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.

I have reached a milestone in my studies about business ethics in the Luxembourg Financial Center, at a moment when most of its stakeholders finally seem to adhere, though reluctantly, to some of the ethical principles that I have always advocated. This requires that I thank those who encouraged these inedited studies in Luxembourg.

I would like to thank Bob Kneip, from KNEIP (formerly Kneip Communication). He is the one who is at the origin of my orientation towards the questions of CSR and ethics in Luxembourg. By his actions (see for example a conference that was given in March 2009)  he encouraged me a lot in my pragmatic approach, i.e. relating to matters of fact or practical affairs. 

I would like to thank the CRP Henri Tudor (which is not founder of the LIGFI, which is a good thing) and his Managing Director, who is retiring, which by refusing my project on ethics and CSR late 2004, made me start the studies with a freedom that I would not have had if deliverables had been subjected to validation at the CRP.

Should my project have been borne by the CRP, I would probably have produced politically-correct deliverables despite issues resulting from matters of fact or practical affairs not to worry nor to oppose the financial community.

“My goal has always been clear — to get those taxpayers hiding assets offshore back into the system.” -

IRS Commissioner Douglas Shulman

 European tax administrations of jurisdictions that are victims of tax evasion should have the same approach as the IRS in the USA by implementing new disclosure guidelines and a penalty structure intended to encourage taxpayers to voluntarily disclose assets held in offshore accounts.

They should offer those who comply the chance to avoid criminal prosecution and a barrage of significant penalties.

Anticipating that a large number of French taxpayers will repatriate their assets back to France, given the recent clampdown by the Organisation for Economic Cooperation and Development on tax havens, and on banking secrecy in particular, France’s Budget Minister Eric Woerth has proposed various “solutions” designed to facilitate this process, although he has firmly ruled out any offer of according a tax amnesty.

Jurisdictions of tax evasion like Switzerland or Luxembourg or Liechtenstein should negociate a tax amnisty for their clients with a use of the money of evasion to fight the crisis in the common interest.

For example the money from tax evasion could be affected to a fund managed in the framework of the European Economic Area, which gathers European Free Trade Association (EFTA), the European Community (EC), and all member states of the European Union (EU) .

Early this year I was quoted by the Financial Times.  

This is what I said: “The [financial centre of Luxembourg] wants to brush up its governance. If it doesn’t do that in the next few months, the centre will collapse. ”If the regulatory situation is not sorted out, dissatisfied investors and asset managers will move their business elsewhere.”

Two facts in the last couple of weeks demonstrate that the jurisdiction is unable to brush up its governance as it is in perdition.

1.      The launch of LIGFI

It appears that this institute has nothing to do with business ethics. Its genesis is an economic intelligence operation.

It is borne by professionals that never ever demonstrated a will to implement what they are now promoting: ethical conduct and its standards and practices in regard to the principles of integrity, which are fairness, transparency, responsibility and accountability.

All these professionals with business standing were especially unable to address the truth or reality of the Luxembourg shutter of the Madoff affair: the law of transposition of the UCITS directive removed two provisions of the directive and the depositary’s liability was rephrased in a way which opened the drift.

2.      The findings of the CSSF on UBS and Madoff

The findings of the CSSF on UBS and Madoff are not a surprise: all is now in order with UBS regarding procedures; it is up to the courts to decide compensations in the contractual framework between UBS and its clients that may include possible valid and opposable contractual clauses contrary to the normal liability of the depositary. It is a caricature.

The Luxembourg “system”, with all its “professional incest” (auditor-auditee, regulator-bank, administration-bank, and so on), because of the small size, is unable to produce anything else than an emollient conclusion from the regulator.

Investors and asset managers cannot be satisfied with such attempt to manipulate facts and such absence of governance in the jurisdiction.

Finance is too serious to be left to amateurs in business ethics…

Jean Asselborn was interviewed by RSR in Switzerland about Luxembourg tax policy.

What he said confirms that Luxembourg did rely on the European Union to provide solidarity (read impunity).

« L’UE c'est une communauté solidaire. »

Free translation: "The EU, it is a community where there is solidarity."

« Cette inscription, vous savez, sur la liste noire qui est devenue grise, ce n'était pas accordé au Conseil européen, ce n'était pas l'engagement du Conseil européen. Ça va à l'encontre de ce qui a été décidé »

Free translation: "This inscription, you know, about the black list which became grey, it was not granted at the European Council, it was not the commitment of the European Council. That goes against what was decided"

The relevant question is: is tax competition fair within the European Union?

According to many politicians and professionals in the European secrecy jurisdictions, and especially Luxembourg that is locked up in its certainty, it is because taxes are too high in France and Germany that taxpayers look for another jurisdiction.

Let’s admit they are right. What should be done to change that?

I have already observed that our European secrecy jurisdictions do not contribute a lot to the OECD budget despite a much more favourable GNP/GDP than in France and Germany.

What about the European Union figures?

The budget of the EU is a “gas factory”, but some ratios are interesting.

In 1970, the Luxembourg National contribution amounted to 0,1533% (6 / 3913*100) of the six countries. In 2007 it amounted to 0.2% (198 / 93414*100) of the 27 members while the jurisdiction has the highest GDP per capita

All figures for the calculation are available there: (The Excel Table is there)

It is easier for Luxembourg to have low taxes than for other jurisdictions and especially France and Germany all the more than Luxembourg does not have all the infrastructures that are needed in a larger state and that it profited from those (for example Universities in France and Germany: the fee for students, either national or foreign, does not cover all the direct or indirect functioning expenses that are financed by the taxpayer: buildings, scientific material, transportation…).

Example: the fee for a student is EUR 169 (year 2008-2009: http://www.nouvelleuniversite.gouv.fr/droits-d-inscription-pour-la-rentree-universitaire-2008.html). The cost of a student is around EUR 7000.

Who pay for the difference?

One can extend the benefit to research.

For example, if Luxembourg contributed to the implementation of the TGV (Train à Grande Vitesse, French for "high-speed train") between Luxembourg and Paris, I don’t think it contributed when it was developed during the 1970s by GEC-Alsthom (now Alstom) and SNCF.

In a nutshell, other criteria should definitely be sought to ensure a more balanced contribution of member states, taking into account the GDP per capita and expanses for the benefit of citizens of other states that do not have to pay for them (especially research and infrastructures).

And I bet Luxembourg will no longer be qualified as a tax haven as it would have to increase its taxes to pay for such more pragmatic European contribution…

I have commented the launch of the LIGFI in Luxembourg and the non relevance of most members in the project team, under patronage of Jacques Santer who recently said that “Le Luxembourg n’a jamais ménagé ses efforts pour assurer la transparence voulue par l’Organisation de coopération et de développement économiques, et ceci en collaboration étroite avec le Groupe d’action financière (Gafi) instauré par l’OCDE justement. J’ajoute que le Luxembourg applique également les directives européennes, en matière de blanchiment d’argent notamment (free translation : Luxembourg never spared its efforts to ensure the transparency required by OECD, and this in close cooperation with FATF, founded by OECD precisely. I add that Luxembourg also implements the European directives, as regards money laundering in particular).

What about the OECD and GRECO requirements regarding the fight against corruption?

What about the enforcement of criminal liability of legal persons as requested by the OECD?

What about the poor means of the regulator compared to what exists abroad, which was admitted by the director who retired recently?

What about the scarce number of financial crime cases for a country that has such a large financial sector, which is regularly observed by the US Department of State in its International Narcotics Control Strategy Reports (INCSR)

Etc.

I am afraid he as a distorted view of reality, what is not good omen for an efficient and credible patronage.

As far as the association is concerned, there is an amazing discrepancy in the Corporate Registration.

It is said that “In the year two thousand and nine, on the twentieth of April (20 April 2009).

Between the undersigned (…) and all those who become parties to the present contract, is formed a non-profit organization in conformity with the law of 21 April 1928 on non-profit organizations and foundations, as amended. »

The Launch is dated 20 April 2009.

But, it is said infra that “The start-up funding of the a.s.b.l. by Sandstone S.A. for the period of September 2008 through April 2009 is allocated for Sandstone SA as a Charter Member to the maximum Charter member initial fee of EUR 40,000, with the amount outstanding to be charged against current and future annual fees as fixed by the Board of Directors”

This raises a couple of questions:

What/who is Sandstone S.A.?

Sandstone was founded in 2008 by a group of former intelligence and international security experts. Their mission is to provide the clients with high value commercial intelligence services.

What on earth was needed to be financed for the period of September 2008 through April 2009 for an association that was launched in April 2009 ?

The domain ligfi.org was actually registered in December 2008 by Jed Grant for Sandstone s.a.

LIGFI was in the pipe late 2008 but LIGFI was not developed until the April 2009 as the website is currently an empty shell (many blank pages)

The Hostmaster is ONEANDONE. Its fees are not very expensive.

The registered office and address are established at 5-7, rue Munster, L-2160 Luxembourg City, Grand Duchy of Luxembourg at the Cercle Munster. Admission to this club is reserved exclusively for members and their guests. To become a member of the club, a candidate's application must have the backing of two sponsors. The final decision rests with the admissions committee for admission.

Cercle Munster is a private business club with restaurants, shops… for wealthy people living in Luxembourg.

To reach the EUR 40,000 between September 2008 and April 2009, made deduction of the fees for the Hostmaster, this represents noshes-up at the Cercle Munster for the team.

To comment the recent tax agreement between the USA and Luxembourg, Le Temps interviewed a couple of Swiss professionals.

What they say admits that financial centers knowingly fool the OECD by accepting the agreement as the OECD framework is not relevant to counter tax evasion.

The agreement requires that the request shall be written, justified and personal, based on a suspicion against a specific person that is addressed to a bank or a precise branch. The circumstances of tax evasion must be described with accuracy.

This is the OECD tax Model for cooperation.

As I wrote, it is exactly as if a travel agency would sell tickets only for detailed requests (e.g. I want a ticket for the flight from X to Y at HH:MMabd) but would not provide information about a destination (Are there flights to go from X to Y, what are the schedules... ?) for  the client to get the ticket. Only a few tickets would be sold.

Professionals that support tax evasion confirm what I recently wrote to Angel Gurria :

According to Thomas Kalbermatten, bank Analyst at Credit Suisse, quoted by Le Temps, "Il sera, en pratique, très difficile pour les autorités fiscales étrangères qui appliquent les standards de l’OCDE de fournir ce degré de details" (free translation: “It will be, in practice, very difficult for the foreign tax authorities which apply the OECD standards to provide this degree of details”)

According to Didier de Montmollin, partner at Secretan Troyanov, quoted by Le Temps, "Si la Suisse va dans la même ligne que le Luxembourg, le résultat ne sera pas du tout si problématique pour la Suisse. Le secret bancaire sera relativement préservé, et le client restera maître de son éthique fiscale". (free translation: “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”)

Which ethics?

The one that the LIGFI wants to promote?

As I explained the OECD framework to counter tax evasion is not relevant and jurisdictions that are used for tax evasion do not want the review of the criteria.

It is a general principle that citizens pay the taxes where they live to contribute to the financing to the public policies and in international law there are assistance rules, which implies in tax matters communication of data relating to foreign citizens.

The protection of private life is limited to the actual residents of a given jurisdiction: in other words, banking secrecy to protect private life is fine for Luxembourg (or Swiss or any other) residents living in Luxembourg (or Switzerland or any jurisdiction for its residents), but it is not opposable to the tax administration of foreign citizens living in their country.

Banking secrecy is actually a tool for tax evasion as in most cases queries from foreign tax administration will not be satisfied despite the OECD tax model that requires accurate queries.

That is the reason why some people advocate for the automatic exchange.

There is a pragmatic way to fix the issue: there are international standards against AML-CFT that are taken into account in the procedures and codes of conduct of firms, and especially KYC. Why not enacting and enforcing Anti Tax Evasion (ATE) standards with a criminal liability for bankers help help to commit evasion?

There is no need for an international agreement at the OECD for that purpose.

Even though the enforcement of AML-CFT laws and regulations is dubious in some jurisdictions (for example in Luxembourg, according to the US Department of State, the scarce number of financial criminal cases is of concern, particularly for a country that has such a large financial sector: but it is true that, according to the Luxembourg FIU, 60% of banks never report any suspicious transaction. There are as well little declarations of suspicion from auditors whose commercial relationship with their auditees is emphasized and personalized by the small size of the jurisdiction… This would be evidence of the good faith of politicians and professionals, when they state their jurisdiction is no a tax haven and that banking secrecy has nothing to do with tax evasion.