Ethics and governance in the European Financial centers

Prem Sikka today wrote an article that demonstrates that without better reform of the UK's political institutions for taming corporate power, a durable regulatory system cannot be developed.

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HM Revenue & Customs has dramatically escalated attempts to compel banks to release the names of thousands of customers with offshore accounts as part of its fight against tax evasion despite fears that it may be overstepping its legal powers.

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Two key US senators recently said the Internal Revenue Service (IRS) needs to do a better job enforcing the collection of US taxes overseas, and one senator warned that legislation could be advanced in order to ensure collection rates improve.

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Tax Justice Network -USA calls on the presidential candidates to declare what they would do to combat tax evasion.

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Today I would like to lay emphasis on the consequences of the “generous grant’ received by the FATF from the financial center of Luxembourg for international organisations (OECD, IMF…) in their programs in fighting against fraud, corruption and money laundering in developing countries despite such grant is compatible neither with the official funding of the FATF nor its assignments.
(FATF, Annual Report 2006-2007, paragraphs 54 and 55 page 17)

First of all, let’s recall what Luc Frieden (Minister of Justice in Luxembourg) stated at the IMF Boards of Governors in 2002 : "Personally, I have no doubt that my country can lead by example in promoting good governance, in fighting against the financing of terrorism and against money laundering, and in actively promoting development policies."

What example?
For a Court to receive a generous grant from a litigant it is gonna judge?
For a commission tender to receive a generous grant from a tender it is gonna assess?
For an auditor to receive a generous grant from an auditee it is gonna audit?
And so on.

By sheltering in a complicit silence and inaction despite many public and official red flags (that are the visible part of the iceberg) of poor governance in Luxembourg, international organisations are responsible for the drifts that took place, the “generous grant” being a milestone.

I was speaker at a conference relating to « Financial Institutions, markets and ethics : Mixed approaches in the European context » (Firenze, May 2007) : my topic was "Ethics in Luxembourg : between myth and reality". The speaker who introduced the conference (Yves Meny) explained that when you have principles you don't need rules. But we are in a situation where there is neither principles nor rules but the rule of money.

Developing countries now only have a couple of word to say to international advisors and/or assessors: up yours; ensure first that developed countries clean up their act.

Mr. Austin Mitchell: To ask the Chancellor of the Exchequer if he will commission research on the levels of use of offshore tax havens by UK banks and the economic effects of that use. [175531]

Jane Kennedy: There are no plans to commission research on the levels of use of offshore tax havens by UK banks and the economic effects of that use.

Source

The Finance Ministry in Moscow has placed Cyprus on a black list of jurisdictions deterring Russian companies from registering here and then repatriating their dividends tax-free back home.

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In this blog I analysed many “red flags” visible in public sources in Luxembourg.
Unfortunately in this financial center every issue is hushed up with the complicity of a captive press that is not independent enough to do its duty of watchdog.

With the dubious grant to the FATF whereas services critical for AML-CFT like Justice (see the report Petita Pro Nova Justitia ) or Police or Tax are unfortunately not given the relevant means for a country that boasts such a large financial sector, we can understand better the reason why things have not changed as they should have done for the sake of the center and why there is a kind of headlong flight, the grant to the FATF being the last visible stupidity as it definitely calls into question every future favourable report on Luxembourg.

Bad example, bad behaviours, negligence are actually given at a political level and professionals (bankers, auditors, regulatory body) only fit with this political tone.

This is exactly what wrote the FATF at the time when it was provided the extra money by Luxembourg: "corruption, and poor governance arising from corrupt institutions (such as the judiciary, the police, or regulatory authorities) and/or individuals, can substantially blunt the effectiveness of an AML/CFT system" (Cf. annual report 2005-2005, paragraphs 32 and 33)

The FATF underlined in the report the “critical need to develop appropriate strategies to deal with the issue”.

Developing appropriate strategies to deal with the issue is definitely making pressure to change the burnt leaders to ensure that people will change their behaviour for the international effort to combat money laundering and terrorist financing be credible, which is no longer the case.

AML regulation is based on soft law and not on hard law, so is the banking regulation. In other words professionals take care of the regulation by stating rules. But the rules that are defined by the negotiating parties (banks in a jurisdiction, jurisdictions at an international level) are not legally binding.
The success of soft law depends actually on the parties’ good faith.

But soft law should evolve into hard law for a party especially when this party weakens the credibility of the commitments by multiplying knowingly negligence, which is a serious threat for every negotiating party.

A couple of weeks ago I noted a dubious grant to the FATF from a state member to be audited all the more than there are many visible dysfunctions in the jurisdiction. The grant is mentioned in the 2006-2007 Annual Report (paragraph 54 page 17). Such grants are not a financing of the FATF : as explained paragraph 55 "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". According to the FATF public sources it is the first time that a grant took place and I hope the last time. And grants are definitely not part of the funding.


Paragraphs 32 and 33 of the FATF previous Annual Report (2005-2006) are worth reading again:

The effective implementation of international AML/CFT standards requires not just appropriate legislative, regulatory and organisational structures but a robust system of governance to ensure the integrity of the systems in place. Corruption poses an important threat to good governance and is therefore a major threat to the effective implementation of AML/CFT regimes.

The link between AML/CFT and corruption is twofold. Firstly, the proceeds of corruption, which may be considerable, are susceptible to being laundered. Secondly, corruption, and poor governance arising from corrupt institutions (such as the judiciary, the police, or regulatory authorities) and/or individuals, can substantially blunt the effectiveness of an AML/CFT system.
While some consideration has already been given to the link between AML/CFT and corruption, there is a critical need to (i) develop a greater understanding of how corruption damages the effectiveness of AML/CFT systems, and (ii) develop appropriate strategies to deal with the issue.

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