Ethics and governance in the European Financial centers

Jean Guill, CSSF, is quoted by Reuters.

What is said by the Luxembourg regulator seems very naïve as Jean Guill implicitly admits that Luxembourg regulation opened the drift with Madoff

It is said that the watchdog had been aware that Luxalpha and other funds' assets were managed by Madoff. It did not oppose the contracts the custodian banks signed with investors limiting their responsibility as custodian.

"People did not invest with Mr Madoff because they thought he was a thief, but precisely because he had a very good reputation. People thought that explained why he could give good results," Guill said.

Circular IML 91/75 states that

1) The concept of custody used to describe the general mission of the depositary should be understood not in the sense of “safekeeping”, but in the sense of “supervision”

2) The depositary has discharged its duty of supervision, when it is satisfied from the outset and during the entire duration of the contract that the third parties, with which the assets of the collective undertaking are on deposit, are reputable and competent and have sufficient financial resources

Additionally EFAMA published a survey on the main tasks and responsibilities of depositaries at national level across Europe. The purpose of this survey was to identify a number of important aspects related to the legal and operating status of depositaries and to emphasize on the principal duties and liabilities of these institutions with respect to the investors and the fund (see page 6 ).

As regards the extent of the duty of supervision, it appears in this survey that among the jurisdiction in the framework of the survey (Austria, Czech Republic, Finland, France, Germany, Ireland, Italy, Luxembourg, Norway, Portugal, UK), Luxembourg seems the only one with such lax clause for the depositary to discharge its duty of supervision (while the duty of safekeeping does not exist) to a third party all the more than it does not comply with the definition of the word supervision : the effective critical watching and directing is no longer done with such clause.

I do think that if the clause had not existed in the Luxembourg regulatory framework, precisely the very good reputation (Jean Guill’s wording) would definitely not have been the criteria to invest with Mr Madoff.

If Luxembourg continues to deny the realities of the world and to disregard the fact that it is in an awkward position vis-à-vis the other jurisdictions, the financial center will collapse.

In his recent open letter in the Lëtzebuerger Wort Jean Meyer questionned “« Dois-je accepter que la réputation affaiblie des banquiers du monde entier serve de cheval de Troie a ceux qui veulent enfoncer la place financière luxembourgeoise? (free translation : “Should I have to accept that the weakened reputation of the bankers worldwide would be use as a Trojan horse for those that  want to ram the Luxembourg financial center?)

However the problem is that the financial center is being rammed by its actors themselves.  

Luxembourg is not willing to implement the automatic exchange of tax information in the European Union despite this is exactly what is targeted in the Savings Directive and agreed to by the Luxembourg Government as observed by the US Senate one year ago:

“Au niveau européen, il existe une pression pour un abandon total du secret bancaire. Or, si des mesures plus strictes sont adoptées seulement en Europe, nous serions défavorisés face à d'autres centres financiers comme Singapour” (free translation : At the European level, there exists a pressure to give up banking secrecy. However, should stricter rules be adopted only in Europe, we would be disadvantaged vis-à-vis other financial centers like Singapore” the former Chairman of ABBL said a couple of weeks ago.

He is right. But I had commented that I wish he had a much more European collective view on the issue

Since the article the ABBL and its president confirmed that they refuse what was agreed to in the Savings Directive: For example « je refuse un échange d'informations automatique onéreux, peu efficace et excessivement intrusif, ceci ne comporte en aucun cas un refus d'application d'une directive alors que nos banques 1'appliquent à la lettre chaque jour qui passe. » (free translation : I refuse an expensive automatic information exchange, not very effective and excessively intrusive, this does not at all mean I refuse the application of a directive which our banks apply with accuracy each day which passes.), Jean Meyer Chairman ABBL has just said in the Lëtzebuerger Wort, in an open letter to my attention.

Luxembourg banks would apply the directive with accuracy each day which passes? What about the fact that The European Commission has just referred Luxembourg to the European Court of Justice over its incorrect application of the Savings Directive?

I am afraid such blatant biased view of the reality actually sows the doubt and depreciates Luxembourg’s credibility (Jean Meyer’s wording in his open letter).

However the issue raised about Singapore and other alternative centers is perfectly right and there is a solution, a definitive solution.

The solution is to have Clearstream and similar organizations under public control to be able to identify all the transfers to Singapore or other jurisdictions in order to detect and sanction tax evasion.

By nature the activity of Cleastream and other similar companies cannot belong to the strict private sector because there is a kind of mission of general interest for every state whose economic development rests on the banking system. It follows that a public control is mandatory to regulate the flows worldwide and protect the Luxembourg financial center.

Thanks to the Luxembourg clever bankers who raised a true problem, this solution should be considered and they cannot seriously oppose it, as this is an effective answer to their fears about Singapore.

The Cercle de Cooperation this week published a study, the findings of which made the ABBL upset. Once again their reaction is pure wooden language.

The ABBL has acknowledged the study made for the “Cercle de cooperation”, which accuses Luxembourg of siphoning off considerable amounts of money from developing countries by illegal or at the least illegitimate means.

The ABBL underlines that the study insinuates that the Luxembourg financial centre features tax practices and mechanisms that would set it apart as a tax haven and implicitly accuses Luxembourg legal vehicles – notably investment funds – of being used to make the poorest countries even poorer. It also claims that finance professionals ignore their essential obligations of identifying their clients.

The ABBL’s bad faith is easy to demonstrate at two levels:

1)

To depreciate the study, ABBL observes that in the study the financial centre supposedly collected around 500 billion euros in defrauded money originating from developing countries, even though in Private Banking the centre manages a total that amounts to less than 300 billion euros.

But in the previous paragraph ABBL mentions investment funds, which amount around 1 500 billion euros. This does not take into account these assets in the total assets present in Luxembourg, nor does it consider other financial vehicles available. ABBL’s reaction is definitely entirely biased.

2)

Additionally, according to the CRF (the Luxembourg FIU), the total number of open STR files within the CRF increased appreciably in 2008 (+24.4%), this increase being however more moderate if we disregard a bank the activity of which is centred on the electronic field (+8%). As a result, small number of banks represent the majority of the declarations of the sector. A large number of banks file no or very few declarations of suspicion. (See report 2008)

There are 152 banks registered of which 75 only reported one or more STR (50%)

What I know is that these finance professionals that never ever reported any declaration of suspicion may ignore their essential obligations of identifying their clients.

The above are facts and not an unhealthy combination of gratuitous assertions, hearsay, half-truths and concocted lies (ABBL wording to comment the study)

What is extraordinary with these professionals in Luxembourg is that they are unable to make amend as they have developed an insulated culture that excludes any information that would contradict their reigning picture of the reality, their reality in the bowl.