Ethics and governance in the European Financial centers

The Permanent Subcommittee on Investigations had scheduled a hearing, "Dividend Tax Abuse: How Offshore Entities Dodge Taxes On U.S. Stock Dividends," on Thursday, September 11, 2008, at 9:30 a.m., in Room 106 of the Dirksen Senate Office Building. The Subcommittee examined how some financial institutions have designed, marketed, and implemented transactions to enable foreign taxpayers, including offshore hedge funds, to dodge millions of dollars of taxes on U.S. stock dividends.

In the report, the Luxembourg financial center is quoted several times.

It is the center where officials feel protected enough to
- state it is not there duty to control if the taxpayer was honest ,
- be willing to protect the interest of the financial center instead of focusing on the relevant issue which is what is to be done to correct the dysfunctions which definitely harm the reputation of the financial center,
- etc.

Extract of the report :

Page 13

In the transactions reviewed by the Subcommittee, U.S. financial institutions engaged in
dividend-related swap and loan transactions with a variety of sophisticated non-U.S. investors,
including offshore hedge funds, foreign financial institutions, certain Luxembourg mutual funds, and large institutional investors such as pension funds, insurance companies, and private equity funds

Page 59

An employee in Merrill’s Global Tax group in New York responded with several ideas
for financial transactions to enable clients to dodge payment of U.S. dividend taxes on the
Microsoft dividend, including transactions involving stock loans, total return swaps, and options.
He observed:
“We had in place a 97-66 structure out of our SNCFE-Hong Kong entity, as it related to
our Luxembourg SICAV funds. This structure was put on hold because the systems
infrastructure supporting the trade did not work as anticipated. We also know that
Morgan Stanley had a 97-66 facility for a couple of years, and our 97-66 thing was an
internal response to that. … I also heard that the IRS is looking into this issue as part of
the single stock futures project and there is some concern that whatever rules they devise
as part of that could adversely impact the 97-66 trades. Other thoughts - …[t]ypical total
return swaps or collars to avoid [withholding] tax.”

Page 63

Project Gemini initially provided “dividend enhancements” to a Luxembourg mutual
fund controlled by Merrill called Merrill Lynch International Investment Fund (MLIIF), whi
was already executing the proposed stock loan transaction “with several of Merrill Lynch’s
competitors

In its presentation, Merrill described MLIIF as a SICAV fund incorporated in Luxembourg, having only non-
U.S. investors, and whose investments were managed by Merrill Lynch. SICAV stands for Societe d’Investissement à Capital Variable, “a Luxembourg based public limited liability company whose capital is at any time equal to the net value of its assets.” Merrill wrote that, in 2005, MLIIF had “approximately $28 billion of assets, with roughly 25% invested in US equities.” It indicated that these U.S. securities were subject to a 30% dividend tax

Two years ago Luxembourg was required to abolish the H29 legislation.
The European Commission had decided that the preferential tax regime in favour of Luxembourg’s Exempt, Milliardaire and Financial Holdings of 1929 violated EC Treaty state aid rules (Article 87). The scheme was granted under a Luxembourg law from 1929, predating the EC Treaty, and therefore constituting existing aid. The Commission had concluded that the scheme grants unjustified tax advantages to providers of certain financial services who set up holding structures in Luxembourg. It distorts competition and trade by altering the level playing field between financial undertakings and induces them to create dedicated structures in Luxembourg to reduce their current tax liabilities.
Competition Commissioner Neelie Kroes said that the “decision to eliminate a scheme providing sizable tax advantages to Luxembourg’s financial holdings will help to restore a level playing field in the EU’s financial services industry”.
The consequence was that the OECD granted Luxembourg for the evolution in the legislation.

Nevertheless if a chartered accounting firm in Luxembourg writes on its website that “Following an investigation of the regime by the EU Commission started in 1999, the Ecofin council recommended in June 2003 that harmful tax measures such as 1929 Exempt Holding companies come to an end by 2010” it adds that “Alternative solutions are already available to investors or families in order to enjoy similar tax benefits”
In other words, the firm admits that the background of harmful tax practices has not changed as investors may “enjoy similar tax benefits”.

Both The European Commission and the OECD are considered as idiots.


What is amazing as well is that a misleading wording is used for the presentation of one of the partners of the firm : the professional is said to be a "certified public auditor in Luxembourg" , with no capitals. Such title does not seem to exist. The problem is that the title can make believe that the professional is a registered auditor at the IRE, the Institute of registered auditors, which is not the case. The acronym CPA actually means “Certified Public Accountant”. Being presented as a “certified public auditor in Luxembourg" may be a way to gain credibility.

When looking the Corporate Registration, the professional is involved in the set up of companies linked to jurisdictions like the Seychelles, the BVI, Jersey and other similar jurisdiction, with a noticeable turnover of administrators and of statutory auditors including, legal persons located the exotic jurisdictions that are controlled neither by the IRE (Institute of Registered Auditors) nor the OEC (Institute of Chartered Accountants).



If I were a responsible leader in Luxembourg I would keep in mind what Senator Levin said:

“If the United States were to enact legislation to curb tax haven abuses, it would not be acting alone. For the first time, we are seeing a worldwide rejection of offshore business as usual. Tax authorities in Germany, Australia, the United Kingdom, France, and other countries are lining up to work in concert to shut down tax havens that have, for too long, carried on an economic war against honest taxpayers. The United States ought to be batting cleanup in that lineup.”

"For the first time, we are seeing a worldwide rejection of offshore business as usual" : This is what I called already almost two years ago the paradigm shift.

"As far as German-Liechtenstein relations are concerned, we wait here for better times, although I am optimistic, for in the past 200 years we have managed to survive three German Reichs, and I hope we will also survive a fourth," wrote Prince Hans-Adam II of Liechtenstein in a letter rejecting a request from a Jewish museum which asked him to lend it a painting from his collection.

I can understand that Hans-Adam II is upset as the reputation of Liechtenstein and its financial center have been damaged by the events.

The prince's office said in a statement that he had in no way intended "to belittle the atrocious events of the Third Reich" in what was meant to be a private and personal letter.

As far as the dispute between Germany and Liechtenstein is concerned since Germany acquired secret bank data by buying information, I do consider that selling the truth or buying it is a pathetic attitude.

Doing a citizen duty cannot be remunerated.

Furthermore, as I already wrote I am not in favor of whistleblowing. Whistleblowing is based on internal information that is communicated and therefore is clearly a breach of loyalty. There are many public and official facts in the jurisdictions that allow to trace both a lax attitude and a support to professional that do not comply with professional standing.

Additionaly if institutions like the GRECO, OECD, the United Nations... call for the implementation of provisions for the protection of whistleblowers, they do not sanction jurisdictions that do not abide by the recommendations.

It is amazing to see that the word "whistleblowing" does not exist in the FATF website with a google search.

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