Ethics and governance in the European Financial centers

Jean Guill, CSSF, is quoted by Reuters.

What is said by the Luxembourg regulator seems very naïve as Jean Guill implicitly admits that Luxembourg regulation opened the drift with Madoff

It is said that the watchdog had been aware that Luxalpha and other funds' assets were managed by Madoff. It did not oppose the contracts the custodian banks signed with investors limiting their responsibility as custodian.

"People did not invest with Mr Madoff because they thought he was a thief, but precisely because he had a very good reputation. People thought that explained why he could give good results," Guill said.

Circular IML 91/75 states that

1) 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”

2) The depositary has discharged its duty of supervision, when it is satisfied from the outset and during the entire duration of the contract that the third parties, with which the assets of the collective undertaking are on deposit, are reputable and competent and have sufficient financial resources

Additionally EFAMA published a survey on the main tasks and responsibilities of depositaries at national level across Europe. The purpose of this survey was to identify a number of important aspects related to the legal and operating status of depositaries and to emphasize on the principal duties and liabilities of these institutions with respect to the investors and the fund (see page 6 ).

As regards the extent of the duty of supervision, it appears in this survey that among the jurisdiction in the framework of the survey (Austria, Czech Republic, Finland, France, Germany, Ireland, Italy, Luxembourg, Norway, Portugal, UK), Luxembourg seems the only one with such lax clause for the depositary to discharge its duty of supervision (while the duty of safekeeping does not exist) to a third party all the more than it does not comply with the definition of the word supervision : the effective critical watching and directing is no longer done with such clause.

I do think that if the clause had not existed in the Luxembourg regulatory framework, precisely the very good reputation (Jean Guill’s wording) would definitely not have been the criteria to invest with Mr Madoff.

If Luxembourg continues to deny the realities of the world and to disregard the fact that it is in an awkward position vis-à-vis the other jurisdictions, the financial center will collapse.

In his recent open letter in the Lëtzebuerger Wort Jean Meyer questionned “« Dois-je accepter que la réputation affaiblie des banquiers du monde entier serve de cheval de Troie a ceux qui veulent enfoncer la place financière luxembourgeoise? (free translation : “Should I have to accept that the weakened reputation of the bankers worldwide would be use as a Trojan horse for those that  want to ram the Luxembourg financial center?)

However the problem is that the financial center is being rammed by its actors themselves.