Ethics and governance in the European Financial centers

The Luxembourg government cannot be taken with serious in the debate about banking secrecy. In a couple of days 3 contradictory messages were communicated.

On 3 February, Luxembourg Prime Minister Jean-Claude Juncker implied before Italian media he was open to discuss the abolition of banking secrecy with the European Commission.

On 20 February, Luxembourg minister for foreign affairs and immigration and Luxembourg's Deputy Prime Minister Jean Asselborn said in Switzerland that banking secrecy needs to be redefined, but abolishing it abruptly is not in Europe's interest

On 25 February, Luxembourg minister for justice and budget Luc Frieden said in Austria that Luxembourg and Austria were ready to take part constructively in a discussion in the EU and the OECD [Organisation for Economic Co-operation and Development] on how to improve international co-operation on cross-border tax evasion, but banking secrecy is not up for negotiation


Who is expressing the actual thought of the Luxembourg government on banking secrecy?

How the jurisdiction can it inspire confidence with the stakeholders all the more than some PSF are using professional secrecy in an abusive way in doing what will be called obstruction to justice in the USA?

Bloomberg has reported that UBS AG won a ruling in a Luxembourg lawsuit filed by Banca Intermobiliare SpA seeking to force the release of 5.1 million euros ($6.5 million) from an account belonging to a fund that had invested with Bernard Madoff.
Banca Intermobiliare SpA argued UBS had a duty to pay it after sending the Italian bank a confirmation for a redemption request from the British Virgin Islands-based Groupement Financier fund made before Madoff was arrested Dec. 11.
As Bloomberg observed, While this decision was the first to deal with UBS as an account holder rather than as custodian, it may show that the regulator’s statement against UBS has “limited” influence on the courts.
It is positive as it demonstrates that Justice in Luxembourg is independant.
But it is negative as well as it confirms that what professional and politicians in Luxembourg said about the investor's protection is a charade : clear and pragmatic law and regulation means risk before the court.

The CSSF has yesterday published a press release (in French) about its investigation.
Olivier Sciales translated the findings :

The CSSF ordered UBS (Luxembourg) S.A. within a three-month-period :

1) to put into place the necessary infrastructure (i.e. all sufficient human and technical means and internal rules in order to carry out all the duties and tasks related to the function of custodian bank of a Luxembourg undertaking of collective investment in accordance with the law of 20 December 2002 on undertakings of collective investments, as amended from time to time (the "Law of 2002") and Circular IML 91/75. UBS (Luxembourg) S.A. is required to provide evidence of such adequate guarantees to the CSSF within a period of 3 months as of the date of notification of the decision of the CSSF to UBS (Luxembourg) S.A. It is important to note that the CSSF mentioned that the wrongful execution of the obligation of "due diligence" constitutes a serious breach of the supervisory duty (devoir de surveillance) of a custodian bank and can consequently constitute a violation of a contractual obligation in view of the legal provisions imposed by the Law of 20 December 2002. Article 36 of the Law of 2002 provides that "the depositary shall, be liable, in accordance with Luxembourg law to the shareholders for any loss suffered by them as a result of its wrongful improper performance thereof".

2) to analyse and rectify all the structures and procedures in place in relation to its supervisory duty (obligation de surveillance) as custodian bank and UBS (Luxembourg) S.A. shall pay damages in case of breaches to the above-mentioned supervisory duty as custodian bank imposed upon by Luxembourg law, without prejudice to any contractual provisions to the contrary and/or as the case may be any court decision.

The CSSF said it continues to probe the Madoff affair and is looking at depository banks and verifying that every intermediary have conducted their business according to Luxembourg law.

Nothing about the CSSF itself
Nothing about the auditor
Nothing about the perfectibility of the Luxembourg law
...

John Cummings has reported that American senators want that the Obama administration’s fiscal year 2010 budget to include an array of measures aimed at shutting down what they describe as “offshore tax abuses".

Levin clearly sees an opportunity to ride a wave of outrage over the deployment of the Troubled Asset Relief Program. Many of the firms listed in a GAO report are TARP recipients. For example, Morgan Stanley, which has 273 subsidiaries in tax havens or financial privacy jurisdictions such as the Cayman Islands, Luxembourg, and the Marshall Islands, has received $10 billion from the fund. Citigroup, with 427 subsidiaries in such jurisdictions, and Bank of America with 115, have each received $45 billion"

Reuters has reported that French Economy Minister Christine Lagarde said on Monday her U.S. counterpart, Treasury Secretary Timothy Geithner, was moving closer to European countries' position on tax havens.
"I noted with great interest when I was in Washington and I met my (U.S.) counterpart that on the issue of tax havens in particular ... my U.S. colleague is moving closer to our positions," Lagarde told Europe 1 radio.

For the first time there is an opportunity to end the abuses of tax havens.

But it is important to be fair with the jurisdictions that are considered as tax havens and currently quoted in the media.
- One cannot stigmatise Switzerland or Luxembourg on the one hand and tolerate Monaco, Andorra or Delaware on the other hand.
- One cannot limit the tax havens to questions of banking secrecy and non-existent taxes or relatively low taxes. As I said, the key problem is permissiveness. And Luxembourg is worse than Switzerland.
- The argument of employments provided often used by the leaders of the jurisdictions (For example Jean Asselborn : "We have 150,000 workers who cross the borders daily to work; 73,000 come daily from France, just as many come from Germany and Belgium. If the banking centre is destroyed, it is a disadvantage for not just Luxembourg, but the whole region") is a perfectly fallacious argument that looks like blackmail: if such pragmatism were admissible, it would be necessary for the incomes that gets to the families to tolerate the child labour, to tolerate the childish prostitution, etc. But, it is necessary to help the jurisdictions to achieve their aggiornamento not to make rest their economic development on a lax legal and regulatory framework.

Time is up to promote a new standard for a certification to ethics that I have already presented two years ago.

Six criteria should be taken into account:

1. Credibility of the ethical statements : are leaders reliable and trustable in their communication?
2. Means for detection of improper business conduct : are the police, the justice and the tax administration given the means in relation to the economic and financial development ?
3. Credibility of sanctions : are sanctions dissuasive enough, or is it worth frauding?
4. Transparency on issues : are media playing their role of watchdog, is the regulatory body communicating on issues, are judgements easily available?
5. Independence of auditors : are auditors actually intependant from their auditees?
6. Protection of the customer: is the customer protected when professionals did not meet their requirements or did not do their duty?

The RTBF diffused a report carried out with a hidden camera in a Luxembourg bank a couple of days ago.
Questioned by Medhi Khelfat, Jean Jacques Rommes, director of the ABBL (The Luxembourg Bankers Association) rose: "This is the case of an alleged customer who comes and says “we will defraud the tax department, how to make? ”. It is the starting assumption. The banker has an answer which I would not have made if I had been in his place. It is not the banker who started. ” If a Luxembourger presented himself in a Belgian bank, in the same situation as the one of the report, it would do the same thing exactly, according to Jean-Jacques Rommes: the applicable rules are the same ones in the two countries.
The greatest tax havens of this world are the United Kingdom, the United States and especially the State of Delaware in the United States. Does somebody one speak? I do not have of it anything considering”

For Jean-Jacques Rommes, "saying that small states are tax havens and large states are the victims of the tax havens is a way of presenting the things that is a complete manipulation."



A couple of comments:

I agree with Mr Rommes when he raises the question of the UK and of the United States and especially the State of Delaware that is not quoted as a tax haven in the Stop tax Havens Abuse act.
I agree with him when he states that saying that small states are tax havens and that large states are the victims of the tax tavens is a way of presenting the things that is a complete manipulation.


But, the RTBF experiment reminds me of the documentary carried out by the German TV about the Luxembourg subsidiary companies of German banks a few months ago.

Above all when the business doctrine of Mr Rommes predecessor, who chairs the special parliamentary commission “economic and financial crisis, is that “It is not our duty to control if the taxpayer was honest”, one should not expect another behaviour.

Noone in Luxembourg repudiated the doctrine that definitely favours frauds.

I do not think that we will be able to find in another jurisdiction a leader who standardises fraud, thanks to the legendary luxembourgish pragmatism : therefore applicable rules as implemented are not the same ones in both countries.

The AP has reported that the Swiss government said Sunday it will not attend a U.S. Senate hearing on tax havens — an apparent protest against a U.S. lawsuit aimed at forcing banking giant UBS AG to hand over data on tens of thousands of American customers.
This behaviour reminds me of the OECD meeting in Paris last october that was boycotted by some countries: Luxembourg, Switzerland, Austria, Liechtenstein and the USA of G.W. Bush.

I can see five simultaneous major risks for Luxembourg:

1. The subprimes, which still will hold surprises in the coming months as most auditors did not do their prudential duty
2. The banking secrecy called in question as the internal pressure is growing
3. The international fight against offshore jurisdictions as the Corporate Registration is a mess with dubious firms and dubious statutory auditors including auditors from the BVI, the Seychelles and other exotic jurisdictions
4. Madoff/UBS-Luxalpha as the Luxembourg authorities deceived.
5. The risk of Sanctions for violation of “Qualified Intermediary” in the USA as the American justice will not appreciate if American citizens' assets were hidden

The behaviors as well of the politicians as of the professionals are not worthy of stakes.

UBS is under pressure: on the one hand the US authorities require banking information of UBS bank clients with sanctions if not provided and on the other hand a Swiss tribunal has just prohibited from providing such information.

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The BBC and other media worldwide have reported the decision by Switzerland's biggest bank, UBS, to hand over details of a few hundred US clients to the US authorities.
The financial community in Switzerland is very upset.
This is the beginning of the end of banking secrecy in every jurisdiction that has based its development on such service and especially Luxembourg that demonstrated close links with Switzerland to support banking secrecy all the more than the situation of permissiveness is worse in Luxembourg than in Switzerland.