Ethics and governance in the European Financial centers

Last week, many jurisdictions that fear to be on the OECD black list said they are going to relax there their banking secrecy legislation.
As Senator Levin said (), “That is a very welcome development which is long overdue, and we look forward to effective implementation of the promised new policies. (…) The promised new limits on offshore secrecy will not only likely take years to implement, but even after taking effect, will not eliminate all offshore tax abuses”. That is the reason why he will proceed with legislation he introduced in the Senate last week.
As far as the G 20 is concerned, the experience of the Luxembourg financial center demonstrates the need for continuing the pressure. Luxembourg minister Luc Frieden said last Friday that Angel Gurria told him that Luxembourg is not a tax haven. I guess Angel Gurria will be happy to be to be evoked or rather called upon for a “satisfecit” of morality in business by a jurisdiction of 2500 Km2:

- that provided the FATF with a generous grant that was not quoted as a funding of the FATF while not implementing the OECD convention on corruption;

- where there is neither a balance sheets database nor the judiciary judgements available online;

- where many registered companies are scams (Shareholders from exotic jurisdictions that exist only in the Luxembourg Corporate Registration, Statutory auditors from exotic jurisdictions that exist only in the Luxembourg Corporate Registration…);

- where there are only a few “repressive” procedures;

- that finds the means for its promotion while not putting into place the necessary infrastructure i.e. all sufficient human and technical means and internal rules in order to carry out all the duties and tasks related to the role of a major financial center: for example, despite the large financial sector, the Luxembourg FIU (the CRF) is made up of two magistrates full-time, of a magistrate at half time, an financial analyst and a secretary . There is a very simple rule: If you don't put in place the relevant means to control, nothing can be found. It is like in a bus, if there are too little controllers for the bus network, most fraudsters will not be detected;

- and so on.

The small size emphasizes dysfunctions. I know that I have readers that are upset when I focus on Luxembourg. But the small size of the jurisdiction allows identifying these dysfunctions all the more than they are in public and official sources that are the visible part of the iceberg.




That is the reason why a couple of pragmatic decisions should be taken at the G 20:

Encourage the jurisdictions that said they are going to relax banking secrecy, including Luxembourg, by deciding a “grey list” to test the effective implementation. The black list and grey list would be updated every three months. Any jurisdiction that would not respect the international commitments would be blacklisted.

Ensure that the OECD has an integrated view of sensitive topics. Currently a jurisdiction like Liechtenstein is on the list of non cooperative countries, but it is no longer on the FATF list. There are links between corruption, harmful tax practices and money laundering. There should be one list taking into account all these parameters.

Build an International Tax Court, where would be filed the claims of the jurisdictions that are victims of jurisdictions that do not comply with international commitments regarding taxes.

Reuters has reported that Senator Levin, the author of U.S. legislation attacking offshore tax havens said he welcomed changes in bank secrecy laws just announced by several nations, but added he will press ahead with his bill.

"The promised new limits on offshore secrecy will not only likely take years to implement, but even after taking effect, will not eliminate all offshore tax abuses", he said.

In a speech yesterday Luc Frieden said he met Angel Gurria, to discuss the blacklist of tax havens. Luc Frieden stated that Angel Gurria confirmed that Luxembourg is not a tax haven according the OECD criteria. But Luc Frieden said at the same time in his speech that
- Luxembourg decided to conclude bilateral conventions of non-doubled tax in accordance with the model of convention of OECD. This would mean that is was not the case before.
- Secrecy does not protect from the infringements with the law : which law ? Luxembourg law that does not admit the penal liability of legal persons for example ?
- Within sight of the decision to adopt OECD standards, Luxembourg requires that this exchange, according to rules OECD, become the only principle which will be applied to the level of the European Union : This would mean that Luxembourg did not accept before OECD standards.

How can Luxembourg not be a tax haven while not respecting OECD standards?

The four OECD criteria to determine wether a jurisdiction is a tax haven or not are:
- insignificant or non-existent tax levels,
- absence of transparency in tax matters,
- absence of fiscal data exchange with other countries and
- attractiveness for straw companies with fictitious activities.

The three last criteria are met in Luxembourg.

What is remarkable is that it seems impossible for the Luxembourg leaders to see reality from the interior of their community. A such goldfish in its bottle, they see the outside world only by the walls of the bottle. That would take an considerable effort to think to look at the bottle of outside.

As I already wrote the experience of the Luxembourg jurisdiction with the OECD unfortunately inclines with mistrust vis-a-vis these declarations:

For example, Luxembourg cooperates in the framework of the Anti-Bribery Convention that was adopted in 2001 in the Luxembourg legislation: but it is reluctant to implement international Recs. For example penal liability of legal persons required since a couple of years and today still neither enacted nor enforced.

Definitely reluctant, because the jurisdiction :
- is able to transpose any European text pro-business very quickly, and recently
- was able to change its constitution in a couple of months with a unanimous vote : The Grand Duke announced his refusal to sign a legal text on 2 December 2008. The project of revision of the constitution was filed in on 3 December 2008. The first vote took place on 11 december 2008. The second vote took place on 12 March 2009.