Ethics and governance in the European Financial centers

There is a motto in Luxembourg, Mir wellen bleiwen wat mir sin, which means "We want to remain what we are"

Yesterday the CSSF, Minister Luc Frieden, the Director of LuxembourgForFinance, and the chairman of the ALFI communicated on the Madoff case in Luxembourg. What they say, which wants analysing between lines, confirms that there is no evolution. And that there will not be any.


The CSSF limits the assessment to a list where it seems that there may be missing funds (for instance what about the possible Luxembourg side of Thema?). It specifies that the amount of EUR 1.7 billion, which is even lower than the amount of EUR 1.9 billion that was stated in December, is given according to the information at its disposal. This means that it may ignore other funds. The CSSF does not contradict the figure of EUR 5-7 that was circulated.

In the first interview Luc Frieden confirms the amount of EUR 1.9 billion, which is a discrepancy with what the CSSF stated the same day, what sounds strange. He denies that Madoff case is a Luxembourg issue, as in his opinion it is an American issue. He denies that Luxembourg is a tax haven saying that France and other jurisdiction are jealous of Luxembourg success. The regulatory framework in Luxembourg is said to be "open and clear". The word "pragmatic" is no longer quoted but the word clear has a similar meaning. The order of words is switched as if Minister Frieden wanted to insist that there is no flexibility in the enforcement.

In the second interview, Luc Frieden explains that Luxembourg adopts an attitude which he describes as favourable to economic development, with decisions fast and close the needs of the economic actors but to in no case contrary with the European rules. It is true that every rule in favour of the business is transposed without delay, which is not the case for rules of regulation (see for instance debates on the directives relating to AML). He admits that decisions are close to the needs of the economic actors: but are the “needs of the economic actors” the needs of the stakeholders: investors, international community (OECD, GRECO)…

In an interview, Fernand Grulms, who is director of LuxembourgForFinance, explains that they must be better known and recognized like a credible and reliable partner.

In an interview, Claude Kremer, who is Managing Director of the ALFI, raises the question of conflicts of interest. He explains that he works in no case connected to Madoff and that "technically" their is no conflict of interest. One of his fellow colleagues in the Law Firm is the Lawyer of UBS and HSBC. Claude Kremer underlines that within his company, he informed the associates that he wishes to remain out of any case having a relationship with Madoff. But there is a huge problem in the small jurisdiction where “everybody knows everyone and where there is a kind of self regulation” as the same Law Firm as legal person is the cornerstone of the regulation.
1. The Law firm provides advises and opinions on law and regulation and has probably a responsibility in the pragmatic wording that harms today the Luxembourg funds by placing the investor in the doubt. As I explained, the famous circular relating to UCITS does not comply with the Luxembourg authorities’ statements. When Luc Frieden said that the professional in Luxembourg had an obligation of conservation, monitoring, control and restitution of the assets of the funds, I am afraid this clear obligation is not what the pragmatic circular says.
2. The Law firm is member of CSSF Committees.
3. The Law firm provides the Chairperson of the ALFI.
4. The Law firm provides representatives at the ABBL
5. The Law firm was chosen by UBS
6. The Law firm was chosen by HSBC
Etc.




All the above leaders never wonder why regularly there are issues and scandals involving Luxembourg, which is definitely the relevant question.
Not a word about the absence of penal liability of legal persons
Not a word about the "fiduciaires" that are neither members of the IRE nor the OEC, which organise scams with exotic jurisdictions
Not a word about statutory auditors from exotic jurisdictions.
Not a word about the absence of balance sheets database
Not a word about bankruptcies with the same individuals that can create companies
Not a word about the wording of the circular relating to UCITS
Not a word about the limited conception of CSR in Luxembourg, which excludes business ethics
Not a word about the persistence of professionals with red flags of bad management and bad governance in the business.
Etc.

It is so easier always to take refuge behind the jealousy undoubtedly probable of the other countries, to start with France which is anyway far from being a model.

Because of all that, there is definitely a country risk for any investor in Luxembourg or any supplier of a Luxembourg client.

Bloomberg has reported that Investments with Bernard Madoff have forced Luxembourg funds and sub funds to suspend redemptions.

List of Luxembourg-registered sub-funds and funds that have suspended their net asset valuations, the subscription and
redemptions of their shares since the Madoff fraud:

The funds are Source: Commission de Surveillance du Secteur Financier in an e-mail to Bloomberg News) :
*U.S. Absolute Return of Herald (Lux)
*U.S. Equity Plus of Luxembourg Investment Fund
*American Selection of Luxalpha Sicav
*Arbitrage of Norvest
*Balanced sub-fund, Growth sub-fund et Xtra Alternative
Investments Sub-fund of GLOBAL FUND SELECTION Sicav
*Global One of Carat (Lux) Sicav
*LRI Invest Alpha Stable EUR
*BG Global Classic, BG Global Dynamic, BG Global Challenge, BG
Global Balance, BG Global Discovery, BG Stable Value of BG
Umbrella Fund
*One (c) of the fund MARS
*Best Selection of Pareturn



I know that there may other funds that are not on the list like a typical Luxembourg-made situation :

X Bermuda as custodian and X Luxembourg as sub- custodian, X being the name of the Bank in the prospectus.
"X Bermuda" is quoted 11 times "X Luxembourg" is quoted 5 times despite they are only sub-custodians.
"Luxembourg" is quoted ...25 times and "Bermuda" 58 times.

The prospectus was changed early 2000 to add X Luxembourg and the word Luxembourg to seduce European investors and have a foot in Europe. X Luxembourg would have given the money to Madoff. A big four is the auditor.

The prospectus specifies that the FUND is a British Virgin Islands business company pursuant to the BVI Business Companies Act, 2004.

The Agefi in France has reported what Charles Muller, who is deputy managing director of the ALFI, said to reassure the investor. “There does not exist any difference between the French and Luxembourg legislations as regards responsibility for the agent”, he said .
In a document the ALFI states that article 1932 of the Luxembourg Civil code makes on request weigh on the depositary “an obligation of restitution of the assets of the client.”

What does article 1932 exactly states ?

Art. 1932. Le dépositaire doit rendre identiquement la chose même qu'il a reçue.
Ainsi, le dépôt des sommes monnayées doit être rendu dans les mêmes espèces qu'il a été fait, soit dans le cas d'augmentation, soit dans le cas de diminution de leur valeur

Free translation

Article 1932. The depositary must return identically the thing as it received.
Thus, the deposit of the monnayées cashed in on sums must be returned in the same species that it was made, either in the case of increase, or in the case of reduction in their value

Should the article be applicable to investments, this would mean that in Luxembourg the investor never loose the money even though the value of shares at the Stock Exchange is decreasing or the NAV of UCITS is decreasing.

In other words, according to the ALFI, if the investor invest EUR 1 billions in Luxembourg and because of the markets the value decrease to EUR 500 million he or she can ask the professionel to receive his EUR 1 billion backj.


In a market that is decreasing I can only encourage every investor in Luxembourg that lost money in the past months to ask the for the refund of the money invested.