Ethics and governance in the European Financial centers

Investor activist group Deminor said last Thursday it is to file a legal complaint against UBS, HSBC, and others for allegedly neglecting clients who invested in Madoff-related products.

The complaint will be filed before the end of the month in courts in Luxembourg and Ireland, where the funds through which some of the banks' clients invested are located: UBS in Luxembourg and HSBC for Ireland.

The banks involved acted as depository banks for the funds and did not verify the true nature of the investments.

As far as Luxembourg is concerned, because of the clear and pragmatic legal and regulatory framework that is promoted I do not think clients will be successful:
- when processing a client complaint, the regulator CSSF’s positions are not binding on the professionals (See CSSF annual report 2007 page 162)
- the penal liability of legal persons does not exist
- the civil jurisprudence in not in favour of the investor “from day to day”
- the guarantee of deposits is very low (limited to 20 000 EUR according to the Bankers’ association)

The consequence is that procedures initiated will be long and probably not successful.

The only way for investors that are victims of a lax legal and regulatory framework to be respected would be a payment by the Luxembourg State that would go later before the court for the refund in the legal and regulatory framework it enforced.

A couple of months ago, Véronique Poujol from the Lëtzebuerger Land published a lucid analysis of the situation in Luxembourg.

She underlined the contradiction of the Luxembourg model. Nothing is more volatile than the capital. The success of the Luxembourg business model, it is to be business friendly, flexible and pragmatic with the economic operators, including in the banking legislation. Luxembourg was flexible with the investors, more slackness with the savers that have a poor level of the guarantees. There will not be doubt in the arbitration which these people will make between the safety of their funds and discretion with which they are managed. The State have reserves which are not inexhaustible.

The guarantee of the deposits will remain limited to 20 000 EUROS as the director of the ABBL confirmed quoted by L'Essentiel. today



Who is lying ?

Minister Frieden today confirmed the amount of 100 000 EUR as reported l'Essentiel in contradiction with what the director of the ABBL said.




Doubts about the protection of the investor with the Madoff case, Doubts about the protection of the client's deposits with the Kaupthing case...

This is the reality of this pragmatic Luxembourg that anyway despises the client as demonstrated the reference book written by Alex Schmitt : in a book called La Responsabilité du Banquier en droit prive luxembourgeois (Banker’s liability in Luxembourg private law) he concludes that one could be pleased with what Luxembourg jurisprudence generally shows very clear-sighted vis-a-vis the investors from day to day (“L'on pourra se féliciter de ce que la jurisprudence luxembourgeoise se montre généralement très clairvoyante face aux investisseurs à la petite semaine”). In other words in case of litigation because of a bank failure, there is a country risk as the foreign investor will not win.

In a nutshell the investor is consirered as a sucker.

The Luxembourg regulator yesterday published a press release about the Madoff case.

The wording is worth commenting :

(...)
The CSSF would like to stress that the Luxembourg law applicable to Luxembourg based depositary banks in their role of safe-keepers of investment funds' assets reflects faithfully the provisions of the European Council Directive 85/611/EEC
(...)
the Commission does not limit its analysis to the depositary banks concerned but verifies that all the other parties involved with the funds concerned have acted with the diligence imposed by Luxembourg law
(...)


What kind of law ? The law that is presented officially as clear and Prag-mac-tic, the fetish word.


This is for instance what Luc Frieden wrote in 2004 (Cf. article « The art of Communication », Fundlook, july-september 2004, page 3) : "I want to ensure that Luxembourg remains a leading player in the world of investment funds. Based on clear and pragmatic legal rules that are fully compliant with the EU legal framework as well as on the unique international experience built up over the past decades, the Grand-Duchy of Luxembourg will continue to undertake every effort to develop Luxembourg as the European hub for investment funds both for European and non-EU financial operators."

Pragmatic means that the actual enforcement in the jurisdiction is at least perfectible as there are many red flags that demonstrate a lax jurisdiction.

Quod erat demonstrandum with the Madoff case .