Ethics and governance in the European Financial centers

The Conseil Economique et Social published its report.


The report is about the financial crisis and its level is much better than the parliamentary report on the financial crisis that was published a couple of weeks ago.

Nevertheless, the insulated culture remains and the authors never wonder why there is a problem in the Luxembourg jurisdiction.

The wording of a couple of paragraphs is worth commenting:




"Que ce soit le passeport européen des sociétés de gestion d’OPCVM, que ce soit l’architecture de la supervision européenne, que ce soit la fiscalité de l’épargne, il y a toujours des intérêts économiques et politiques manifestes derrière les attaques contre la réputation de la place financière luxembourgeoise."("Whether it is about the European passport for UCITS, whether it is about the architecture of the European supervision, whether it is about the savings tax, there are always obvious economic and political interests behind attacks against the reputation of the Luxemburg financial center")

It is a frequent argument in the language of many professionals in the Luxembourg: the jealousy of the other countries. They do not admit that there are dysfunctions in Luxembourg that create an unfair competition with other jurisdictions, especially in the European Union.
One cannot have the advantage of an “onshore jurisdiction” thanks to the membership in the EU, and of an “offshore jurisdiction” by offering the same services as a tax haven, and especially the possibility to create scams linked to exotic jurisdiction without any control.
This is what many fiduciaries located in Luxembourg sold and still sell.



"Les cercles intéressés français ont prétendu que la protection d’investisseurs à travers des fonds luxembourgeois serait plus faible qu’ailleurs en Europe, notamment à cause du niveau de responsabilité des banques dépositaires. Cette question a pu être partiellement désamorcée par les associations professionnelles et par les autorités luxembourgeoises, mais il reste que la réputation de la place financière a pour la première fois, été fortement ébranlée dans le domaine d’activités des fonds d’investissement."("The French interested circles claimed that investors' protection through Luxembourg investment funds would be weaker than anywhere else in Europe, in particular because of the level of responsibility of the depositary banks. This question could be partially defused by the professional associations and by the Luxemburg authorities, but it remains that the reputation of the financial center has for the first time, been strongly shaken in the field of activities of investment funds.")

The Luxembourg fund industry was not touched by chance by the Madoff case, but was made possible by the ‘Luxembourg-made” transposition" of the UCITS directive.
Facts are that:
- Two provisions of the directive that are connected to the Luxalpha case were not transposed into Luxembourg law : the one that states that unit trust's assets must be entrusted to a depositary “for safekeeping” (this explicit notion of “safekeeping” is not in the French version of the Directive) (Cf. French text page 15 v. English text page 15) and the one that states that “No single company shall act as both management company and depositary”.
- The depositary’s liability is limited by the wording of the supervision authority in circular IML 91/75 : "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” : Madoff was definitely reputable and competent and had sufficient financial resources.

By denying their lax transposition, I am afraid that the Luxembourg professionals unfortunately weaken the funds industry in Europe and their own reputation: a fault confessed is half redressed.



“De façon plus générale, le Luxembourg devra maîtriser la vague réglementaire qui suivra la crise. Il n’est pas exclu qu’il puisse même prendre avantage dans le contexte actuel sur les centres offshore entièrement déréglementés. » ("In a more general way, the Luxembourg will have to monitor the regulatory wave that will follow the crisis. It is not excluded that it can even take advantage in the current context of the fully deregulated offshore centres.")

It is clear enough that the Luxembourg professionals are not willing to abide to regulation. The professional culture is that they want a pragmatic implementation, like for the UCITS directive.
Above all, by reading between the lines one understands that Luxembourg is an offshore center that is not totally deregulated, which means that it is partially deregulated. And it is true.




In a nutshell, the behaviour of the jurisdiction with Juncker’s crusade against the OECD and the USA while not questioning the dysfunctions in the jurisdiction, is a business suicide.