Ethics and governance in the European Financial centers

Two weeks ago TJN launched their website for the Mapping the Faultlines project, which explores the furtive world of secrecy jurisdictions where furtive types get up to all sorts of dubious business.

Now they launch another site, www.financialsecrecyindex.com which takes reader step-by-step into the details of their new ranking of secrecy jurisdictions. The ranking results will be published early November.

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Bloomberg has reported that Austria and Luxembourg opposed the plans, which would force them to give up their system of withholding tax and join an automatic EU-wide information exchange system.

"European Tax Commissioner Laszlo Kovacs said yesterday that Luxembourg and Austria at the time “agreed with the conditions” that they would give up withholding tax and join the automatic information exchange system once the non-EU countries agree to swap tax-related information. “Now they’re working against the conditions,”" Bloomberg quoted.

"László Kovács, the European commissioner for taxation, said that the Liechtenstein agreement should not be “held hostage to other issues”. He said the actions of Austria and Luxembourg were hampering progress in cracking down on global tax fraud, an issue he said was “high on the political agenda of the EU”. Kovács said that no member states were opposed to the substance of the Liechtenstein agreement and that he would present it for formal adoption by EU finance ministers before the end of the year.", Jim Brunsden added to quote László Kovács .

According to TJN Austria yields and opacity score of 91% whereas Luxembourg yields and opacity score of 87%.

Both jurisdictions are no longer on the "OECD grey list" (Cf. list dated 20 October 2009) despite nothing is actually done to implements the agreements. So the title of the "white list" is misleading.

 

Late July I announced the launch of a personal project that appears to be complementary to the one of TJN.

 

The last paragraph of my article was: On a subsidiary basis, for the jurisdictions which lodge an activity of general interest for the international financial sector (for example, clearing), will be posed logically and practically the question of the relevance of the maintenance of the activity if it appears a deficit of regulation compared to what is done in the other jurisdictions

 

A trial is currently taking place before the French court. It involves a Luxembourg-based Company that is called Clearstream. Clearstream is a clearing house like its competitor Euroclear. It is amazing to observe that both clearing houses are located in secrecy jurisdictions: according to TJN, Luxembourg is scored 87% secrecy and Belgium is scored 73% secrecy.  

 

TJN assessment relates to 12 indicators reflecting the legal and financial arrangements of the jurisdiction (Key Financial Secrecy Indicators, KFSI):

 

1. Is legal banking secrecy banned (i.e. Is there no legal right to banking secrecy)? (OK for Belgium)

2. Is there a Public Trust and Foundations Registry?

3. Does the FATF rate 90% largely compliant and with no non-compliant ratings?

4. Are company accounts available for inspection by anyone for a fee of less than US$10? (OK for Luxembourg)

5. Are details of the beneficial ownership of companies available on public record online for less than US$10?

6. Are details of the beneficial ownership of companies submitted to and kept updated by a competent authority?

7. Did the jurisdiction participate in the TJN Survey in 2009 (1=both questionnaires; 0.5 one questionnaire)? (OK for Luxembourg)

8. Does the jurisdiction fully participate in Automatic Information Exchange (the European Savings Tax Directive)?

9. Has the jurisdiction at least 60 bilateral treaties providing for broad information exchange clauses covering all tax matters (either DTA or TIEA)? (OK for Belgium)

10. Has the jurisdiction's authority effective access to bank information for information exchange purposes?

11. Does the jurisdiction prevent company redomiciliation?

12. Does the jurisdiction prevent protected cell companies from being created in its territory? (OK for Belgium)

 

Clearing is definitely an activity of general interest for the international financial sector. As Clearstream explains, the world's entire financial system is built on trust. When assets are traded, both parties must be sure they will receive their part of the transaction. Given the complexity, speed and quantity of assets involved, a fast, secure and trusted third-party is absolutely essential for settling transactions. The business of a clearing house is therefore to ensure that cash and securities are promptly and effectively delivered between trading parties. It also manages, safekeeps and administers the securities that it holds on behalf of its customers.

It results that every financial flow uses such services including criminal flows.

 

The question is: should such services be born by the private sector?

 

I would say definitely no, especially if there is a weak regulation in the jurisdiction where the clearing house is located. 

 

The experience in Luxembourg corroborates the need to “supra-nationalize” the activity under the supervision of an international body (OECD, IMF…).

 

 

Clearstream is a PSF (Professional of the Financial Sector) that is regulated by the CSSF.

 

The regulator is a stakeholder in the promotion of the jurisdiction

 

The Law of 23 December 1998 establishing a financial sector supervisory commission (“Commission de surveillance du secteur financier”), as amended, states:

 

Art. 3. The CSSF shall:

 

(a) examine all requests from undertakings or persons seeking to establish themselves in the Grand Duchy of Luxembourg to engage in one or more of the activities enumerated in Article 2 which require authorisation from the Minister responsible for the CSSF;

(b) carry out prudential supervision of undertakings and persons coming under its authority in accordance with the laws and regulations governing such supervision;

(c) coordinate the implementation of government initiatives and measures aimed at achieving an orderly expansion of the activities of the financial sector in the Grand Duchy of Luxembourg;

(d) monitor dossiers and participate in negotiations at a Community and international level relating to problems affecting the financial sector;

(e) present to the Government any suggestions likely to improve the financial sector’s legislative and regulatory environment;

(f) examine any other question relating to financial activities which the Minister responsible for the CSSF might submit to it.

 

This situation had been pointed out with relevance by the Commission that was mandated to determine solutions to fight the crisis. « le rôle de la CSSF, défini à l’époque comme celui non seulement d’un contrôleur du secteur financier mais encore d’un promoteur de la place doit être revu afin d’éviter tout équivoque sur sa mission essentielle qui est celle de la surveillance prudentielle » (free translation : “the role of the CSSF, defined at the time as both a controller of the financial sector and as a promoter of the financial center, must be re-examined in order to avoid any ambiguity on its essential mission which is that of the prudential monitoring”) (In report « Vers un nouveau modèle de croissance », 23 March 2009, page 13)

 

What has been done? Nothing.

Does the CSSF require the change? No.

 

Professionals in Luxembourg do not provide an opinion on laws and regulation that are applicable to them: it is actually an assent.

 

Article 3 is very interesting when one keeps in mind what Rafik Fischer stated and what the CSSF confirms on its website.

- “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" (Cf. Rafik Fischer, « Shaping the regulatory environment ». Fundlook, July 2005, page 6);

- "The internal committees assist the CSSF in the analysis of the development of the different financial sector segments, give their advice on any question relating to their activities and participate in the DRAWING-UP and the INTERPRETATION of regulations relating to their specific field."(Cf. Site internet de la CSSF, page « Comités internes »).

 

 

Article 3 must be rephrased in this perspective.

 

The CSSF shall

(a) examine all requests from undertakings or persons seeking to establish themselves in the Grand Duchy of Luxembourg to engage in one or more of the activities enumerated in Article 2 which require authorisation from the Minister responsible for the CSSF;

(b) carry out prudential supervision of undertakings and persons coming under its authority in accordance with the laws and regulations governing such supervision for which regulated entities had a very close and direct say  in the drawing up and the interpretation  of regulations relating to their specific field;

(c) coordinate with different professional associations, be it ALFI or ABB,L the implementation of government initiatives and measures aimed at achieving an orderly expansion of the activities of the financial sector in the Grand Duchy of Luxembourg;

(d) monitor dossiers and participate in negotiations at a Community and international level relating to problems affecting the financial sector;

(e) present to the Government any suggestions likely to improve the financial sector’s legislative and regulatory environment resulting from lobbying initiatives taken on the level of the different professional associations, be it ALFI or ABBL , but also and more importantly, from a direct association with by means of a number of standing committees;

(f) examine with different professional associations, be it ALFI or ABB,L any other question relating to financial activities which the Minister responsible for the CSSF might submit to it.

 

 

This is actually how works the regulated jurisdiction of Luxembourg.

 

I do not think this is the regulated entities’ role to have a very CLOSE AND DIRECT SAY on the evolution of the Luxembourg prudential regulatory environment that is opposable to them, and to exert directly and indirectly LOBBYING initiatives. Such “close and direct say” and “influence” and “direct association “apply not only for the regulator bus as well for the parliament (many members of parliament are business lawyers).

The direct consequence is the delay to transpose Recs or regulations despite international commitments.

A very good current example is the difficulty to enforce the criminal liability of legal persons whereas it was possible to change the constitution in a couple of weeks.

 

The result is that in case of trial (money laundering, fraud…) courts in Luxembourg cannot use legal provisions that are delayed. In other words, the crime does not exist because of the CLOSE AND DIRECT SAY and LOBBYING and DIRECT ASSOCIATION.

 

After the generous grant to the FATF which is in situation exactly as if a Court received a generous grant from a litigant it is gonna judge, a commission tender received a generous grant from a tender it is gonna assess, an auditor received a generous grant from an auditee it is gonna audit…, Luxembourg has imagined a regulation that is as if auditees had a close and direct say on how the auditors must work…

 

By the way, it is about to be the case.  The CSSF bases its work on audit reports. The draft law to transpose the 8th directive on audit as modified appoints the CSSF for the public supervision of auditors (An ad to hire staff is online on the CSSF website)

 

The situation will be: professionals will be controlled by auditors that will be controlled by the CSSF that will be controlled by professionals that will control themselves in fine.

 

 

Don’t you smell the coffee?

 

I personally do.