Ethics and governance in the European Financial centers

I went through the "Mémorial C" in Luxembourg to see to what extend exotic jurisdictions are connected to Luxembourg-registered companies, with the view to determine whether situations met may be a scam involving a number of economic entities including legal persons located in risky far jurisdictions like the Seychelles, the BVI..., or simply are the creation of a company that optimise tax at an international level. One may criticize tax optimisation but that was not my concern in the assessment.

To determine dubious situations for the reputation of the Luxembourg jurisdiction, a couple of "red flags" should be taken into account :

I. ABOUT THE LUXEMBOURG-BASED COMPANY

Is it a sector of money laundering?
Is there a twin company: same or similar object, same individuals?
Does the object allow the company to act at an international level?
Is the managing director non compliant with the requirement of every guaranty of irreproachable conduct as stated by the legislation (especially an individual that was proved to have used without shame for private expanses the money of a previous company he worked for cannot be appointed managing director and/or administrator as he/she may start again what may be called "unauthorized use of corporate property")?
Is there a turnover of administrators?
Is there a turnover of statutory auditors?
Is the statutory auditor not a chartered auditor member of the IRE or or chartered accountant member of the OEC i.e. not controlled by these organisations?
Is the company only quoted in the corporate registration with no visible economic reality (an office mentioned in the yellow pages, a website, employees, brochures, Ads...)?

These items are not exhaustive. Each answer "yes" is a red flag.

II. ABOUT THE EXOTIC-BASED COMPANY

Is the company acting as the statutory auditor of the Luxembourg-based company?
Does the company appear recently in the Corporate Registration in Luxembourg?
Is the company only quoted in the corporate registration with no visible economic reality (an office mentioned in the yellow pages of its jurisdiction, a website, employees, brochures, Ads...)

These items are not exhaustive. Each answer "yes" is a red flag.


The more "yes" are observed, the more the fraudulent situation is built.

Many dubious situations are visible in the "Mémorial C" and are a risk for the reputation of Luxembourg because we are no longer in a question tax optimisation that may be defended. Dubious companies should not be accepted anymore. Time is up to separate the wheat from the chaff, and to not forget hearing before the US Senate a couple of weeks ago with the new state of mind that can be summarized in a couple of words: "Billions and billions of dollars worth of U.S. assets find their way into these secrecy tax havens, aided by banks, trust companies, accountants, lawyers, and others. (...) Tax havens are engaged in economic warfare against the United States ".

Philip Robinson, Financial Crime & Intelligence Division Director at the FSA, did a speech last 3 September.
He stated that "Where there’s evidence of fraud and dishonesty, regulators, professional bodies and law enforcement all have differing combinations of powers to take against offenders. And government agencies and trade bodies all have interests in the housing market being clean and efficient."
The FSA communicates any time there is an issue, which is a good thing and its fines are dissuasive enough.

Know more

I have mentioned several times on this blog the “system”. Time is up to quote a couple of examples of this "corruption catalyst" specific to Luxembourg.

1) A litigation between a foreign legal person or individual and a local legal person or individual. The local legal person or individual causes prejudice. The foreign legal person or individual decides to be a party to legal proceedings. For that he/she/it appoints a Luxembourg lawyer. This lawyer, who is a client’s friend in the local networks, calls the local legal person or individual, meets with him/her/it and agrees to do the minimum by not raising what could make the local legal person or individual feel uncomfortable before the court.
This situation is very common:
- Foreign client of a bank v. Luxembourg bank that did not do its duty,
- foreign supplier v. Luxembourg client that does not want to pay,
- etc.

The foreign party does not win.


2) Individuals with decision making power, including in the framework of a disciplinary action, join a board of directors in an association where they meet those for which they have the decision making power or disciplinary power. A member needs a decision in his/her favour and contact the member of the board to obtain the favour. If the favour is relating to a disciplinary action he/she may raise the risk of reputation for the association.

Due to the pressure, some of these individuals with decision making power may forget their duty.


3) A member of an audit team finds a possible money laundering situation involving management of the audited company and reports the issue to the audit leader or partner. The audit leader or partner that
- meets management of the company in associations like ABBL or ALFI,
- plays the golf with management of the company,
- has possibly received a generous grant from the company with a view to providing the leader or the partner with with better time management tools : a new PDA to manage appointments, a new watch to be in time... (as neither the OECD nor the GRECO experts on corruption did repudiate the "generous grant" that the FATF officially received from the Luxembourg I guess auditors may accept such "grants" that are complementary to audit fees),
- does not forget that the relation between auditors and auditees in actually a commercial relationship, which means that if he/she report the declaration of suspicion he/she would loose the clients’ confidence (and probably prospects’ confidence).
Decides to condone the issue.

Due to the fear of exclusion, some professionals do not do their duty.

The existence of the networks is admitted page 18 of the last GRECO report about Luxembourg when underlining "the importance of relationships and networks of persons in Luxembourg society" to explain the reason why the number of cases coming before the courts appears to be very
small (Greco Eval III Rep (2007) 6E, theme I, 13 June 2008, published on 25 August 2008).