Ethics and governance in the European Financial centers

Wim Piot, a PwC Luxembourg Partner, wrote a text in European CEO, July August 2008 to support the financial center of Luxembourg :

The truth about Luxembourg

The problem is when what he states to support the Luxembourg financial center is not compatible with public and official facts that are the visible part of the iceberg.

Let’s analyse a couple of sentences:

1)

To nip another misconception in the bud, we would like to stress that rules have been implemented to make sure that unscrupulous taxpayers do not take advantage of confidentiality rules to commit certain offences, such as tax fraud.

I would not comment the vague wording “certain offences” and the use of “tax fraud” which is a subtle difference with tax evasion.

I would only ask one question: which rules?
In 2008 an important leader from the banking sector admits that banks do not control the client’s honesty: Mr Lucien Thiel, the former chairman of the Banker’s association (1990-2004) and advisor near its board until January 1st this year, stated just after the beginning of the Liechtenstein affair that “It is not our duty to control if the taxpayer was honest” (In L'Essentiel, 27.02.08), which is not compatible with the statement that “rules have been implemented to make sure that unscrupulous taxpayers do not take advantage of confidentiality rules to commit certain offences, such as tax fraud”.

Mr Lucien Thiel is a respected leader whose statements reflect and influence the business behaviours in Luxembourg. He clearly confirms that Luxembourg does not care of the taxpayer's honesty. This is true for tax fraud as well as for tax evasion. No control is done at all. And this is not a new thing.

This means that Mr Piot’s statement cannot be true.

2)

The Luxembourg anti-money laundering legislation is one of the most stringent in the world

It is true that the CRF, the Luxembourg FIU, is one of the best in the world. Its reports or opinions do not condone issues.
But when one reads parliamentary sources (opinions from bankers, from the Conseil d’Etat…), when one analyse some judgements, when one analyses reports from the CSSF, the Luxembourg anti-money laundering legislation is not one of the most stringent in the world.

I would state a couple of evidences
- Sanctions are not dissuasive enough compared to a Center like the UK,
- Legal and regulatory framework comply neither with all the FATF Recs that contribute to the AML legislation (see the CRF warnings is opinions or annual report), nor the OECD Recs (Cf. OECD presse release this year)
- Requirement of “professional Standing” as defined in the Luxembourg law in a wording similar to Switzerland, is not implemented which was admitted by the head of the CSSF in the Annual Report 2004: “we observed certain behaviours of players in the financial centre, who do not blend in with this image. I do not intend to generalise, but I am of the opinion that, in too many cases, the persons responsible for reprehensible acts do not suffer the consequences with regard to the continuation of their occupation. The person responsible for such an act is often simply removed from management while being granted compensations, which largely exceed normal expectations. Sometimes, the impression could arise that crime pays, which soils the reputation of a financial centre. Moreover, it can be observed on too many occasions that when such professionals seek new employment, the new employers tend to somewhat close their eyes to the problem, while knowingly taking the risk that the persons concerned could again perform reprehensible acts”. We may demonstrate that the problem remains in 2008: professionnals that do not comply are still knowingly hired or appointed (managing director...).

This means that Mr Piot’s statement cannot be true.

3)

Luxembourg actively works with other governments to fight international financial crime

It is true that Luxembourg is involved in inter-governmental bodies: OECD, FATF, GRECO, Egmond Group…

It is even a generous member state that provides the FATF with a “generous grant” as written in the FATF Report 2006-2007 paragraph 54.

As the FATF states on its website, "the OECD is giving priority to combating economic crimes such as corruption and tax fraud. Its Principles of Corporate Governance and its work on beneficial ownership is of direct relevance to the FATF".

The OECD, were Luxembourg is a state member, last year published a Glossary of International Standards for Criminalisation of Corruption where it is stated that "For the bribery offences, the briber must offer, promise or give the bribe with the intention that the bribed official act or refrain from acting in the exercise of his/her functions or duties, etc. For trading in influence, the briber must intend that the recipient of the bribe influence the decision-making by an official. However, this does not mean that the intended result must have in fact occurred. The bribery offences require proof that the briber intended to influence the actions of the bribed official; they do not require proof that the official did, in fact, alter his/her conduct. (…) Proving the requisite intention is not always an easy task since direct evidence (e.g. a confession) is often unavailable. Indeed, bribery and trading in influence offences can be difficult to detect and prove due to their covert nature, and because both parties to the transaction do not want the offence exposed. Therefore, the offender’s mental state may have to be inferred from objective factual circumstances. (…) It is vital that the rules of evidence in criminal procedural codes permit this form of proof."

To implement what the OECD, where Luxembourg is a state member, states the OECD explains that “Ethics is everybody’s responsibility, including that of an assertive media, which through its probing reporting helps citizens to act as watchdog over the actions of public officials” (Measures for promoting integrity and preventing corruption 13 octobre 2004,). In other words, the OECD, where Luxembourg is a state member, encourage the citizens and/or the justice to report as watchdog what the OECD calls the “objective factual circumstances” that can be determined by asking two series of questions on the giver’s interest to act and the relevance of the grant for the recipient.

The giver’s interest to act

Two dimensions must me assessed: the functioning of the jurisdiction where the giver located is located and his/her/its relationship with the recipient

A couple of questions relating to the jurisdiction should be asked :
- Is there a TI (Transparency International) chapter?
- Is the jurisdiction well ranked in its area in TI Barometer?
- Are Recs to fight corruption (GRECO, OECD working group on bribery) implemented?
- Does the liability of legal person exist in the penal law?
- Is the press actually acting as a watchdog?

These questions are not exhaustives. The answer « no » to one or several question(s) should incitate the recipient to refuse the grant as it would be clues of “objective factual circumstances” as the OECD said.

Another critical question should be asked : does the giver expect or may the giver expect something from the recipient because of his/her/its role (a report, an assessment, a decision...) The answer « yes » should incitate the recipient to refuse the grant as it would be a clue of “objective factual circumstances” as the OECD said.

The relevance of the grant for the recipient

To assess, the relevance of the grant for the recipient, two dimensions should be taken into account: the risk for the recipient’s independance and the status of grants in the recipient’s funding.

To assess the risk for the recipient’s independance, three questions from Transparency International (6th TI principle) should be asked:
- May the funding compromise the recipient' ability to address issues freely?
- May the funding compromise the recipient' ability to address issues thoroughly?
- May the funding compromise the recipient' ability to address issues objectively?
- May the giver remind later the recipient of the grant to negociate a favor?
The answer « yes » to one or several question(s) should incitate the recipient to refuse the grant as it would be clues of “objective factual circumstances” as the OECD said.

Another critical question should be asked to verify if such grants are part of the recipient’s funding? The answer « no » should incitate the recipient to refuse the grant as it would be a clue of “objective factual circumstances”, as the OECD said.


This pragmatic framework to assess “objective factual circumstances” as recommended by the OECD and the FATF that implement the Principles of good governance as stated by the OECD allows identifying situations where the giver is de facto a briber:
- when a litigant give a grant to the court that is gonna judge the litigation
- when a tender give a grant to the commission tenders
-...

The OECD and the FATF are required to be strict with member states as they have a role of "auditor" : can one imagines the OECD working group on corruption accepting a « generous grant » from a state that do not implement its critical Recs? Definitely no. So it is for the FATF.

This means that Mr Piot’s statement cannot be true.




In a nutshell, as I keep saying banking secrecy and low taxes are not a problem in them, and may be supported provided that a financial center is credible and courageous enough to
1) admit its dysfunctions and deficiencies
2) correct them with transparency.

To to be credible an expert must be able to balance facts, positive facts as well as negative facts.

I am out of what is called in Luxembourg the “system”. I can state what is positive and what is not positive with an independent mindset. And this is a huge difference with every expert in Luxembourg that are unable to state issues.

The failure to ask or to answer questions allows these experts to operate with a distorted sense of reality. Finkelstein calls institutions that are unable to question their prevailing view of reality zombies. A zombie company, he says, is “a walking corpse that just doesn’t yet know that it’s dead—because this company has created an insulated culture that systematically excludes any information that could contradict its reigning picture of reality”. "See Finkelstein, Sydney, Why Smart Executives Fail: And What You Can Learn from Their Mistakes. Portfolio Hardcover, 2003)



Investors and international assessors will appreciate and identify actual experts that support a sustainable and fair business. So will appreciate the Permanent Subcommittee on Investigations of the U.S. Senate Committee on Homeland Security and Governmental Affairs.

When looking carefully the Mémorial C in Luxembourg (the Luxembourg Corporate Registration) we find various cases of individuals that are appointed managing director retroactively.

Exemple
Board meeting dated 20 May 2003
Appointment of an individual as managing director with retroactive effect to 01 June 2001


Such retroactive nominations are dangerous and should not be authorised as this means that decisions in the meantime may have been taken on an illegal basis which is a risk for stakeholders.

Among the exhibit document provided in the framework of the investigation, the US Senate published a transaction that is worth commenting in a couple of words.


The text of the exhibit

YYY Bank
Luxembourg Branch Office
XXXXXXXXXXXXXXXX
L-XXXX Luxemberg



Statement of Beneficiary

Subject e transfer / deposit / check / transfer of securities
In the amount of: approx. USD 1,200,000
To account nr. XXXXXXXXXXXXXXX
Account holder: ZZZ, B.V.I.
Rubric (if appl.) XXXXXX
Bank YYY, Succursale du Luxembourg
Date of Transaction no later than 12/31/2000

The undersigned NNN management Limited, Tortola, as Managing Director of the company ZZZ, Tortola, B.V.I.

Hereby declares

(X) that the following beneficiar(ies) is/are entitled to the above-referenced transaction:

Last name/First name : XXXXXXXXXXX
DOB: XXXXXXX
Resident in Boca Raton, FL 33496, USA

( ) that the asset in question are of rightful origin and do not stem from illegal drug or weapons trade or other criminal activities

The undersigned understands that the bank is obligated to provide the competent authorities with information upon request in so far as provided by Luxemburg legislation.

Place / Date: Vaduz, 10/31/00/ soh NNN management Limited
NFE
Signature



Attachment: copy of beneficiary’s personal ID.


Comment

The case involves Liechtenstein, the subsidiary in Luxembourg of a Swiss bank and the BVI.

The amount is important: around 1 454 000 EUR (1 EUR = 0,8252 USD late 2000)

The box that confirms that the asset in question are of rightful origin and do not stem from illegal drug or weapons trade or other criminal activities is not ticked, which may mean that the undersigned did not commit himself/herself to abide by the requirements.

The control is limited as it is in so far as provided by Luxemburg legislation.

The story demonstrates that companies located in the BVI (or similar jurisdictions) may be a risk for the Luxembourg financial center (or other centers as well). Any business registered in Luxembourg with a connection with the BVI wants analysing:

1) who is involve as shareholder and/or appointed managing director in the company(ies) registered in Luxembourg to assess the risk:
- is he/she a competent professional,
- does the professional gather every guarantee of irreproachable conduct, irreproachable being larger than a word like licit.

2) the wording of the Object of the company to assess if it is large enough for management do whatever activity he/she wants, which may result a fraud (activity very far from the object...).

3) the auditor, to see on the one hand if he/she is a regulated professional in Luxembourg (either by the IRE or the OEC) and on the other hand if the auditor’s auditor is as well a regulated professional in Luxembourg.


The analysis allows identifying red flags for which it is required to tighten up the ship for the reputation of the Luxembourg Financial Center.