Ethics and governance in the European Financial centers

Fernand Grulms, who chairs LFF, published an interesting article in German to fustigate the study published by the Cercle de Coopération and fustigate experts or bloggers, of which myself.

His article is very telling.

He uses the usual smear tactics: take one detail out of the discussion such as an error, a bad translation or faulty grammar, blow it up into a major, major flaw, and use it as a demonstration that the whole study, argument, article or whatever is peinlich, peinlich, peinlich. You don't have to address the real issue anymore.

But the issue remains as there is no corrective action and may explode later…

But the issue remains and may explode later...

He says: "Alle Unzulänglichkeiten, Falschaussagen und Fehlinterpretationen dieser “Studie” darzulegen würde den Rahmen dieses Beitrags sprengen. Dennoch war das Manuskript ein gefundenes Fressen für selbsternannte Experten und  Blogger, die dieses sofort ungeprüft und unkritisch zum Anlass nahmen, den Finanzplatz Luxemburg (abermals) durch den Dreck zu ziehen."

(Freely translated: To expose all shortcomings, false statements and false interpretations of this “study” would go beyond the scope of this contribution. However this manuscript became a feeding frenzy for all self-proclaimed experts and bloggers, who seized the opportunity to use it immediately, without critical questioning, to smear the Luxembourg financial center (again). )

Fernand Grulms fustigates self-proclaimed experts and bloggers.

ABBL’s opinion in the framework of the transposition of the Second Directive already fustigated in 2003 the "critiques des spécialistes autoproclamés de l’étranger" (free translation: critics from self-proclaimed specialists abroad).

I will only state that most self-proclaimed professionals in Luxembourg did not see that the fight against tax havens was serious and did not anticipate changes.

He concludes "Dieser ist in den vergangenen Monaten in ausländischen Medien häufig angegriffen worden, nicht selten waren die Vorwürfe völlig aus der Luft gegriffen. Dass nun luxemburgische ONGs ebenfalls auf diesen Zug aufspringen, ist mehr als bedenklich. Dass sie sich dabei auf derart unseriöse “Studien” stützen, ist mehr als nur peinlich. Und dass sie dafür auch noch öffentliche Gelder ausgeben – denn besagte nicht-Regierungsorganisationen werden auch mit luxemburgischen Steuergeldern finanziert – kann man als skandalös bezeichnen"

(Freely translated: It (the financial center) often came under attack these past months in foreign media, and quite often the criticism was pure invention. The fact that Luxembourg NGOs now also get onboard that train is more than questionable. The fact that they thereby use such un-serious “studies”, is more than embarrassing. And the fact that they spent taxpayers’ money on this – because these NGOs are also funded with tax payers’ money – is outright scandalous.)

This means that there cannot be any public financing for those who question the dysfunctions in Luxembourg. I kew it.

The organization for NGOs lives among others from public Luxembourg taxpayers money. So does LFF. It might be that an argument by the ONGs can be defeated and contradicted. Then LFF should do it.

But what if LFF promotes and supports faulty policies that will eventually hurt Luxembourg's reputation much more than a study by a charitable organization, because clients' money can be lost?

See for instance the analysis for investor compensation schemes that will be in my guide.

Figures (in EUR)

As far as investors are concerned, the Directive sets a Community minimum level of compensation per investor of Euro 20 000, while at the same time authorising Member States to provide for a higher level of compensation if they so wish. However, certain categories of investors may be excluded by Member States from the scheme's coverage or may be afforded a lower level of coverage. The arrangements for organizing and financing schemes are left to the discretion of Member States.

Clever investors will realize they seem less protected in Luxembourg than in France or Belgium, that both go beyond the directive.

Source:

Luxembourg

France

Belgium

"Aujourd'hui la plupart des pays disposent de textes anti-blanchiment et le blanchiment n'a pas disparu. Ce qui compte c'est la mise en œuvre: quel poids a la personne chargée des vérifications au sein d'un établissement financier, peut--elle imposer ses vues, de quels moyens dispose-t--elle ?" (Thierry Godefroy, CNRS)

(free translation: “Today most jurisdictions have AML texts, and money laundering did not disappear. What counts it is the implementation: which power has the person in charge of the controls within any financial institution, can he or she to impose his or her views, what are his or her means?”

Source : Les Echos

Reuters has reported that Swiss prosecutors said on Wednesday they are investigating allegations that an unnamed high-ranking Swiss official took a bribe from a U.S. client of UBS to help cover up tax fraud.

Federal prosecutors said in a statement the tax authority had filed charges against unknown persons which it was now investigating, without giving further details.

A U.S. client of the Swiss bank, which is at the centre of a U.S. tax fraud case, pleaded guilty on Tuesday to using Swiss bank accounts to hide money from the U.S. taxman and said he paid a Swiss official $45,000 to help cover up the fraud.

Know more

UBS is more and more disappointing. They had a video on Corporate Social responsibility, with the participation of Jermyn Brooks, Director Transparency International. It is no longer online but I have it as it is a very good example of the deceptive use of Corporate Social Responsibility for the good image while not respecting rules all the more than there are links between money laundering, tax evasion and financial regulation.

What Jermyn Brooks said is quoted in a brochure : “UBS was instrumental in creating the Wolfsberg Group, named after their own management training center in Switzerland. With the help of the anti-corruption organization, Transparency International, 12 of the worlds largest banks – banks which would normally be guarded about sharing internal procedures with their competitors, collaborated to develop and publish the “Anti Money Laundering Principles” called the “Wolfsberg Principles” …which have received worldwide recognition as good practice – filling gaps in national laws and regulations.”

Over the years, my focus on financial centres has been primarily on Luxembourg and occasionally on some other jurisdictions, mostly in Europe.

Knowing Luxembourg best is the starting point for a project of guide, which has as an ambition to identify characteristics both good and bad of what is generally considered a “financial centre” or a “tax haven” or a “judicial haven”.  

Luxembourg has also assumed leadership of a group of tax havens, even inviting them to a coordination meeting to Luxembourg, which offers a good starting point, as Luxembourg has been a coordinator.

Lastly, numerous reactions are available because of that leadership from institutions such as OECD, G20, European Commission or public comments on issues such as Madoff, double taxation agreements, compliance and banking secrecy.

Starting with Luxembourg as a benchmark, the guide will cast a present day picture of the Luxembourg financial center, and evolve from there into an analysis of other jurisdictions.

Jean Meyer’s open letter in the Lëtzebuerger Wort (he is the chairman of the ABBL, the Luxembourg Bankers’ Association) to my attention to decline my help gave me the idea of the guide for the clients and the investors to compare jurisdictions on the basis of precise and objective criteria:

- Wording of the laws and regulations: in particular words that were cut off or on the contrary added compared to the original directives (or other standards) and the practical effects in the implementation of the standard of origin (in particular for the EU members, law and regulation of transposition of the countries versus formulation of the OPCVM Directive, the Savings Directive and the Deposit-guarantee schemes Directive)

- System of protection for the investor and/or the client (mechanisms under the leadership of regulator, trend of the jurisprudence in the litigations banks/customers…)

- Use of ratios of comparison of the effective implementation of the regulation: for example the comparison with Monaco, with which Luxembourg has just signed an agreement for exchange of information, it appears that the ratio of Suspicious Transaction Reports per $1billion in assets for Luxembourg, fund industry excluded, is 6 times less than Monaco and the ratio of Suspicious Transaction Reports per $1billion in assets for Luxembourg, fund industry included, is almost 17 times less than Monaco. That is to be brought closer to the CRF (the Luxembourg FIU) reports every year that 50% of the banks never make Suspicious Transaction Reports. Unfortunately, the amount of assets that the aforementioned banks represent is not known

The idea is to assess the quality of the regulation in the broad sense to guide the customers and investors in their choices.

On a subsidiary basis, for the jurisdictions which lodge an activity of general interest for the international financial sector (for example, clearing), will be posed logically and practically the question of the relevance of the maintenance of the activity if it appears a deficit of regulation compared to what is done in the other jurisdictions.

I do not prejudge results but I unfortunately fear a bad classification for Luxembourg, which is being rammed by its actors themselves.

Richard Murphy has detected an interesting message on Youtube posted by someone who put her life savings on deposit with Kaupthing Isle of Man after being assured that my money was safe. With the backing of the Financial Supervision Commission the directors put over 50% of the bank's assets into Kaupthing UK which subsequently went into Administration. She received no letter of explanation or apology from the directors, and now she has to wait 6 years before she gets a fraction of her money back. Her message to anyone who is thinking of depositing in the IoM is: "don't bank on the Isle of Man"

Richard comments his guess is she’s one of at least 10,000 who have lost out by doing so. That’s what comes from relying on ‘well regulated’ jurisdictions made of straw.   
 

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.  

Luxembourg is not willing to implement the automatic exchange of tax information in the European Union despite this is exactly what is targeted in the Savings Directive and agreed to by the Luxembourg Government as observed by the US Senate one year ago:

“Au niveau européen, il existe une pression pour un abandon total du secret bancaire. Or, si des mesures plus strictes sont adoptées seulement en Europe, nous serions défavorisés face à d'autres centres financiers comme Singapour” (free translation : At the European level, there exists a pressure to give up banking secrecy. However, should stricter rules be adopted only in Europe, we would be disadvantaged vis-à-vis other financial centers like Singapore” the former Chairman of ABBL said a couple of weeks ago.

He is right. But I had commented that I wish he had a much more European collective view on the issue

Since the article the ABBL and its president confirmed that they refuse what was agreed to in the Savings Directive: For example « je refuse un échange d'informations automatique onéreux, peu efficace et excessivement intrusif, ceci ne comporte en aucun cas un refus d'application d'une directive alors que nos banques 1'appliquent à la lettre chaque jour qui passe. » (free translation : I refuse an expensive automatic information exchange, not very effective and excessively intrusive, this does not at all mean I refuse the application of a directive which our banks apply with accuracy each day which passes.), Jean Meyer Chairman ABBL has just said in the Lëtzebuerger Wort, in an open letter to my attention.

Luxembourg banks would apply the directive with accuracy each day which passes? What about the fact that The European Commission has just referred Luxembourg to the European Court of Justice over its incorrect application of the Savings Directive?

I am afraid such blatant biased view of the reality actually sows the doubt and depreciates Luxembourg’s credibility (Jean Meyer’s wording in his open letter).

However the issue raised about Singapore and other alternative centers is perfectly right and there is a solution, a definitive solution.

The solution is to have Clearstream and similar organizations under public control to be able to identify all the transfers to Singapore or other jurisdictions in order to detect and sanction tax evasion.

By nature the activity of Cleastream and other similar companies cannot belong to the strict private sector because there is a kind of mission of general interest for every state whose economic development rests on the banking system. It follows that a public control is mandatory to regulate the flows worldwide and protect the Luxembourg financial center.

Thanks to the Luxembourg clever bankers who raised a true problem, this solution should be considered and they cannot seriously oppose it, as this is an effective answer to their fears about Singapore.

The Cercle de Cooperation this week published a study, the findings of which made the ABBL upset. Once again their reaction is pure wooden language.

The ABBL has acknowledged the study made for the “Cercle de cooperation”, which accuses Luxembourg of siphoning off considerable amounts of money from developing countries by illegal or at the least illegitimate means.

The ABBL underlines that the study insinuates that the Luxembourg financial centre features tax practices and mechanisms that would set it apart as a tax haven and implicitly accuses Luxembourg legal vehicles – notably investment funds – of being used to make the poorest countries even poorer. It also claims that finance professionals ignore their essential obligations of identifying their clients.

The ABBL’s bad faith is easy to demonstrate at two levels:

1)

To depreciate the study, ABBL observes that in the study the financial centre supposedly collected around 500 billion euros in defrauded money originating from developing countries, even though in Private Banking the centre manages a total that amounts to less than 300 billion euros.

But in the previous paragraph ABBL mentions investment funds, which amount around 1 500 billion euros. This does not take into account these assets in the total assets present in Luxembourg, nor does it consider other financial vehicles available. ABBL’s reaction is definitely entirely biased.

2)

Additionally, according to the CRF (the Luxembourg FIU), the total number of open STR files within the CRF increased appreciably in 2008 (+24.4%), this increase being however more moderate if we disregard a bank the activity of which is centred on the electronic field (+8%). As a result, small number of banks represent the majority of the declarations of the sector. A large number of banks file no or very few declarations of suspicion. (See report 2008)

There are 152 banks registered of which 75 only reported one or more STR (50%)

What I know is that these finance professionals that never ever reported any declaration of suspicion may ignore their essential obligations of identifying their clients.

The above are facts and not an unhealthy combination of gratuitous assertions, hearsay, half-truths and concocted lies (ABBL wording to comment the study)

What is extraordinary with these professionals in Luxembourg is that they are unable to make amend as they have developed an insulated culture that excludes any information that would contradict their reigning picture of the reality, their reality in the bowl.

In a video, J.-M. Goy, CSSF, is developing the Responsibility of a Luxembourg Depositary bank in the framework of a conference that took place on 4 March 2009 with the participation Peter de Proft, EFAMA, under the leadership of KPMG Luxembourg. 

What the CSSF says is very interesting even  more so that the ALFI admitted that The relationship between the Luxembourg Commission de Surveillance du Secteur Financier Luxembourg ( CSSF ) and the Financial centre it supervises has always been described, and rightly so, as being heavily influenced by a true common interest approach. (...) The Luxembourg Investment Fund Industry has regularly had a very close and direct say on the evolution of the Luxembourg prudential regulatory environment governing the collective Investment Industry.

J.-M. Goy stated:

The principles are perfectly clear. In Luxembourg we consider that our legal and regulatory framework is absolutely on line with the principles set up by the directive and provides for an appropriate level for investor protection.

 The rules are practically the same in all the European jurisdictions.

 Practically means in Merriam Webster: 

1 : in a practical manner <look practically at the problem>

2 : almost, nearly <practically everyone>

Practically has as its basic and primary sense "in a practical manner”. Language critics sometimes object when the notion of practicality means "almost, nearly" but this usage is widely used by reputable writers and must be considered acceptable.

Mr Goy is using the first meaning.

The problem is that in the transposition Luxembourg dropped some critical keywords under the influence of the financial sector so that their legal and regulatory framework cannot be on line with the principles set up by the directive to provide for an appropriate level for investor protection.

Which was confirmed late May by Mr McCreevy.

And they are unable to admit that there is a direct link between the changes and the Madoff affair in Luxembourg. Especially:

1. UBS was both management company and depositary, which is proscribed by the directive to prevent the conflicts of interest but is authorized by the Luxembourg law that keeps silence on the provision;
2. There is no safekeeping duty in the Luxembourg law whereas it is explicitly prescribed by the directive. Only the duty of supervision exists.
3. The way to discharge the duty of supervision to a third party does not comply with basic meaning of the word supervision: It is considered that the depositary has discharged its duty, 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, which is not consistent with a critical watching and directing as defined in Merriam Webster.

Additionally in a survey dated 20 February 2009 provided by the EFAMA itself to compare the jurisdiction, it appears that Luxembourg is the only jurisdiction with such strange wording for the depositary to discharge its duties.

These are facts.

Therefore who actually sows the doubt and depreciates the Luxembourg credibility (Jean Meyer’s wording)?

Those who are telling the truth on facts and want to correct dysfunctions in the jurisdiction, or those who are not telling the truth?

Investors will judge.

Subsidiary observation. I bet that according to the CSSF, their legal and regulatory framework is absolutely on line with the principles set up by the FATF and the European Directive and provides for an appropriate level for AML-CFT.

Should I be the FATF or the European Commission, I would definitely have a look on the transposition into the Luxembourg legal and regulatory framework…