Ethics and governance in the European Financial centers

The Commission on the Financial crisis this week provided its report titled « Vers un nouveau modèle de croissance » (Towards a new model for growth).

In the framework of this blog, among the pages of the report, a couple of paragraphs relating to the financial sector are worth commenting.

« Bien que les temps où le Luxembourg était considéré, à juste titre, comme centre offshore soient révolus … » (“Although times when Luxembourg was considered, and rightly so, as an offshore center are over…”)

I am afraid Luxembourg definitely remains an offshore center. It is what is visible in The Corporate Registration with many Luxembourg-registered companies, which are linked to exotic jurisdictions that do not have the same standards of controls as Luxembourg. They are used for scams.
This is as well what is sold publicly by many professionals who explain without shame that Luxembourg gathers the advantages of an “onshore” jurisdiction because it is in the European Community” and of an “offshore” jurisdiction.

L’implication de la place de Luxembourg dans l’affaire d’escroquerie du financier américain Madoff (…) a donné lieu à des critiques peu fondées venant de l’étranger et visant la surveillance prudentielle telle qu’elle est pratiquée au Luxembourg. (“The implication of the Luxembourg financial center in the Madoff case (…) gave place to criticisms not founded coming from abroad and aiming at the prudential monitoring as it is implemented in Luxembourg”)

There is like a contradiction with what Jean-Nicolas Schaus, who has been chairing the CSSF for many years, explained in a recent interview: “The maximum of the fines is 12,500 euros. Which is very weak taking the stakes into consideration” and “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.”, he said.

« une intégration totale de la CSSF dans un système de surveillance européen représente un grand danger dans la mesure où elle enlèverait à notre surveillance prudentielle toute marge de manœuvre en matière d’interprétation et de réglementation pourtant indispensable à une gestion flexible de la place » (“a full integration of the CSSF into a European monitoring system represents a great danger insofar as it would strip our prudential monitoring from any room for interpretation and regulation however essential to a flexible management of the center”)

This is exactly this organizational slack for interpretation and regulation that is in question with Luxalpha, which is unfortunately denied by the actors:
- Why two sensitive provisions of the UCITS directive are missing in the Luxembourg Law of 2002 (Which is not the case for the Celtic Tiger jurisdiction that is as well in crisis )?
- Why the change to the depositary’s liability ? “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 (…) 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 “ (IML 91/75 of 25 January 1991).

This is perfect illustration of what organizational slack for interpretation and regulation is in Luxembourg. UBS has discharged its duty of supervision as it is satisfied from the outset and during the whole of the duration of the contract that Madoff was reputable and competent and had sufficient financial resources.

« le rôle de la CSSF, défini à l’époque comme celui non seulement d’un contrôleur du secteur financier mais encore d’un promoteur de la place doit être revu afin d’éviter tout équivoque sur sa mission essentielle qui est celle de la surveillance prudentielle » (“the role of the CSSF, defined at the time as both a controller of the financial sector and as a promoter of the financial center, must be re-examined in order to avoid any ambiguity on its essential mission which is that of the prudential monitoring”)

I totally agree with this observation. It is quite strange to have a kind of schizophrenic regulator with two roles that are definitely not compatible.

« l’agence (LFF) contribuera à combler progressivement les lacunes qui existent au niveau de l’information et de la perception de notre pays, à condition évidemment que les réalités à la base de notre place concordent avec l’image que nous voulons en transmettre aux autres » (“the agency (LFF) will contribute to gradually fill the gaps which exist at the level of the information and the perception of our country, under the condition obviously that realities at the base of our center fit the image which we want to transmit to the others”)

I am afraid that the distorted view of the realities of Luxembourg which for a good portion this report translates does not make it possible for the agency to achieve its mission.



There are many, many other distorted views of the reality in the report. They couldn’t see the wood for the trees.

And the 21 recs formulated at the end are really poor in view of stakes for the country.

Read the report