Ethics and governance in the European Financial centers

In a recent press release Angel Gurria from the OECD stated that “agreements with six of its key economic partners show that Luxembourg has joined the international drive to combat tax havens and is moving swiftly towards substantial implementation of the OECD standard.”

Considering that the agreements do not have as an aim an automatic exchange of banking information and do not authorize general requests i.e. fishing expeditions as confirmed by Mr Angel Gurria in a letter to Luc Frieden that the Luxembourg Government published ;

Considering that only accurate requests will be satisfied: “where information is requested, it must be exchanged only where it is "foreseeably relevant' to the administration or enforcement of the domestic laws of the treaty partner. Countries are not at liberty to engage in 'fishing expeditions" or to request information that is unlikely to be relevant to the tax affairs of a given taxpayer. In formulating their requests, competent authorities should demonstrate the foreseeable relevance of the requested information” (A. Gurria to L. Frieden, 13 March 2009);

Considering that it will be a long shot for competent tax authorities to demonstrate the foreseeable relevance of the requested information;

Considering that the "foreseeable relevance" of the requested information will be at the discretion of country where the evasion take place;

Considering that in any event for accepted requests there will be delays for foreign tax administrations to obtain the requested data, like it is for the “letters of request” (to foreign courts);

Considering that in Luxembourg bankers welcome tax evasion that is not repudiated all the more than they consider that it is not their duty to control if the taxpayer was honest (Cf. Lucien Thiel’s doctrine: he is the former chairman of the Luxembourg Bankers’ association, and one of the founders of the LIGFI);

Considering that Swiss professional recently admitted the OECD tax model is a charade to counter tax evasion (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”)  

Considering that it result from the above that many tax payers that commit fraud neither will be dissuaded nor will be detected

The international drive to combat tax havens, as promoted by the OECD, and the swift move towards substantial implementation are a charade, so was the OECD list.

Luxembourg, and every jurisdiction, will be credible in their will to combat tax evasion when they vote at least a legal and regulatory framework to criminalise tax evasion, like AML legal and regulatory framework, with dissuasive sanctions.

Such framework would make useless the automatic exchange, provided that the sanctions are both dissuasive and effective, and are not made difficult even impossible in practice by a subtle formulation (like “knowingly”, added to the Luxembourg AML law).

Subsidiary questions:

-         By the way, what about Luxembourg’s situation in the international drive to combat corruption especially, with the criminal liability of legal persons and in general in the implementation of OECD or GRECO Recs?

-         By the way, what about Luxembourg’s actual framework on the depositary’s liability regarding the UCITS directive despite a misleading communication on the “faithful transposition” (I know that the OECD did not communicate on Madoff despite it is a very interesting case study of the perfectible governance in Luxembourg where EVERYONE - leaders and powerhouses, politicians and professionals, regulator - did not tell the truth. Why would they be trusted in their move towards substantial implementation of the OECD standard? Once a liar always a liar…

The ethical one always happens to be right, and proof of this will be immediate.

In a press release dated 28 May, it is stated that: Commissioner McCreevy initiates clarification of UCITS (Undertakings for Collective Investment in Transferable Securities) regulations regime. Commissioner McCreevy announced today in Brussels that he intends to clarify and strengthen provisions of the UCITs regime particularly as regards the liability of depositories. He announced he will launch a consultation before the end of June to deal with inconsistencies in the application of the UCITS directive which were shown up by the Madoff scandal. One of the consequences of the Madoff scandal in the EU is that it affected retail investors who had invested in certain UCITS funds the assets of which had been entrusted to a Madoff entity as a sub-custodian. Last December (MEMO/09/27) Commissioner McCreevy informed Ministers of Finance that he had asked his services to work closely with the Committee of European Securities Regulators (CESR) to look into the liability of the UCITS depositories in the 27 Member States. The outcome of this review by CESR is now known and it shows that the minimum high level principles of the UCITS Directive have been transposed in very diverging ways by Member States. The outcome is an unlevel playing field. This means that some EU investors in UCITS funds are better protected than others. On the other hand, the Commission has made stringent proposals on the regulation of depositories, their liability, eligibility, etc in its recent proposal for Alternative Investment Fund Managers (AIFM) (MEMO/09/211). According to this proposal, depositories should be credit institutions based, authorised and supervised in the EU. Their liability has been strengthened, including an inversion of the burden of proof, and there are clear provisions on delegation as well as on the conditions under which assets can be entrusted to depositories outside the EU. Mr McCreevy wants to extend such provisions to UCITS funds. The new proposal should at least cover what the AIFM proposal covers. It would not be appropriate to have a less stringent approach for retail investors than for professional investors.

It seems that the embarassing findings were not circulated in Luxembourg, the jurisdiction that aims to promote, through the LIGFI, stronger ethical practices and standards based on the principles of integrity: transparency, fairness, responsibility and accountability. However the ABBL published information, which is to its credit.

"The minimum high level principles of the UCITS Directive have been transposed in very diverging ways by Member States."

This is what I have explained on this blog several times. I had contacted Commissioner McCreevy in a letter dated 13 February 2009 to report and demonstrate the pragmatic transposition in Luxembourg that opened the drift with Madoff. In the answer on behalf of Comissionner McCreevy, which is dated 19 March 2009, Niall Bohan confirmed that the European Commission attaches great importance to addressing the questions relating to the way in which the depositaries of the UCITS funds have discharged their responsibility, as the role  of the depositary is a cornerstone of the UCITS regulatory framework by ensuring the safe-keeping of assets.

I cannot understand that politicians and professionals in Luxembourg claim, and are still claiming, that the transposition was faithful all the more than the recent CSSF decision on UBS was disappointing, but so compliant with the business culture of the center: the CSSF stated again that "Luxembourg law applicable to Luxembourg depositary banks in their role as safe-keepers of UCI's assets reflects faithfully the provisions of the European Council Directive 85/611/EEC ".

This statement only does not comply with facts, legal and regulatory facts.

As I demonstrated for deposit-guarantee schemes, the business culture to fool the client and international organisations, thanks to a misleading wording in the local texts,  has not changed, which build a country risk for the client as the outcome is once more an unlevel playing field.

Some leaders in Luxembourg should definitely quit the business on the principles of integrity: transparency, fairness, responsibility and accountability. 

Le temps has reported that Switzerland is willing to introduce specific provisions in the tax agreements that are to be signed.

- On the one hand, the request of the foreign jurisdiction would describe the behaviour in question, the name of the author, as well as the documents on which the jurisdiction bases its suspicions. If the foreign authority seeks to make raise the bank secrecy protecting the author from supposed tax evasion, the name of the Swiss bank should also be indicated in the request. This requirement of precision aims at preventing fishing with information by foreign tax authorities.

- On the other hand, Switzerland should negotiate the way in which the foreign jurisdiction can collect evidence to refuse requests that are based on evidence on an unlawful basis, according to the Swiss law.

I know that there is a change in progress in Luxembourg. Not with the LIGFI which is an association of the past as it is promoted by leaders of the jurisdictions that never ever repudiated, at least publicly, drifts and abuses in Luxembourg. It is about a major change which transcends the parties. The stake is to substitute the best elements for an old guard.