Ethics and governance in the European Financial centers

MONEYVAL is a Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism that was established in 1997. This evaluation and peer pressure mechanism reviews the anti-money laundering measures and measures to counter the financing of terrorism in Council of Europe member States (and Council of Europe applicants which apply to join the terms of reference) which are not members of the Financial Action Task Force (FATF).

The 3rd round evaluation report on Malta, as adopted at MONEYVAL’s 24th Plenary meeting (10-14 September 2007) and published late November 2007.


Read MONEYVAL report on Malta

As explained in the previous articles, I was surprised to read in the FATF report 2006-2007 the text " Thanks to a generous grant from Luxembourg, the FATF has been working to improve its information technology systems, with a view to providing FATF delegations with better access to confidential documents. This system will be strengthened over the coming year and the FATF will then be in a position to enhance its public website." (paragraph 54 page 17 of the English text)

Let's adapt the text to other contexts:

Variation 1: for a tribunal

Thanks to a generous grant from a litigant to be judged next year, the tribunal has been working to improve its information technology systems, with a view to provide those to be tried with better access to information. This system will be strengthened over the coming year and the tribunal will then be in a position to provide with judgement online.

Variation 2: for an external auditor

Thanks to a generous grant from one of its auditees, the audit firm has been working to improve its information technology systems, with a view to providing auditees with better access to confidential documents. This system will be strengthened over the coming year and the audit firm be in a position to enhance its public website.

Variation 3: for a commission tenders

Thanks to a generous grant from a tender, the commission tenders has been working to improve its information technology systems, with a view to providing tenders with better access to confidential documents. This system will be strengthened over the coming year and the audit firm will be in a position to enhance its communication.

Variation 4: for a City Hall

Thanks to a generous grant from a citizen who may ask for a building permit, the City Hall has been working to improve its information technology systems, with a view to providing citizens with better access to confidential documents. This system will be strengthened over the coming year and the City Hall will be in a position to enhance its communication.

Variation 5: for a bank

Thanks to a generous grant from a rich client to be assessed in the framework of AML procedures, the bank has been working to improve its information technology systems, with a view to providing clients with better access to confidential documents. This system will be strengthened over the coming year and the bank will be in a position to enhance its communication.

Variation 6: for a disciplinary committee of a regulatory body

Thanks to a generous grant from a bank/audit firm, the committee has been working to improve its information technology systems, with a view to providing members with better access to confidential documents. This system will be strengthened over the coming year and the committee will be in a position to enhance its communication.



All the situations are definitely corruption situations: a tribunal, an audit firm, a commission tenders, a City Hall, a bank or a regulatory body have their proper financing (income tax, salary, fees...) and are not supposed to receive a “generous grant” especially when they have a decision making power or a control to do relating to the one who provides the “extra money”.

That is the reason why the FATF should not have accepted a Grant from Luxembourg all the more than there are many public red flags in this jurisdiction including corruption behaviours that are the visible part of the iceberg, and unfortunately, because of this corruption, nobody is willing to tighten up the ship and eliminate negligent people, which is not responsible as the small size emphasizes dysfunctions.

Finance it too serious to be untrusted to negligent people that have become a threat for the financial community worldwide unless they cut all visible "rotten branches" in the small center where everybody knows everyone and where self regulation is a charade.

The frontage of business ethics is definitely cracked because of Luxembourg. Time is up for international organisations to wake up and smell the coffee. I have been warning them since a couple of years.

International organisations play their credibility.

Unless they find it normal, like in Luxembourg, that a tribunal/a judge should receive "extra financing" from a litigant, an auditor receive "extra financing" from an auditee, a commission tenders receive "extra financing" from a tender, a City Hall/Mayor receive "extra financing" from a citizen who may ask for a builing permit...

An article published by the OECD in 2000 is worth being read again.

"When corruption permeates a country’s political and economic institutions, it is no longer a matter of a few dishonest individuals, but rather institutional, systemic corruption. It is a phenomenon which thrives where institutions are weak or non-existent. And it is strongly related to poor governance. Systemic corruption happens most where adequate legislative controls are lacking, where there is no independent judiciary or oversight, and where independent professional media and civil society agencies are absent. Reforms aimed at providing greater transparency and accountability of public institutions and government operations are urgently needed to redress such corruption.
There is much to be done. And let it not be forgotten that wherever corruption occurs and at whatever level, the ultimate victims of corruption are ordinary citizens and society at large. That is why fighting corruption is so important. Finding effective, credible and enforceable measures to stamp out corruption and to hold those guilty accountable is more than a noble objective. Our economic, political and legal institutions may depend on it."

The FATF report 2006-2007 is available in English.

It clearly states that "Funding for the FATF is provided by its members on an annual basis and in accordance with the scale of contribution to the OECD. The cost of the secretariat and other services is met by the FATF budget, using the OECD as the channel for these operations. This scale is based on a formula related to the size of the country’s economy. Non-OECD members’ contributions are calculated using the
same scale of OECD members. The two member organisations also make contributions to the FATF
budget."

Therefore when the previous paragraph states that "Thanks to a generous grant from Luxembourg, the FATF has been working to improve its information technology systems, with a view to providing FATF delegations with better access to confidential documents. This system will be strengthened over the coming year and the FATF will then be in a position to enhance its public website." we are no longer in the normal financing.

Organisations like the FATF with a controlling role should not receive such grants from their members and members should not give any grant. How the FATF would be able to sanction poor compliance in the future ? How the positive report on the member would be reliable in the future ? The grant introduces a doubt which is a shame for the financial community worldwide.

Active and passive corruption are standardised in a way.

What Wealth of Expertise ?

Further to my last article about the FATF Annual Report 2006-2007 that was published last 20 December, I would like to demonstrate to what extend the "generous gift" received by the FATF from Luxembourg is definitely a serious corruption affair and a threat for the financial community worldwide.

The affair is worse that the BAE corruption case as the FATF is publicly satisfied of the "generous gift".

BUT

We are exactly in the situation of a judge receiving with public satisfaction a "generous gift" from a litigant he/she is gonna judge.
We are exactly in the situation of a bank receiving with public satisfaction a "generous gift" from a client it is gonna assess in the framework of AML procedures.
We are exactly in the situation of an auditor receiving with public satisfaction a "generous gift" from a client he/she is gonna audit.

The list of examples is not exhaustive.


By accepting, the judge or the bank or the auditor would definitely compromise their ability to address issues freely, thoroughly and objectively (TI words). Additionaly, in many companies such "generous gifts" to employees are a reason for dismissal.

Like every financial center, Luxembourg does not like comments from abroad on the dysfunctions. Financial centers do not like comments on their internal affairs. I can understand such point of view provided that dysfunctions are actually corrected internally.

But because of corruption and the fear to lose contracts or jobs, dysfunctions are either denied or hushed up and therefore there cannot be corrective actions. This is what I have demonstrated in many articles in this blog and the small size emphasizes the impact of dysfunctions.

What I have been trying to explain since 2004 with a project of research on ethics and CSR and many articles among other things. Unfortunately everyone decided to blame the messenger that wanted to change the risky behaviors for the sake of the center.


What's new is that with its "generous gift" Luxembourg has now exported its way of life of corruption to the international bodies that are supposed to control fraud, money laundering and ... corruption.

We are no longer in internal affairs.

We are now in an international concern for the OECD, the IMF, Transparency International, the IFAC, the PCAOB, the GRECO : it is up to them to do their duty in 2008.

Let's analyse the latest report published in the French version of the website (Annual report 2006-2007).


18ème rapport annuel du GAFI - 2006-2007
20-déc.-2007

Depuis sa création, le GAFI dirige au niveau mondial la lutte contre le blanchiment de capitaux, et, depuis une époque plus récente, le financement du terrorisme. Cette dix-huitième année a été marquée par l'accomplissement d'importants progrès réalisés par le GAFI et ses partenaires.

For the English-speaking readers of this blog this means "Since its creation, the FATF has been managing at the worldwide level the fight ainst money laundering and mopre recently the financing of terrorism. This eighteenth year was marked by the achievement of important progress done by the FATF and his partners".

Paragraph 56 page 20 wants commenting. It states "Grâce à un don généreux du Luxembourg, le GAFI améliore ses systèmes informatiques, afin d’offrir à ses délégations un meilleur accès aux documents confidentiels. Ce système sera renforcé au cours de l’année à venir et le GAFI sera alors en mesure d’améliorer son site Internet ouvert à la consultation du public". For the English-speaking readers of this blog this means "Thanks to a generous gift by Luxembourg the FATF is improving its IT systems to offer to its delegates a better access to confidential doccuments. This system will be reiforced in the coming year and the FATF will be able to improve its website opened to public consultation".

We are not talking about the annual members' contribution as explained paragraph 57.

The report underline a GENEROUS GIFT by a jurisdiction where professionals focus on the growth and do not care of business ethics as demonstrated by the restrictive vision of CSR, which is limited to private sponsorship and may be a kind of money laundering.

The report underline a GENEROUS GIFT by a jurisdiction where, according to Transparency International, 6 % of respondents reported they paid a bribe to obtain a service.

The FATF is visiting Luxembourg next year. Some might see in the GENEROUS GIFT an attempt to be in the FATF's good books at a time when many people realise the strong gap between the legal and regulatory framework and
1) what is enforced
2) and even the FATF Recs.

Let's imagine what would be said should one discovers that an auditee would give a GENEROUS GIFT to its auditor !!! Even though the fact is public in the report, the FATF should not accept such GENEROUS GIFT on the principle, as such behaviour definitely weakens its credibility and furthermore is definitely an incentiment to corruption.

I am sad to see that neither Luxembourg nor the FATF are aware of that.

When looking the FATF website it is amazing to observe that the page for English-speaking visitors is not the same as one for French-speaking visitors.

Lasts events for English-speaking visitors:
- 24-Oct-2007 - FATF third mutual evaluation report of Finland adopted by the FATF plenary in June 2007.
- 15-Oct-2007 - Guidance Regarding the Implementation of Activity-Based Financial Prohibitions of United Nations Security Council Resolution 1737

Lasts event for French-speaking visitors:
- 20-déc.-2007 - 18ème rapport annuel du GAFI - 2006-2007
- 16-oct.2007 - Lignes directrices relatives à la mise en oeuvre des interdictions financières liées aux activités couvertes par la Résolution 1737 du Conseil de Sécurité des Nations Unies


The web site is not controlled so money laundering is not controlled by the perfectible functioning of the FATF.