Ethics and governance in the European Financial centers

As of September 20, 2006, the Association of Luxembourg Compliance Officers for the Financial Sector (ALCO) and the Luxembourg Institute for Training in Banking (IFBL) signed a partnership agreement to the purpose of providing a specific training course dedicated to the job of Compliance Officer, under its various aspects.
At the end of the course which will be delivered by ALCO board members among others, a certificate will be issued to attest the achieved qualification.
For several years, the fight against money laundering and the financing of terrorism have been an important part of the financial sector’s environment. This evolution has seen the emergence of a new profession: the Compliance Officer. Its role is to ensure the respect of legislative, statutory and ethical standards in effect.

The training is positive trend but there are a couple of issues that relativize its effect :
- first, due to link of subordination inherent to any contract of employment, how compliance officers may deal with management that officially minimized and standardized accounting frauds in the debate that took place for the transposition of the second directive (See "Clear and pragmatic legal rules") ?
- second, taking into account the low level of sanctions (number and amount of fines) in Luxembourg compared to competitors (See article "CSS poor communication on sanctions"), what is the credibility of the compliance framework of the financial center ?
- finally, beyond the knowledge of the legal and regulatory framework that may be learnt during a traditional training, what about the individual ethical decision making process and ethical behavior, actually the most important ?

Compliance is much more a question of state of mind than a question of training. This implies a specific coaching/training at every level of the organisation to monitor a cultural change. Such coaching can only be provided by people that have hindsight and therefore are able to repudiate the visible dysfunctions of the financial center.


Press release
See Brochure

The CSSF in Luxembourg has a poor communication relating to fines. The only source of public information is the annual reports.
Furthermore, when looking the annual reports since 2002 we may see that the number and the amount of fines is not credible compared to those of the FSA (See article “FSA transparence on sanctions").
In 2002, in two cases fines of EUR 8,000 each were imposed on account of transmission of information that proved to be incorrect; in two other cases, EUR 1,500 fines were imposed because the managers did not communicate the required information by the CSSF. The CSSF also imposed disciplinary fines of EUR 1,500 each on persons responsible for the daily management of two PFS on account of refusal to transmit information as required by CSSF Circular 01/40 on professional obligations of financial professionals within the scope of the fight against money laundering and the circular letter of 19 December 2001 on the same matter. The CSSF imposed EUR 495.78 disciplinary fine on each of the three persons responsible of a SICAV for their refusal to communicate the management letter. In 2002, the CSSF imposed disciplinary fines of EUR 12,500 on each of the managers of a financial intermediary. These fines were imposed on the one hand because of communication
of incomplete, incorrect, and, in certain cases, even false information, and on the other hand on the account of non-compliance with provisions relating to internal organisation, rules concerning stock exchanges and rules of conduct.
In 2003, the CSSF required the departure of six managers and directors : in two cases, the legislation concerning money laundering was seriously infringed; the other cases concerned unprofessional and deontological incorrect behaviour relating to the granting of a credit which resulted in a loss for the bank. The CSSF imposed disciplinary fines of EUR 1,500 each on persons responsible for the daily management of three PFS on account of refusal to transmit information relating to the closing of previous financial years.
In 2004, the CSSF required the resignation of two managers: in one case, the legislation governing money laundering was seriously infringed; the other case was about unprofessional and deontologically incorrect behaviour with relation to a client. The CSSF also imposed disciplinary fines of EUR 1,500 each on persons responsible for the daily management of four PFS on account of refusal to transmit information relating to the closing of previous financial years
In 2005, the CSSF did not fine any professional.

Compared to the FSA in the United Kingdom, except for year 2002 probably due to the "11 September effect", the number and the amounts are not dissuasive enough to prevent improper business conduct all the more as there is no communication on the issues. One must keep in mind that 14% of the total Offshore assets are in the United Kingdom compared to 16% in Luxembourg and 28% in Switzerland (Source : Merrill Lynch, Capgemini, Vontobel Equity Research, quoted by Le Temps, 14 Septembre 2005)). Therefore One should expect the same level of sanctions.

Furthermore the requirement for proper business conduct is not implemented as it should be compared to what is done by the Swiss Federal Banking Commission in Switzerland (See article “Proper conduct : Luxembourg v. Switzerland” )


CSSF Reports

See abstract of the report 2002
See abstract of the report 2003
See abstract of the report 2004
See abstract of the report 2005

The FSA communicates on sanctions, which demonstrates an actual will of the financial center to ensure proper conduct in business and has a dissuasive effect.

Press releases are detailed and state who was fined, what was the fine for and the amount of the fine. Such communication by the regulation body may not negative for companies that are quoted provided that they implement an appropriate communication to demonstrate they have enhanced their controls.

We may see that the typology of sanctions is very large :

Approving a misleading financial promotion
Attempting to mislead the Japanese regulatory and tax authorities
Breach of listing rules
Breaches of FSA Principles ("skill, care and diligence" and "internal organization")
Breaches of FSA Principles relating to the sale of assets
Breaches of money laundering rules
Breaches of rules in relation to a placing of shares and its dealing with regulators thereafter
Breaches of the listing rules
Breaching FSA Principle 5 and Principle 2
Breaching FSA Principles 2 and 3 by failing to conduct its business with due skill, care and diligence
Breaching the FSA's Statements of principle for Approved Persons.
Client money rule breaches
Committing market abuse by misusing relevant information
Compliance failings
Failing to apply for approval of an employee who held a significant management role at the firm when it first applied for authorisation.
Failing to detect or prevent attempts to mislead the Japanse tax authority when chief executive of Credit Suisse Financial Products
Failing to take reasonable steps to ensure the accuracy of transaction reports
Failure to act with due care, skill and diligence, failed to ensure his firm complied with AML requirements and was knowingly concerned in the actions taken by ISUK.
Failure to report contracts for differences (CFD) transactions
Financial promotions failings
For breaching the FSA 's principles for business
For mis-selling precipice bonds
For running a misleading campaign promoting spread betting
For serious systems and controls failings
Inadequate monitoring and record keeping
Inadequate supervision of 'appointed representatives'
Maladministration of PEPs and ISAs
Market abuse
Market misconduct
Mishandling mortgage and endowment complaints
Misleading advertisements
Misleading financial promotion
Misleading precipice and high income bond promotion
Mis-selling savings plans
Mis-selling with-profits savings policies.
Mortgage endowment mis-selling and other failings
Mortgage endowments failings
Pension review failings
'Pensions unlocking'
Poor anti-fraud controls over client identities and accounts
Precipice and with-profit bonds mis-selling
Programme trade failings
Providing misleading information to the FSA
Record keeping and associated compliance breaches
Regulatory failings
Rule breaches relating to the Secure Growth Portfolio
Serious compliance failings and pensions review failings
Serious systemic flaws in its mortgage endowment complaints handling procedures and for not drawing the problems to the attention of the regulator
Systemic failings in its sales process for pensions unlocking
Systems and controls, risk management and compliance failures
Telesales; not providing customers with key facts documents
Transaction reporting breaches
Unacceptable sales practices and not treating customers fairly
Unsuitable sales of high income bond

The total amount of fines between 2002 and 2006 is £70,968,643.

The number of cases depends on the year :
2006 : 18 (dated 26/09)
2005 : 40
2004 : 32
2003 : 17
2002 : 9

The amount fo the fines starts at £ 1,000 in a situation of market abuse up to £ 17,000,000 in an unprecedented situation of market abuse and breaching the listing rules. The averange is £ 760,000.

The amount is dissuasive.

See the cases