Ethics and governance in the European Financial centers

John Christensen from Tax Justice Network last Sunday analysed the reason why the OECD tax model based on bilateral treaties for tax information by request was adopted by secrecy jurisdictions in the European Union that do not want to go further in the implementation of the Savings Directive.

The statu quo is promoted by Luxembourg, the tiny jurisdiction where there are so many red flags of frauds and bad governance that are emphasized by the small size all the more than these red flags are visible in public and official sources, which are the visible part of the iceberg. The ABBL (the Luxembourg bankers' Association) wrote: in light of Luxembourg’s decision to adopt OECD standards in tax matters, the government has demanded that the exchange of information upon request, as defined by the OECD Model Tax Convention, becomes the only standard applicable within the European Union.

As John Christensen explains, The OECD’s standards for tackling tax evasion rely on complex, time‐consuming and ineffective bilateral treaties for tax information by request. G‐20 leaders must seize the current political opportunity to push for a more ambitious multilateral treaty process based on automatic information exchange on the model currently being used within the European Union.

Some will complain that automatic information exchange is too complex and detailed to provide the basis for a global standard for information exchange. We disagree. The OECD standard based on a ‘by request’approach, which they would like to have considered as the global standard, is weak and ineffective. One statistic alone demonstrates how weak they are: in the past three years the British Crown Dependencies of Guernsey, Isle of Man and Jersey have cooperated with only 17 exchanges of information across their entire network of treaty partners. That’s fewer than two exchanges a year for each jurisdiction. No wonder the tax evasion industry prefers the OECD exchange model to the European standard.

If anyone doubts the effectiveness of the European model they should note that a prominent British lawyer ‐ an adviser to tax havens, no less ‐ has urged these jurisdictions to cooperate with the OECD processes in order to resist pressure for the alternative automatic exchange process.

The tax avoidance industry knows that automatic exchange works. It is what the tax avoidance industry is afraid of, and with good reason.

The OECD on 28 August issued a document to clarify its approach to counter tax evasion.

A couple of paragraphs are worth being quoted:

[The experts the OECD’s Committee on Fiscal Affairs and the Global Forum have suggested that] a good indicator of progress is whether a jurisdiction has signed 12 agreements on exchange of information that meet the OECD standard. This threshold will be reviewed to take account of (i) the jurisdictions with which the agreements have been signed (a tax haven which has 12 agreements with other tax havens would not pass the threshold), (ii) the willingness of a jurisdiction to continue to sign agreements even after it has reached this threshold and (iii) the effectiveness of implementation. 

In 1998 the OECD set out a number of factors for identifying tax havens.

The four key factors were:

1) No or nominal tax on the relevant income;

2) Lack of effective exchange of information;

3) Lack of transparency;

4) No substantial activities.

No or nominal tax is not sufficient in itself to classify a country as a tax haven.

The fourth factor above “no substantial activities” was not considered when determining whether a jurisdiction was cooperative. Thus, in order to avoid being listed as an uncooperative tax haven, jurisdictions which met the criteria were asked only to make commitments to implement the principles of  transparency and exchange of information for tax purposes.

The key principles of transparency and exchange of information for tax purposes can be summarised as follows:

• Exchange of information on request where it is “foreseeably relevant” to the administration and enforcement of the domestic laws of a treaty partner.

• No restrictions on exchange caused by bank secrecy or domestic tax interest requirements.

• Availability of reliable information, particularly accounting, bank andownership information and powers to obtain it.

• Respect for taxpayers’ rights.

• Strict confidentiality of information exchanged 

First, tax information received from another country can only be used for the purposes stated in the agreements. Second, a country is free to decline a request for information in a number of situations. One reason for declining to provide information relates to the concept of public policy/ordre public. “Public policy” generally refers to the vital interests of a country, for instance where information requested relates to a state secret. A case of “public policy” may also arise, for example, where a tax investigation in another country was motivated by racial or political persecution.

The OECD does not have power to impose sanctions on countries that do not implement the standards. Individual countries whether OECD or non‐OECD will decide for themselves what actions they consider necessary to ensure the effective enforcement of their tax laws. The G20 has produced a list of potential measures based upon an analysis provided by the OECD. The OECD will continue to provide a forum where countries can discuss how to make these measures more effective.

In a nutshell, the OECD admits that

1) there are loopholes for a given jurisdiction to decline a request for information and its decision is discretionary,

2) it does not have power to impose sanctions on countries that do not implement the standards.

Those who believe that the signature of agreements based on the OECD thax model is the panacea to counter tax evasion are very naive. Aren’t they?

France gets a list of 3000 French taxpayers with bank accounts in Switzerland, according to a report in the weekly Journal du Dimanche . Minister Woerth interviewed by the newspapers says the accounts contained some euro 3 billion , "some of which is very likely linked to tax evasion." (original text: Nous avons récupéré les noms de 3000 contribuables détenteurs de comptes dans les banques suisses dont une partie correspond très probablement à de l'évasion fiscale).

I think that Switzerland is alone in front of the USA and now France. Where are the allies of March to protect banking secrecy?

A couple of days ago Austrian political parties have just agreed to relax the country's banking secrecy regarding foreigners, paving the way for parliamentary approval. This agreement secures the two-thirds majority needed to pass legislation that would help remove Austria from the Organization for Economic Cooperation and Development's "gray list" of countries not complying with international tax information standard.

Luxembourg was the first "financial center" to quit the OECD "grey list". But the goal was to sign the required agreements as fast as possible knowing that it will be a long shot in practice for foreign tax administration to gather all information required to formulate the request all the more than the OECD tax model includes discretionary loopholes:

In no case shall the provisions be construed so as to impose on a Contracting State the obligation:
 a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;
 b) to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State;
 c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information the disclosure of which would be contrary to public policy (ordre public). 

The culture has not changed in Luxembourg. Definitely not.

In this blog I have expressed several times that I do not agree with whistle blowing despite it is promoted by international organizations like GRECO or OECD : whilst the OECD Convention on bribery does not impose specific obligations regarding whistle blowing the OECD monitoring procedures identify reporting mechanisms and whistle blower protection as relevant factors for detecting and deterring bribery.

Whistle blowing is based on internal information that is communicated and therefore is clearly a breach of loyalty. There are many public and official facts in the jurisdictions that allow to trace both a lax attitude and a support to professionals that do not comply with professional standing. I have decided to focus on these and I refuse any information that is not public or official I could be sent.

The definition of corruption is large enough to include those who organize huge banking schemes to facilitate tax evasion.

The UBS tax scandal in the USA started with Bradley Birkenfeld, who acted as a whistleblower. This guy was sent to jail for facilitating offshore tax evasion through UBS banking schemes, despite assisting federal investigators in exposing the secretive bank whereas it was agreed between the USA and UBS that UBS would disclose 4,450 client names instead of the 52000 targeted.

A couple of days later President Barack Obama played the golf with Robert Wolf, president of UBS Investment Bank and chairman and CEO of UBS Group Americas. Wolf, an early financial backer of Obama's presidential campaign, raised $250,000 for him back in 2006, and in February was appointed by the president to the White House's Economic Recovery Advisory Board.

There is all but an happy end for whistleblowers and I did not read any support  for Bradley Birkenfeld from the OECD or the GRECO, those organizations that promote what he did.

I think these organisation are neither trustable nor reliable as they are upset when one reports red flags from public and official sources. So how can they actually support the reporting of information that is more confidential ?

Luxembourg is said to be a regulated and international financial center.

In the framework of my study to compare some jurisdictions with the view to inform investors and clients, I can’t help posting the findings that Luxembourg is actually for the least a half-regulated center.

I know that many professionals with business standing in the jurisdiction do not like criticism and that their immature reaction is to fustigate an unhealthy combination of gratuitous assertions, hearsay, half-truths and concocted lies instead of tightening up the ship whenever issues are raised.

So I will use official sources to point out the failures of the regulation.

1) Failure of the regulator to inform investors for their protection.

Should such failure be demonstrated it would be crippling and the Ad stating “Luxembourg: regulated and international financial center” would be misleading.

My sources are provided by the regulator, the CSSF itself: on the one hand warnings published by the CSSF regarding suspicious activities of certain companies (in the investor protection section) and on the other hand CSSF annual reports (in the Publications section).
Unfortunately as transparency is not the quality of the jurisdiction, annual reports do not specify the persons involved so it is not possible to verify if every warning triggered a complaint .


As the annual reports specify in the “Means of sanctions available to the CSSF” chapter (9th chapter currently), the CSSF informs the State Prosecutor of any instance of non-compliance with legal provisions relating to the financial sector, giving rise to penal sanctions and that could entail prosecution against the implicated persons. The following cases are concerned:
- persons performing an activity of the financial sector without holding a licence;
- persons active in the field of company domiciliation without belonging to any of the professions entitled by the law of 31 May 1999 governing the domiciliation of companies as amended to carry on this activity;
- persons other than those registered on the official lists of the CSSF, who use a title or appellation, thereby breaching Article 52(2) of the law of 5 April 1993 on the financial sector, as amended, that gives the appearance that they are authorised to perform one of the activities reserved for persons registered on one of the lists;
- attempted fraud

There should not be any discrepancy between warnings published by the CSSF regarding suspicious activities of certain companies and complaints filed with the State Prosecutor’s office.

Otherwise this would mean that practically the CSSF would not protect the investor in an appropriate way : in other words by not being informed in time of every case filed, investors might loose their money with some persons that the CSSF knew were dubious.

Let’s see (click to enlarge):

The figures are telling: the last two years (the “current” regulation) investors were not informed of 50% of complaints filed with the State Prosecutor’s office.


2) Failures of banks to report Suspicious Transaction reports

This symbolic percentage of 50% reminds me of the percentage of banks that never ever reported a declaration of suspicion according to the CRF, the Luxembourg FIU

According to the CRF, many banks never ever reported a Suspicious Transaction report. Practically half of the banks report a Suspicious Transaction reports. It is not possiblethat there isn’t at least one report.

Report 2008 page 15

La proportion des banques ayant opéré une ou plusieurs déclarations à la CRF est demeurée globalement stable depuis 2002 et représente environ la moitié des banques de la place.
Un examen statistique plus approfondi confirme le phénomène relevé dans les rapports d’activités antérieurs, à savoir qu’un faible nombre de banques représente la majorité des déclarations du secteur.
(…)
Il ressort de ce qui précède qu’un grand nombre de banques ne procède pas sinon très peu à des déclarations de soupçon.

NB: This report was not promoted by the government but the information was circulated by the ALCO


Report 2007 page 14

La proportion des banques ayant opéré une ou plusieurs déclarations à la CRF est demeurée globalement stable depuis 2002 et représente environ la moitié des banques de la place.
Un examen statistique plus approfondi confirme le fait qu’une large majorité des déclarations est effectuée par un nombre très restreint d’établissements de crédit (…)
Ainsi, comme constaté dans les rapports antérieurs, un grand nombre de banques ne procède pas sinon très peu à des déclarations de soupçon.
Les causes de ce phénomène n’ont pas été identifiées par la CRF qui ne dispose pas de compétence pour mener des contrôles sur place systématiques afin de vérifier le respect de leurs obligations professionnelles par les banques n’ayant pas déclaré de soupçon pendant l’année sous examen.

Report 2005-2006 pages 11-12

La proportion du nombre de banques ayant au moins opéré une déclaration de soupçon est demeurée stable depuis 2002 et représente environ la moitié des banques de la place. Cette constatation est cependant sensiblement relativisée par le fait qu’une large majorité des déclarations est effectuée par un nombre très restreint d’établissements de crédit.
Comme pour la période précédente, il y a partant lieu de relever qu’un grand nombre de banques ne procède pas sinon très peu à des déclarations de soupçon. Les causes de ce phénomène ne sont pas connues de la CRF.

Report 2003-2004 page 9

Il y a une certaine stabilisation du nombre de banques ayant opéré une ou plusieurs déclarations de soupçon. En effet, depuis 2002, environ la moitié des banques de la place a opéré au moins une déclaration d’opération suspecte auprès de la CRF par an.
Ce chiffre est cependant sensiblement relativisé par le fait qu’une large majorité des déclarations est effectuée par un nombre très restreint d’établissements de crédit (…)
Un grand nombre de banques ne procède pas sinon très peu à des déclarations de soupçon.

Report 2001-2002 page 12

L’évolution du nombre des établissements de crédit agréés

1998 : 209
1999 : 210
2000 : 202
2001 : 189
2002 : 177

L’évolution du nombre des établissements différents ayant opéré une ou plusieurs déclarations est la suivante :

1998: 32
1999: 36
2000: 31
2001: 59
2000 : 80

Le pourcentage d'établissements ayant opéré une ou plusieurs déclarations est le suivant :

1998 : 15%
1999 : 17%
2000 : 15%
2001 : 31%
2002 : 45%





Conclusion: This is the visible part of the iceberg because many data are not available to assess the quality of the regulation in every area as transparency is not a hallmark of the jurisdiction. But the figures are telling enough to conclude that the communication about the regulated center is deceptive. Definitely deceptive for clients as well as for international organisations (OECD, FATF, IMF…).

Last year, on 15 May 2008, the Commission de Surveillance du Secteur Financier warned the public of the activities of a certain Mr Thomas Martin acting notably under the name “Thomas Martin Investment Club” and “TMI Club” (address: 34, parc Syrdall, L-5365 Munsbach).
According to the information available to the CSSF, the above-mentioned person offered services of the financial sector.
The Commission de Surveillance du Secteur Financier informed the public that neither Mr Thomas Martin, nor “Thomas Martin Investment Club”, respectively “TMI Club” had been granted the required authorisation to offer such services in or from Luxembourg.

The information was circulated as well by the Centre Européen des Consommateurs. But only the CSSF and the Centre Européen des Consommateurs circulated the information.

A couple of days before the warning Thomas Martin was interviewed and he presented himself. The conversation took place online NOT face to face.

1.) Hi Admin, where do you come from?
I am a retired man from Western Europe, I am more precisely French but lived in Switzerland and Luxembourg most of my life. I am what people call a self-made-man, didn’t study a lot as I had to work quickly, so I had many and various jobs. Finally I ran a small HR Cabinet in Switzerland, where I met a lot of high executives in the financial world. They opened my eyes and my mind to finance, and all began really.

2.) Why did you decided to start an online investing program?
Well to be frank I didn’t decide by myself to go online. In 1990 I opened a very small and very private Club, where a few friends and I invested our hard earned money. Years after years the Club grew, without any other advertising than private conversations.
Then a few years ago my son Stan joined me, it was if I remember around the year 2000. As he is from another – younger! – generation, he was very opened on the internet world, and began to say “why not go online”! I wasn’t very happy of this as our success was, in my opinion, due to our private and confidential status. But years after years he convinced me and in 2007 we decided to offer our online program.
The rule is simple: Higher is the amount of our funds, more we invest and more we make profit. So, why not coming online, despite I must confess that after what I saw on the internet, I was not very enthusiast to open a website. The danger for him was the Club to be mixed with all “ponzi” that are around.
Finally so we hired a programmer to write our software, and came online!

3.) So how long has your program started?
So, our program – the Club – was launched in 1990, and we came online in 2007. It will soon be one year we are online.

4.) What type of payment processors do you accept and do you plan to accept more payment processors in the future?
Most of our business is made through bank wires. But we understood that coming online, we will need to accept e-currencies. According to Stan, the most popular was e-gold, the most serious e-bullion, so we decided to accept them.
Later we added Libertyreserve, but we will probably remove it if they do not fix their problems really quickly, I suppose you know their situation!
We are opened to new processors, but as far as I can see, there is nothing serious now! Let’s wait, maybe something really new and great will come? Nevertheless once more, the best way to work with us is using bank wires.

5.) How confident are you with your site security level?
Sorry we do not communicate about this topic.

6.) What are your plans for the future and how long do you think you will stay online?
We have no plans to not stay online! Do you think that any company can think “when will we close?”? Our program works, and worked since 1990!
We turned into a registered company last month. We are expecting to receive a bank license next year; we will emit our payment cards (OUR cards and not third party cards), offer certificates of deposit and other bank services. As you see, our plans for the future look fine!

7.) Do you have any phone support other than email support?
Yes we have but only on a case by case basis, as Stan (he cares of the Support) has really no time to return phone calls. Support is now done through a “ticket center” that allow our Investors and us to keep a trace of all exchanges.
I add that I sometimes meet some Investors or potential serious Investors, but as I am very often travelling it isn’t that easy. Our commercial director, Alain Martel, meets more frequently people, especially in Europe.

8.) Can you explain on how you calculate the ROI of your plan?
We offer 10.25% by month. This is an average return we can pay, we of course do not exactly make 10.25% every month. We can for example make 50% one month (we made even more some times!), then a month in loss, etc. Globally with paying 10.25% to our Investors, believe me we still have some nice profit for us!

9.) Do you have a physical office/address for your program/company?
We have a small office in Luxembourg but we do not disclose the place, anyway we will close it as we have now no more link with Luxembourg. When we need to meet people, we find a place: At home sometimes, or we rent an office in a business center, or in a good restaurant!

10.) How many percentage of the funds received from investor will go to admin, staff profit?
None. We invest 100% of the funds we receive. We make our living on the profit we generate, not on the funds we receive.

11.) Lastly in less than 50 words, briefly describe what can your program give to your investors?
A High, Regular and Honest Income! High as 10.25% is really high, Regular as we pay this rate or just about this rate since 1990 without any break, Honest because we do not invest in illegal activities, AND we do not pay Investors with the investments of others!

Thomas Martin’s website does not exit anymore and many investors are saying he left with their money and have filed a complaint.


This story raises one question: Why it was so long for the Luxembourg regulator to warn clients: the business was created as of 1990 and the warning was published 18 years later?

Luxembourg is a small jurisdiction where everybody knows everyone and what the others are doing.

The activity should have been detected earlier. Information on the business had circulated on the internet at least since October 2007.

There were many red flags:

In the 2000s there is no business in the investment activity that does not have a website.

Additionaly, the address was a PO Box. The so-called phone number +1.8318506188 that seems from California is from Pac-West Telecom California. PacWest provides notably VoIP services.

Finally, Thomas Martins seems to be located now in the Seychelles. The telephone is still the one of Luxembourg and the fax is the so-called phone number from California.



In the context of the Luxalpha affair, this story that is not circulated in Luxembourg (the Keydata affair is not circulated either), demonstrates that the regulation is at the very least perfectible.

TJN and Financialtastforce have reported that Eva Joly, the recently elected EU deputy and former anti-corruption prosecutor and currently advisor is Iceland, denounced French Bank BNP’s offshore financial activities which have enabled African leaders to amass unreported oil-money in tax havens.  “We would like to know how much BNP earned from its two subsidiaries in Cyprus, 27 subsidiaries in Luxembourg and 21 subsidiaries in the Cayman Islands.”, she said reported Le Monde.

BNP Paribas, one of the largest European banks, has 189 subsidiaries located in tax havens, more than any other French firm.

An example of African leaders that was able to amass unreported money in tax havens was given in a report that was prepared by by Kroll Associates UK Limited a couple of years ago to expose details of the massive corruption perpetrated by former Kenyan President Daniel arap Moi and his two sons, including drug dealing, money laundering, and kickbacks. The report was intended to be confidential for the private an exclusive use of the client but it is available online now.

As Nick Wadhams observes advertisement Kroll refused to comment on the authenticity of the report.

The suspicion has always been there but to put a number of that magnitude to it is quite a revelation," said David Ndii, a research adviser with the Kenya branch of Transparency International quoted by Nick Wadhams . "The regime saw a lot of corruption, there are people locally who enriched themselves unjustly, that we know. But concrete information of that nature has never been in the public domain."

What is said in the report about Luxembourg is worth reading.

The Study by the Cercle de Cooperation may be inaccurate in the figures (but how to be accurate when transparency is not a hallmark in the jurisdiction: banking secrecy, poor communication on sanctions...), but it is not the unhealthy combination of gratuitous assertions, hearsay, half-truths and concocted lies that was presented with threats on the financing of NGOs in Luxembourg and censorship.

To comment the turn over of names of suspected U.S. tax dodgers who have held 4,450 secret accounts at banking giant UBS,  "It's like a dog that's tasted the blood of its first victim (...)It's clear that the concept of a perpetually safe tax haven is a fantasy that no longer exists" said Ron Geffner quoted by Washington Post. He is a former enforcement attorney at the Securities and Exchange Commission who now heads the financial services group at Sadis and Goldberg.

Let's read what said the Department of Justice to comment the agreement:

The Swiss Government has agreed to review and process additional requests for information from other banks regarding their account holders to the extent that such a request is based on a pattern of facts and circumstances equivalent to those of the UBS case.

Associated Press has reported that Swiss banking giant UBS AG agreed today to turn over to the IRS the details of 4,450 accounts suspected of holding undeclared assets by American customers, ending an intense trans-Atlantic legal fight. UBS had feared that it might be forced to hand over as many as 52,000 clients.

In return, US authorities are to abandon their lawsuit against UBS in the US.

Despite the agreement is for only 8.5% of the target, it is a turmoil for banking secrecy.

The deal will give the Internal Revenue Service thousands of long-sought account names, and is expected to provide even more UBS clients who voluntarily disclose their financial details. UBS's American customers have until September 23 to confess to the IRS about offshore bank accounts

"This issue is not going away, and people hiding assets and income offshore will find themselves increasingly at risk due to our efforts in this area," IRS Commissioner Doug Shulman said.

Money Marketing has reported that Administrator PricewaterhouseCoopers is still assessing potential litigation for Keydata investors with missing assets in SLS Capital but says dividend prospects for creditors in the insolvent firm are currently ‘poor’.