Ethics and governance in the European Financial centers

I have been studying CSR in the financial center of Luxembourg since 2004. This center has definitely advantages for investors. But it relies too much on its certitudes by denying or condoning problems.
This insularity that prevents any criticism has become a risk . And unfortunately anyone who states issues is repudiated while everyone in the system is fascinated by the growth that is expected forever.

I went through a brochure: Luxembourg Bank Insight 2008, that was published on May 2008.

It is amazing to see how officials deny or condone risks :

Message by Mr Luc Frieden

Banking institutions worldwide have experienced turbulent times recently. The global financial crisis, initially triggered by the subprime mortgage crisis in the United States, has caused significant losses, both socially and
economically. Fortunately, the Luxembourg financial institutions have so far been less hit than some other banks elsewhere.

Brilliant analysis.

Opinion of Mr Jean-Nicolas, Schaus, CSSF

In our supervisory area we did not identify any drastic problems caused by the subprime crisis. Of course, credit for this is not entirely ours, rather there are several reasons behind it. When the problems began in August
last year, we had no difficulties in getting a fast and comprehensive overview of the situation with the Luxembourg Banks

What about Dexia and Fortis a couple of months later?

Analysis of Carlo Thill, Fortis

The merger with ABN Amro was one of great satisfaction and pride for Fortis management and employees, as Fortis managed to achieve this result despite some people saying that Fortis was too small to play in this league.

I think they definitely should have listen to these people. Don't you?



As they should have listened and listen to those who haven been warning them the last years that there are specific risks for the financial center in a competitive environment with a paradigm shift for transparency and ethics.

As I wrote professionals and politicians in Luxembourg operate with a distorted sense of reality. Finkelstein calls institutions that are unable to question their prevailing view of reality zombies. A zombie company, he says, is “a walking corpse that just doesn’t yet know that it’s dead—because this company has created an insulated culture that systematically excludes any information that could contradict its reigning picture of reality”. (See Finkelstein, Sydney, Why Smart Executives Fail: And What You Can Learn from Their Mistakes. Portfolio Hardcover, 2003)

It is true as well for a financial center.

In the context of the financial crisis and of errors in management and governance that are the root causes of the current situation, European bankers explain that despite collateral troubles due to what is going on in the USA everything is fine in Europe because of the PRO-CE-DU-RES.

Let’s have a look on what Daniel Bouton, Chairman of the Board, Société Générale, stated six years ago:


"one of the key issues revolves around off-balance-sheet commitments and the company's risk exposure. Off-balance-sheet items can include a large number of commitments given and received, and are often highly varied, ranging from financial commitments to payroll-related matters to sales relationships. The content of offbalance-sheet items also varies according to the accounting standards used. This situation
has sometimes caused insufficient attention to be paid to the commitments and risks resulting from liabilities not recognized in the balance sheet for various reasons, or even to a view that off-balance-sheet items constitute a kind of "regulation-free zone" beyond the reach of valuation and disclosure rules.
A company's first obligation in this area is and remains the true and fair application of two core accounting principles: prudence and the primacy of substance over form. Once that is established, the two main objectives should be a careful valuation of off-balance-sheet commitments and of the risks they generate, and appropriate disclosures on these subjects.
Each listed company must have in place reliable procedures to identify and value its commitments and risks, and to ensure to its shareholders and investors that it provides them with the relevant information on these matters

Everyone knows what happened at the Société Générale a couple of months ago : see PwC Report and General Inspection Report


Why bankers that state they have relevant procedures would be trusted?
Why accounts certified by auditors that are not independent enough in a blatant way would be trusted?
Why accounts certified by auditors that disregarded risks and the prudence principle in a blatant way would be trusted?

The problem is that because of poor ethics there are neither principles nor rules except the rule of making money.