Ethics and governance in the European Financial centers

In a video, J.-M. Goy, CSSF, is developing the Responsibility of a Luxembourg Depositary bank in the framework of a conference that took place on 4 March 2009 with the participation Peter de Proft, EFAMA, under the leadership of KPMG Luxembourg. 

What the CSSF says is very interesting even  more so that the ALFI admitted that The relationship between the Luxembourg Commission de Surveillance du Secteur Financier Luxembourg ( CSSF ) and the Financial centre it supervises has always been described, and rightly so, as being heavily influenced by a true common interest approach. (...) The Luxembourg Investment Fund Industry has regularly had a very close and direct say on the evolution of the Luxembourg prudential regulatory environment governing the collective Investment Industry.

 

J.-M. Goy stated:

 

The principles are perfectly clear. In Luxembourg we consider that our legal and regulatory framework is absolutely on line with the principles set up by the directive and provides for an appropriate level for investor protection.

 The rules are practically the same in all the European jurisdictions.

 

 Practically means in Merriam Webster: 

1 : in a practical manner <look practically at the problem>

2 : almost, nearly <practically everyone>

 

 

Practically has as its basic and primary sense "in a practical manner”. Language critics sometimes object when the notion of practicality means "almost, nearly" but this usage is widely used by reputable writers and must be considered acceptable.

 

Mr Goy is using the first meaning.

 

The problem is that in the transposition Luxembourg dropped some critical keywords under the influence of the financial sector so that their legal and regulatory framework cannot be on line with the principles set up by the directive to provide for an appropriate level for investor protection.

 

Which was confirmed late May by Mr McCreevy.

 

And they are unable to admit that there is a direct link between the changes and the Madoff affair in Luxembourg. Especially:

1. UBS was both management company and depositary, which is proscribed by the directive to prevent the conflicts of interest but is authorized by the Luxembourg law that keeps silence on the provision;
2. There is no safekeeping duty in the Luxembourg law whereas it is explicitly prescribed by the directive. Only the duty of supervision exists.
3. The way to discharge the duty of supervision to a third party does not comply with basic meaning of the word supervision: It is considered that the depositary has discharged its duty, 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, which is not consistent with a critical watching and directing as defined in Merriam Webster.

Additionally in a survey dated 20 February 2009 provided by the EFAMA itself to compare the jurisdiction, it appears that Luxembourg is the only jurisdiction with such strange wording for the depositary to discharge its duties.

 

These are facts.

 

Therefore who actually sows the doubt and depreciates the Luxembourg credibility (Jean Meyer’s wording)?

 

Those who are telling the truth on facts and want to correct dysfunctions in the jurisdiction, or those who are not telling the truth?

 

Investors will judge.

 

Subsidiary observation. I bet that according to the CSSF, their legal and regulatory framework is absolutely on line with the principles set up by the FATF and the European Directive and provides for an appropriate level for AML-CFT.

 

Should I be the FATF or the European Commission, I would definitely have a look on the transposition into the Luxembourg legal and regulatory framework…

 

In rhetoric, wooden language (calque of the French expression langue de bois) refers to a diverting of attention from reality by using certain vague and ambiguous words, such as banalities too abstract or pompous, which appeal to sentiment and emotions rather than to facts.

This is unfortunately how the Chairman of ABBL expressed himself  in an article to my attention that was published recently in the Lëtzebuerger Wort.

 

It is strange that there cannot be any critics in this jurisdiction. Critics are said to be against Luxembourg, which is not the truth. I am afraid that “soft law” and self regulation does not work especially in a small jurisdiction like Luxembourg where there are many conflicts of interest.

 

I cannot agree when he states regarding my views on the Madoff affair in Luxembourg: « vous adoptez les raccourcis insidieux qui prétendent que ce serait la législation luxembourgeoise qui aurait permis et «ouvert la voie a la dérive avec Madoff». C'est une machination sans nom qui profite du caractère dramatique de cette fraude gigantesque et de la complexité technique de la matière pour semer le doute dans les esprits et pour déprécier notre crédibilité sur un créneau essentiel de nos activités. En réalité, rien ne permet d'affirmer en droit que le Luxembourg aurait a s'inspirer auprès d'un quelconque autre pays européen. »

 

(free translation : you adopt the insidious shortcuts which claim that it is the Luxembourg legislation which has  allowed and “opened the way to the Madoff drift”. It is a machination without name which takes advantage of the dramatic situation of this gigantic fraud and of the technical complexity of the matter to sow the doubt and to depreciate our credibility on an essential pillar of our activities. Actually, nothing allows to affirm legally that Luxembourg should get inspiration from any other European country.

 

Investors will judge on the light of the report I sent to the European Commission to answer the public consultation on the depositary (Download report).

 

One can deplore that Luxembourg’s special liability towards the investors from which the professionals want to withdraw, with the support of the European Fund and Asset Management Association (EFAMA), which is not willing to easily identify liabilities among its members either.

 

It is demonstrated, thanks to public and official sources that:

 

-         The actors of the Luxembourg financial sector do not hide that the financial sector strongly influences laws and regulations and strongly influences the regulator in its duties. Rafik Fischer, Vice Chairman of ALFI, stated in 2005 for Fundlook in an article titled "Shaping the Regulatory Environment" : "The relationship between the Luxembourg Commission de Surveillance du Secteur Financier Luxembourg ( CSSF ) and the Financial centre it supervises has always been described, and rightly so, as being heavily influenced by a true common interest approach. (...) The Luxembourg Investment Fund Industry has regularly had a very close and direct say on the evolution of the Luxembourg prudential regulatory environment governing the collective Investment Industry. (...) This influence has been exerted directly and indirectly by the lobbying initiatives taken on the level of the different professional associations, be it ALFI or ABBL , but also and more importantly, trough a direct association with the Luxembourg Supervisory Authorities by means of a number of standing committees (...) It is in those Committees which have proven instrumental in launching new legislative initiatives like the International Pension Funds or the SICAR ( société d’investissement en capital à risque ) and providing pragmatic and timely solutions to the evolution of the industry". In other words, ALFI which includes bankers, lawyers and auditors, decides of the regulatory environment and of what is to be done by the regulator.

-         Contrary to the talks about the “faithful transposition” of the UCITS directive, there are clear discrepancies between the UCITS directive  and Luxembourg texts on precisely the points related to the Madoff affair in Luxembourg (UBS being management company and depositary, which is proscribed by the directive to prevent the conflicts of interest but is authorized by the Luxembourg law; no safekeeping duty in the Luxembourg law whereas it is prescribed by the directive…) : there was a crippling misleading communication among the actors of the Luxembourg financial center. This is even more disturbing as it is easy to check in a branch of industry such as finance,  where confidence is a paramount.

 

The Madoff fraud shows the relative country risk for the investor in Luxembourg and it shows that the European investment management industry is unable to tell the truth and gain the investors’ and the European Commission’s respect. All the talk about compliance in Luxembourg as a regulated financial center (fight against corruption, fight against money laundering, fight against tax evasion…) is unfortunately tainted with suspicion

 

Mr Meyer appeals to sentiment and emotions rather than to facts.

 

The drama is that in this jurisdiction everyone sees the world like a fish from inside its bowl. There are problems and issues in Luxembourg which represent a huge reputational risk. Government and professionals should seriously take criticisms into consideration and address those concerns and the risks they describe, by tightening up the ship, instead of fustigating those who are the critics.

 

  

 

I have raised that the Luxembourg regulator is much better than Irish regulator in the communication on Madoff.

The Irish regulator this week published its annual report 2008. It ignores Madoff despite Thema fund.

The Luxembourg regulator had published its annual report 2008 a couple of weeks ago. It does not condone Madoff.