Ethics and governance in the European Financial centers

Reuters has reported that according to Financial experts gathered at the annual Luxembourg fund industry association's annual conference insisted the fraud orchestrated by Bernard Madoff was an unfortunate isolated incident that would not dent the country's leadership.


I am afraid that Madoff was not an isolated incident in the Luxembourg fund industry.


The Luxembourg leaders who communicate that there is agility in the decision-making process in Luxembourg thanks to a Close working relationship between the business community, the Government and the Legislator, actually demonstrate inertias in the handling of the case, because:


1) The European directive was transposed in a “pragmatic” way, which facilitated the drifts with Madoff: the pragmatic wording did not transpose faithfully the directive of 2005, which is easy to compare with the Luxembourg law of 2002;

2) Everyone is a “potential Madoff” in Luxembourg insofar as the requirement of business standing, as strictly defined by the law of 1993, is not really enforced because the relationships and networks of persons are very important in Luxembourg society, which explains the small number of criminal case before the courts. As I wrote, most of the identified operational red flags identified by EDHEC are definitely met in Luxembourg:
- lack of segregation amongst service providers,
- obscure auditors,
- heavy family influence,
- lack of disclosure,
- insufficient staff.

Everyone meets in the same associations, same business clubs... because of the small size. And nothing is done to prevent conflicts of interest.

3) At the beginning of the Madoff case, Luxembourg should have compensated the investors and negotiated in discretion with UBS: I suggested this solution in January to definitely close the file.

It its interim report dated 13 Marc 2009, the ALFI states that For Luxembourg-based funds, the Luxembourg regulator CSSF has evaluated the direct impact at 1.7 billion euros.

There is a funny substential discrepancy : the CSSF figure is about undertakings for collective investment which were impacted directly or indirectly and the ALFI figure quoting the CSSF is about undertakings for collective investment which are directly exposed

Such misleading discrepancy is not professional.


By denying the relevant issues, by not listening to lucid supports of the business, they collectively harm the credibility and the sustainability of the Luxembourg investment funds industry.

Reuters has reported what Luc Frieden said the day before yesterday about :
"I would encourage all parties involved to sit around a table and look for an extra-judiciary solution"
"It is always negative if court cases take a long time"
"It would be in the best interest of all parties if rather than having numerous court cases they would sit around a table."

As I explained despite what professionals and politicians in Luxembourg are saying, the Luxembourg framework allowed the situation.
I can understand UBS.

As I said in January, It is morally up to the Luxembourg state to compensate the clients for the Luxalpha disaster and sit around a table and look for an extra-judiciary solution with UBS for the refund.

Luxembourg has lost 2 months that damaged the country's reputation as a financial centre

The annual report 2007 of SICFIN, the Monaco FIU, informs of the staffing of SICFIN and of its positioning:

Le SICCFIN, est un service administratif relevant du Département des Finances et de l’Economie qui répond à la définition internationale des Cellules de Renseignements Financiers. Le service est composé de 9 agents, spécialement commissionnés et assermentés. Le personnel du SICCFIN possède un profil bancaire et financier, complété par des connaissances juridiques, avec, pour certain, une spécialisation en audit et en contrôle. Ces compétences sont également complétées par des stages auprès d’autres CRF, notamment CTIF-CFT. A ce titre, des échanges réguliers ont lieu avec TRACFIN ainsi qu’avec la Commission Bancaire française afin de confronter les expériences de chacun en matière de lutte contre le blanchiment de capitaux et le financement du terrorisme.
Depuis 2005, le SICCFIN est doté d’un nouveau système informatique développé afin de répondre aux besoins nés de l’évolution de son activité.


There are 9 people with a banking and financial profile.
It is like most FIUs an administrative body under the responsibility of the Ministry of Finance.



The annual report 2007 of the CRF, the Luxembourg FIU, informs of the staffing of the CRF and of its positioning:

La structure de la CRF est demeurée identique à celle existante pour l’exercice précédent, à savoir qu’elle est composée de deux magistrats à plein temps, d’un magistrat à mi temps, d’un analyste financier et d’une secrétaire. Les activités de la CRF se déroulent sous la direction du Procureur d’Etat Robert BIEVER et du Procureur d’Etat Adjoint Jean-Paul FRISING. La CRF est épaulée dans ses devoirs de renseignement financier par un membre de la Section Anti-Blanchiment du Service de Police Judiciaire. Les quatre autres membres de cette section se consacrent plus particulièrement aux enquêtes pénales proprement dites (enquêtes préliminaires, informations judiciaires, exécution d’ordonnances prises dans le cadre de l’exécution de certaines commissions rogatoires internationales dans lesquelles le blanchiment est libellé par l’autorité requérante).

There are 4.5 people including a secretary in the CRF stricto sensu plus the support of members of the Service de Police judiciaire.
The CRF acts under the supervision of the prosecuting authorities.





We have seen that the number of declarations of suspicion in Luxembourg is not consistent with the importance of assets managed. The ratio of Suspicious Transaction Reports per $1billion in assets for Luxembourg, fund industry excluded, is 6 times less than Monaco

If I take into accounts only banks, as I have a comparison point with Monaco, the number of declarations of suspicion in Luxembourg is not consistent with the business activity in the jurisdiction.

In 2007, of 156 banks, 63 only reported a declaration of suspicion, which is almost the number of banks in Monaco according to CIA World Factbook. This means that 60% of banks in Luxembourg never ever had a dubious client to be reported to the FIU. This is not serious and is definitely worrying for the enforcement of the AML procedures in the jurisdiction.


My observations are consistent with the Narcotics Control Strategy report 2009, which observes that in Luxembourg the scarce number of financial crime cases is of concern, particularly for a country that has such a large financial sector.