Ethics and governance in the European Financial centers

The BBC has reported that the UK's Overseas Territories and Crown Dependencies have been told to improve standards of regulation, and find new methods of raising tax.

A government-commissioned report suggests changes offshore centres need make to meet international standards.

Michael Foot, the report's author, said that several jurisdictions had "a good story to tell, but others had more to do on regulation and tackling financial crime".

As TJN observes, one useful thing the report does is to recognise that the OECD's standards on information exchange are inadequate. It states: "In the longer term, the trend for greater transparency is likely to result in pressure to move to a system of automatic exchange of information with the aim of combating tax evasion by individuals on a cross-border basis. . . . The jurisdictions within the scope of this Review must keep pace with international developments and move towards full automatic information exchange wherever possible. . . . The Review encourages (Guernsey and the Isle of Man) to announce a firm date for a move to automatic exchange. . . The UK should call on all EU Member States and third party countries which currently apply the withholding tax option to also make a similarly firm commitment."

The Wall Street Journal has reported that while the spotlight has been on the aggressive drive by the U.S. government to flush tax dodgers out of Switzerland, bankers here are instead grappling with the loss of a much richer clientele: Europeans

Read article

The Financial Times has reported that the Financial Secrecy Index will be published soon. This Sunday according to Richard Murphy.

The league table to be published by the Tax Justice Network, a respected campaign group, is led by the US state of Delaware and includes Luxembourg, Switzerland and Hong Kong in its top.

The index complies with Prime Minister Juncker's concern: it includes Delaware.

As TJN explains, the FSI (Financial Secrecy Index) is designed to identify the key contributors to global financial secrecy on a jurisdiction-by-jurisdiction basis. However, in some important cases, different level of secrecy prevail in different sub-jurisdictional entities. Since financial flow data are only systematically and comparably available at a jurisdictional level, this creates a potential problem. To deal with this, and recognising the impact that even marginal secrecy differences can have on the volume of illicit flows, we treat the most secretive sub-jurisdictional entity as representative of the potential for opacity of the whole jurisdiction, and therefore base its Opacity Score on this. The most obvious case where we have applied this technique is with the US state of Delaware, which is taken as representative of the maximum secrecy available within the whole jurisdiction (the USA).

This is exactly the point I raised a couple of months ago:

For Unions, Confederations and other multi jurisdictional states, the weakest link in the chain would give the country's final grade. For Switzerland it may be Zug, Delaware for the US, Andorra for France, Hong Kong for China...

The result would be surprising.

LIGFI just sent a press release that demonstrates once more it is a Luxembourg deceptive economic intelligence operation with no intelligence as it ignores facts in a jurisdiction that does not like critics.

A couple of sentences want commenting:

1. If LIGFI is engaged in recruiting members and partners within and outside the global financial sector, it calls for banks, other financial services and service providers to the financial sector to join the association

They are not calling for for academics, NGOs… It is definitely a body for the business in the financial sector, member outside the global financial sector being a frontage of opening.

2. Members will be called upon to financially support the LIGFI association through membership dues and/or grants

The fees are prohibitive and there is a dubious hierarchy by money that is not compatible with the spirit of ethics (See statutes).

The initial fee is fixed at:

- EUR 10,000 for charter members

- EUR 5,000 for public and private institutions

- EUR 2,500 for the financial sector and professional services

- EUR 1,250 for academe

The yearly fee is fixed at:

- EUR 2,000 for charter members

- EUR 1,000 for public and private institutions

- EUR 500 for the financial sector and professional services

- EUR 250 for Academe

Regular members assume the commitment to provide assistance and support to the a.s.b.l. and its activities. Any regular member has the ability to become a charter member. A charter member is a member recognized as committed at the highest level to the a.s.b.l., providing it with increased support and financial assistance (article 8 of the Statutes)

Charter members have eight voting rights each; public and private institutions have four voting rights each; financial sector and professional services have two voting rights each, and academe have one voting right each (article 28 of the Statutes)

3. Founded by private citizens from Europe and The United States

It is not accurate in the statutes, where founders and members of the board of regents are quoted:

- Jacques Santer, Luxembourger, Honorary Minister of State and former Prime Minister of Luxembourg, former President of the European Commission, residing in Luxembourg

- Michel Maquil, Luxembourger, President of the Luxembourg Stock Exchange, residing in Luxembourg

- Lucien Thiel, Luxembourger, Member of Parliament of Luxembourg and Honorary Director of the ABBL, residing in Luxembourg

- Patrick Zurstrassen, Belgian, Chairman of the Institut Luxembourgeois des Administrateurs, residing in Luxembourg

- Yves Wagner, Luxembourger, President of the Association des Analystes Financiers et Gestionnaires de Portefeuilles, residing in Luxembourg

- François Schanen, Luxembourger, Manager of the BCEE, residing in Luxembourg

- Gilbert McNeill, Swiss, Professor and Counselor, residing in the USA, residing in Luxembourg

- Luc Henzig, Luxembourger, Senior Partner of PricewaterhouseCoopers, Luxembourg, residing in Luxembourg

- Guy Harles, Luxembourger, Senior Partner of Arendt & Medenach, residing in Luxembourg

- Jed Grant, Irish, Senior Partner of Sandstone S.A, residing in Luxembourg

- René Brülhart, Swiss, Director of the Financial Intelligence Unit of the Principality of Liechtenstein, residing in Liechtenstein.

A private citizen is one who does not possess or exercise any authority or power of court, government, law enforcement, or military.

Lucien Thiel, Luxembourger, Member of Parliament of Luxembourg and Honorary Director of the ABBL, residing in Luxembourg is not a private citizen.

Furthermore founders are quoted with their job title and company. Most of them are acting in the Luxembourg financial sector directly or indirectly. They are acting as stakeholders of the Luxembourg financial sector.

Additionnaly members of the board of regents are definitely not "private citizens".

Jean-Claude Juncker,  Honorary Chairman of the Board, is Prime Minister.

Lucien Thiel, Honorary Member, is member of parliament.

A brochure was published by the Luxembourg government in 1999 at a period where Jean-Claude Juncker was already Prime Minister. It states : "In Luxembourg direct contact with Cabinet members is a normal procedure. This produces quick and timely decisions. Avoiding over-regulation and excessive red tape has certainly prompted the emergence of Luxembourg as financial center in the nineteen sixties"

Professionals of the banking sector decide of policies.

Nothing has changed in the perfectible governance.

The day after the pre-announcement for the “Luxembourg Monthly Finance Lunch” a new ALFI brochure: " Your bridge between Europe and China: Luxembourg" was online

This brochures states page 2 : "Shape regulation. An up-to-date, innovative legal and fiscal environment is critical to defend and improve Luxembourg’s competitive position as a centre for the domiciliation, administration and distribution of investment funds. Strong relationships with regulatory authorities, the government and the legislative body enable ALFI to make an effective contribution to decision-making through relevant input for changes to the regulatory framework, implementation of European directives and regulation of new products or services."

The media have reported that Austria, Liechtenstein and Switzerland yesterday met about banking secrecy.

This meeting was for german-speaking attendees.

Luxembourg was not in the group. The geography is only part of the explanation.

Some would see a sanction for a partner that is not reliable : when Luxembourg, Austria and Switzerland met in March in Luxembourg they agreed to coordinate their policies about banking secrecy.

After the publication of the OECD list, Luxembourg :
- did not care of the agreement to coordinate policies and signed more that the 12 required agreements whereas the culture did not change. It was removed from the "grey list" whereas the culture did not change.
- launched LIGFI for its own ethical promotion even though the new body was in the pipe since December 2008 and is a deceptive economic intelligence initiative without intelligence.

Nine organisations including TJN yesterday sent a letter to the Finance Ministers of G20 countries to call for:

1. Supporting a truly multilateral agreement for automatic exchange of information between jurisdictions, including the disclosure of beneficial ownership of assets and trusts. At the very least, a robust review mechanism must be put in place to evaluate the extent to which developing countries have been able to benefit from progress on information exchange.

2. Supporting an international accounting standard requiring multinational companies to report profits on a country-by-country basis. The OECD is currently investigating this proposal. We urge all G20 members to take an interest in this investigation and to use the St Andrews’ summit to request a formal report from the OECD to the G20.

Both measures aim effectively to combat tax evasion and, therefore, should be incorporated in regional and bilateral investment agreements with developing countries.

Read letter

When the Luxembourg Institute for global Financial Integrity was launched in May, Richard Murphy was contacted by Gibb McNeil, its Executive Director (also board member and president of the executive committee).

Richard noted the extraordinary fees they propose charging which are way beyond most NGOs, let alone academics or others who might have interest.

LIGFI has officially announced (with a delay) the Luxembourg Monthly Finance Lunch that is held at the Cercle Munster, 5-7, rue Munster, L-2160 Luxembourg City. The event starts at 11:45 h with drinks, followed by lunch at 12:15 h. The event is concluded by 14:00 h.
The lunch fee of 50 € is to be paid at the Cercle Munster prior to the lunch.

The lunch fee is telling of what Richard observed 6 months ago and raises a couple of questions:

The lunch fee for LIGFI is 50 € whereas the lunch fee for AMCHAM for example is 40 €


Why is it so expansive ? Such fee is way beyond most NGOs, let alone academics or others who might have interest.

Will NGOs and academics be invited by banks and other financial institutions ? If yes, what about their independance?

The pre-announcement for the “Luxembourg Monthly Finance Lunch” was online on Wednesday, 21 October 2009.

The day after a new ALFI brochure: " Your bridge between Europe and China: Luxembourg" by ALFI whose members would be wealthy enough to invite NGOs and academics.

This brochures states page 2 : Shape regulation. An up-to-date, innovative legal and fiscal environment is critical to defend and improve Luxembourg’s competitive position as a centre for the domiciliation, administration and distribution of investment funds. Strong relationships with regulatory authorities, the government and the legislative body enable ALFI to make an effective contribution to decision-making through relevant input for changes to the regulatory framework, implementation of European directives and regulation of new products or services.

This sounds like a renewal of what Rafik Fischer said a couple of years ago that I have quoted several times.

What is the practical consequence?
Professionals confirm they decide of the regulatory framework : hence for example poor sanctions compared to what is done in other jurisdictions ; this is the reason why the crime pays in Luxembourg.
Professionals confirm they decide of the implementation of European directives : hence for example the changes to the UCITS directive that introduced the flexibility (the so-called
innovative legal and fiscal environment) that facilitated the drift with Madoff.
Professionals confirm they decide of regulation of new products or services.


In this context, regulation is a frontage in the jurisdiction. So is the recent talk on ethics through LIGFI.

QED.

Will FATF and OECD smell the coffee?

"Si, aujourd’hui, l’évasion fiscale est égale à la fraude fiscale, et donc un crime, chaque Suisse en est complice pour avoir profité de la prospérité que nous a amenée tout cet argent étranger pendant des années!"

(Free translation: If today tax evasion is equal to tax fraud, and is therefore a crime, everyone in Switzerland is accomplice for having accepted the prosperity which brought us all this foreign money for years!”)

Source: Le Temps

Bloomberg has reported that two leading U.S. lawmakers proposed legislation that would impose new taxes on foreign banks that refuse to disclose the identity and contents of accounts owned by Americans.

The measure would impose a 30 percent withholding tax on income from U.S. assets held by non-U.S. institutions that refuse to name American account holders and report balances, deposits and withdrawals.

However the bill disappointed some of the most-aggressive critics of offshore-tax avoidance. It doesn't include a proposal from Mr. Obama to establish legal presumptions that favor the IRS in prosecuting suspected tax dodgers. It also leaves out more-stringent proposals from other lawmakers, including one that would treat offshore corporations as U.S. firms for tax purposes if their senior executives were located in the U.S. (see WSJ)

FATF today published a report about Switzerland.

According to FATF, Switzerland made significant progress.