Ethics and governance in the European Financial centers

According to the OECD, advances are being achieved in bringing greater transparency to financial centres around the world, but progress on exchange of information on tax issues is more limited, according to OECD’s latest report on its drive to bring more fairness to cross-border tax co-operation.
Significant restrictions on access to bank information for tax purposes remain in three OECD countries – Austria, Luxembourg and Switzerland – and in a number of offshore financial centres, including Liechtenstein, Panama and Singapore. Further, a number of offshore financial centres that committed to implement the standards on transparency and the effective exchange of information developed by the OECD’s Global Forum on Taxation have failed to follow through.

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Eric Woerth is willing to organise whith his german colleague Peer Steinbrück a meeting with OECD members in October or November about tax havens.
He stated that a tax haven is like a paradis fiscal acts like a poacher that go without legislation to the groundà of someone who abide by the law."
He added that he is willing to go much farther in the control of tax havens and that the responsibility if up to the international community.

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Some Fortis press releases in 2008 are worth reading


25 January 2008 : Fortis confirms sound capital and solvency position and unchanged dividend policy

3 April 2008 : Fortis Banque Luxembourg achieves a net profit of EUR 676.8 million : Vigorous profitability confirmed. The crisis is not taken into account.

18 August 2008 : Fortis Banque Luxembourg - solid performance in first half-year 2008: Six-month net profit exceeds EUR 380 million


The annual report 2007 underlines three times that the bank does not have any subprime exposure.


Page 13

Exceptional, non-recurrent income was significantly lower than in 2006. Moreover, while we did not ourselves take positions with sub-prime exposure, our bank suffered, like many others, from the impact of the crisis on financial markets and the general business environment. As a result, net earnings were lower for the parent company alone; at consolidated level, they were equal to the previous year's record results

Page 19

In view of the turbulence resulting from the crisis in the US mortgage market and which affected financial markets, it is important to note that the Bank does not have any subprime exposure and has been particularly attentive to the management of credit risks and liquidity, in keeping with the Bank's traditional caution.

Page 28

In view of the turbulence resulting from the crisis in the US mortgage market and which affected financial markets, it is important to note that the Bank does not have any subprime exposure and has been particularly attentive to the management of credit risks and liquidity, in keeping with the Bank's traditional caution.


The report of the Reviseur d’Entreprise dated March 2008 unfortunately does not quote the subprime crisis and the potential risk.

In my opinion the auditor should have taken into account the risk by stating a reserve because of the incertainty due to the subprime environment and the lack of traceability of the financial derivatives markets and a possible indirect exposure because of the business relationships with financial institutions with direct exposure. Luxembourg is not a sanctuary. He relied to much on the preparation and presentation of too optimistic financial statements at a time when the subprime risk was growing worldwide.

Luxembourg, where the leading audit firm consider that clients' confidence if the cornerstone to the job, probably reduces the subprime problem in many audits all the more than clients want to demonstrate their growth (see Fortis motto "rise2" in the last press release dated 18 September 2008 that sounds strange today : Confirmed vigour of financial performance with net profit for the first half reaching a high EUR 388.4 million).

As I said, it is important to focus on long-term business issues as achieving quality in production and developing good relations with stakeholders (clients, staff, suppliers and the community) who are the actual addressees of audit reports, and not just on short-term results that are figures.

As Kenneth Blanchard said, "Managing only for Profit is like playing tennis with your eye on the scoreboard and not on the ball" (K. Blanchard, The power of Ethical Management. Ballantine, 1988, p. 109).



Which bank located in Luxembourg will be next ?

The Guardian has reported that the British government is attempting to torpedo a section of an international plan to eradicate tax evasion with the view of protecting the interests of City law and accountancy firms.

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PwC Luxembourg has recently published a brochure called "Investment Management Luxembourg - the location of choice" that is worth reading in the context of the financial crisis and of the contestation of offshore centers and other tax havens.

Here are some extracts page 8 that are very representative of the local state of mind :


Being a small country in size and having had to rethink its traditional steel-based economy to make it a centre for international banks and funds, the Luxembourg government has always had an open and friendly ear for the financial community. The authorities, and particularly the financial regulator, are accessible and flexible; officials are welcoming, easy to contact and open to dialogue.
(...)
Luxembourg’s success has been and continues to be predicated on a combination of the depth and breath of the supporting infrastructure – service providers and professionals, systems and technology geared toward supporting the diverse and complex vehicles we see in the funds world today – in addition to a stable and business friendly regulatory and tax environment which effectively supports international fund providers


What does mean a business friendly regulatory environment ? Is it the role of a regulator (or of the justice) to be the "friend" of financial institutions ?
Definitely no.

What does mean a particularly flexible financial regulator? Does that mean a regulator that consider business over rules?
I am afraid yes because the regulator is involved in the promotion of the center.

What does mean officials are welcoming, easy to contact and open to dialogue? Does that mean that they some may be corrupted?
I am afraid yes because many officials are involved in networks with business people that may lead to conflicts of interest or corruption.

What does mean a "government that has always had an open and friendly ear for the financial community" Does that mean that if the financial community is not willing to abide by international recs (OECD, GRECO, FATF...) the governement is ready to give up before the financial community?
Definitely yes. There are many examples in public and official sources.


What is extraordinary with this jurisdiction is that the financial community governs in a way the country and this is admitted.

The Financial Times has reported that Ireland, easily the best performing eurozone economy since the birth of the single currency, this week became the first in the 15-country region to fall into recession.
As I already said, a financial center cannot base a sustainable growth on tax advantages to attract companies.
Which financial center will be next to face reality? I am afraid Luxembourg as the development model has not been changed and is still promoted.

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I have read the findings of the last CPI that was published this week by Transparency International.

As far as Luxembourg is concerned (There are other jurisdictions where the index is not realistic as well like Singapore and Switzerland), I do not think that the CPI is realistic: the result does not comply with TI Barometer for Luxembourg, were 6% of respondents admitted they pay a bride to obtain a service (5% Western Europe average).

Furthermore for anyone who observes carefully Luxembourg, there are recent corruption cases, but because of the culture of lack of transparency, because of the will to hush up issues, and because of the role of “lapdog” instead of watchdog of the press that is not independent enough, issues were not taken into account by business people.

Hence a positive perception expressed by expert and business surveys while Luxembourg is not implementing GRECO and OECD (Working Group on Bribery) Recs and the number of cases coming before the courts appears to be very small because of: “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 GRECO PHASE III Report "Criminalisation of corruption" [theme I]).

At the time of the “generous grant” to the FATF, that should have never taken places for reasons that I have already developed:
- The GRECO report (Phase II) dated May 12, 2006 stated that Luxembourg has implemented satisfactorily or satisfactorily dealt with less than one quarter of the recommendations: “GRECO notes a fairly significant shortfall in the implementation of the recommendations contained in the second-round evaluation report. It nonetheless expects the Luxembourg authorities to do everything necessary to bring to completion the numerous legislative initiatives referred to in this respect. It urges the authorities of Luxembourg to speed up the reform process so as to show tangible results in the effective implementation of the recommendations as soon as possible”.
- The OECD report dated August 2 2006 concludes with almost the same wording: “Noting a substantial shortfall in Luxembourg’s satisfactory handling of the recommendations given in the Phase 2 report, the Working Group urged the Luxembourg authorities to speed up the process of reforms in order to deliver tangible results with respect to the implementation of these recommendations as soon as possible“.

The convergence of the wording is remarquable : “fairly significant shortfall”, “urges the authorities of Luxembourg”, "speed up the reform process", “show tangible results”, "as soon as possible” for GRECO and “substantial shortfall”, “urged the Luxembourg authorities”, "speed up the process of reforms", “deliver tangible results, “as soon as possible” for OECD.

On 27 March 2008, the OECD published a severe report a couple of months ago following a special decision taken by the Group in June 2006 and stating that that Luxembourg should:
- introduce promptly liability of legal persons for foreign bribery. Currently, prosecution and thus conviction of companies that engage in bribery remains impossible because legal persons cannot be held liable for criminal offences,
- reinforce its mechanisms for combating bribery by making it easier for its judicial authorities to obtain information held by banking institutions in the Grand Duchy,
- introduce effective, dissuasive and proportionate sanctions for companies and guarantee the jurisdiction of the Luxembourg courts over acts of bribery committed abroad by Luxembourg companies,
- step up its efforts to make SMEs aware of the crime of bribing foreign public officials, and introduce a whistleblower protection system.

At its 38th Plenary Meeting (Strasbourg, 9 – 13 June 2008), GRECO adopted the Addendum to the Second Round Compliance Reports Luxembourg. For the first time Luxembourg did not authorised the publication of its report. Addendum to GRECO Report Phase II relating to Luxembourg still remains confidential.

TI reports are used by the FATF that states that “Perceptions surveys reach to subsets of the population to explore facets of crime, impacts of crime, or specific crime types. Of greater relevance to money laundering threat, however, is the work of Transparency International (TI) on corruption. TI employs an indirect approach to measuring corruption, by drawing on primary sources that survey business people. TI forms a corruption perception index based on the input of these sources The benefit of using perception surveys is that corruption is a crime very likely to be under-represented in crime data; the perceptions of experts can overcome this undercounting. The downside, of course, is that the results are based on opinion alone. Perception surveys are also used to gauge foreign and domestic investors’ and CEOs’ perceptions of crime in certain jurisdictions.” (Cf. MONEY LAUNDERING & TERRORIST FINANCING RISK ASSESSMENT STRATEGIES, 18 June 2008, page 23)

Is there a cultural change in Luxembourg? Definitely not, as demonstrates a recent parliamentary question, dated 22 September 2008, from the former chairman of the Luxembourg Bankers’ Association whose statements are the “voice of business” in Luxembourg about the first report on implementation of savings taxation Directive: is the government willing to abide by the recommendations? The implicit state of mind behind the question is that professionals in Luxembourg do not care of the European Commission Recs. Otherwise the responsible question should have been “What is to be done to implement the recommendations and correct what definitely harms the reputation of the financial center in the international context against offshore jurisdictions?" In February the same Lucien Thiel had said in an interview that that “it is not our duty to control if the taxpayer was honest” a couple of days after the beginning of the Liechtenstein story (L’essentiel, 27/02/2008).

With such statements, once more Luxembourg officials demonstrate that the jurisdiction bets that there are no risks as there will be no sanctions because of the financial stakes, because of the use of Luxembourg by officials from other countries in corruption cases (Cf. recent DCNI-Eurolux case to bypass the OECD convention) and positive assessments provided by TI that reinforce the positive perception by the FATF.

Money over ethics: international institutions responsible for the fight against corruption and money laundering are definitely in question as they have the back to the wall.

European Commission issues first report on implementation of savings taxation Directive.

Lucien Thiel, MP and former chairman of the Luxembourg Bankers’ Association asked a parliamentary question relating to the findings of the European Commission that lead to several recommendations to improve the system.

And Lucien Thiel to ask : “Est-ce que le Gouvemement a l'intention de suivre ces recommandations? » which means « is the government willing to abide by the recommendations ?”
The implicit state of mind behind the question is that professionals in Luxembourg do not care of the European Commission Recs.

The good question should have been “What is to be done to implement the recommendations and correct what definitely harms the reputation of the financial center in the international context against offshore jurisdictions?"

With this parliamentary question, once more a Luxembourg official demonstrates that the jurisdiction has not realised the paradigm shift or bet that there are no risks as there will be no sanctions because of the financial stakes.



Parliamentary question

European Commission issues first report on implementation of savings taxation Directive.
There is an interesting difference between the french version and the english version on a critical issue. The word “fraude” in French, which means ‘fraud” in english is translated by “evasion” in the English text.
Jurisdictions that have banking secrey rules and tax advantages underline the difference between tax evasion and tax fraud to justify their legal framework.




A selective application of the "look through" approach could, however, be considered for payments to specific categories of legal entities and arrangements established in targeted jurisdictions outside the EU, likely to be used for tax evasion by EU resident beneficial owners. A list of those jurisdictions and their relevant entities and arrangements would then have to be annexed to the Directive.

Une application sélective de l’approche «par transparence» pourrait toutefois être envisagée pour les paiements en faveur de certaines catégories spécifiques de personnes morales et constructions juridiques établies dans des juridictions ciblées, situées en dehors de l’Union européenne, susceptibles d’être utilisées à des fins de fraude fiscale par les bénéficiaires effectifs résidant dans l’Union. Dans ce cas, il conviendrait d’annexer à la directive une liste de ces juridictions et des personnes morales et constructions concernées



Recent cases of tax evasion, involving non-EU countries already cooperating with the EU on taxation of savings, have shown that, where the “paying agent upon receipt” concept is not consistently implemented, room is left for abuse and distortions

Des cas récents de fraude fiscale, impliquant des pays tiers coopérant déjà avec l’Union européenne dans le domaine de la fiscalité de l’épargne, ont montré qu’une application incohérente de la notion d’«agent payeur à la réception» ouvre la porte à des abus et à des distorsions de concurrence.


English text
French text

Anti-money laundering and combating the financing of terrorism (AML/CFT) was highlighted by the Council of Europe Moneyval Committee’s adoption of the third round mutual evaluation report on the Principality of Monaco, which was prepared following IMF and FATF methodology.

The report follows the on-site visit of financial and legal experts in the Principality in 2006. It states among others that "the Principality has a satisfactory legal framework to combat money laundering and terrorist financing.” […] Overall, the Monegasque FIU is effective and the driving force behind the AML/CFT national efforts. Monaco has designated competent authorities to investigate and prosecute money laundering and terrorist financing offences […]. Measures for domestic and international co-operation are generally comprehensive as well. "

It is said page 12 that 381 declarations of suspicion were reported in 2007, of which 213 from banks (56%).
It seems that there are no declarations from registerd auditors but chartered accountants reported 7 declarations.
In 2007, the number of Suspicious Transaction Reports received by SICCFIN slightly dropped by 3.5% (395 declarations in 2006).

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