paying).
  - Scenario 2
    - Recorded as FP in Secondary Income: No
    - Indirectly Impacted Accounts: Primary income, potentially
    - Notes: Resident DIE named; DIE pays using its own resources (resident-to-resident). Fine could affect primary income if expense is COPC.
  - Scenario 3
    - Recorded as FP in Secondary Income: Yes
    - Indirectly Impacted Accounts: Primary income potentially
    - Notes: Resident DIE and nonresident owner both named; split the fine between resident and nonresident portions; only nonresident portion recorded in secondary income.
  - Scenario 4
    - Recorded as FP in Secondary Income: No
    - Indirectly Impacted Accounts: Direct investment
    - Notes: Resident DIE named; nonresident owner sends resources to DIE. Payment by investors is a direct investment transaction (equity or intercompany lending). Could affect primary income if COPC.
  - Scenario 5
    - Recorded as FP in Secondary Income: Yes
    - Indirectly Impacted Accounts: Direct investment
    - Notes: Nonresident owner named; DIE pays. Record FP in secondary income between issuer (resident) and direct investor (nonresident). If resident DIE did not receive resources, equivalent to a withdrawal in DIE capital.
  - Scenario 6
    - Recorded as FP in Secondary Income: Yes
    - Indirectly Impacted Accounts: None
    - Notes: Nonresident owner named and paying; record FP in secondary income with no direct investment flows related.

### SECTION II — Annex III (United States) — Illustrative examples with numeric impacts
- Example 1 – Income Payments (Inward Direct Investment)
  - DIE 1 (U.S. resident) wholly owned by direct investor in Country B fined $1 billion by U.S. government for banking regulation violation.
  - DIE 1 recognizes fine as cost; reports earnings reduced by $1 billion to BEA.
  - BEA recognizes fines/penalties as part of COPC; allows fine to impact DI earnings (income on equity).
  - Effects (ceteris paribus):
    - U.S. balance of payments primary income payments decrease by $1 billion.
    - Rest of World (ROW) balance on income increases by $1 billion.
    - U.S. domestic corporate profits decrease by $1 billion.
    - Total U.S. gross domestic income (GDI) not impacted because decrease in corporate profits offset by $1 billion increase in net current business transfer payments to government.
    - U.S. national corporate profits unchanged; total U.S. gross national income (GNI) increases by $1 billion due to decreased payments to ROW.
    - U.S. direct investment liabilities financial transactions reduce by $1 billion via reduced reinvestment of earnings; direct investment liabilities position in IIP decreases by $1 billion.
- Example 2 – Income Receipts (Outward Direct Investment)
  - DIE 2 (Country C resident) wholly owned by U.S. direct investor fined $0.5 billion by Government C.
  - DIE 2 recognizes fine as cost; parent reports reduced earnings of $0.5 billion to BEA.
  - BEA treats fines as COPC; allows impact on DI earnings.
  - Effects (ceteris paribus):
    - U.S. balance of payments primary income receipts decrease by $0.5 billion.
    - ROW balance on income decreases; U.S. national corporate profits decrease by $0.5 billion; overall U.S. GNI decreases by $0.5 billion.
    - U.S. domestic corporate profits and GDI not impacted since DIE 2 not U.S. resident.
    - U.S. direct investment assets financial transactions reduce by $0.5 billion via reduced reinvestment of earnings; direct investment assets position in IIP decreases by $0.5 billion.

### SECTION II — Annex IV (United Kingdom) — Compiling DI earnings on COPC after accounting for fines and compensation
- Illustrative UK cases and data-collection templates:
  - Example 1 – Inward DIE fined £3 billion; ONS advises respondents to exclude fines/penalties from COPC as extraordinary; aggregate DI income payments remove the £3 billion impact; government receipts increase by £3 billion; loss reflected in reduced unquoted equity value by £3 billion for IIP.
  - Example 2 – Outward DIE in France fined £15 billion; ONS advises excluding fine from COPC; aggregate DI income payments remove £15 billion impact; loss reflected in unquoted equity value for IIP.
  - Monetary financial institutions use Form PL (profit/loss) and Form BG (geographical breakdown) with specific items for holding gains, provisions, exceptional items, and fines/compensation to construct COPC-based aggregates:
    - Inward branch payments (total) = PL32A less PL8 less PL14 plus PL20A
    - Inward subsidiary payments (total) = PL32B less PL8 less PL14 plus PL20A
    - Outward branch payments (total) = PL31A less PL33A
    - Outward subsidiary payments (total) = PL31B less PL33B

### SECTION II — Annex V (Brazil) — Assessment, survey improvements, and classification practice
- Main view: fines and penalties are closer to non-COPC and therefore would not impact primary income.
- Historical limitation: until reference year 2018, Brazil’s DI surveys captured only total earnings and could not separate COPC from non-COPC.
- Prior practice: manually inspect financial statements of main DIEs to identify and exclude non-COPC items.
- 2015 context: many resident DIEs recorded impairments and exchange rate losses related to recession; a natural disaster in mining produced fines and provisions for reconstruction regarded as non-COPC.
- Survey improvements:
  - Reference year 2019 liabilities survey added three fields:
    - (i) net income (loss) from non-recurring transactions;
    - (ii) net income (loss) from revaluations of assets and liabilities;
    - (iii) net income (loss) from exchange rate changes.
  - Survey manual for 2019: no exhaustive list; fines and penalties not among given examples.
  - Reference year 2020 assets survey introduced same three fields and explicitly mentioned fines as a non-recurring item to be reported.
- Relevant manual paragraphs cited for classification rationale:
  - BPM6 paragraph 12.13: capital transfers include major nonrecurrent compensation for accumulated losses or extensive damages.
  - BPM6 paragraph 12.18: record compulsory transfers such as fines/penalties on accrual when government has an unconditional claim.
  - BPM6 paragraph 12.54: fines/penalties generally punitive and treated as miscellaneous current transfers; exceptions when intended to compensate for damages.
  - SNA paragraphs 8.135 and 8.140 and 10.212(a) and GFSM paragraphs 3.16 and 5.142/6.124 provide parallel guidance on fines, compensation, and capital-transfer treatment for major compensation payments.

*IMF Guidance Note — Recording of fines and penalties*

### SECTION I: THE ISSUE

### SECTION I: THE ISSUE

### Background
- Cross-border fines and penalties imposed on institutional units by courts of law or other government bodies are treated as miscellaneous current transfers in the secondary income account of the balance of payments (Balance of Payments and International Investment Position Manual, sixth edition (BPM6), paragraph 12.54).
- Fines and penalties have become more frequent and are sometimes very large, including large transactions related to corruption, banking supervision, and antitrust.
- Examples of large settlements cited:
  - In 2015 the U.S. Department of Justice announced the final settlement against BP for the Deepwater Horizon oil spill totaling $20.8 billion, which included a penalty of $5.5 billion for Clean Water Act violations.
  - In 2018, Petrobrás agreed to pay $2.95 billion to settle a corruption scandal.
  - In 2015, Deutsche Bank was fined $7.2 billion over an investigation into mortgage-backed securities.
- Multinational enterprises (MNEs) frequently are involved, introducing complexity in identifying the institutional unit responsible for settling fines/penalties and in obtaining complete information (e.g., unit responsible, timing, amount, appeals).
- Timing of recording is prescribed as “when a legal claim to the funds is established, which may be when a court renders judgment or an administrative ruling is published” (BPM6, paragraph 12.18), but appeals, provisions, contingent liabilities, liabilities recognized in corporate accounting, and escrow deposits can complicate recording and create bilateral asymmetries.
- Classification comparisons:
  - Fines/penalties are conceptually similar to current taxes and to payments of compensation for injury or damages, which may be recorded in the current or capital account depending on nature (GFSM 2014 paragraph 6.123; BPM6 paragraph 12.56; BPM6 paragraph 13.29).
  - GFSM 2014 defines fines and penalties as “compulsory current transfers imposed on units by courts of law or quasi-judicial bodies for violations of laws or administrative rules” (paragraph 5.142), consistent with BPM6 and 2008 SNA.

### Issues for discussion — Role of Multinational Enterprises
- Identifying which part of an MNE (resident or nonresident entity) is liable can be challenging; the part that pays may not be the part that responds to the court.
- Regulatory authorities may:
  - Issue fines against the nonresident direct investor or ultimate beneficial owner,
  - Issue fines against the resident subsidiary,
  - Assess joint liability between an immediate owner and a direct investment enterprise (DIE).
- The Guidance Note (GN) catalogs scenarios in Annex I identifying whether a fine/penalty is recorded in secondary income and whether other balance of payments accounts are impacted; the scenarios for resident issuing entities apply in reverse when the issuing entity is nonresident.
- Examples of balance of payments implications:
  - If the fine is imposed on the resident DIE (scenario 2 in Annex I), there is no current transfer (resident-to-resident), but DIE profits recorded in primary income could be affected.
  - If the DIE pays the fine using resources from direct investors (scenario 4), the fine remains resident-to-resident, but results in a resident–nonresident financial account transaction recorded as direct investment.
- A decision tree in Annex II aims to guide compilers on classification.
- Measurement issues for direct investment income:
  - Direct investment income is measured according to the Current Operating Performance Concept (COPC) in BMD4 (paragraph 208).
  - BMD4 Box A.6.2 lists extraordinary items to be excluded from COPC; fines and penalties are not listed explicitly.
  - Some compilers (e.g., U.S. Bureau of Economic Analysis (BEA)) allow fines/penalties to negatively impact DIE income.
  - Others (e.g., U.K. Office for National Statistics (ONS)) interpret fines/penalties as extraordinary items and exclude them from COPC.
  - Case studies for the United States (Annex III), United Kingdom (Annex IV), and Brazil (Annex V) apply hypothetical scenarios to explore current treatments.
- National accounts implications:
  - When a fine is levied on a resident unit, it is recorded in the secondary distribution of income account with no direct impact on GDP or GNI.
  - If the resident unit is part of an MNE, impacts on GDP and GNI depend on whether the fine/penalty is recognized as COPC; case studies in Annexes III–V examine these effects.
- M&A and contract-based penalties:
  - Fines/penalties established in contracts (not imposed by courts) and contingent on performance or legal outcomes may be interpreted as adjustments to the market price of the acquired enterprise and treated as direct investment (or portfolio investment if voting power is under 10 percent) rather than current transfers.

### Issues for discussion — Time of recording
- Although legal recognition suggests accrual recording after the first decision, appeals may overturn obligations; accrual recording may therefore be premature and introduce contingent liability recording issues.
- A cash-basis approach to recording is attractive because effective payment cannot be disputed, but cash-basis recording would create inconsistencies with balance of payments, national accounts, and government finance statistics.
- GFSM 2014 specifies that fines and penalties should be recorded “when the general government unit has an unconditional claim to the funds” (paragraph 5.144) and adds that if a judgment or ruling is subject to further appeal, time of recording is when the appeal is resolved (paragraph 3.85).
  - The “unconditional claim” clarification exists in GFSM 2014 but is missing from 2008 SNA and BPM6; aligning SNA and BPM with GFSM clarifications is desirable.
- If a fine/penalty is accrued in the current period but not paid, the corresponding entry should be recorded as other accounts receivable/payable.
- In practice, compilers must assess whether amounts are captured in source data or whether additional adjustments are necessary.

### Issues for discussion — Classification
- Large fines/penalties for major events (e.g., oil spills) can significantly affect a country’s current account; there is appeal to treating significant fines/penalties as capital transfers to reduce current-account volatility, but recording should follow conceptual definitions.
- Payments labeled as fines/penalties may in substance compensate for damages; settlements may combine punitive penalties and compensation (example: in the Deepwater Horizon settlement, a Clean Water Act penalty was labeled a penalty while payments for damages were labeled separately; “80 percent of the Clean Water Act penalty will go to help the Gulf recover from the injuries it has suffered”).
- Proposal to distinguish payments:
  - Define fines/penalties as compulsory payments that are punitive in nature (intended to punish and/or deter activities).
  - Define compensation payments as compulsory payments intended to remedy specific harms (e.g., property damage, loss of income).
  - Under these definitions, amounts legally identified as fines/penalties but intended to compensate for damages could be recorded as compensation payments for balance of payments purposes.
- Clarification needed on the economic meaning of “major compensation payments for extensive damages” to determine capital account treatment:
  - Current guidelines provide examples (oil spills, side effects of pharmaceutical products) but lack clear rationale for identifying relevant aspects that justify capital transfer classification.
  - Using a Pigouvian externality approach, “extensive damages” could be interpreted as negative externalities with economy-wide impacts; major compulsory payments related to antitrust/competition laws that seek compensation for widespread one-off effects could be treated as capital transfers.
  - The drafting team recommends a practical criterion: payments linked to recovery of losses incurred over a multi-year period, or to replacement of an asset (financial or nonfinancial), meet the threshold for capital transfer classification—consistent with BPM6’s definition of a capital transfer as resulting in a commensurate change in the stocks of assets of one or both parties (paragraph 12.13).
  - GFSM 2014 already includes accumulated losses in the definition of major compensation payments (paragraph 3.16); BPM6 and 2008 SNA do not, indicating scope for closer alignment.
- For compensation payments involving MNEs:
  - The analogous scenarios for fines/penalties apply to compensation payments.
  - Major compensation payments involving MNEs should be classified out of the current account; rather than impacting DI earnings, a major compensation payment should be included in other changes in volume and valuation within the direct investment account.
- EDS 2013 guidance on penalties arising from commercial contracts recommends recording the debt from the time the resident becomes liable under the contract, following accrual basis recording (EDS 2013 Appendix 1, part 2).
- Contingent contractual payments in M&A that adjust the market price of the acquired enterprise should be treated as direct investment (or portfolio investment if shareholding is below 10 percent) rather than current transfers.

*IMF Guidance Note — Recording of fines and penalties: SECTION I: THE ISSUE*

### SECTION II: OUTCOMES

### SECTION II: OUTCOMES

### Summary of review and revisions
- The draft GN with a preliminary set of recommendations (definition of fine/penalty, time of recording, classification of compensation payments, and impact of fines/penalties involving MNEs on primary income) was discussed during the February 2021 IMF Committee on Balance of Payments Statistics meeting.
- The Advisory Expert Group on National Accounts (AEG) broadly agreed with the draft GN during the initial review but indicated no full consensus that fines and penalties involving DIEs should impact their earnings and therefore the primary income account.
- The AEG highlighted practical challenges in implementing the proposed time of recording and requested more guidance; further guidance can be provided in the next Compilation Guide.
- Following Committee suggestions, the GN was revised to include a decision tree (Annex II) to help compilers determine the appropriate treatment of fines/penalties and related compensation payments, and case studies (Annexes III–V) providing examples of differing current treatments involving MNEs.

### Final recommendations (GN)
- Revise the international standards to define a fine/penalty payment as one that is “punitive in nature” and to more clearly distinguish these payments from payments of compensation, which are intended to compensate for injury or damages.
- Revise the international standards to indicate that major compensation payments should be recorded as capital transfers (instead of current transfers) if they are “intended to recover losses incurred over a multi-year period or to replace an asset (financial or nonfinancial).”
- Clarify that fine/penalty transactions should not be recorded until the unit issuing the fine has an “unconditional claim to the funds” and clarify that if a judgment or ruling is subject to further appeal, an unconditional claim exists “when the appeal is resolved.”
  - The BPM6/2008 SNA could be modified to state that the corresponding entry to fines/penalties accrued but not yet paid should be recorded as other accounts receivable/payable.
  - Note: an MNE subject to a fine/penalty may recognize the liability in their financial accounting before the judgement has been finalized; for large fines/penalties that would have a material impact on the accounts, compilers may need to make adjustments to ensure the transactions are recorded in the appropriate period.
  - Further practical guidance on this issue should be provided in the next BPM7 Compilation Guide.
- Where there was not agreement on whether fines/penalties should impact direct investment income when DIEs are the responsible party, compilers should make a determination about whether to include fines/penalties as part of COPC based on the specific characteristics of the fine/penalty, including whether it is considered extraordinary. Examples should be provided in the Compilation Guide.
  - Any clarification to the treatment of fines and penalties would need to be incorporated subsequently into updates of the BMD4 and GFSM 2014 as well, to maintain consistency.
- Explicitly treat contingent fines and penalties in contracts of M&A as updates to the market value of the acquired enterprises—and therefore direct investment (or portfolio investment) transactions (flows), and not as transfers.
- Add guidance regarding possible fines and penalties related transactions. For the next Compilation Guide, provide details on how compilers can use public information, such as court documents, to identify fines/penalties as well as related direct investment transactions (as described under “indirectly impacted accounts” in Annex I).
  - The table in Annex I and the decision tree in Annex II could both be included in the BPM7 Compilation Guide.
- The recommendations will require additions or clarifications to BPM, SNA, and GFSM to maintain consistency across the sets of accounts. A preliminary list is in Annex VI.

### Rejected proposals
- A proposal to change the recording of fines and penalties from accrual to cash basis was rejected because it would deviate from existing accrual standards and introduce other inconsistencies within the balance of payments and with other accounts.
- A proposal to reclassify certain fines and penalties from the current account to the capital account (to align with other compulsory payments such as compensation for damages) was rejected; the team determined that all fine/penalty payments should be treated as current transfers because they are recorded as current income of the general government unit that receives the payment.
- The drafting team considered defining compensation payments that should be recorded as capital transfers according to whether the payments were “meant to alleviate negative externalities,” but concluded that this definition would not be easy to implement. Instead, the team adopted the definition of a payment that is “intended to recover losses incurred over a multi-year period or to replace an asset (financial or nonfinancial).”
- The drafting team initially proposed to clarify in updates to BMD4 and BPM6 that fines/penalties should impact COPC, then considered a broader review of COPC and the definition of income via the BTEG, but ultimately revised the recommendation to indicate that SNA and BPM should be explicit on this issue.

### Decision tree
- A decision tree was added (Annex II) covering fines/penalties and associated payments of compensation and designed to help determine whether cross-border transactions (credits or debits) exist. The decision tree applies symmetrically whether the issuing entity is resident or nonresident.
- If a scenario has no fine/penalty but only a compensation payment, compilers should follow the decision tree as if there is a fine/penalty and then ignore concluding statements about classification of the fine/penalty part.

### Annex I — Scenarios for Fines and Penalties (FP) Transactions (summary)
- Scenario 1
  - Recorded as FP in Secondary Income: Yes
  - Indirectly Impacted Accounts: None
  - Notes: “Classic” cross-border FP scenario (Unaffiliated nonresident entity named and paying).
- Scenario 2
  - Recorded as FP in Secondary Income: No
  - Indirectly Impacted Accounts: Primary income, potentially
  - Notes: Resident direct investment entity (DIE) named; DIE pays using its own resources. The FP is a resident-to-resident transaction so not recorded in the balance of payments. The fine could affect the primary income account if the expense is considered COPC.
- Scenario 3
  - Recorded as FP in Secondary Income: Yes
  - Indirectly Impacted Accounts: Primary income potentially
  - Notes: Resident DIE and nonresident immediate or ultimate owner of DIE both named. Criteria about how to split the fine should be adopted; only the portion related to the nonresident is recorded in secondary income. DIE or owner might provide details; some legal documents might provide this information if public. The portion related to the resident would not be recorded in the balance of payments but could affect the primary income account if considered COPC.
- Scenario 4
  - Recorded as FP in Secondary Income: No
  - Indirectly Impacted Accounts: Direct investment
  - Notes: Resident DIE named; nonresident immediate or ultimate owner sends the resources to the DIE. Since the DIE was named, the FP is resident-to-resident. If direct investors send resources for the DIE to pay, this is a direct investment transaction (equity or intercompany lending). It could affect the primary income account if the expense is considered COPC.
- Scenario 5
  - Recorded as FP in Secondary Income: Yes
  - Indirectly Impacted Accounts: Direct investment
  - Notes: Nonresident immediate or ultimate owner of DIE named; DIE pays. FP transaction should be recorded in secondary income as a transaction between the issuer (resident) and the direct investor (nonresident). If the resident DIE did not receive resources to make the payment on behalf of the direct investor, this is equivalent to a withdrawal in the DIE capital.
- Scenario 6
  - Recorded as FP in Secondary Income: Yes
  - Indirectly Impacted Accounts: None
  - Notes: Nonresident immediate or ultimate owner of DIE named and paying. FP transaction should be recorded in secondary income; no direct investment flows related since the DIE is not involved.

### Annex III — U.S. examples: How fines and penalties impact DI earnings in U.S. Economic Accounts
- Example 1 – Income Payments (Inward Direct Investment)
  - DIE 1 is resident in the United States and is wholly owned by its direct investor resident in Country B. DIE 1 is fined $1 billion by the U.S. government for violating an aspect of U.S. banking regulations.
  - DIE 1 recognizes the fine as a cost in its financial statements and reports its earnings reduced by the fine on its DI survey report to the U.S. Bureau of Economic Analysis (BEA).
  - BEA recognizes fines and penalties as part of the Current Operating Performance Concept (COPC) and does not exclude the fine as extraordinary, thereby allowing it to impact DI earnings (income on equity) for DIE 1.
  - Aggregate DI income payments for the United States reflect the impact of the fine, which reduces income payments from U.S. DIEs to their foreign owners by $1 billion (ceteris paribus). U.S. balance of payments primary income payments decrease by $1 billion (ceteris paribus). This increases the Rest of World (ROW) balance on income since receipts are unchanged and payments are reduced.
  - U.S. domestic corporate profits would decrease $1 billion (ceteris paribus) since DIE 1 is resident in the United States.
  - Total U.S. gross domestic income (GDI) would not be impacted because within operating surplus the decrease in corporate profits would be offset by a $1 billion increase in net current business transfer payments reflecting the business transfer to government.
  - U.S. national corporate profits would not be impacted by the fine since the fine reduced both domestic corporate profits and ROW income payments. Total U.S. gross national income (GNI) would increase by $1 billion since payments to ROW decreased due to the fine.
  - The fine would reduce U.S. direct investment liabilities financial transactions by $1 billion through reduced reinvestment of earnings for DIE 1. The U.S. direct investment liabilities position in the IIP accounts would also decrease by $1 billion as the value of lower reinvestment of earnings impacts the equity position of DIE 1.
- Example 2 – Income Receipts (Outward Direct Investment)
  - DIE 2 is resident in Country C and is wholly owned by its direct investor resident in the United States. DIE 2 is fined $0.5 billion by Government C for violating an aspect of Country C’s banking regulations.
  - DIE 2 recognizes the fine as a cost in its financial statements and its U.S. parent reports the earnings of DIE 2, reduced by the fine, on its DI survey report to BEA.
  - BEA recognizes fines and penalties as part of the COPC and does not exclude the fine as extraordinary, thereby allowing it to impact DI earnings (income on equity) for DIE 2.
  - Aggregate DI income receipts for the United States reflect the impact of the fine, which reduces income receipts from nonresident DIEs to their U.S. owners by $0.5 billion (ceteris paribus). U.S. balance of payments primary income receipts decrease by $0.5 billion (ceteris paribus).
  - This decreases the ROW balance on income in the U.S. national economic accounts and decreases national corporate profits by $0.5 billion (ceteris paribus). Overall U.S. GNI would also decrease by $0.5 billion.
  - U.S. domestic corporate profits and GDI would not be impacted since DIE 2 is not a resident of the United States.
  - The fine would reduce U.S. direct investment assets financial transactions by $0.5 billion through reduced reinvestment of earnings for DIE 2. The U.S. direct investment assets position in the IIP accounts would also decrease by $0.5 billion as the value of lower reinvestment of earnings impacts the equity position of DIE 2.

### Annex IV — U.K. examples: Compiling DI earnings on COPC after accounting for fines and compensation payments
- Example 1 – Private Non-Financial Corporation Income Payments (Inward Direct Investment)
  - DIE 1 is resident in the UK and is wholly owned by a multinational resident in Country B (USA). DIE 1 is fined £3 billion by the U.K. government for contamination to the environment.
  - DIE 1 recognizes the fine as a cost and reports earnings reduced by the fine.
  - On its DI survey report to the U.K. Office for National Statistics, the respondent is advised by the data clearing team to not recognize fines and penalties as part of the COPC and to exclude the fine as extraordinary, thereby not allowing it to impact DI earnings (income on equity) for DIE 1.
  - Aggregate DI income payments for the UK therefore remove the impact of the fine. In the U.K. national economic accounts, government receipts increase by £3 billion.
  - The loss is reflected in the unquoted equity value reduced by £3 billion reported by the respondent and features in the calculation of the IIP.
- Example 2 – Private Non-Financial Corporation Income Receipts (Outward Direct Investment)
  - DIE 1 is resident in France and is wholly owned by a multinational resident in Country B (The UK). DIE 1 is fined £15 billion by the French government for contamination to the environment.
  - DIE 1 recognizes the fine as a cost and reports earnings reduced by the £15 billion loss.
  - On its DI survey report to the U.K. Office for National Statistics, the respondent is advised by the data clearing team to not recognize fines and penalties as part of the COPC and to exclude the fine as extraordinary, thereby not allowing it to impact DI earnings (income on equity) for DIE 1.
  - Aggregate DI income payments due to the UK from France therefore remove the impact of the fine. The loss is reflected in the unquoted equity value reported by the respondent and features in the calculation of IIP for outward foreign direct investment in France.
- Example 3 – U.K. Monetary Financial Institutions Income Payments (Inward Direct Investment)
  - Data sources: profit and loss of U.K. resident monetary financial institutions collected by the Bank of England on Form PL (part 1 granular income/expenditure; part 2 breakdown of payments and receipts to/from non-residents including DI profit and loss). Form BG provides a geographical breakdown.
  - Form PL part 1 identifies holding gains (PL item 8), net provisions for bad and doubtful debts (PL item 20A) and exceptional items (PL item 14) with PL item 14 breaking down fines and compensation payments (PL item 14A). Total profit/loss due to non-resident parent is PL item 32 (PL item 32A for branches, PL item 32B for subsidiaries) reported on an all-inclusive basis.
  - Form BG collects geographical breakdowns for non-resident parent’s share of profit/loss and related holding gains/losses, exceptional items and provisions (BG item 14).
  - Data aggregation (inward payments on COPC):
    - Inward branch payments (total) = Branch profits/loss (PL32A) less holdings gains/losses (PL8), less exceptional items (PL14) plus provisions (PL20A)
    - Inward branch payments (geog) = Branch profits/loss (BG7) less holdings gains/losses, exceptional items and provisions (BG14)
    - Inward subsidiary payments (total) = Subsidiary profits/loss (PL32B) less holdings gains/losses (PL8), less exceptional items (PL14) plus provisions (PL20A)
    - Inward subsidiary payments (geog) = Subsidiary profits/loss (BG8) less holdings gains/losses, exceptional items and provisions (BG14)
- Example 4 – U.K. Monetary Financial Institutions Income Receipts (Outward Direct Investment)
  - Data sources: Form PL part 2 includes items for profit/loss of UK-owned foreign branches (PL31A) and foreign subsidiaries (PL31B) and collects holding gains/losses, exceptional items and provisions of non-resident branches (PL33A) and subsidiaries (PL33B). Form BG collects geographical breakdowns (BG item 3, BG item 4, BG item 13A, BG item 13B).
  - Data aggregation (outward receipts on COPC):
    - Outward branch payments (total) = Branch profits/loss (PL31A) less holdings gains/losses exceptional items and provisions (PL33A)
    - Outward branch payments (geog) = Branch profits/loss (BG3) less holdings gains/losses, exceptional items and provisions (BG13A)
    - Outward subsidiary payments (total) = Subsidiary profits/loss (PL31B) less holdings gains/losses exceptional items and provisions (PL33B)
    - Outward subsidiary payments (geog) = Subsidiary profits/loss (BG4) less holdings gains/losses, exceptional items and provisions (BG13B)
  - Forms PL and BG reporting templates and definitions are referenced for compilation practice.

*Source: IMF approved guidance notes — c8-recording-of-fines-and-penalties, SECTION II: OUTCOMES.*

### Annex V. Examples of How Fines and Penalties Impact Direct Investment Earnings i n    Braz il’s

### Annex V. Examples of How Fines and Penalties Impact Direct Investment Earnings in Brazil’s Economic Accounts

### Assessment and classification in Brazil
- Key issue: differentiate COPC and non-COPC items in the earnings of DIEs.
- Main view: fines and penalties are closer to non-COPC, which would mean they would not impact primary income.
- Historical data limitation: until reference year 2018, direct investment surveys in Brazil captured only total earnings and therefore could not be used to separate COPC from non-COPC items.
- Compiler practice prior to survey enhancements: manually collect and inspect financial statements of the main DIEs to identify and exclude non-COPC items from direct investment earnings.
- Example year and relevance: in 2015, many resident DIEs recorded impairments and exchange rate losses, both probably related to an economic recession; adjustments to exclude non-COPC items were more relevant in that year.
- Specific incident in 2015: a natural disaster related to mining activities involving a firm partly owned by a resident DIE produced losses related to fines and provisions for reconstruction of the affected areas that were regarded as non-COPC items.

### Survey improvements and explicit capture of non-COPC items
- For reference year 2019, three fields were introduced in the direct investment liabilities survey to address the shortcoming of not capturing non-COPC items:
  - (i) net income (loss) from non-recurring transactions;
  - (ii) net income (loss) from revaluations of assets and liabilities; and
  - (iii) net income (loss) from exchange rate changes.
- Survey manual practice for 2019: no exhaustive list of items provided for respondents; fines and penalties are not among the given examples.
- For reference year 2020, the same three fields were introduced in the assets survey and fines were explicitly mentioned as a non-recurring item to be informed in the respective field.

### Relevant guidance from the Balance of Payments and International Investment Position Manual (selected paragraphs)
- Paragraph 12.13: definition and characteristics of capital transfers, including that "Major nonrecurrent payments in compensation for accumulated losses or extensive damages or serious injuries not covered by insurance policies are also capital transfers."
- Paragraph 12.18: taxes and other compulsory transfers recorded when activities, transactions, or other events occur that create the government's claim; compulsory transfers such as fines, penalties, and property forfeitures are recorded on an accrual basis when the general government unit has an unconditional legal claim, which may be when a court provides judgment or an administrative ruling is published.
- Paragraph 12.54: "Fines and penalties imposed on institutional units by courts of law or other government bodies (including international bodies) for violations of laws or administration rules, which are generally punitive in nature, are treated as miscellaneous current transfers."
  - Exception: fines and penalties intended to compensate for damages should be considered payments for compensation of damages and recorded as either current or capital transfers per paragraphs 12.55 and 12.56.
  - Note: early or late repayment penalties agreed as part of the original contract are not included in current transfers; they should be treated with the associated good, service, or income.
- Paragraphs 12.55–12.56 and 13.29: payments of compensation and treatment of major compensation payments as capital transfers when they relate to extensive damages or recover losses over a multi-year period.

### Relevant guidance from the System of National Accounts (selected paragraphs)
- Paragraph 8.135: fines and penalties are compulsory payments imposed by courts or quasi-judicial bodies and are punitive in nature.
  - Fines or penalties imposed by tax authorities for evasion or late payment of taxes normally grouped with taxes and not recorded under fines.
  - Fines and penalties intended to compensate for damages should be treated as payments for compensation of damages and recorded as either current or capital transfers per paragraphs 8.140 and 10.212(a).
- Paragraph 8.140: payments of compensation consist of current transfers paid in compensation for injury or damage not settled as nonlife insurance claims; major compensation payments related to extensive damages are treated as capital transfers.
- Paragraph 10.212(a): capital transfers include "Major payments in compensation for extensive damages or serious injuries not covered by insurance policies" and may be paid to resident or nonresident units.

### Relevant guidance from the Government Finance Statistics Manual (selected paragraphs)
- Paragraph 3.16: definition of capital transfers and that "Major nonrecurrent payments in compensation for losses incurred over a multi-year period or extensive damages or serious injuries not covered by insurance policies are also capital transfers."
- Paragraph 5.142: "Fines and penalties are compulsory current transfers imposed on units by courts of law or quasi-judicial bodies for violations of laws or administrative rules, which are punitive in nature."
  - Forfeits and out-of-court agreements included.
  - Fines and penalties intended to compensate for damages should be considered payments for compensation of damages and recorded as either current or capital transfers per paragraphs 6.123–6.124.
- Paragraph 6.124 (bullet): includes "Major, nonrecurrent, exceptional payments in compensation for extensive damages or serious injuries such as those arising from catastrophes not covered by insurance policies" as capital transfers.

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_Source: https://www.imf.org/-/media/files/data/statistics/bpm6/approved-guidance-notes/c8-recording-of-fines-and-penalties.pdf_