Ethics and governance in the European Financial centers

The Council of Europe’s Group of States against Corruption (GRECO) has published recentyly its Third Round Evaluation Report on Luxembourg. The report, which was adopted on 13 June 2008, has been made public following the agreement of the authorities. It focuses on two distinct themes: criminalisation of corruption and transparency of party funding.

In practice, the number of convictions for corruption remains very low.

The first report is the most interesting. A footnote is very relevant to explain the reason why the number of cases coming before the courts appears to be very small: Limited police access in law and/or practice to administrative and financial information at the preliminary inquiries stage, tax data base scattered over several local authorities, lack of staff in the investigating authorities, who concentrate on important and priority cases, no "whistle blowing" arrangements and in some cases reporting hindered by professional confidentiality, excessively strict rules on the burden of proof in criminal law, room for improvement in relations between the prosecution service and investigating judges, and so on (...) A prosecutor has stated that even though banking confidentiality has been relaxed in recent years, the non-banking financial sector and financial institutions such as trust funds were still very reluctant to impart information. Certain lawyers stressed the importance of relationships and networks of persons in Luxembourg society, the difficulties faced by the police in dealing with complex economic and financial crime, particularly because of lack of legal and other resources, and the ease with which companies can be established in Luxembourg. (Cf. page 18 of the report "Criminalisation of corruption" [theme I]).

This is exactly what I keep saying :
- " the importance of relationships and networks of persons in Luxembourg society" is what I called the Luxembourg system and can be demonstrated in official and public sources that are the visible part of the iceberg,
- "the ease with which companies can be established in Luxembourg" is an example what I called the fraud catalyst with for example companies with the statutory auditor located in the BVI and therefore that is controlled neither by the Luxembourg registered accountants nor the Luxembourg registered auditors : notaries should not accept that especially when the shareholder and/or the managing director does not comply with the requirement of professional standing,
- "lack of staff in the investigating authorities" and " lack of legal and other resources" : this is one of the reasons why I said that the "generous grant" to the FATF is a problem because the jurisdiction lacks means to fight economic and financial crime all the more than such grants are not a normal funding of the FATF. Additionaly, the problem is that in its report the FATF actually provided Luxembourg with recognition while the financial center does not care of GRECO and OECD working group on bribery Recs : the sentence "Thanks to a generous grant from Luxembourg, the FATF has been working to improve its information technology systems" actually demonstrates the recognition with positive words like "thanks" and "generous". The wording should have been at least more neutral like "A grant from Luxembourg allowed the FATF to improve its information technology systems". FATF statement that promotes and congratulates Luxembourg definitely weakens the credibility of the international fight againt corruption.

By the way, the ADDENDA to Compliance Report relating to the 2nd evaluation round still remains confidential.

Read press release
Read Third Round Evaluation Report Theme I
Read Third Round Evaluation Report Theme II

The BBC published very interesting country profiles.

It explains that Luxembourg's prosperity was formerly based on steel manufacturing. With the decline of that industry, Luxembourg diversified and is now best known for its status as a tax haven and banking centre. But Luxembourg's strict laws on banking secrecy mean the system can be exploited for the purposes of tax evasion and fraud.

The qualification of "tax haven" is used neither for Switzerland nor for the UK. But it is for Liechtenstein .

About Liechtenstein : "Much of its wealth is based on its status as a low tax haven. Around 75,000 companies have their nominal "letter box" offices in Liechtenstein, where business tax rates are very favourable".

About Switzerland : "A landlocked, majestically-scenic country, Switzerland's long-standing neutral status has given it political stability that has helped it become one of the world's wealthiest countries where banking is a key industry."

Royaume-Uni : "The economy - one of the largest in the world - is no longer manufacturing but services-based, with e-commerce of growing significance. The City of London is a global financial centre."


Is the BBC right ?

Probably yes to a certain extend as the UK and Switzerland demonstrate more transparency on their dysfunctions than Luxembourg or Liechtenstein do. Especially the media actually play the role of watchdog and an organisation like Transparency International observes the jurisdiction in the UK and Switzerland.

In the framework of a speech before French ambassadors, Président Sarkosy underlined the responsability of tax havens in the financial crisis.
"La crise financière a débuté avec le scandale des « subprimes », les fautes graves –mais toujours impunies- des agences de notation et, d’une façon générale, les excès d’un capitalisme financier qui a connu de sérieuses dérives : dissimulation des risques, sophistication incontrôlée des instruments financiers, lacunes de la régulation et persistance de paradis fiscaux captant une partie de l’épargne mondiale qui serait plus justement employée à financer les investissements et la croissance. Le coût de ces errements pour le système bancaire international sera à terme, selon le FMI, de l’ordre de 1.000 milliards de dollars. Mais le coût pour l’économie réelle sera bien plus élevé encore." he said.
For English-speaking readers, this means : "the financial crisis began with the "subprime" scandal, serious -but still unpunished- mistakes by rating agencies and, in a general way, the excesses of financial capitalism which has experienced serious abuses: concealment of risks, uncontrolled sophistication of financial instruments, gaps in regulation and persistence of tax havens capturing a part of global savings that would be more justly employed financing investment and growth. The cost of such misguided ways for the international banking system will be later, according to the IMF, even much higher".

As co prince of the Principality of Andorra, President Sarkozy should act to correct dysfunctions as Andorra does not respect international recs to fight money laundering and the financing of terrorism.

Bloomberg has reported that Switzerland asked the U.S. not to pressure UBS AG for client data located in the Alpine country as investigators look into whether the world's largest wealth manager helped American clients evade taxes.

According to Swiss law, bank secrecy can only be lifted in connection with a criminal offense, such as tax fraud or money laundering. Tax evasion isn't a crime in Switzerland. Should the finance ministry agree for the account details to be given out, account holders would be informed before their details are handed over, giving them the option to go to court.

Joseph Stiglitz, a former chief economist for the World Bank, in an interview published in Germany calls for coordinated worldwide action against tax havens because single actions against jurisdictions such as Liechtenstein or Monaco may simply make money transfer to other contested jursidiction.

Quotation

Es bringt nichts, wenn man Liechtenstein oder Monaco dichtmacht und das ganze Geld dann in eine andere Steueroase fließt. Deshalb muss man weltweit vorgehen, ohne Ausnahme

There is no result, if you close down Monaco or Liechtenstein and then all the money flows into another tax haven. That is why we must proceed around the world, without exception.


Read interview (german)

Interpol, the world’s largest international police organization, that was created in 1923 to facilitate cross-border police co-operation, and support and assist all organizations, authorities and services whose mission is to prevent or fight international crime, is involved in the fight against corruption that is one of INTERPOL’s six priority crime areas.

The Mission statement of the INTERPOL Anti-Corruption Academy is "Working together towards a corruption-free world by promoting and defending integrity, justice and the rule of law".


The INTERPOL Group of Experts on Corruption (IGEC) defines corruption as "any course of action or failure to act by individuals or organizations, public or private, in violation of law or trust for profit or gain."

IGEC’s mission statement is "We believe in a free and just society. To be truly just, society must embrace high standards of integrity and openly resist corruption. To this end, we join with the community to ensure such standards and accept responsibility to fight all forms of corruption through education, prevention and effective law enforcement."


The IGEC approach is probably more extensive than the one of Transparency International that defines corruption as "the misuse of entrusted power for private gain."

Tax Justice Network has designed a very interesting dictionary of Offshore Obfuscation. It's currently a very short dictionary, but they will be adding to it over time.


"We are not a tax haven" actually means "We are a tax haven, but don’t tell anyone"
"We offer agile and flexible / 'light touch' regulation" actually means "We offer lax / complacent regulation"
"We respect privacy" actually means "We will turn a blind eye to your dirty money"
"Tax-friendly" actually means "Friendly for us, but probably not for you"
"This should be regulated elsewhere" actually means "This will be regulated nowhere"
"We maximise our tax efficiency" actually means "We avoid tax"
"No tax was due, so no tax was avoided" actually means "We dodged the tax, so it was not due"
"We manicured our tax affairs" actually means "We evaded our taxes"
"We use innovative tax planning" actually means "You paid your taxes? Sucker!"

The Telegraph has reported that the former Liechtenstein bank employee who sparked an international tax evasion probe after allegedly handing over stolen information on ex-clients is now wanted by Interpol himself.

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Ten years ago the OECD published its report on Harmful Tax Competition: An Emerging Global Issue. This was followed by a series of concrete measures designed to limit some forms of harmful tax competition, such as preferential regimes in OECD countries and offshore tax havens. The OECD initiative has met considerable resistance and in some ways has fallen short of its goals.

Reuven S. Avi-Yonah, from the University of Michigan - Law School, argues in a paper that it has been a worthwhile effort and has achieved some measure of success and outlines some future directions for the project.

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The financial Times has reported that the anti-bribery working group of the Organisation for Economic Co-operation and Development attacked London’s performance in a letter delivered to the government in June.

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