Triangulation: the only method to ensure legal compliance


Luc Moeremans*
Triangulation is the new buzzword which has launched numerous discussions and interpretations on what compliance actually entails and how it is defined. The legal basis for triangulation is defined in Council Regulation 1103/97 on certain provisions relating to the introduction of the euro. Article 4 (4) of this Regulation states: "monetary amounts to be converted from one national currency unit into another shall first be converted into a monetary amount expressed in the euro unit (…) and then be converted into the other national currency unit." Rounding rules defined in the Regulation must also be applied when triangulating. The aim of triangulation is to avoid rounding inaccuracies when conversion takes place between EMU-participating currencies.

With all the different types of legislation emanating from Brussels and their various forms of application, some parties may not be fully aware of the legal reach and scope of Council Regulations. It must be clear that each Council Regulation is binding in its entirety and directly applicable in all Member States. Consequently, as from 1 January 1999, when conversion rates between EMU-participating national currencies and the euro are irrevocably fixed, all public and private parties will be legally obliged to convert via the euro when converting from one national currency into another in the EMU zone. As the use of the triangulation method is a legal obligation, compliance is easy to define.

The same Regulation also states that: "No alternative method of calculation may be used unless it produces the same results". This has prompted the search for alternative methods that can be used instead of triangulation. The European Commission has run simulations to test the accuracy of using bilateral rates with different significant figures and has concluded that: "it is safe to assume that it will be impossible to find bilateral rates which always lead to the same result as the triangulation method" (Euro Paper, N° 22). This is a major challenge for both public and private parties, as the majority of IT systems do not currently have triangulation capabilities. Without the necessary IT capabilities, all parties which can or do not triangulate will systematically break the law as from next January.

All parties should be aware that the legal risk of not discharging a debt or not fulfilling other obligations when applying bilateral rates instead of triangulation in conversion operations stays with the party which has failed to use the triangulation method. Is there any scope for ‘escaping’ the legal requirements of triangulation? In theory: no, there is not; however, a number of parties are likely to continue using bilateral rates and there may be some comfort for them as a result of practicalities.

Parties can simply avoid the issue of triangulation by ensuring that invoices or debts are always discharged in the currency of the invoice or debt; any conversions should be left to banks which must and will use the triangulation method.

Another possible option to avoid the legal risk is the use of two different bilateral rates: one bilateral rate for the conversion of amounts owed to a third party and another bilateral rate for amounts received from a third party. However, in each case, a bilateral rate would have to be used which leaves the counterparty as well or better off when compared with conversion via the triangulation method. Given the technical complexities surrounding this option and the costs involved, parties would have to investigate whether it would simply be better and more cost effective to invest in IT software which has triangulation capabilities; furthermore, and importantly, compliance would be ensured.

Parties will need to check whether their auditors will be prepared to sign off annual accounts if the triangulation method has not been used. Some auditors may be prepared to render an unqualified opinion on statutory accounts where bilateral rates are used, provided that certain conditions are met. These conditions must be discussed and agreed upon with the auditors.

Finally, the European Commission and national governments are unlikely to rigorously enforce the use of triangulation. Triangulation will therefore be monitored, if at all, by a counterparty of the contractual relationship; if one party uses bilateral rates, the counterparty can sue because legal obligations have not been fulfilled. In practice, therefore, each party must evaluate what the consequences are if it chooses not to triangulate.


* Luc Moeremans, Managing Partner, Deloitte Consulting, Euro Service Line.