## c8-recording-of-fines-and-penalties

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---

### Background
- Fines and penalties are treated as miscellaneous current transfers in the secondary income account of the balance of payments (BPM6 paragraph 12.54).
- Frequency and scale:
  - 2015: U.S. Department of Justice 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.
  - 2018: Petrobrás agreed to pay $2.95 billion to settle a corruption scandal.
  - 2015: Deutsche Bank was fined $7.2 billion over an investigation into mortgage-backed securities.
- Multinational enterprise (MNE) complexity:
  - Transactions often involve MNEs, complicating identification of the institutional unit responsible for settling the fine or penalty (headquarter or affiliate/subsidiary).
  - Complete information (unit responsible, timing of ruling, amount, appeals) can be difficult to obtain; compilers may make assumptions, introducing large bilateral asymmetries.
- Time of recording:
  - Transfers are to be recorded “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).
  - Significant fines are often appealed; final amount may not be known until many years after the judgement; companies may recognize provisions or liabilities prior to final judgment; amounts may be deposited in escrow accounts pending appeals.
- Classification context:
  - Payments of compensation for extensive damages are to be recorded as capital transfers (BPM6 paragraph 12.56; capital transfers defined in paragraph 13.29).
  - In practice, fines/penalties are often closely tied to compensation payments and settlements may report amounts indistinguishably.

### Issues for discussion — Role of multinational enterprises
- Liability identification problems:
  - Identifying which part of an MNE (resident or nonresident entity) is liable can be challenging; legal cases can be complex.
  - The unit that pays a fine is not necessarily the unit named in a court ruling; authorities may issue fines against nonresident direct investors, ultimate beneficial owners, or domestic subsidiaries; joint liability may be assessed.
- Balance of payments implications:
  - If the fine is imposed on the domestic direct investment enterprise (DIE), the payment is a resident-to-resident transaction and thus not a current transfer in the BOP, though DIE profits recorded in primary income may be affected.
  - Direct investment income is measured according to the Current Operating Performance Concept (COPC) in BD4; BD4 Box A.6.2 lists extraordinary items to be excluded from COPC, but fines and penalties are not listed explicitly. Some compilers (including US-BEA) allow fines and penalties to negatively impact DIE income; alternative interpretations may exclude them as extraordinary items.
  - A DIE paying a fine using resources from direct investors can generate resident–nonresident financial account transactions recorded as direct investment.
- Cataloguing and scenarios:
  - The Guidance Note catalogs scenarios in Annex I, identifying whether the fine/penalty would be recorded in secondary income and whether other BOP accounts would be impacted. Scenarios where the issuer is resident are listed; reverses (issuer nonresident) would also apply.

### Issues for discussion — Time of recording
- Accrual vs cash concerns:
  - Legal appeals after an initial decision mean that recognition on an accrual basis after the first decision may not hold; subsequent appeals may overturn obligations.
  - A cash-basis approach has appeal because effective payment cannot be disputed, but switching to cash basis would introduce inconsistencies within the BOP and with national accounts and GFS.
- Government revenue alignment:
  - GFSM 2014 specifies fines and penalties should be recorded “when the general government unit has an unconditional claim to the funds” (paragraph 5.144) and that if “the judgment or ruling is subject to further appeal, then the time of recording is when the appeal is resolved” (paragraph 3.85). These clarifications are missing from 2008 SNA and BPM6 and should be added.
- Accrued but unpaid fines:
  - If a fine/penalty is accrued in the current period but not paid, the corresponding entry should be recorded as other accounts receivable/payable. Compilers must check source data coverage and make additional adjustments if necessary.

### Issues for discussion — Classification
- Current vs capital transfer debate:
  - Large fines (e.g., for oil spills) can significantly impact a country’s current account; there is appeal to treating significant fines as capital transfers, similar to major compensation payments, but conceptual definitions should guide recording.
- Distinguishing punitive fines from compensatory payments:
  - Proposed definition: fines/penalties are compulsory payments that are punitive in nature (intended to punish and/or deter); compensation payments are intended to remedy specific harms (property damage or loss of income). Payments labeled fines but intended to compensate could be treated as compensation for BOP recording.
  - Example: Deepwater Horizon — distinction between Clean Water Act penalty and Oil Pollution Act damages; statement that “80 percent of the Clean Water Act penalty will go to help the Gulf recover.”
- Defining “major compensation payments for extensive damages”:
  - Practical criterion proposed: 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. This aligns with BPM6 paragraph 12.13 that a capital transfer “results in a commensurate change in the stocks of assets of one or both parties.”
  - GFSM 2014 includes accumulated losses as part of major compensation payments (paragraph 3.16); BPM6 and 2008 SNA do not.
- M&A contract contingent fines:
  - Contingent fines/penalties in M&A contracts (performance-based additional payments or compensation adjustments due to lawsuits) can be interpreted as price adjustments/updates of the market price of the acquired enterprise and thus treated as direct investment (or portfolio investment if buyer has <10 percent voting power) rather than current transfers.

### SECTION II: Outcomes — Recommendations
- Revise 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 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 time of recording:
  - Clarify that fines and penalties should not be recorded until the unit issuing the fine has an “unconditional claim to the funds” and that if a judgment or ruling is subject to further appeal, an unconditional claim exists “when the appeal is resolved.”
  - Modify BPM6 to state that fines/penalties accrued but not yet paid should be recorded as other accounts receivable/payable.
  - Note that MNEs may recognize liabilities in financial accounting before final judgment; compilers may need adjustments to ensure appropriate period recording. Further practical guidance may be necessary.
- Clarify BD4 and direct investment guidance:
  - Update BD4 to state fines and penalties should impact direct investment income (COPC) when DIEs are the responsible party and update BPM6 direct investment sections to mention that fines and penalties can impact DIE profits.
- Treat contingent fines/penalties in M&A contracts explicitly as price adjustments/updates and therefore as direct investment (or portfolio investment) transactions, not as transfers.
- Add compilation guidance:
  - For the next Compilation Guide, provide detail on using public information, such as court documents, to identify fines/penalties and related direct investment transactions.
- Implementation note:
  - The recommendations would require additions or clarifications to the BPM and to the SNA and GFSM to maintain consistency across the sets of accounts (a preliminary list is in Annex II).

### Rejected proposal
- The drafting team considered but rejected changing recording of fines and penalties from accrual to cash basis because it would deviate from existing accrual standards and introduce inconsistencies within the balance of payments and with other accounts.

### Treatment decision and rationale
- The drafting 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 received the payment.
- The drafting team considered but rejected reclassifying certain fines and penalties from the current account to the capital account.
- The drafting team adopted the practical definition of capital-transfer compensation payments as those “intended to recover losses incurred over a multi-year period or to replace an asset (financial or nonfinancial)” because many compilers already use this criterion.
- Divergent views:
  - One member of the DITT and two members of the AEG disagreed with the recommendation.
  - One member of the CATT disagreed with the recommendation.
  - During CATT review, one member preferred cash-basis recording; two members preferred allowing certain large and one-off fines/penalties to be treated as capital transfers.

### Key questions for discussion
- Do you agree with the recommendation to define fines and penalties transactions as being punitive in nature, in order to differentiate these payments from payments for compensation of damages?
- Do you agree that fines and penalties involving DIEs should impact their earnings and therefore the primary income account?
- Do you agree with the proposed clarification on the economic meaning of “major compensation payments for extensive damages”?
- What are your views on time of recording of fines and penalties considering the possibility of various appealing courts and subsequent changes in the decisions?
- Do you agree that fines and penalties in M&A contracts, related to the value of the enterprise, should be treated as direct investment (or portfolio investment) transactions, and not as transfers?

### Scenarios for Fines and Penalties (FP) transactions — Annex I (summaries)
- Scenario 1
  - Recorded as FP in secondary income: Yes
  - Indirectly impacted accounts: None
  - Notes: “Classic” cross-border FP scenario — Unaffiliated nonresident entity named (as the responsible party) 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 it is not recorded in the balance of payments. Although the fine/penalty itself is not recorded in the balance of payments, it could affect the primary income account if the expense of the fine 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. Only the portion related to nonresident is recorded in secondary income. Die or ultimate owner might provide additional details if requested.
- 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 in the legal documents, the FP is a resident-to-resident transaction. If the direct investors send the resources for the DIE to pay, this is a direct investment transaction, in equity or in intercompany lending.
- 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. Since the immediate or ultimate owner of the DIE was named in the legal documents, the 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. Since the immediate or ultimate owner was named in the legal documents, the FP transaction should be recorded in secondary income. There would be no direct investment flows related since the DIE is not involved.

### Proposed updates and manual text extracts — Annex II (selected)
- BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL (new text excerpts)
  - Fines and penalties imposed on multinational enterprises by courts of law or other government bodies can be complex and may affect the direct investment accounts as well, or in addition to, the secondary income account where cross border fines and penalties are recorded in the balance of payments.
  - Compilers should review the legal documents to determine which part of the multinational is responsible for paying the fine or penalty.
  - If a DIE is the responsible party named in the legal documents the fine or penalty will negatively impact direct investment income, flows, and positions.
  - The income on equity (earnings) of the DIE will be negatively impacted by paying the fine or penalty. This will decrease the reinvested earnings of the DIE and therefore the reinvestment of earnings in the direct investment financial transactions in the financial account.
  - The value of the DIE will decrease as a result of paying the fine or penalty and this will decrease the direct investment position.
  - If the DIE receives funds from its immediate or ultimate owner to pay the fine or penalty, compilers should record additional direct investment financial transactions in addition to those mentioned above.
  - If the immediate or ultimate owner of the DIE is the responsible party in the legal documents, the fine or penalty should be recorded in the secondary income account.
- Reinvestment of earnings (paragraphs cited)
  - 8.16: Reinvestment of earnings may be negative in some cases, for example, in case of losses by the direct investment enterprise, if a fine or penalty is payable by the DIE, or if dividends payable in a period are larger than net earnings in that period.
  - 11.44: Reinvested earnings are measured on the basis of net saving before reinvested earnings are deemed distributed, and thus linked to the concept of operational earnings generated from production, lending and borrowing financial assets, and renting natural resources, and current transfers. Reinvested earnings include the impact of fines or penalties imposed by courts of law or other government bodies but do not include any realized or unrealized holding gains or losses.
- Capital transfers and timing (selected paragraphs)
  - 12.13: Capital transfers are transfers in which the ownership of an asset (other than cash or inventories) changes from one party to another; or that oblige one or both parties to acquire or dispose of an asset (other than cash or inventories); or where a liability is forgiven by the creditor. Major nonrecurrent payments in compensation for accumulated losses or extensive damages or serious injuries not covered by insurance policies are also capital transfers.
  - 12.18: Taxes and other compulsory transfers should be recorded when the activities, transactions, or other events occur that create the government’s claim to the taxes or other payments. Some compulsory transfers, such as fines, penalties, and property forfeitures, are determined at a specific time. These transfers are recorded on an accrual basis when the general government unit has an unconditional legal claim to the funds or property, which may be when a court provides judgment or an administrative ruling is published. If such judgement or ruling is subject to further appeal, then the time of recording is when the appeal is resolved.
  - 12.54: Fines and penalties imposed on institutional units by courts of law or other government bodies (including international bodies), which are punitive in nature, are treated as miscellaneous current transfers. (However, fines and penalties imposed by courts of law or other government bodies that are actually intended to compensate for damages should be considered as payments for compensation of damages for the purposes of recording in the balance of payments, and recorded as either current or capital transfers as explained in paragraph 12.55 and 12.56.)
  - 12.55–12.56 and 13.29: Payments of compensation consist of current transfers paid by institutional units to other institutional units in compensation for injury to persons or damage to property caused by the former that are not settled as payments of nonlife insurance claims. Major compensation payments related to extensive damages (e.g., oil spillages, side effects of pharmaceutical products, or anti-competitive behavior) are treated as capital rather than current transfers. Major compensation payments are intended to recover losses incurred over a multi-year period or to replace an asset (financial or nonfinancial).
- SYSTEM OF NATIONAL ACCOUNTS and GOVERNMENT FINANCE STATISTICS parallels
  - SNA paragraphs: fines and penalties are compulsory payments punitive in nature; payments intended to compensate for damages should be recorded as current or capital transfers as applicable (paragraphs 8.135, 8.140, 10.212(a)).
  - GFS: Major nonrecurrent payments in compensation for extensive damages or serious injuries not covered by insurance policies are included as capital transfers (paragraphs 3.16, 5.142, 6.124 referenced).

*Source: International Monetary Fund (Guidance Note — drafting team and proposed updates in the Balance of Payments and International Investment Position Manual and related manuals cited in the text).*

### SECTION I: THE ISSUE

### c8-recording-of-fines-and-penalties - SECTION I: THE ISSUE

### Background
- Fines and Penalties: 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 (BPM6 paragraph 12.54).
- Frequency and scale: Fines and penalties have become more frequent and are sometimes very large. Examples cited include:
  - 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 enterprise (MNE) complexity:
  - Transactions often involve MNEs, complicating identification of the institutional unit responsible for settling the fine or penalty (headquarter or affiliate/subsidiary).
  - Complete information (unit responsible, timing of ruling, amount, appeals) can be difficult to obtain; compilers may make assumptions, introducing large bilateral asymmetries.
- Time of recording:
  - Transfers are to be recorded “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).
  - Significant fines are often appealed, and the final amount may not be known until many years after the judgement; companies may recognize provisions or liabilities prior to final judgment; amounts may be deposited in escrow accounts pending appeals.
- Classification context:
  - Fines and penalties can be compared with taxes (current or capital transfers) and payments of compensation for injury or damages (current or capital account depending on nature).
  - BPM6: payments of compensation for damages are to be recorded as capital transfers when “for extensive damages (e.g., oil spillages or side effects of pharmaceutical products)” (BPM6 paragraph 12.56). Capital transfers defined as “major nonrecurrent payments in compensation for extensive damages or serious injuries” (paragraph 13.29).
  - In practice, fines/penalties are often closely tied to compensation payments and settlements may report amounts indistinguishably.

### Issues for discussion — Role of multinational enterprises
- Liability identification problems:
  - Identifying which part of an MNE (resident or nonresident entity) is liable can be challenging; legal cases can be complex.
  - The unit that pays a fine is not necessarily the unit named in a court ruling; authorities may issue fines against nonresident direct investors, ultimate beneficial owners, or domestic subsidiaries; joint liability may be assessed.
- Balance of payments implications:
  - If the fine is imposed on the domestic direct investment enterprise (DIE), the payment is a resident-to-resident transaction and thus not a current transfer in the BOP, though DIE profits recorded in primary income may be affected.
  - Direct investment income is measured according to the Current Operating Performance Concept (COPC) in BD4; BD4 Box A.6.2 lists extraordinary items to be excluded from COPC, but fines and penalties are not listed explicitly. Some compilers (including US-BEA) allow fines and penalties to negatively impact DIE income; alternative interpretations may exclude them as extraordinary items.
  - A DIE paying a fine using resources from direct investors can generate resident–nonresident financial account transactions recorded as direct investment.
- Cataloguing and scenarios:
  - The Guidance Note (GN) catalogs scenarios in Annex I, identifying whether the fine/penalty would be recorded in secondary income and whether other BOP accounts would be impacted. Scenarios where the issuer is resident are listed; reverses (issuer nonresident) would also apply.

### Issues for discussion — Time of recording
- Accrual vs cash concerns:
  - Legal appeals after an initial decision mean that recognition on an accrual basis after the first decision may not hold; subsequent appeals may overturn obligations.
  - A cash-basis approach has appeal because effective payment cannot be disputed, but switching to cash basis would introduce inconsistencies within the BOP and with national accounts and GFS.
- Government revenue alignment:
  - Since the counterpart of fines/penalties is classified inside general government, recording timing similar to taxes could avoid distorting government finance statistics.
  - GFSM 2014 specifies fines and penalties should be recorded “when the general government unit has an unconditional claim to the funds” (paragraph 5.144) and that if “the judgment or ruling is subject to further appeal, then the time of recording is when the appeal is resolved” (paragraph 3.85). These clarifications are missing from 2008 SNA and BPM6 and should be added.
- Accrued but unpaid fines:
  - If a fine/penalty is accrued in the current period but not paid, the corresponding entry should be recorded as other accounts receivable/payable. Compilers must check source data coverage and make additional adjustments if necessary.

### Issues for discussion — Classification
- Current vs capital transfer debate:
  - Large fines (e.g., for oil spills) can significantly impact a country’s current account; there is appeal to treating significant fines as capital transfers, similar to major compensation payments, but conceptual definitions should guide recording.
- Distinguishing punitive fines from compensatory payments:
  - Some settlements mix fines/penalties with compensation (Deepwater Horizon example: Clean Water Act penalty vs Oil Pollution Act damages; statement that “80 percent of the Clean Water Act penalty will go to help the Gulf recover”).
  - Proposal: define fines/penalties as compulsory payments that are punitive in nature (intended to punish and/or deter) and compensation payments as intended to remedy specific harms (property damage or loss of income). Under this distinction, payments labeled fines but intended to compensate could be treated as compensation for BOP recording.
- Defining “major compensation payments for extensive damages”:
  - Current guidelines give examples (oil spills, pharmaceutical side effects) but lack clear rationale. A Pigouvian approach interprets extensive damages as negative externalities with economy-wide impacts.
  - Practical criterion proposed: 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. This aligns with BPM6 paragraph 12.13 that a capital transfer “results in a commensurate change in the stocks of assets of one or both parties.”
  - GFSM 2014 includes accumulated losses as part of major compensation payments (paragraph 3.16); BPM6 and 2008 SNA do not, indicating room for alignment.
- M&A contract contingent fines:
  - Contingent fines/penalties in M&A contracts (performance-based additional payments or compensation adjustments due to lawsuits) can be interpreted as price adjustments/updates of the market price of the acquired enterprise and thus treated as direct investment (or portfolio investment if buyer has <10 percent voting power) rather than current transfers.

### SECTION II: Outcomes — Recommendations
- Revise 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 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 time of recording:
  - Given appeals, clarify that fines and penalties should not be recorded until the unit issuing the fine has an “unconditional claim to the funds” and that if a judgment or ruling is subject to further appeal, an unconditional claim exists “when the appeal is resolved.”
  - Modify BPM6 to state that fines/penalties accrued but not yet paid should be recorded as other accounts receivable/payable.
  - Note that MNEs may recognize liabilities in financial accounting before final judgment; compilers may need adjustments to ensure appropriate period recording. Further practical guidance may be necessary.
- Clarify BD4 and direct investment guidance:
  - Update BD4 to state fines and penalties should impact direct investment income (COPC) when DIEs are the responsible party and update BPM6 direct investment sections to mention that fines and penalties can impact DIE profits.
- Treat contingent fines/penalties in M&A contracts explicitly as price adjustments/updates and therefore as direct investment (or portfolio investment) transactions, not as transfers.
- Add compilation guidance:
  - For the next Compilation Guide, provide detail on using public information, such as court documents, to identify fines/penalties and related direct investment transactions (as described under “indirectly impacted accounts” in Annex I).
- Implementation note:
  - The recommendations would require additions or clarifications to the BPM and to the SNA and GFSM to maintain consistency across the sets of accounts (a preliminary list is in Annex II).

### Rejected proposal
- The drafting team considered changing recording of fines and penalties from accrual to cash basis to address appeals; this proposal was rejected because it would deviate from existing accrual standards and introduce inconsistencies within the balance of payments and with other accounts.

*Source: IMF Guidance Note — SECTION I: THE ISSUE.*

### 21.      The drafting team also considered but rejected a proposal to reclassify certain fines and

### c8-recording-of-fines-and-penalties

### Treatment decision and rationale
- The drafting 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 received the payment.
- The drafting team considered but rejected a proposal to reclassify certain fines and penalties from the current account to the capital account to align treatment with other compulsory payments (such as payments of compensation for damages).
- The drafting team considered defining capital-transfer compensation payments by whether payments were “meant to alleviate negative externalities,” but concluded that such a definition would not be easy to put in practice.
- Instead, the drafting team decided to use 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)” since this is what many compilers already use in practice.

### Divergent views and procedural notes
- One member of the DITT and two members of the AEG disagreed with the recommendation.
- One member of the CATT disagreed with the recommendation.
- During CATT review, one member expressed a preference for cash-basis recording for fines/penalties.
- During CATT review, two members expressed a preference for allowing certain large and one-off fines/penalties to be treated as capital transfers.

### Key questions for discussion (as posed by the drafting team)
- Do you agree with the recommendation to define fines and penalties transactions as being punitive in nature, in order to differentiate these payments from payments for compensation of damages?
- Do you agree that fines and penalties involving DIEs should impact their earnings and therefore the primary income account?
- Do you agree with the proposed clarification on the economic meaning of “major compensation payments for extensive damages”?
- What are your views on time of recording of fines and penalties considering the possibility of various appealing courts and subsequent changes in the decisions?
- Do you agree that fines and penalties in M&A contracts, related to the value of the enterprise, should be treated as direct investment (or portfolio investment) transactions, and not as transfers?

### Scenarios for Fines and Penalties (FP) transactions — Annex I (summaries)
- Scenario 1
  - Recorded as FP in secondary income: Yes
  - Indirectly impacted accounts: None
  - Notes: “Classic” cross-border FP scenario — Unaffiliated nonresident entity named (as the responsible party) 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 it is not recorded in the balance of payments. Although the fine/penalty itself is not recorded in the balance of payments, it could affect the primary income account if the expense of the fine 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 nonresident is recorded in secondary income. DIE or ultimate owner of DIE might provide additional details if requested. Some legal documents might provide this information, if they are made public. Although the portion related to the resident would not be recorded in the balance of payments, it could affect the primary income account if the expense of the fine is 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 in the legal documents, the FP is a resident-to-resident transaction. If the direct investors send the resources for the DIE to pay, this is a direct investment transaction, in equity or in intercompany lending.
- 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. Since the immediate or ultimate owner of the DIE was named in the legal documents, the 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. Since the immediate or ultimate owner was named in the legal documents, the FP transaction should be recorded in secondary income. There would be no direct investment flows related since the DIE is not involved.

### Proposed updates and manual text extracts — Annex II and related manual paragraphs
- BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL (new text)
  - (New) Fines and penalties imposed on multinational enterprises by courts of law or other government bodies can be complex and may affect the direct investment accounts as well, or in addition to, the secondary income account where cross border fines and penalties are recorded in the balance of payments.
  - Compilers should review the legal documents to determine which part of the multinational is responsible for paying the fine or penalty.
  - If a DIE is the responsible party named in the legal documents the fine or penalty will negatively impact direct investment income, flows, and positions.
  - The income on equity (earnings) of the DIE will be negatively impacted by paying the fine or penalty. This will decrease the reinvested earnings of the DIE and therefore the reinvestment of earnings in the direct investment financial transactions in the financial account.
  - The value of the DIE will decrease as a result of paying the fine or penalty and this will decrease the direct investment position.
  - If the DIE receives funds from its immediate or ultimate owner to pay the fine or penalty, compilers should record additional direct investment financial transactions in addition to those mentioned above.
  - If the immediate or ultimate owner of the DIE is the responsible party in the legal documents, the fine or penalty should be recorded in the secondary income account.

- Reinvestment of earnings (paragraphs cited)
  - 8.16: Reinvestment of earnings may be negative in some cases, for example, in case of losses by the direct investment enterprise, if a fine or penalty is payable by the DIE, or if dividends payable in a period are larger than net earnings in that period.
  - 11.44: Reinvested earnings are measured on the basis of net saving before reinvested earnings are deemed distributed, and thus linked to the concept of operational earnings generated from production, lending and borrowing financial assets, and renting natural resources, and current transfers. Reinvested earnings include the impact of fines or penalties imposed by courts of law or other government bodies but do not include any realized or unrealized holding gains or losses.

- Capital transfers and timing (selected paragraphs)
  - 12.13: Capital transfers are transfers in which the ownership of an asset (other than cash or inventories) changes from one party to another; or that oblige one or both parties to acquire or dispose of an asset (other than cash or inventories); or where a liability is forgiven by the creditor. Major nonrecurrent payments in compensation for accumulated losses or extensive damages or serious injuries not covered by insurance policies are also capital transfers.
  - 12.18: Taxes and other compulsory transfers should be recorded when the activities, transactions, or other events occur that create the government’s claim to the taxes or other payments. Some compulsory transfers, such as fines, penalties, and property forfeitures, are determined at a specific time. These transfers are recorded on an accrual basis when the general government unit has an unconditional legal claim to the funds or property, which may be when a court provides judgment or an administrative ruling is published. If such judgement or ruling is subject to further appeal, then the time of recording is when the appeal is resolved.
  - 12.54: Fines and penalties imposed on institutional units by courts of law or other government bodies (including international bodies), which are punitive in nature, are treated as miscellaneous current transfers. (However, fines and penalties imposed by courts of law or other government bodies that are actually intended to compensate for damages should be considered as payments for compensation of damages for the purposes of recording in the balance of payments, and recorded as either current or capital transfers as explained in paragraph 12.55 and 12.56.)
  - 12.55–12.56 and 13.29: Payments of compensation consist of current transfers paid by institutional units to other institutional units in compensation for injury to persons or damage to property caused by the former that are not settled as payments of nonlife insurance claims. Major compensation payments related to extensive damages (e.g., oil spillages, side effects of pharmaceutical products, or anti-competitive behavior) are treated as capital rather than current transfers. Major compensation payments are intended to recover losses incurred over a multi-year period or to replace an asset (financial or nonfinancial).

- SYSTEM OF NATIONAL ACCOUNTS and GOVERNMENT FINANCE STATISTICS parallels
  - 8.135 and 8.140 (SNA): Fines and penalties are compulsory payments imposed on institutional units by courts of law or quasi-judicial bodies, which are punitive in nature. Fines and penalties imposed by courts of law or other government bodies that are actually intended to compensate for damages should be considered as payments for compensation of damages for the purposes of recording in the national accounts, and recorded as either current or capital transfers as explained in paragraphs 8.140 and 10.212(a).
  - 10.212(a) (SNA) and 3.16, 5.142, 6.124 (GFS): Major nonrecurrent payments in compensation for extensive damages or serious injuries not covered by insurance policies are included as capital transfers. Major compensation payments are intended to recover losses incurred over a multi-year period or to replace an asset (financial or nonfinancial).

- BENCHMARK DEFINITION OF FOREIGN DIRECT INVESTMENT (selected excerpts)
  - 4.3.3 Direct investment income (paragraph 207): Direct investment earnings measure earnings from current operations. Fines and penalties imposed by courts of law or other government bodies should be included in direct investment earnings.
  - 4.3.3.1 Direct Investment Income on equity (New): Fines and penalties imposed on multinational enterprises by courts of law or other government bodies can be complex and may affect the direct investment accounts as well, or in addition to, the secondary income account where cross border fines and penalties are recorded in the balance of payments. Compilers should review the legal documents to determine which part of the multinational is responsible for paying the fine or penalty. If a DIE is the responsible party named in the legal documents the fine or penalty will negatively impact direct investment income, flows, and positions. The income on equity (earnings) of the DIE will be negatively impacted by paying the fine or penalty. This will decrease the reinvested earnings of the DIE and therefore the reinvestment of earnings in the direct investment financial transactions in the financial account. The value of the DIE will decrease as a result of paying the fine or penalty and this will decrease the direct investment position. If the DIE receives funds from its immediate or ultimate owner to pay the fine or penalty, compilers should record additional direct investment financial transactions in addition to those mentioned above.

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