Ethics and governance in the European Financial centers

In the late 1980s and early '90s, Harvard-educated economist Franklin Jurado ran an operation to launder money for Columbian drug lord Jose Santacruz-Londono. His was a very complex scheme. In its simplest form, the operation went something like this:

Placement: Jurado deposited cash from U.S. drug sales in Panama bank accounts.
Layering: He then transferred the money from Panama to more than 100 bank accounts in 68 banks in nine countries in Europe, always in transactions under $10,000 to avoid suspicion. The bank accounts were in made-up names and names of Santacruz-Londono's mistresses and family members. Jurado then set up shell companies in Europe in order to document the money as legitimate income.
Integration: The plan was to send the money to Columbia, where Santacruz-Londono would use it to fund his numerous legitimate business there. But Jurado got caught.

In total, Jurado funneled $36 million in drug money through legitimate financial institutions. Jurado's scheme came to light when a Monaco bank collapsed, and a subsequent audit revealed numerous accounts that could be traced back to Jurado.

Jurado's neighbour in Luxembourg filed a noise complaint because Jurado had a money-counting machine running all night. Local authorities investigated, and a Luxembourg court ultimately found him guilty of money laundering. When he'd finished serving his time in Luxembourg, a U.S. court found him guilty, too, and sentenced him to seven-and-a-half years in prison.

When authorities are able to interrupt a laundering scheme, it can pay off tremendously, leading to arrests, dirty money and property seizures and sometimes the dismantling of a criminal operation. However, most money-laundering schemes go unnoticed, and large operations have serious effects on social and economic health

The Jurado case is an example of the increasingly sophisticated means drug cartels employ to secure assets. But it also indicates that the very profits that motivate drug organizations are an Achilles heel and that national legislators, law enforcement agencies and international bodies are stepping up efforts against money laundering.

In this context, Luxembourg did a very good job.

Something striking is that the case, which is in favour of Luxembourg to demonstrate the action to refuse criminals, is forgotten in Luxembourg (it is not actually presented in the Codeplafi Database, it is not quoted by professionals to promote the ethics of the financial center) all the more as at the time of the trial, Etienne Schmit, who was deputy prosecuting attorney had said "We hope this makes the criminals understand that we do not want their money" (quoted by the International Herald Tribune). As if some pragmatic people wanted the criminals do not understand Luxembourg do not want their money. After the Jurado case Luxembourg had adopted a money-laundering law in 1989, but critics had said that it was full of holes. At the same time, the government had been concerned not to undermine the banking secrecy laws on which much of Luxembourg's wealth depends. Other text came later: Law of 5 April 1993 updated on 18 October 1999 and recently law of 12 November 2004.

We saw the same bad pragmatism in the framework of the debate relating to the current law on money laundering (12/11/2004). Luc Frieden's draft text was credible and appreciated by the IFM, but some professionals refused the wording as they wanted a text that would not have a negative impact on the commercial objectives and would be strictly limited to European requirements. The Prosecutors' Office underlined some international recommendations and especially those of the FATF-GAFI and explained it is no use having texts if the implementation is not effective. The Prosecutors' Office had even understood when reading comments on the draft that it was expected "to close the eyes on some obvious cases of dysfunction".

"Pragmatic people" won, which is a shame as Luxembourg could have anticipated some of the requirements of the new 3rd European directive. and therefore become a market leader in business ethics.



Know more

Financial havens, banking secrecy and money laundering
Watching the clothes go round
Banking Secrecy Diluted Duchy Convicts 2 in Drug Case
In Luxembourg, Drug Money Goes Down Legal Drain

Case Law as presented in the Codeplafi database (in French)

Tribunal d'arrondissement de Luxembourg, 2 avril 1992

Law 2004

Interview of Luc Frieden, Minister of Finance to justify the draft (in French)
Archives of the debate about the AML law (in French)

Table to compare the draft and the final text (in French) : an Englsh version of the essentials will be provided later, including influences in the debate.

On 12th July 2006 the Monegasque Tribunal found William Fogwell guilty of the charges against him in relation to the collapse of Hobbs Melville in 2000 and sentenced to 5 years prison. He was also fined €500,000. Fogwell was not in court for the sentencing and an international arrest warrant was issued against him. He is now a fugitive from justice. Shelley Fogwell, the 45-year-old daughter, was also convicted of fraud charges against her. She was sentenced to four and a half years in prison and fined €300,000.
Guillaume Losada, Shelley Fogwell's former boyfriend, and Jean-Christophe Moroni, a broker, were found guilty and jailed and fined €100,000. Patrick Grasset, another broker, was discharged and released.

The criminal trial of Bill and Shelley Fogwell had started on 28 March 2006 in the Palais de Justice with a stop after concerns were raised over the impartiality and independence from Monegasque authorities of court President Gérard Launoy who was replaced after three weeks.

The Hobbs-Melville brokerage folded in 2000 leaving a EUR140 million hole in its accounts, according to Reuters
Wealthy investors had invested sums of up to EUR8 million each in the company, lured by the promise of returns of between 30% and 60%. While things appeared to be running smoothly for investors in the five years prior to the collapse of Hobbs-Melville, many suspected that things were amiss when the company began to make late payments and failed to honour other obligations to its stakeholders.
Citing one investor in the firm, Reuters reported that Hobbs-Melville made risky bets in the short-term money markets.
It is thought that around 500 investors have lost money, and 300 of them have hired 50 lawyers to press their case
Mr Hobbs was not present at the court hearing, although his daughter, Shelley, 45, was on the stand in connectionwith the collapse of the brokerage.

Monaco has renewed its determination to rid itself of the image as a haven for financial criminals and money launderers : Prince Albert II, who assumed the throne following the death in April of his father, Prince Ranier, stated in his inaugural speech last July that: “I intend that ethics always be the basis of the behaviour of the Monegasque authorities". The case illustrates the time when English author Somerset Maugham called Monaco "a sunny place for shady people" (quoted by The Times , April 07, 2005).

Lawyers representing several plaintiffs declared they will file proceedings against the Monegasque authorities.

All the steps of the trial were reported by the local media.



Know more

Articles in English :

Investment Fraud Trial Commences In Monaco
Hobbs-Melville - the final verdict

Articles in French

See L'Observateur de Monaco
See the news on TV : France 3 (in French)

Supporting actually a financial center means sentencing, especially in cases of criminal breach of fiduciary duty. This reflects need to protect reputation of Island’s financial services industry and is a positive sign of ethics all the more as issues are transparent.

FRAUDULENT CONVERSION—factors for consideration

Six years’ imprisonment is an appropriate sentence for an accused convicted of a multi-million pound series of fraudulent conversions, committed to fund his neurotic addiction to gambling. Whilst a plea of guilty (which saves time and cost) and remorse are mitigating factors, the fact that his gambling has been encouraged by others is not. Furthermore, the court should have regard to the effect of the offence on the reputation of the Island’s financial businesses (Hayden v. Att. Gen., 1985–86 JLR N–23, considered; Att. Gen. v. Delaney, Royal Court, May 13th, 1993, unreported, considered; R. v. Aucott (1989), 11 Cr. App. R. (S.) 86, dictum of Watkins, L.J. considered; R. v. Barrick (1985), 7 Cr. App. R. (S.) 142, considered).
Att. Gen. v. Hanley (Royal Ct.: Crill, Bailiff and Jurats Coutanche, Vint, Bonn, Orchard, Hamon, Le Ruez, Herbert and Rumfitt), October 14th, 1993.

FORGERY—sentence—breach of trust—mitigating factors

The appellant was an accountant who had pleaded guilty to 15 counts of forgery, uttering and obtaining money on false instructions and fraudulent conversion, involving £52,600 of funds administered on behalf of clients in England. The proceeds were used primarily to relieve his liabilities incurred mainly through unsuccessful investment. He sold his business and left the Island leaving the problems unresolved and a considerable sum of money unaccounted for. He appealed against a sentence of four years’ imprisonment.
Held: The appellant’s behaviour amounted to a gross breach of trust and it was of paramount importance that the reputation and integrity of the financial businesses on the Island should be preserved. Nevertheless, important mitigating factors were the appellant’s total co-operation with the police, his previous good behaviour and subsequent remorse, his intention to repay and his actual repayment of some of the money, and the occurrence of the offences over the relatively short period of five years. The sentence would be reduced to one of three years, based on the particular circumstances of the case, without making any comment on appropriate tariff levels (R. v. Pemberton (1982), 4 Cr. App. R. (S.) 328, distinguished).
Hayden v. Att. Gen. (C.A.: Neill, Clyde and Collins, JJ.A.): July 10th, 1985.

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