Ethics and governance in the European Financial centers

Dear Mr de Swardt,

 

 

I have seen that you will be speaker at the OECD Forum 2009 that will take place on 23 June 2009 especially in the framework of a workshop called “Promoting market integrity” at the sides of Luc Frieden, who is minister of Finance and Treasury of a tiny jurisdiction that claims not to be a banking, financial and judiciary haven and claims to be self regulated (see OECD or GRECO reports).

 

The objectives of “Promoting market integrity” were given in the Declaration of the Summit on Financial Markets and the World Economy that took place on 15 November 2008

 

Promoting Integrity in Financial Markets: We commit to protect the integrity of the world's financial markets by bolstering investor and consumer protection, avoiding conflicts of interest, preventing illegal market manipulation, fraudulent activities and abuse, and protecting against illicit finance risks arising from non-cooperative jurisdictions. We will also promote information sharing, including with respect to jurisdictions that have yet to commit to international standards with respect to bank secrecy and transparency.

Let’s analyse with a glance at public and official sources what Luxembourg’s situation is regarding these objectives all the more than the small size emphasizes issues and dysfunctions:

Bolstering investor and consumer protection

I am afraid the recent CSSF decision on UBS about Madoff and Luxalpha (28 May 2009) is not a good omen for investor and consumer protection.

In any other jurisdictions UBS would have been fined by the regulator. May be Stephen Timms, Financial Secretary, The Treasury, United Kingdom, who is speaker in your workshop will be able to explain how the FSA sanctions professionals to protect investors and clients (see fine tables in the UK on the FSA web site). But in Luxembourg it is not possible: the legal and regulatory framework is weak compared to what exists abroad (see what J.-N. Schaus admitted, who retired recently from the CSSF: The maximum of the fines is 12,500 euros. What is very weak taking the stakes into consideration; 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) and conflicts of interest are generalised. (In Paperjam, 20 March 2009)

 

Avoiding conflicts of interest

Because of the small size there are many conflicts of interests, many cases of "professional incest".
The direct consequence is the small number of crime cases or corruption cases, which are of concern in official reports (See Narcotic Control Strategy report and GRECO report Phase III about Luxembourg):

• “The scarce number of financial crime cases is of concern, particularly for a country that has such a large financial sector. The GOL should take action to delineate in legislation regulatory, financial intelligence, and prosecutorial activities among governmental entities in the fight against money laundering and terrorist financing.” (Cf. p. 342 of the Narcotic Control Strategy report 2009)
• “Certain lawyers stressed the importance of relationships and networks of persons in Luxembourg society, the difficulties faced by the police in dealing with complex economic and financial crime, particularly because of lack of legal and other resources, and the ease with which companies can be established in Luxembourg.”  (Cf. page 18 of the GRECO PHASE III Report "Criminalisation of corruption" [theme I] in Luxembourg).

Additionally it was shocking that Luxembourg provided the FATF with a generous grant that has nothing to do with the normal funding of the FATF, nor the OECD. Recently Angel Gurria admitted that a grant to the OECD from a member state would be of concern (See interview in Le temps dated 18 April 2009: “I can even ask a Member State to grant this sum. But how the world will interpret this grant?”)

Such grants definitely compromise the recipient' ability to address issues freely, thoroughly and objectively as the recipient (either FATF or OECD) has a decision making power in favour or discredit of the giver.

Preventing illegal market manipulation

I have no public or official sources about any possible illegal market manipulation from Luxembourg.

Preventing fraudulent activities and abuse

 

The Luxembourg Institute for Global Financial Integrity was launched a couple of weeks ago. Among the founders is a Luxembourg powerhouse that stated publicly opinions that do not comply with the will to prevent fraudulent activities and abuse. The former chairman of the Luxembourg Bankers' Association (ABBL) and who was until recently advisor to its board, explained in the framework of the transposition of the second directive that offences such as forgery, use of forgery, false balance sheet, use of false balance sheet or unauthorised use of corporate property are vague and ambiguous (See ABBL report 2003 page 22 for instance). Last year the same professional stated that “It is not our duty to control if the tax payer was honest” (Le Temps, 27 February 2008)

 

In Luxembourg, there is no balance sheet database and there are many bankruptcies including dubious bankruptcies involving the same actors.

In Luxembourg, anyone can be statutory auditor (Cf. law of 10 August 1915 on commercial companies as amended). There are statutory auditors that are neither members of the IRE (institute of registered auditors) nor the OEC (institute of chartered accountants), including auditors registered in exotic jurisdictions and that only exist in the Luxembourg Corporate Registration.

 

Protecting against illicit finance risks arising from non-cooperative jurisdictions

There are many “red flags” in the Corporate Registration of offshore scams including with non-cooperative jurisdictions. Exotic companies, i.e. companies that are registered in non-cooperative jurisdictions, may be shareholder and/or auditor of Luxembourg-registered companies.

 

As I wrote, to determine illicit finance risks arising from non-cooperative jurisdictions, a couple of "red flags" should be taken into account:

 

• Does the company appear recently in the Corporate Registration in Luxembourg?
• Is there a turnover of directors?
• Is there a turnover of auditors?
• Is any exotic company acting as the statutory auditor of the Luxembourg-based company?
• Is the company and or the auditor only quoted in the corporate registration with no visible economic reality (an office mentioned in the yellow pages of its jurisdiction, a website, employees, brochures, Ads...)

 

Many dubious situations are visible in the “Mémorial C” including a case under investigation to bypass the OECD convention: Eurolux Gestion, which is based in Luxembourg and would have been used to bypass the OECD Anti-Bribery Convention, meets these “red flags”.

 

Information sharing, including with respect to jurisdictions that have yet to commit to international standards with respect to bank secrecy and transparency.

In a speech before the Luxembourg Parliament on 13 March 2009, Luc Frieden announced that Luxembourg will conclude Double Taxation Agreements that conform to the OECD Model Tax Convention, which means that this was not the case before. Conventions are being signed.

 

But it remains that the request of information must be made on concrete, clear and precise evidence of tax evasion which excludes any “fishing expedition”. This is a problem in Luxembourg as leaders support tax evasion:

 

• Cf. what stated Lucien Thiel, former director of the Luxembourg Bankers’ Association: “It is not our duty to control if the taxpayer was honest” (L’Essentiel, 27 February 2008)
• Cf. what stated Jean-Jacques Rommes, current director of the Luxembourg Bankers’ Association, to comment a tax evasion case: “It is not the banker who started” (RTBF, 19 February 2009)

 

Nobody in Luxembourg repudiated their “business doctrine” to get the money, which definitely favours frauds.

 

The OECD tax framework is not sufficient to counter seriously tax evasion (Cf. Swiss professionals quoted by Le Temps on 26 May 2009: “It will be, in practice, very difficult for the foreign tax authorities which apply the OECD standards to provide this degree of details; If Switzerland goes in the same line as Luxembourg, the result will not be so problematic at all for Switzerland. Banking secrecy will be relatively preserved, and the client will keep his/her tax ethics under control”).

 

May I ask you to ask Luc Frieden a couple of critical questions publicly about Luxembourg’s goals to seriously promote Integrity in Financial Markets?

1. Why is it so difficult to enforce the criminal liability for legal persons, despite an injunction by the OECD last year? Consensus to change the Luxembourg  constitution however was reached within a day last year.
2. Even though UBS procedures were changed, a breach with the legal and regulatory framework was made. Why wasn’t UBS fined all the more than fines in Luxembourg are not dissuasive?
3. Why were Public Research Centres (Lippmann or Tudor) and/or the University of Luxembourg not involved in genesis of the LIGFI (Luxembourg Institute for Global Financial Integrity) project, which is promoted by a company specialised in economic intelligence and professionals that never ever demonstrated a commitment to business ethics?
4. The registration of the domain ligfi.org took place in December 2008 by Luxembourg-based intelligence and international security experts but this cannot explain the amount of EUR 40 000 for the start-up funding. How were those EUR 40 000 spent on the LIGFI project between September 2008 and April 2009 prior to the official launch?
5. Are you ready to enforce a legislation to introduce a criminal liability for bankers that help to commit tax evasion, a clear one with no pragmatic (read deceptive) wording like "knowingly" that was introduced in the AML legislation of 2004, which makes lawsuits a long shot in practice as admitted by the Luxembourg FIU?

 

 

Yours sincerely

Jérôme Turquey

Consultant is business ethics and reputational risk

http://ethiquedesplaces.blogspirit.com

 

 

 

Switzerland and Denmark have agreed at a technical level to the extension of administrative assistance in tax matters under Art. 26 of the OECD Model Convention. The tax authorities of both States initialed a revised double taxation agreement (DTA)

 

 

Le temps reported that at the same time ,Switzerland and Luxembourg initialed as well revised double taxation agreement with no transparency.

 

The secrecy was intended to mislead France and the European Union prior to sensitive tax negociations and does not comply with Luc Frieden's recent statement that Luxembourg is a transparent financial center.

 

The CSSF as of today published a press release that is worth commenting.

Firstly the CSSF seems that despite weaknesses that were identified by the CSSF in the infrastructures and procedures of the depositary bank, UBS was not fined. It definitely would have been in the UK by the FSA. UBS reviewed its infrastructures and procedures, that are now found to be convenient.  Pierre Reuter, from Luxembourg law firm Thewes & Reuter that is handling about 70 claims against Madoff-related funds, banks and auditors, quoted by bloomberg said: "It’s extremely frustrating for investors to see that the bank was faulted for a grave breach and now, three months later, everything seems to be in order" 

 

Secondly, the CSSF states again that the transposition of the UCITS directive was faithful, which does not comply with the synoptic table and Circular CSSF 05/177, which is quoted in the press release. Circular CSSF 05/177 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."

Thirdly and mainly, the CSSF states that “ As the CSSF has previously noted, UBSL shall have to indemnify a UCI depositor according to its obligations as a Luxembourg depositary bank, subject to valid and opposable contractual clauses to the contrary and, as the case may be, to a court decision in such matter."

 « Subject to valid and opposable contractual contrary clauses “ : This means that if the client signed any provision to discharge UBS’s responsibility, there will be no compensation.

 

Finally, ithe CSSF states that “the ordinary courts (juridictions de droit commun) are exclusively competent for any grievances regarding rights of a private law nature (droit civil). Therefore, only the ordinary courts (juridictions de droit commun) can establish the liabilities incurred and the damages to be indemnified."

 

This means that, as I had said, the client has to go to the court and the recovery of his/her money will be a long shot and very expensive.

 

It will be a long shot for 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 criminal point of view, the criminal 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” all the more than the CSSF admits possible valid and opposable contractual clauses contrary to the normal liability of the depositary: subscription documents for the Luxalpha Sicav explicitly remove UBS's liability if the fund's assets are lost. Under European rules, custodians such as UBS must take responsibility for "safekeeping" of a regulated mutual fund's assets. But the Luxalpha subscription form states that UBS "is not the safekeeping agent of the assets of the fund as the assets are safekept by the US registered broker-dealer"

 

 

Clients cannot be satisfied. That is the reason why proceedings are now underway in Paris for aggravated betrayal of trust, aggravated fraud, handling of stolen goods by a criminal group and money laundering by a criminal group, as Reuters reported.