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The head of the Luxembourg regulator, who is retiring, analyses the current situation in Luxembourg: what he said is worth commenting

Jean-Nicolas Schaus is about to retire. He has been managing the Luxembourg regulator – CSSF – since January 1999.

In an interview he states a couple of ideas that are worth commenting as he can speak more freely.

We were not prepared to face such things and we did not realize the possible consequences of such fraud. However, it should not be forgotten that this case originates in the United States and concerns only indirectly Luxembourg

Jean-Nicolas Schaus observed in the annual report 2004 that “in too many cases, the persons responsible for reprehensible acts do not suffer the consequences with regard to the continuation of their occupation. The person responsible for such an act is often simply removed from management while being granted compensations, which largely exceed normal expectations. Sometimes, the impression could arise that crime pays, which soils the reputation of a financial centre. Moreover, it can be observed on too many occasions that when such professionals seek new employment, the new employers tend to somewhat close their eyes to the problem, while knowingly taking the risk that the persons concerned could again perform reprehensible acts.”
But I have examples in public and official sources that demonstrate that unfortunately the CSSF did not sanction those who did not show irreproachable (more than irreprehensible) behaviour, as the law of 1993 requires.

The figure of 7 billion euros seems to include the impact on the foreign funds managed in Luxembourg

Jean Nicolas Schaus admits the figure of 7 billion euros with an explanation. It remains that there is a huge discrepancy with what the ALFI wrote in its report quoting the CSSF. In its interim report dated 13 March 2009, the ALFI states that for Luxembourg-based funds, the Luxembourg regulator CSSF has evaluated the direct impact at 1.7 billion euros. The CSSF figure was about undertakings for collective investment which were impacted directly or indirectly but the ALFI figure quoting the CSSF is about undertakings for collective investment which are directly exposed.
The indirect exposure cannot be limited to 0.2 billion euros and “foreign funds managed in Luxembourg” is a kind of indirect exposure.

Madoff was a very much appreciated person and very famous. However, if everyone had played its part, in particular in the United States, where auditors clearly worked under-staffed, there would have been more guarantees.

There are many very much appreciated and very famous persons in Luxembourg. As I said above quoting the CSSF report 2004, Jean-Nicolas Schaus admitted that, in too many cases, the persons responsible for reprehensible acts do not suffer the consequences with regard to the continuation of their occupation. This was never corrected and is visible in this jurisdiction of 2500 Km2, despite poor communication and an expressed will to hush up issues in the name of reputation, which is a mistake.

Additionally I think that in Luxembourg as well, auditors works under-staffed at the auditee’s with furthermore an additional risk: the promiscuity between auditors and auditees. In the context of the Luxalpha-UBS case, it is not opportune that Luxalpha-UBS head joined his auditor even of advisory services.

The legal framework of the depositary's responsibility is the same in France as in Luxembourg. The basic text is a European text and the rights are similar

I do not agree as I explained on this blog with a synoptic table, and this is what I raised to Commissioner Mc Creevy.

In a second stage, after the investigation into Madoff, which requires a couple of months and disrupts a little the normal functioning of the CSSF, we will review the funds which could have a similar problem.

I think this is dangerous for Luxembourg to waste this time. As I explained many people are “potential Madoff” in the jurisdiction that has some operational red flags that were identified by the EDHEC: http://ethiquedesplaces.blogspirit.com/archive/2009/02/11/edhec-report-highlights-madoff-red-flags-that-should-have-be.html

Lack of segregation amongst service providers: For example, Luxembourg did not transpose in its law of 2002 Article 10 paragraph 1. of the UCITS directive: No single company shall act as both management company and depositary.

Obscure auditors: Luxalpha/UBS’s auditor was Ernst & Young; Access Management Luxembourg’ auditor was KPMG. Both belong to the big four group. “Obscure auditors” do not apply to them, but it applies to many bogus exotic firms acting as auditors in the Corporate Registration. Nevertheless neither Luxalpha/UBS’s auditor nor Access Management Luxembourg’s auditor saw the “red flags”. I suggest auditors in Luxembourg take more time in their assignment rather than being in the spotlight in leisure magazines which is definitely not the place for an auditor.

Heavy family (or network) influence: this is because of the small size of the jurisdiction

Lack of disclosure: there is a culture of secrecy that serves dishonest people.

Insufficient staff: Luxembourg is understaffed in many areas of “control”: FIU (CRF), police, justice, audit teams…

One cannot defend oneself against the swindles

I do not agree with such resignation. Luxembourg created the framework for frauds as a permissive legal and regulatory framework encourages swindles. With due respect to the pragmatic people in Luxembourg, there are at least serious people in the administrations which deplore it in annual reports that unfortunately most media do not analyse.

The maximum of the fines is 12,500 euros. What is very weak taking the stakes into consideration.

This is what I keep saying. The risk is worth taking in Luxembourg.

It is necessary to engage the reflection on increasing our power to sanction. It would be better indeed to have more means, especially taking into consideration what exists in other jurisdictions.

This is what I keep saying. Other jurisdictions are much more dissuasive for those who do not abide by laws and regulations.

It is very delicate to say it, but I have been thinking for a long time that the center can survive without banking secrecy

This is what he already said in the annual report 2003: “As I had predicted since 1999, not without making some waves, the banking secrecy is not considered anymore as element conditioning the development of the financial centre. Although its importance decreases – and will continue to decrease in the future -, it nonetheless constitutes an important asset, but only one among others.”

16:48 Posted in Luxembourg | Permalink | Comments (1)


The issue of the responsibility of a depositary bank of an UCITS in Luxembourg is only “une obligation des moyens” not as it should be, to protect investors ,“une obligation de résultat” . I do not intend to translate this in legal English as the concepts in Anglo-Saxon law are not always similar to the ones we use in our continental “civil law” context based on the Roman Law.
That is the real problem in Luxembourg, in addition to the conflict of interests resulting from the toxic agglutination of the functions and tasks of the different instrumentalities that are involved in the investment fund business assets custody. This situation is tolerated by the CSSF, encouraged by an unfortunately, or rather desired vague wording of their “circulaires”, that do always protect the financial intermediaries and never give real protection to the clients of the same institutions.

Posted by: Dr Fred Reinertz | 03/26/2009

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