Ethics and governance in the European Financial centers

The ALFI published last 29 January on its website the document giving ALFI’s views on the Madoff affair and its implications for the Luxembourg fund industry that was presented at the EFAMA Management Committee meeting held on Tuesday, 20 January.

The text is pure Luxembourg wooden language and unfortunately corroborate that leaders in the financial center of Luxembourg are far away from what is to be done prisoners of there insulated business culture.

Let's comment a few paragraphs :


Luxembourg regulation on the responsibility the depositary of an investment fund complies with the UCITS Directive and is equivalent to regulation in France

It is not true. Let’s compare the European directive with the Law of transposition dated 20 December 2002.
There is one critical provision that seems to be missing in the Luxembourg text.
Article 10 of the UCIT directive states that “ 1. No single company shall act as both management company and depositary”. Such provision is not in the Luxembourg text.
Paragraph one of Article 10 the UCIT directive was purely removed to only transpose literally paragraph 2 that states that “2. In the context of their respective roles the management company and the depositary must act independently and solely in the interest of the unit-holders.”.
What is not prohibited by the law is possible. When one knows that Luxembourg is a small jurisdiction where there are many conflicts of interests, requiring acting independently and solely with no requirement of being distinct legal entities is a beginning of problem. It is exactly like the law firm in Luxembourg that is both UBS and HSBC’s lawyers and provides the Chairman of the ALFI.

I will quote again Circular IMS 91/75 (as amended by Circular CSSF 05/177) dated 21 January 1991 that states that “The concept of custody used to describe the general mission of the depositary should be understood not in the sense of “safekeeping”, but in the sense of “supervision” (…) The depositary has discharged its duty of supervision when it is satisfied from the outset and during the whole of the duration of the contract that the third parties with which the assets of the UCI are on deposit are reputable and competent and have sufficient financial resources. “

Additionally the ALFI states that Luxembourg regulation on the responsibility the equivalent to regulation in France. I am afraid this is not true. As far as the provision Luxembourg removed is concerned France has transposed it with a rephrasing. Art. L. 214-16. of the French UCIT Code states that « Les actifs de la SICAV sont conservés par un dépositaire unique distinct de cette société et choisi sur une liste de personnes morales arrêtée par le ministre chargé de l'économie » (free translation : "The assets of the UCIT are preserved by depositary distinct from this [management] company and chosen on a list of legal persons stopped by the minister in charge for the economy")


The Luxembourg government and the country’s applicable regulatory and supervisory bodies acted as soon as the scandal broke to analyse and manage the consequences of the Madoff affair

The French regulator issued its first press release on 17 December 2008.
The Luxembourg regulator issued its first press release on 22 December 2008, 5 days later.
Additionally the French regulator issued on 18 December 2008 pedagogic material to explain the situation.


The first court ruling in Europe concerning the Madoff affair was given by a court in Luxembourg and was in the interests of investor protection

It is true. But the ALFI admits itself infra page 3 that “the legal basis in this specific case does not apply to all investors (ODDO had asked to redeem its shares before the fraud was uncovered).”


Luxembourg is in favour of a constructive process of reflection on investor safety in Europe and would like to see a debate based on an objective analysis of the situation

It is exactly like for other topics: for banking secrecy, for AML… Luxembourg always supports any a constructive process of reflection in Europe, which is mean to save time.
The objective situation is clear enough and may be summarized by a Fault Tree Analysis.

Large picture

I am afraid those that are responsible for investigating the issue (the European Commission and the Luxembourg regulator) are part of the problem and not of the solution.


The letter [of Ms Lagarde] has also met with a very muted reception both from sector professionals and investors affected by the Madoff affair because it casts doubt on the effectiveness and even the existence of investor protection measures currently in place under European law. There is a real danger that this declaration of uncertainty could continue to shake the confidence of investors in Europe (and the world) in the UCITS brand.
At the same time, we wish to congratulate the Commission for opening an inquiry on the transposition of the UCITS Directive in various countries of the EU because it will answer the French criticisms of Luxembourg in this case.
The letter will certainly re-open the debate on European harmonisation of rules concerning fund depositaries. This is nothing new and has already been covered by a European Commission report in 2004. ALFI welcomes with interest this re-examination of current regulation and believes the first question to be asked should be what the status of the depositary is. Depositories in Luxembourg must be banks.


The first paragraph is the typical Luxembourg attitude when there are issues or dysfunctions. There is the will to hush up issues in the name of making money instead of tighten up the ship.
Such attitude is no longer acceptable all the more than despite a reassuring speech the transposition of the UCIT Directive in Luxembourg is lax and the European commission did not do its job.
This is by the way what stated the ALFI at the end by underlining that “This is nothing new and has already been covered by a European Commission report in 2004. ALFI welcomes with interest this re-examination of current regulation”.
The first question to be asked is not the status of the depositary (One might think that Luxembourg is willing to eliminate the foreigner nonbanking competitors as circular IMF 91/75 states that “The admission to the activity of depositary of a UCITS subject to Part I of the Law of 30th March, 1988 is exclusively limited to banks incorporated under Luxembourg Law or Luxembourg branches of banks established in an EU Member State. This also applies to the depositary of a UCI subject to Part II of the Law of 30th March, 1988 save that such depositary may also be a Luxembourg branch of a bank established in a non Member State of the EU”). The French code requires that the depositary have his head office in France (Art. L. 214-16 of the UCIT Code).

The first question to be asked is definitely the risk of conflict of interests that are visible in Luxembourg and at the EU level in the decision-making process.




To conclude I will quote Fernand Grulms, who is head of Luxembourg For Finance.

He explains that Luxembourg wants “To be better known and recognized like a credible and reliable partner”. It is not by going on denying the poor governance in the jurisdiction that it will reach its objective.

Almost 5 years ago the European Commission issued the following content in a Press Release (IP/04/430, dated 31/03/2004 ).

The Internet consultation flagged up significant gaps on, for example, minimum capital requirements, legal duties or the scope of liability for depositaries. A true Internal Market for depositary services will require convergence of these rules. In order to appoint depositaries based in other Member States, domestic fund managers and supervisors will want clarity on the resources of depositaries and on their obligations, whilst investors will need improved standards of information.

The Commission is therefore proposing close cooperation with EU regulators, covering four fields over the next two years.

1. Better prevention of conflicts of interests

Conflicts of interest arise when investors' interests are not at the heart of the depositary's or the fund manager's behaviour. The Commission survey revealed evidence of diverging approaches and it has therefore suggested action to boost convergence of national rules in this field. This includes the list of the functions that fund managers can outsource to depositaries and, conversely, the list of depositary activities which may be outsourced.

2. Clarifying the extent of the depositary's liability

Discrepancies in the level and scope of depositaries' liability constitute huge obstacles to ensuring a high level of investor protection throughout the EU and developing cross-border opportunities for depositaries. The Commission has identified as a key objective ensuring a common interpretation of the principal duty of depositaries which is to keep assets safe - and of the specific control duties assigned to them.

3. Convergence of prudential requirements

The prudential rules which must be applied to set up and operate a depositary differ considerably between Member States, since there are no common EU definitions of eligible institutions. The Commission proposes to foster convergence of these rules, and in particular of capital requirements, by identifying a specific group of relevant supervised institutions.

4. Enhancing transparency and investor information

In order to help create pressure to remove discrepancies in regulations, the Commission has identified the following areas for enhanced public information standards: the organisation of depositaries' tasks; measures taken against conflicts of interest; depositaries' liability; and the costs of their services.


The Madoff affair demonstrates that Luxembourg did not care of these Recs.
The Luxembourg financial center does not comply at all.

The Madoff affair demonstrates that the European Commission did not do its job.

I have quoted circular IML 91/75 (as amended by Circular CSSF 05/177) to demonstrate that the depositary's liability is not as clear as what Luxembourg authorities are saying to reassure the investors.

This circular was modified by a recent circular that is definitely worrying for the investors.

CSSF circular 05/177 dated 6 April 2005 is relating to the abolition of any prior control by the CSSF of advertising material used by persons and companies supervised by the CSSF. (See original text in French)

It is a very short circular the wording of which is worth commenting.


Use of the verb Refrain

“the persons and companies subject to the supervision of the CSSF must continue to comply with the rules of conduct of the financial sector both in Luxembourg and abroad, in refraining from issuing misleading advertising material with regard to the services offered”

This means that It is up to the professional to decide not to circulate misleading Ads. The wording is not direct like “Misleading Ads are prohibited”. It is pragmatic.

Investor's liability

“by mentioning, where necessary, the particular risks inherent to these services and in bringing to the client's attention his own responsibility”

Furthermore a liability may be put on the investor as the professional is invited to mention the particular risks inherent to the services if necessary and bring to the client's attention his/her own responsibility.
When reading Luxalpha documentation it is written is the subscription form a clause, to be signed by investors or their agents, that states that assets would be “safekept” by a US broker – although it did not name Mr Madoff, and investors would bear most of the risk of that broker’s default. A suscription form is not an advertising material but why Luxalpha subscription form was circulated with such clause?


No sanction

“The control of the compliance with the rules of conduct of the financial sector regarding advertisement remains within the competence of the CSSF, which has the authority to require the withdrawal of any misleading advertisement with regard to the services offered as well as of any inappropriate communications of information on the Luxembourg legal framework”

The circular does not state a sanction, but only the withdrawal, which is not a sanction.





Above all, the circular states at the beginning that “advertising material used by persons in charge of the distribution of units of undertakings for collective investment and their representatives no longer needs to be submitted to the CSSF for their control, even if this material is not subject to control by the competent authorities in countries where it is used."

The European passport from Luxembourg is a threat as no control is done at all on the communication from Luxembourg investment funds.

In the context of the Madoff case, this means that the investor cannot trust anymore the communication from Luxembourg investment funds.

QED.

There is a motto in Luxembourg, Mir wellen bleiwen wat mir sin, which means "We want to remain what we are"

Yesterday the CSSF, Minister Luc Frieden, the Director of LuxembourgForFinance, and the chairman of the ALFI communicated on the Madoff case in Luxembourg. What they say, which wants analysing between lines, confirms that there is no evolution. And that there will not be any.


The CSSF limits the assessment to a list where it seems that there may be missing funds (for instance what about the possible Luxembourg side of Thema?). It specifies that the amount of EUR 1.7 billion, which is even lower than the amount of EUR 1.9 billion that was stated in December, is given according to the information at its disposal. This means that it may ignore other funds. The CSSF does not contradict the figure of EUR 5-7 that was circulated.

In the first interview Luc Frieden confirms the amount of EUR 1.9 billion, which is a discrepancy with what the CSSF stated the same day, what sounds strange. He denies that Madoff case is a Luxembourg issue, as in his opinion it is an American issue. He denies that Luxembourg is a tax haven saying that France and other jurisdiction are jealous of Luxembourg success. The regulatory framework in Luxembourg is said to be "open and clear". The word "pragmatic" is no longer quoted but the word clear has a similar meaning. The order of words is switched as if Minister Frieden wanted to insist that there is no flexibility in the enforcement.

In the second interview, Luc Frieden explains that Luxembourg adopts an attitude which he describes as favourable to economic development, with decisions fast and close the needs of the economic actors but to in no case contrary with the European rules. It is true that every rule in favour of the business is transposed without delay, which is not the case for rules of regulation (see for instance debates on the directives relating to AML). He admits that decisions are close to the needs of the economic actors: but are the “needs of the economic actors” the needs of the stakeholders: investors, international community (OECD, GRECO)…

In an interview, Fernand Grulms, who is director of LuxembourgForFinance, explains that they must be better known and recognized like a credible and reliable partner.

In an interview, Claude Kremer, who is Managing Director of the ALFI, raises the question of conflicts of interest. He explains that he works in no case connected to Madoff and that "technically" their is no conflict of interest. One of his fellow colleagues in the Law Firm is the Lawyer of UBS and HSBC. Claude Kremer underlines that within his company, he informed the associates that he wishes to remain out of any case having a relationship with Madoff. But there is a huge problem in the small jurisdiction where “everybody knows everyone and where there is a kind of self regulation” as the same Law Firm as legal person is the cornerstone of the regulation.
1. The Law firm provides advises and opinions on law and regulation and has probably a responsibility in the pragmatic wording that harms today the Luxembourg funds by placing the investor in the doubt. As I explained, the famous circular relating to UCITS does not comply with the Luxembourg authorities’ statements. When Luc Frieden said that the professional in Luxembourg had an obligation of conservation, monitoring, control and restitution of the assets of the funds, I am afraid this clear obligation is not what the pragmatic circular says.
2. The Law firm is member of CSSF Committees.
3. The Law firm provides the Chairperson of the ALFI.
4. The Law firm provides representatives at the ABBL
5. The Law firm was chosen by UBS
6. The Law firm was chosen by HSBC
Etc.




All the above leaders never wonder why regularly there are issues and scandals involving Luxembourg, which is definitely the relevant question.
Not a word about the absence of penal liability of legal persons
Not a word about the "fiduciaires" that are neither members of the IRE nor the OEC, which organise scams with exotic jurisdictions
Not a word about statutory auditors from exotic jurisdictions.
Not a word about the absence of balance sheets database
Not a word about bankruptcies with the same individuals that can create companies
Not a word about the wording of the circular relating to UCITS
Not a word about the limited conception of CSR in Luxembourg, which excludes business ethics
Not a word about the persistence of professionals with red flags of bad management and bad governance in the business.
Etc.

It is so easier always to take refuge behind the jealousy undoubtedly probable of the other countries, to start with France which is anyway far from being a model.

Because of all that, there is definitely a country risk for any investor in Luxembourg or any supplier of a Luxembourg client.

Bloomberg has reported that Investments with Bernard Madoff have forced Luxembourg funds and sub funds to suspend redemptions.

List of Luxembourg-registered sub-funds and funds that have suspended their net asset valuations, the subscription and
redemptions of their shares since the Madoff fraud:

The funds are Source: Commission de Surveillance du Secteur Financier in an e-mail to Bloomberg News) :
*U.S. Absolute Return of Herald (Lux)
*U.S. Equity Plus of Luxembourg Investment Fund
*American Selection of Luxalpha Sicav
*Arbitrage of Norvest
*Balanced sub-fund, Growth sub-fund et Xtra Alternative
Investments Sub-fund of GLOBAL FUND SELECTION Sicav
*Global One of Carat (Lux) Sicav
*LRI Invest Alpha Stable EUR
*BG Global Classic, BG Global Dynamic, BG Global Challenge, BG
Global Balance, BG Global Discovery, BG Stable Value of BG
Umbrella Fund
*One (c) of the fund MARS
*Best Selection of Pareturn



I know that there may other funds that are not on the list like a typical Luxembourg-made situation :

X Bermuda as custodian and X Luxembourg as sub- custodian, X being the name of the Bank in the prospectus.
"X Bermuda" is quoted 11 times "X Luxembourg" is quoted 5 times despite they are only sub-custodians.
"Luxembourg" is quoted ...25 times and "Bermuda" 58 times.

The prospectus was changed early 2000 to add X Luxembourg and the word Luxembourg to seduce European investors and have a foot in Europe. X Luxembourg would have given the money to Madoff. A big four is the auditor.

The prospectus specifies that the FUND is a British Virgin Islands business company pursuant to the BVI Business Companies Act, 2004.

The Agefi in France has reported what Charles Muller, who is deputy managing director of the ALFI, said to reassure the investor. “There does not exist any difference between the French and Luxembourg legislations as regards responsibility for the agent”, he said .
In a document the ALFI states that article 1932 of the Luxembourg Civil code makes on request weigh on the depositary “an obligation of restitution of the assets of the client.”

What does article 1932 exactly states ?

Art. 1932. Le dépositaire doit rendre identiquement la chose même qu'il a reçue.
Ainsi, le dépôt des sommes monnayées doit être rendu dans les mêmes espèces qu'il a été fait, soit dans le cas d'augmentation, soit dans le cas de diminution de leur valeur

Free translation

Article 1932. The depositary must return identically the thing as it received.
Thus, the deposit of the monnayées cashed in on sums must be returned in the same species that it was made, either in the case of increase, or in the case of reduction in their value

Should the article be applicable to investments, this would mean that in Luxembourg the investor never loose the money even though the value of shares at the Stock Exchange is decreasing or the NAV of UCITS is decreasing.

In other words, according to the ALFI, if the investor invest EUR 1 billions in Luxembourg and because of the markets the value decrease to EUR 500 million he or she can ask the professionel to receive his EUR 1 billion backj.


In a market that is decreasing I can only encourage every investor in Luxembourg that lost money in the past months to ask the for the refund of the money invested.

The ABBL recently issued a press release.


A couple of sentences are worth commenting.

LFF recently decided to develop a tool that should allow all concerned stakeholders to counter common prejudices and misconceptions about the Luxembourg financial centre. In the form of an FAQ, the tool in question will not only provide a set of ready-to-use answers for less defensive questions concerning, for example, Luxembourg’s vision for the future of its financial centre, but also effective responses to ill-informed accusations, such as those relating to the country being a tax haven that favours tax evasion; accusations that are still all too frequently levelled against Luxembourg

“ill-informed accusations” they state.

They do not analyse the reason why Luxembourg is said to be a tax haven to correct the dysfunctions:

• Why in this tiny jurisdiction the penal liability of legal persons does not exist?
• Why in this tiny jurisdiction balance sheets are not made public in a database?
• Why in this tiny jurisdiction anybody can be a statutory auditor including exotic firms from the BVI, the Seychelles and so on, that are not controlled?
• Why in this tiny jurisdiction ethics is not part of CSR, which is limited to promotion actions?
• Why in this tiny jurisdiction those who dare question on the dysfunctions are repudiated?
• Why in this tiny jurisdiction the PSF status is used by some firms, and especially confidentiality, to prevent the manifestation of the truth before the justice by intimidating former employees with a complaint even though the testimony is fair?
• Why in this tiny jurisdiction, bogus professionals, that are neither regulatory auditors nor chartered accountants, go on creating firms that are actual scams?
• Why in this tiny jurisdiction professionals who demonstrate their poor ethics and governance while having financial resources remain reputable and competent for the fellow members of their business networks?
• Why in this tiny jurisdiction money from foreign taxpayers is accepted without control, which was admitted by the former chairperson of the ABBL?
• Why is this tiny jurisdiction parliamentary parties agree quickly to change the constitution against the Grand Duke while tergiversating to implement all the international recommendations (AML, fight against corruption)?
• Why is this tiny jurisdiction the fourth estate is the financial sector that influences the political decision-making process?
• Etc.

These are not “ill-informed accusations” as all sources are public or official.

These have been building Luxembourg as tax haven for many years.

By ignoring the lax business environment that is attractive for fraudsters, LFF is not credible.


As I already wrote, banking secrecy and low taxes are criteria of tax haven. But the determining criterion is permissiveness, which is definitively met in Luxembourg, a small jurisdiction of 2500 Km2 where dysfunctions are visible but denied.

Give them a couple of months to go on like that. And look them go bust.

Luxembourg authorities and especially the regulator are definitely considering other authorities and investors as idiots.

Let’s compare what the CSSF wrote in its last press release and what the pragmatic Luxembourg regulatoru framework states clearly.

What the CSSF wrote on 2 January 2009

(...) When a fund's assets are deposited by the depositary bank with a third party, these deposits are under the monitoring and supervisory responsibility of the depositary bank, implying that the latter must know at all times in which manner the assets are invested and where and how these assets are available. This responsibility is not affected by the fact that the depositary has entrusted to a third party all or part of the assets in its safe-keeping. (...)

What the regulatory framework actually states (this text is not on the list of removed texts):


(…)
La notion de garde, telle qu'elle est employée pour désigner la mission générale du dépositaire, n'est pas à comprendre dans sa signification de "conserver", mais dans sa signification de "surveiller", ce qui implique que le dépositaire doit savoir à tout moment de quelle façon les actifs de l'opc sont investis et où et comment ces actifs sont disponibles.
(…)
A celui qui a subi un préjudice, il échet dès lors de prouver la faute du dépositaire dans son obligation de surveillance et la relation de cause à effet
Cette surveillance du dépositaire s'exerce notamment à l'égard des tiers auprès desquels les actifs de l'opc se trouvent en dépôt.
Quant au contenu de l'obligation de surveillance du dépositaire, l'on peut considérer que le dépositaire satisfait à son obligation de surveillance lorsqu'il est convaincu dès le départ et pendant toute la durée du contrat que les tiers auprès desquels les actifs de l'opc sont en dépôt, sont honorables et compétents, et bénéficient d'un crédit suffisant.
A celui qui a subi un préjudice, il échet dès lors de prouver la faute du dépositaire dans son obligation de surveillance et la relation de cause à effet.
Le devoir de surveillance quant aux actifs de l'opc, et partant la responsabilité pour cette surveillance subsiste toujours dans le chef du dépositaire. Toute clause du règlement de gestion et des statuts respectivement ou tout autre accord tendant à exclure ou à limiter cette responsabilité sont nuls.
Il s'ensuit que le dépositaire ne peut en aucun cas se décharger de sa responsabilité de surveillance. Ainsi, le dépositaire ne peut notamment pas se prévaloir de ce que le dépôt des actifs de l'opc aurait été effectué de l'accord général ou spécifique de celui-ci. La responsabilité du dépositaire n'est de plus affectée ni par le fait qu'il se fait assister par des tiers dans l'exécution des tâches qui lui sont imparties, ni par le fait qu'il confie à des mandataires l'exécution de ces tâches.


The official translation (Codeplafi)

(…)
The concept of custody used to describe the general mission of the depositary should be understood not in the sense of “safekeeping”, but in the sense of “supervision” which implies that the depositary must have knowledge at any time of how the assets of the UCI have been invested and where and how these assets are available
(...)
Anyone suffering damages must prove the depositary's negligence in respect of its duty of supervision and the correspondence between cause and effect.
This supervision by the depositary is in particular exercised over the third parties with which the assets of the UCI have been deposited with.
As regards the extent of the duty of supervision of the depositary, one can consider that the depositary has discharged its duty of supervision when it is satisfied from the outset and during the whole of the duration of the contract that the third parties with which the assets of the UCI are on deposit are reputable and competent and have sufficient financial resources.
The duty of supervision of the assets of the UCI and consequently the liability for such supervision always resides with the depositary. Any provision of the management regulations and the articles or any other agreement aiming to exclude or limit this liability are null and void.
It follows from there that the depositary may, in no case, release itself from its duty of supervision. Therefore the depositary may in particular not argue that the deposit of the assets of the UCI has been carried out with its general or specific approval. The liability of the depositary is furthermore unaffected by the fact either that it has been assisted by third parties in the execution of its tasks or that it has entrusted the execution thereof to its representatives.


The key sentences

Affirmative CSSF

When a fund's assets are deposited by the depositary bank with a third party, these deposits are under the monitoring and supervisory responsibility of the depositary bank, implying that the latter must know at all times in which manner the assets are invested and where and how these assets are available. This responsibility is not affected by the fact that the depositary has entrusted to a third party all or part of the assets in its safe-keeping.

versus

Pragmatic regulatory text

The concept of custody used to describe the general mission of the depositary should be understood not in the sense of “safekeeping”, but in the sense of “supervision”

The depositary has discharged its duty of supervision when it is satisfied from the outset and during the whole of the duration of the contract that the third parties with which the assets of the UCI are on deposit are reputable and competent and have sufficient financial resources.




When reading the official regulatory text that is pragmatic like AML provisions in Luxembourg, if UBS was satisfied from the outset and during the whole of the duration of the contract that Access was :

- reputable : but everyone is reputable in Luxembourg, the small place where everybody knows everyone, and where economic crime officially does not exist.
- competent : everyone is competent in Luxembourg where many statutory auditors are not controlled (exactly like Madoff’s auditor)
- and have sufficient financial resources : everyone makes money in Luxdembourg where the motto is definitely money over ethics

It has discharged its duty of supervision



I am telling you. There are other Luxalpha cases in the pragmatic jurisdiction. Many others.

On 15 January 2009, it was admitted unofficially that Luxembourg Funds are exposed up to EUR 7 Billion to Madoff.

“The experts have tallied the amount between five and seven billion euros," a MP said, speaking on condition of anonymity. Does he fear to be repudiated to tell the truth to speak on condition of anonymity?

As I wrote this exposure us 20% of the Madoff Fraud of USD 50 billion for a jurisdiction of... 2500 Km2 (about 1000 sq miles)

How the authorities are handling the situation ?

Let’s have a look on the agenda of the last Council of Goverment that took place on 16 January 2009. There is not a word about Madoff despite the exposure.

Let’s have a look on the CSSF website. Luxembourg's financial sector monitoring commission, the CSSF, had initially estimated at the end of December that Luxembourg funds had EUR1.9 billion invested in funds managed by Bernard Madoff. The CSSF did not issue a press release to update the figure.
This attitude demonstrate that Luxembourg is unable to face the situation, to take decisions in time, to communicate fairly for the investors on disfunctions... The last press release about the Madoff cas is dated 2 January 2009 only to confirm that Luxembourg complies with the European legislation. But it did not specify that rules are clear but prag-ma-tic. For example a circular states that : "Pursuant to the commentary of the Articles of the Law of 30th March, 1988, the concept of custody used to describe the general mission of the depositary should be understood not in the sense of “safekeeping”, but in the sense of “supervision” which implies that the depositary must have knowledge at any time of how the assets of the UCI have been invested and where and how these assets are available. In accordance with the meaning thus attributed to the concept of custody, the physical deposit of all or part of the assets may be made either with the depositary itself (which represents the most prudent solution) or with any professional designated by the UCI in agreement with the depositary (...) As regards the extent of the duty of supervision of the depositary, one can consider that the depositary has discharged its duty of supervision when it is satisfied from the outset and during the whole of the duration of the contract that the third parties with which the assets of the UCI are on deposit are reputable and competent and have sufficient financial resources" (Know more).

I do not think that official's attitude is responsible. This attitude remind me of Louis XVI : on the day the Bastille was seized by revolutionaries, he wrote in his diary, "Rien," "Nothing happened."

The AFP reported that Luxembourg authorities ordered UBS Luxembourg on Thursday to compensate French brokerage Oddo et Cie for EUR3 0 million invested in funds managed by Bernard Madoff.
Oddo had invested EUR30 million in investment fund Lux Alpha, for which UBS Luxembourg was the custodian. Lux Alpha in turn invested the money in Madoff's funds.
Luxembourg authorities gave UBS Luxembourg 24 hours to disburse the money from the moment the order was issued and told the bank to pay EUR 10,000 to cover Oddo's legal fees.
Oddo took legal action against UBS on the grounds that it had sold its clients' shares in Lux Alpha on Nov. 4, 2008 - more than a month before the Bernard Madoff scandal blew up - but had never received the money.

In my opinion, the case is not a question of responsibility because of Madoff for UBS.
As I already wrote, it will be a long shot of investors who lost their money in Luxalpha to have it back:
1) From the administrative point of view, when processing a client complaint, the regulator CSSF’s positions are not binding on the professionals (See CSSF annual report 2007 page 162),
2) From a penal point of view, the penal liability of legal persons does not exist,
3) From the civil point of view, the civil jurisprudence in not in favour of the investor “from day to day”

As far as one the one management of UBS/Luxalpha and on the other hand the auditor are concerned, they definitely ignored red flags because of the local lax business culture in Luxembourg.

There were at least three red flags for any clever professionnal, either banker or auditor :
1) Madoff was at the same time intermediate and manager, which involves risks of important conflict of interest but it is true that in Luxembourg one lives with the conflict of permanent interest without taking precautionary measures,
2) His auditor was very a small structure but it is true that in Luxembourg no matter who can be the statutoty auditor and accounts are in the dark as there is no balance sheet database,
3) The interest yield of the fund was suspect but Luxembourg is a country where the short term and the growth take precedence over the critical spirit and the independent mindset.


Know more