The various terms used for conduit financing

• Captive financial institutions and money lenders in S.127
• Special purpose entities in S.127
• Financial holding companies owned by multinational corporations in the conduit sector
• Letterbox companies
• Special financial institutions
• Conduit companies

Captive financial institutions and money lenders in S.127

The introduction of the European system of national and regional accounts (ESA 2010) also saw the creation of sector S.127 ‘captive financial institutions’ (CFIs). This sector was created to classify entities that play a role in intra-group financing but undertake no or limited operational activities. The official definition according to ESA 2010 is:

“The captive financial institutions and money lenders subsector (S.127) comprises all financial corporations and quasi-corporations that are neither engaged in financial intermediation nor in providing financial auxiliary services, and where the majority of either their assets or their liabilities are not traded on open markets.”

Institutions in sector S.127 are often referred to as ‘CFIs’ or ‘captives’. The term ‘captive’ means that the entity is controlled by a parent company. Larger CFIs are part of multinational corporations. However, there are also many smaller CFIs owned by private households, such as holding companies owned by directors/major shareholders and family trusts.

In the Netherlands, S.127 is also known as ‘Financiële instellingen en kredietverstrekkers binnen concernverband’ or just ‘Financiële instellingen binnen concernverband’. Statistics Netherlands (CBS) publishes statistics for sector S.127 on Statline.

Special purpose entities in S.127

Special purpose entities (SPEs) are closely related to CFIs. The term ‘SPE’ was introduced into statistics to provide a clearer picture of financial flows of multinational corporations. The definition used by the IMF is:

“Special purpose entities (SPEs) are entities that are formally registered and have little or no physical presence in the country of registration. They are often set up for specific legal or tax purposes and typically have no employees and no production activities. They are used to hold assets and liabilities and to facilitate financial flows within a group of companies.

In the Netherlands, SPEs are found exclusively in sector S.127 as a subsector. Where relevant in our balance of payments statistics, we distinguish SPEs as a separate subcategory. Based on a standardised definition, the ECB, the OECD and the IMF publish internationally comparable SPE statistics for a large number of countries, including the Netherlands.

Financial holding companies owned by multinational corporations in the conduit sector

The ‘conduit sector’ comprises all financial holding companies in sector S.127 that are owned by multinational corporations. Only this subcategory in S.127 are of a pass-through nature. The financial holding companies owned by households are primarily domestically oriented.

We only publish statistics on financial holding companies owned by multinational corporations. In terms of total assets, these account for approximately 95% of sector S.127. The assets of financial holding companies owned by households account for the remaining 5%.

Within the ‘financial holding companies owned by multinational corporations’ subcategory, we distinguish between SPEs and ‘other financial holding companies owned by multinational corporations’ which do not meet the SPE definition. Other financial holding companies are almost always part of an international group of companies, generally have very few operational activities, and often engage in intra-group financing. However, they cannot be classified as SPEs because they are listed on a stock exchange or hold a substantial interest in a Dutch non-financial corporation.

Letterbox companies

For some time now, the Dutch Chamber of Commerce has had many entities registered that employ almost no staff and carry out almost no operational activities, yet have substantial financial liabilities and assets abroad. These entities are commonly referred to as ‘letterbox companies’. Many financial holding companies owned by multinationals are regarded as letterbox companies, but the term does not feature officially in the statistics. 

Special financial institutions

Some time ago, we developed our own statistical concept for cross-border conduit financing through the Netherlands: special financial institutions (SFIs).

Special financial institutions: resident enterprises or institutions, irrespective of their legal form, in which non-residents hold a direct or indirect interest – whether or not through a shareholding – or otherwise exert influence, and whose objective it is, or whose activities consist to a significant extent of, whether or not performed in combination with other domestic group companies, to:

1. mainly hold assets and liabilities abroad; and/or
2. channel revenues consisting of royalty and licensing proceeds received abroad to foreign group companies; and/or
3. generate revenues and expenses that are mainly originate from re-invoicing from and to foreign group companies.

For some time, we published statistics for SFIs as a separate category, and in many balance of payments statistics, they featured as a subcategory. This ended with the introduction of sector S.127 and the official SPE concept. Since then, we have published statistics on SPEs as a subsector of S.127, and balance of payments statistics with SPEs as a subcategory. We no longer compile statistics on SFIs.

Many SFIs were reclassified as CFIs in S.127, but not all. Some were reclassified to sector S.11, ‘non-financial corporations’, such as those that were subsidiaries of a non-financial corporation, royalty and licensing companies, and re-invoicing companies. Also, the SFIs used for securitisation purposes were reclassified to sector S.125, ‘other financial intermediaries’. Conversely, not all CFIs used to be SFIs. The top-tier holding companies with no or almost no operational activities were separated from S.11 and transferred to S.127.

Many SFIs classified as CFIs under S.127 are SPEs. Those SFIs that did not meet the SPE definition were reclassified as ‘other financial holding companies owned by multinational corporations’. They are SFIs with a substantial interest in S.11 entities and SFIs listed on a stock exchange.

Conduit companies

According to the Conduit Companies Committee (2021), there is no single universal definition of a conduit company. The Committee has identified six characteristics of a conduit company:

1. It forms part of an international structure.
2. Its transactions are (primarily) conducted with (directly or indirectly) affiliated parties.
3. It has no or almost no real physical presence in the Netherlands.
4. It is created to secure financial, tax, legal or other benefits.
5. Significant funds pass through it to and from other countries.
6. It has significant assets and liabilities.

While the Committee regards all SPEs and other financial holding companies as conduit companies, it adopts a wider concept that also includes sectors other than the S.127 sector. The Committee notes that foreign multinationals also use subsidiaries engaged in non-financial activities (in S.11) as conduit companies. For example, it also qualifies the former SFIs that were reclassified as S.11, such as the SFI subsidiaries and the royalty and licensing companies, as conduit companies. No statistics are available for the conduit companies in S.11.