Ethics and governance in the European Financial centers

Luxembourg as a jurisdiction is a perfect illustration of what Sydney Finkelstein described for companies.


Flawed executive mind-sets that throw off a company's perception of reality

Whenever there is an international issue involving Luxembourg, rather than questioning the weaknesses of the center, leaders deny and/or state that those who question are jealous of the center’s success.

See for example
What was said in 2002 by the Luxembourg authorities after the French MPs report.
What was said in 2006 by bankers after the study carried out by the Utrecht School of Economics .
What was said in 2007 by Prime Minister Juncker after the ridiculous French TV report.

Delusional attitudes that keep this inaccurate picture of reality in place

Many dysfunctions, that are perfectly known, were never corrected: the abuse of offshore scams , the role of statutory auditors, dubious bankruptcies...

Compared to the European benchmark, the financial centre of Luxembourg is intensely missing ‘drivers – locomotives’ (only 8% have a reference value of 21%) as well as ‘critics’ (only 4% have a reference value of 13%); instead of having 1 employee out of 3 who are motivated and convinced of the performance of the centre, the survey reveals that there is only 1 in 8.

Additionally for a long time, local media did not play their role of Fourth Estate. Because of its public financing, the press does not act as a watchdog in Luxembourg because of the pressure arising from conflicts of interest due to the country’s small size. There is no culture of investigation. This was stated by the GRECO in a report early 2001: “the press, which has strong political affiliations, does not seem to exercise its role of public watchdog with the same vigour as in other countries.” (GRECO Report dated 15 June 2001).
This was stated as well by the OECD in a report in 2004: “The “watchdog” role of the media is also very limited in Luxembourg, although in some cases they have played a part, when detailed information fell in to their hands, in bringing to light suspicious behaviour. (…) According to media representatives interviewed, the shortage of financial and human resources available to the Luxembourg media generally preclude investigative journalism and consequently prevent the revelation of bribery cases” (OECD Report dated 28 May 2004).

To be honest there is a recent change.

Media that are doing a good job by accepting to publish those who raise issues are: Paperjam, Lëtzebuerger Land, Lëtzebuerger Wort, l'Essentiel. I would add Nicolas Group (L’Investigateur, Privat) that was the only critical publication for a long time, even though I do not agree with the editorial line and somehow the rude wording.
Media that are not doing a good job are: Agefi (it used to do a good job: my articles were removed after I stated in May 2007 that Luxembourg is a tax haven, which was not “politically correct”), Codex-online (it used to do a good job: my articles were removed after I stated early 2009 that Luxembourg authorities and professionals did not tell the truth on the legal and regulatory framework for UCITS in Luxembourg, which was not “politically correct”), EditPress group (Le Jeudi, Tageblatt).

Breakdowns in communication systems that stop important information from getting through

There are many business taboos and a trend to hush up issues: many actors believe that if an issue is hushed up it does not exist
Many actors “in” the system do not dare to report some sensitive information as they fear exclusion. The consequence is that the decision-making process is corrupted.
That is the reason why the paradigm shift was ignored.

A typical example is a parliamentary question (N°1826) from Laurent Mosar in July 2007 about the project of Stop Tax Haven Abuse Act.
Laurent Mosar asked two questions:
1. What is the attitude of the government in front of the draft law?
2. What necessary steps are planed to protect the interests of the financial center?

The second question is the wrong one. The relevant question should have been "What is to be done to correct the dysfunctions which definitely harm the reputation of the financial center ?"

Luc Frieden’s answer was a perfect example of the wrong perception of the environment as he stated that the draft text does not reflect the policy of the US Government and that the fact that Luxembourg is quoted in the draft law does not reflect the positive assessment on the cooperation that is expressed by the American authorities.

Leadership qualities that keep a company's executives from correcting their course

“We want to remain what we are” is the motto. Therefore top leaders persist is their mistakes.
Cf. Lucien Thiel, former chairman of the ABBL for whom it is not the duty of the jurisdiction to check if the taxpayer was honest.
Cf. his successor Jean-Jacques Rommes, who stated that if banks help to commit fraud they did not start it. But the banker went farther by suggesting a scam through Panama.

Nobody repudiated Thiel’s statement in february 2008. Jean-Jacques Rommes and the ABBL did not repudiate officially the bank that helped to commit fraud in February 2009.

This is as well visible in the way the Madoff case was handled since the beginning. Despite the fact that the synoptic table of the UCITS directive and the Luxembourg law demonstrates that the directive was not faithfully transposed, everyone agrees to change the story and to insist on its "faithful transposition".

Long before obvious danger signs appear, several of these syndromes can take hold of executive behavior. People might continue to do business the way they always have, maybe even doing it extremely well. But when a problem develops and things stop working the way they did before, managers have no way of knowing because they are largely cut off from the outside information they need.

The paradigm shift in the world was visible mid 2000 as I explained as of the first articles of this blog in July 2006:

To ensure the sustainability of the financial center, Governing authorities must be aware of the changes to the geopolitics and the geoeconomics: we live at a time of transparence and governance with various programs (OECD, World Bank...).

Governing authorities must ask questions and accept questions especially on compliance issues. They must tighten up the ship on issues all the more than there are alternative financial centers for investors and head offices of banks. Otherwise they weaken their international credibility.

The failure to ask or to answer questions allows these authorities (either political or professional) to operate with a distorted sense of reality. In fact, Finkelstein calls companies that are unable to question their prevailing view of reality zombies. A zombie company, he says, is “a walking corpse that just doesn’t yet know that it’s dead—because this company has created an insulated culture that systematically excludes any information that could contradict its reigning picture of reality”.

This is true as well for a financial center.




The world goes faster than cultural changes. A couple of years were lost and will never be recovered.

Jean Claude Juncker yesterday stated that “neither financial product nor actor of finance should be able to escape from the regulation and the control mechanisms”. “The chart of the economic and financial world should not be sullied any more by black holes”, he concluded.



What a charade when one observes some Luxembourg-registered companies and some statutory auditors in Luxembourg, which escape from the regulation and the control mechanisms thanks to the abuse of offshore in Luxembourg, notably with many jurisdictions that are considered as tax havens by the OECD.

Switzerland is very angry against the OECD.
By trying to please everyone the OECD is now caught in its own trap of kindness and political games.
Its credibility is now in question.

As I wrote in my second letter to Angel Gurria, the solution is simple: if States that do not have signed yet the required agreements are not happy with the OECD, let them leave.

Considering the ridiculous amount of their contributions to the OECD budget, it will quickly be compensated by the advantages for the other States to recover funds escaped in the jurisdictions.

As far as Switzerland is concerned, I had warned Hans Rudolf Merz’s services to beware of Luxembourg, as Switzerland is more credible than Luxembourg in the implementation of the international recommendations in business ethics.

This is what I explained in two articles in French published in Banque & Finance in Switzerland:
"Suisse ou Luxembourg: quelle est la place la plus crédible en matière d’éthique?" (January 2007)
“La Suisse est-elle un paradis fiscal?" (septembre 2008) http://www.banque-finance.ch/numeros/93/70.pdf

My conclusion is that despite banking secrecy and low taxes in Switzerland I can see in this jurisdiction a positive framework in favor of business ethics that I cannot see in Luxembourg.

The political error of the Swiss authorities was (and still is) to bet on Luxembourg to advocate their positions within the European Union without seeing that Luxembourg was a manipulator.

The political error of the Luxembourg authorities was (and still is) to ignore what the other jurisdictions are doing, otherwise they would have realised that ratios to compare Luxembourg with other jurisdictions are definitely not in favour of Luxembourg, whose figures are not credible :
- number of disciplinary actions for auditors : ex Luxembourg v. Belgium
- number of declarations of suspicion : ex Luxembourg v. Monaco
- …

In a democracy when political authorities fail, there is a solution.