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Launch of an agency for the development of financial center

In order to promote the financial center outside the borders, the Luxembourg Governement has set up in an « agency for the development of the financial centre ». The will is to develop Luxembourg’s financial place and have it become a privileged place for business in the competitive environment.

The will is as well to promote a good image of the center worldwide.

Unfortunately such communication will fail as their is no will to change the bogus pragmatism which is actual negligence.

As Christian Maréchal (Meurtres à l’ombre de la qualité, INSEP, 2002) wrote: behind the frontage of respectability, if there is another world it is difficult to have both worlds in parallel. At one time an error takes place, something is no longer compatible.

The study of official (Corporate Registration, cases law, administrative reports, parliamentary files) and public sources (websites, annual reports, press releases, interviews) in Luxembourg demonstrates that the ethical frontage of the self regulated small country (I) is definitely cracked (II), which is a threat for the international finance (III) and raises the question of a certification to ethics for financial centres (IV).

I. The ethical frontage of the self-regulated small country (...)

According to the Luxembourg authorities, the centre is a small country where everybody knows everyone and what the others are doing. This is what is said to the OECD and GRECO. Luxembourg has positive international assessments in the fields of business ethics from the IMF or the FATF. The OECD and GRECO reports about corruption are more qualified.
These assessments are communicated to demonstrate that the centre complies with international requirements and is not a tax haven.
It is true that there are standards and examples of their implementation: e.g the Jurado case or more recently the Friederich case. These positive facts are not taken into account by the detractors of the Centre (e.g the Jurado case is quoted twice in the Montebourg report without giving the credit to the country)
The law of 1993 requires professional standing and experience from the professionals of the financial sector. Many laws were voted against financial crime. There are many training conferences and workshops on AML. The Financial Intelligence Unit does a goof job.
Nevertheless there are recurrent involvements in money laundering scandals or tax evasion scandals . But problems are denied and any criticism is considered as dubious like the report The amount and effects of money laundering from the Utrecht School of Economics that was released in 2006. There is a silence on issues to give the image of competence and respectability of the centre.

II. (…) is definitely cracked (…)

What’s going on behind the front office in the back office?
The fourth power is banks and financial institution and not the media and the country is unfortunately a fraud catalyst: the three criteria for fraud (pressure, opportunity and rationalisation) are met when one observes official and public facts.

Pressure to commit fraud is met because the communication is based exclusively on the growth of the centre and the companies. Accurate facts that could discourage criminals are not communicated.

Opportunity to commit fraud is met because there are many official or public examples of poor governance, permissiveness ,and conflict of interest. For example :
• The Luxembourg code of governance allows company to find reasons why integrity of accounts should not be applicable: integrity is not a principle but a recommendation (the 9th recommendation under the 9th principle which requires "rigorous rules": all the companies that were involved in the scandals of the last years had "rigorous rules"). Only principles are mandatory (comply).
• Some fiduciaries communicate freely that “The abuse social good and tax evasion are non-existent in the Luxembourg law” or that “Luxembourg is better than a tax haven”. They attract knowingly bad investors.
• The Chairman of the Institut des Réviseurs d’Entreprises (Institute of external auditors) who has an exclusive disciplinary decision making power, is member of the board in a non profit making society with companies that could potentially be involved in frauds.
• But above all networks are very active to support knowingly professionals despite their official and public negligence, bad management and bad governance that do not fit with ethical statements and the requirements of professional standing and experience as defined.

Rationalisation to commit fraud is met because there is absolutely no feeling to be accountable or guilty. That is the reason why a financial director decided to sue the employer after he was dismissed despite his actual faults. That is the reason why this financial director is hired and supported knowingly by his successive employers including a Big Four. That is the reason why bad management and bad governance are standardised.
As far as AML is concerned, this absence of feeling to be accountable or guilty was exceptionally clear in the framework of the debate where the bankers association stated in 2003-2004 on behalf of their members including the Big Four that “offences such as forgery, use of forgery, false balance sheets, use of false balance sheets or unauthorised use of corporate property are offences with financial connotations which are confused with laundering for the sole purpose of applying exceptional powers to these vague offences". All sensitive provisions were removed in the transposition of the Second European Directive and the Tranposition of the Third Directive is limited.
This absence of feeling to be accountable or guilty was exceptionally clear recently in the framework of a parliamentary question about the Stop Tax Haven Abuse Act that was released by three American senators last February identifying Luxembourg as a tax haven : the member of Parliament asked two questions (3 July 2007) : 1) What is the attitude of the government in front of the draft law ? 2) What necessary steps are planed to protect the interests of the financial center ? The second question is a wrong one. The relevant question should have been “What is to be done to correct the dysfunctions which definitely harm the reputation of the financial center?” Minister’s answer is interestig as well. In his answer dated 24 July, Luc Friden states that the draft text does not reflect the policy of the US Government and that the fact that Luxembourg is quoted in the draft law does not comply with the positive assessment on the cooperation that is expressed by the American authorities. Unfortunately, when reading the Narcotics Control Strategy Report 2007 (publication from the US Departement of State dated March 2007), it is stated that “Although Luxembourg has steadily enacted anti-money laundering and terrorist finance laws, policies, and procedures, the lack of prosecutions and convictions is telling, particularly for a country that boasts such a large financial sector”. Luxembourg’s attitude is not acceptable for the American authories and in the United States, where there is a tradition of investigation either by the Congress or the media and a will to tighten up the ship.

III. (…) which is a threat for the international finance (…)

Professional standing and experience turned out to be charade in Luxembourg, so turned out to be charade the myth of the self regulated place. As the proverb says: “Once a liar, always a liar” (Cf. Naturam expellas furca, tamen usque recurret - Horace, liv. I, ep. ix.)
Business stakes and promiscuity in the networks prevent any critics and any action including when official and public facts are compatible neither with the ethical communication nor the requirement of professional standing and experience.
Such "system", which is no longer trustable, is a risk for the reputation of head offices (banks, Big Four) and for the credibility of international organisations like the IMF or the FATF. Head offices, investors and international institutions cannot rely anymore on many actors of the Luxembourg centre, where public and official negligence and poor governance are considered as values of success and examples. But there is a complicit silence and inertia as the business (auditors' and bank's one) progresses anyway. Until the time when the scandal come. As Einstein said "The world is not dangerous because of those who do harm but because of those who look at it without doing anything". This is true for the business world as well.

IV. (…) and raises the question of a certification to ethics for financial centres

Luxembourg is probably not the worst financial centre and has honest polititicians and professionals but the size and the lack of responsibility of many actors allows identifying ethical weaknesses, and realizing the limits of current international assessments in business ethics and notably AML/CFT concerns.

Therefore an actual certification to ethics for financial centres should be implemented, to go beyond the existing assessments. Six criteria should be taken into account:
1. Credibility of the ethical statements
2. Means for detection of improper business conduct
3. Credibility of sanctions
4. Transparency on issues
5. Independence of auditors
6. Protection of the client

In a nutshell the experience of the Luxembourg financial centre demonstrates the need to reinforce ethics in financial institutions and markets and to go beyond the current assessments that turned out to be charade so turned out to be charade some "code of conduct" and other "code of ethics" from banks and audit firms.

As far as the investor is concerned, he (she) gonna be suspected to commit fraud just by choosing such centers that have clear and so a pragmmatic regulatory framework.

I have contacted the decisions-makers either political or professional to work on the risks, including the one of reputation in a competitive business world, but I had no answer on my management and governance issues. The reality is that those who raise questions are repudiated when dishonest professionals are knowingly hired.

Official presentation of the agency (French)

Interview with Pr Unger (text in German) : "Grauzone Luxembourg"

19:00 Posted in Luxembourg | Permalink | Comments (0)

Three people sentenced for money laundering in the UK

A recent press release from the Metropolitan Police states that two men have been sentenced to a total of six years' imprisonment and a woman given a suspended sentence for laundering in excess of £15 million, believed to be the proceeds of drugs.

Detective Superintendent Trevor Shepherd, Met's Economic and Specialist Command, said:

"This case demonstrates once again the potential of the Proceeds of Crime Act 2002. The driving force behind drug trafficking and supply is the generation of wealth. This legislation enables police and other law enforcement agencies to hit criminal networks where it hurts most, in their pockets.

"This cash is now removed from criminal circulation and is prevented from causing future harm to our communities. Under 'incentivisation' a significant proportion will also be returned to police to fund future investigations

See press release

10:00 Posted in UK | Permalink | Comments (0)

Third EU Money Laundering Directive and the Money Laundering Regulations 2007 in the UK

The FSA provides information on the new responsibilities under the Money Laundering Regulations 2007. These Regulations will bring the Third EU Money Laundering Directive into effect in the UK. It must be implemented by all EU member states by 15 December 2007.

See FSA's page

09:50 Posted in UK | Permalink | Comments (0)

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