Ethics and governance in the European Financial centers

On 14 December 2006, the UK Attorney General (AG), Lord Goldsmith, informed the House of Lords that the Director of the Serious Fraud Office (SFO), Robert Wardle, had decided to discontinue its investigation into the affairs of British Aerospace Systems plc (BAeS) as far as they relate to the Al Yamamah defence contract. The decision had been taken following representations made both to the Attorney General and the SFO Director concerning "the need to safeguard national and international security". The announcement unleashed widespread criticism, both in the UK and externally.

Know more from Transparency International

Press release TI UK

The Wolfsberg Group is an association of twelve global banks, which aims to develop financial services industry standards, and related products, for Know Your Customer, Anti-Money Laundering and Counter Terrorist Financing policies.

The Group came together in 2000, at the Château Wolfsberg in north-eastern Switzerland, in the company of representatives from Transparency International.

The Wolfsberg Anti-Money Laundering Principles for Private Banking were subsequently published in October
2000 (and revised in May 2002). The Group then published a Statement on the Financing of Terrorism in January 2002, and also released the Wolfsberg Anti-Money Laundering Principles for Correspondent Banking in November 2002 and the Wolfsberg Statement on Monitoring Screening and Searching in September 2003. In 2004, the Wolfsberg Group focused on the development of a due diligence model for financial institutions, in co-operation with Banker's Almanac, thereby fulfilling one of the recommendations made in the Correspondent Banking Principles. During 2005 and early 2006, the Wolfsberg Group of banks actively worked on four separate papers, all of which aim to provide guidance with regard to a number of areas of banking activity where standards had yet to be fully articulated by lawmakers or regulators. It was hoped that these papers would provide general assistance to industry participants and regulatory bodies when shaping their own policies and guidance, as well as making a valuable contribution to the fight against money laundering. The papers were all published in June 2006, and consisted of two sets of guidance: Guidance on a Risk Based Approach for Managing Money Laundering Risks and AML Guidance for Mutual Funds and Other Pooled Investment Vehicles.


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The French business newspaper Les Echo informed almost a fortnight ago (article dated 28 February 2007) that AOL France has troubles with the French fiscal administration because of an organisation through the Luxembourg financial center to invoice clients with the Luxembourg VAT, which is cheaper.

This is a very interesting implementation of the principle "Substance over form" and other companies might have the same troubles.

The AOL case very significant if one analyses what professionals state about the Luxembourg financial center.

As far as bankers are concerned, in the Börsen-Zeitung dated 19 April 2006 Benedikt Buhl (Chief Executive Officer of the Dresdner Bank) Thomas Kiefer (Chief Financial Officer of the Dresdner Bank) published an article called "The The financial centre of Luxembourg as a centre of competence". When one looks on the article a paragraph is worth analysing:
"Hub" for European-Activities
In respect of service provision within the group and the outsourcing of operations, the burden of value added tax is capable of generating not inconsiderable cost incentives. Thus, a comparison of the applicable value added tax rates in European countries is of fundamental importance here too. With tax rates of between 3% and 15%, Luxembourg, along with Malta, has the lowest value added tax burden in Europe. Primarily in the financial sector, there are additional cost exonerations as a result of generous regulations on the level of exemption from value added tax.
Moreover, the favourable tax environment has resulted in companies such as AOL, amazon.com and skype choosing Luxembourg as the "hub" or platform for their European activities.
Against this background of the large number of comparative advantages over other financial centres, it is also clear that financial institutions in diverse international positions have bundled certain activities in Luxembourg in recent years, or have selected Luxembourg as the centre of competence for the provision of specific service tasks on behalf of parent companies. For example, international private banking, company-wide activities under international portfolio management or treasury operations could be mentioned here.


As far as auditors are concerned, when one looks a leaflet from the major Big Four in Luxembourg, the center is as well promoted as a an international decision-making, financing or distribution hub: an opportunity to be seized by many multinational corporations, a place that offers a range of advantages in terms of indirect taxes and more specifically in terms of VAT. The firm specifies that its outsourcing proposition allows the
clients to rely on the firm to deal with their VAT obligations and manage the risk of non-compliance, allowing to cut back on support function costs, focus on core competencies and centralise accounting systems. There is no warning or observation that such hub may be litigious from a fiscal point of view. The brochure on VAT advantages highlights that two major US ESS providers already decided to set up a European services platform in Luxembourg, i.e. Amazon.com and AOL Time Warner. Anyway auditors in general should not ignore the fiscal risk for the clients, which should be clearly stated on the brochures. They are not fined, but their clients are.


The authorities as well supported the hub: the Ministre of Economy and H.R.H the Grand Duc visited AOL premices late 2005.


In a nutshell, many bankers, auditors and authorities in Luxembourg are happy to promote publicly the financial centre of Luxembourg as a centre of competence for frauds, a haven for business where professionals do not care of the "Substance over form" doctrine and therefore promote tax evasion.

This is stupid: one must keep in mind that Al Capone collapsed on a simple tax evasion issue. They definitely weaken the investment funds industry by attracting for tax reasons companies that are not intended to be professionals of the financial sector, which "feeds" the reputation of tax haven of Luxembourg.



Sources:

Information about AOL (in French)

Article from bankers

Why Luxembourg: VAT advantages for commercial companies (the AOL hub is quoted as an example)

Luxembourg a prime location for doing business (the AOL hub is quoted as an example)


S.A.R. le Grand-Duc et le ministre Jeannot Krecké chez AOL (presse release in French)