Ethics and governance in the European Financial centers

HM Treasury is conducting a consultation on the Government's proposed implementation of the Third Money Laundering Directive. The Directive was adopted in October 2005 and will need to be implemented into UK law by December 2007. The aim of the Directive was to update European legislation in line with the Financial Action Task Force recommendations. The purpose of this consultation document is to seek views on our proposals for implementation into UK legislation.

This consultation document sets outs our proposed implementation for the articles of the Directive. It also contains a Partial Regulatory Impact Assessment (PRIA) and poses a number of questions to which interested parties are invited to respond. Consultees have until 20th October 2006 to respond.

Following on from this consultation process, draft new Money Laundering Regulations will be issued and consulted upon by the end of this year.

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The Third Money Laundering Directive: Regulatory Impact Assessment

The Isle of Man was targetted by US Senate subcommittee report (see article "Tax Haven Abuses: The Enablers, The Tools & Secrecy (US Senate hearing)").

A spokesman for the Financial Supervision Commission (FSC), said: "'Any financial institution doing any business in the Island is required to understand the nature of the transaction being done and also has to ensure that the transaction is not deliberately breaking the laws of another country. We do not tolerate misuse of the financial system in any circumstance".

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The standards that pragmatic professionals are using in Luxembourg are incumbent upon them. They have admitted officially that business objectives are more important than business ethics and governance. They have made knowingly the choice in 2004 not to comply with some FATF Recs and have expressed their poor governance concerns notably by normalising financial frauds (forgery, use of forgery, false balance sheets, use of false balance sheets or unauthorised use of corporate property) that are considered as "vague” or “ambiguous” (Sic) offences and even by justifying possible money laundering when saying "actual money laundering" (Sic) which implies there may be dubious transactions they do not consider as money laundering (see articles "Clear and Pragmatic legal rules" and "Luxembourg and CFT" for the detailed analysis).

These standards of business behavior are up to them. But these people did not realise the paradigm shift worldwide and that their bogus pragmatism that is deep enough to be publicly expressed in official reports does not comply with the international ethical and governance trends or requirements, notably:
1) Those from the FATF and the IFM relating to AML/CFT.
2) Those from the IFAC (International Federation of Accountants), the IIA (The Institute of internal Auditors), the CFA Institute and other international professional organisation relating to business ethics and governance.
3) Those from the GRECO, the OECD and the World Bank relating to bribery. The GRECO report dated May 12, 2006 stated that Luxembourg has implemented satisfactorily or satisfactorily dealt with less than one quarter of the recommendations: “GRECO notes a fairly significant shortfall in the implementation of the recommendations contained in the second-round evaluation report. It nonetheless expects the Luxembourg authorities to do everything necessary to bring to completion the numerous legislative initiatives referred to in this respect. It urges the authorities of Luxembourg to speed up the reform process so as to show tangible results in the effective implementation of the recommendations as soon as possible”. The OECD report dated August 2 2006 concludes with almost the same wording: “Noting a substantial shortfall in Luxembourg’s satisfactory handling of the recommendations given in the Phase 2 report, the Working Group urged the Luxembourg authorities to speed up the process of reforms in order to deliver tangible results with respect to the implementation of these recommendations as soon as possible“. The convergence of the wording is remarquable : “fairly significant shortfall”, “urges the authorities of Luxembourg”, "speed up the reform process", “show tangible results”, "as soon as possible” for GRECO and “substantial shortfall”, “urged the Luxembourg authorities”, "speed up the process of reforms", “deliver tangible results, “as soon as possible” for OECD. As far as bribery is concerned there are resistances to implement international Recs so there are to implement AML/CFT Recs. Reports pointed out the link between corruption and money laundering.
4) Those from the European Union that is willing to prevent tax evasion. That is the reason why Luxembourg was required to abolish the H29 legislation and moreover an Amended proposal for a Council Directive amending Directive 77/388/EEC as regards the place of supply of services is in the pipe. Many frauds are based in Luxembourg where a fiduciary states that “the abuse of social goods and tax evasion are non-existent in the Luxembourg law” (see article “Is Luxembourg a tax haven?). The same fiduciary sell secrecy to attract business: "The bank secrecy forms integral part of the Luxembourg legislative system" or "Anonymity is a paramount concept in the Grand Duchy whose keystone is the bank secrecy".
5) Those from the US Senate, which is willing as well to fight tax havens that "sell secrecy to attract business" (Senator Carl Levin) and "have become the Wild West of the financial world, havens for fraud and evasion" (Senator Norm Coleman) (see article "Tax Haven Abuses: The Enablers, The Tools & Secrecy (US Senate hearing)"). Luxembourg was not targeted by the investigation, but senators pointed out the link between tax havens and money laundering. US Senators might assess what is going on in Luxembourg and tighten up the ship on the reality of Luxembourg.

One may find it logical that decisions and actions should be taken at the international level: the credibility, the authority and the reputation of supranational organisations is in question. The risk is to encourage "the Wild West of the financial world havens for fraud and evasion".

Decisions and actions should be taken as well at the national level to rebuild trust, being aware that there is a collective responsibility, as statements are official, and nobody repudiated such wording in the chain of responsibility, except the prosecuting authorities that do an excellent job with little means.

From a management and governance point of view, to rebuild the international trust, decision-makers (either professionals or politicians) at the time of the AML/CFT debate should leave the business under the international pressure as they do not accept the paradigm shift and one cannot rely on them to support the international trends and requirements: Naturam expelles furca, tamen usque recurret (You can drive out nature with a pitchfork, but it always returns, which gives a pragmatic proverb in English: "Once a liar, always a liar").