Ethics and governance in the European Financial centers

LFF put online Jean Guill’s interview.

 

The title sounds interesting: “reinforcing controls in entities”, but when looking carefully he misses the essential.

 

I have three observations:

 

1. He does not talk again of the “faithful transposition” of UCITS directive but of “misunderstandings on the applicable provisions in the various countries”. I love such wooden language.

 

2. He does not speak about the influence of the professionals on the regulator beyond what is normal because it is practically an assent that professionals state for every regulation.

I will quote again Rafik Fischer and the CSSF itself:

 

“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" (Rafik Fischer, Vice Chairman, ALFI, in 2005)

 

This is confirmed by the CSSF: "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."

 

3. There is nothing on the Luxembourg strangeness which gives to the regulator a role in the promotion of the financial center. This had been pointed out with relevance by the Lucien Thiel’s Commission:

 

« 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)

 

 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.

 

You know what: whereas the CSSF is involved in the promotion of the financial center and carry out prudential supervision of undertakings and persons coming under its authority in accordance with the laws and regulations governing such supervision in the framework of what professionals that have a very close and direct say have decided, Investor protection is not listed clearly among the missions.

 

Amazing.

 

 

 

 

The Tribunal d'Arrondissement of Luxembourg had decided on March 4, 2009 that Luxalpha and UBS release certain important documents to the plaintiffs, investors in Luxalpha advised by Deminor. More in particular, these documents are the contracts entered into between UBS and Bernard Madoff Investment Securities LLC (BMIS) and the yearly auditor's report on the inner functioning of Luxalpha.


This decision followed another decision on February 19, 2009 were investors in Luxalpha advised by Gide Loyrette Nouel were supposed to be communicated informations and documents.


In a recent article in the Land, it is reported that the auditor Ernst & Young refused the communication of Long Form Reports. An investor went before the court to request the communication but the judge did not accept.

The so-called Long Form Report describing and testing the UCI’s activities was created by Circular CSSF 2002-81


As stated in the circular, the purpose of the long form report is to report on the findings of the auditor in the course of its audit concerning the financial and organisational aspects of the UCI comprising inter alia its relationship with the central administration, the custodian and the other intermediaries (the investment managers, the transfer agents, the distributors, etc.). The long form report must be concise, clear and critical.
It is not intended to be made available to the public. It is issued for the exclusive use by the board of directors of the UCI or the management company of the UCI as well as the CSSF.


As Nadia Faber, Ernst & Young Luxembourg , explained “Un tel rapport a pour objectif, entre autres, de décrire et d'évaluer les procédures de contrôle mises en place par les différents prestataires de services intervenant dans la production du produit final qu'est la VNI. (…) Cette façon de voir les choses s'est traduite dans le domaine de l'audit en un basculement d'une approche substantive vers une approche basée sur l'identification des contrôles et les tests de conformité de ceux-ci. Pour obtenir son assurance, l'auditeur va non seulement valider des données chiffrées à une date donnée, mais il va aussi analyser les principaux processus de production de la VNI et les contrôles internes qui alimentent ces processus. L'auditeur cherche à avoir une assurance raisonnable que des erreurs éventuelles soient détectées par des contrôles internes efficaces en place avant que la VNI ne soit publiée et ce jour après jour
(free translation : Such a report aims at, inter alia, to describe and evaluate the audit processes installation by the various service providers intervening in the production of the finished product which is the NAV. (…) This way of seeing things was translated in the field of the audit into a swing of a substantive approach towards an approach based on the identification of controls and the tests of conformity of those. To obtain his insurance, the auditor not only will validate statistical data on a given date, but he also will analyze the principal production process of the NAV and internal controls which feed these processes. The auditor seeks to have a reasonable insurance that possible errors are detected by effective internal controls in place before the NAV is published and this day after day)


Long form reports are clearly intended to provide safety and transparency to investors.

One cannot understand the reason why Ernst & Young does not want to communicate these whereas neither the depositary bank nor the CSSF opposed according to the Land, unless these reports would demonstrate a failure in the assignment to describe and evaluate the audit processes installation by the various service providers intervening in the production of the finished product which is the NAV.

One can understand the judge’s decision in the light of what Alex Schmitt wrote: in a book called La Responsabilité du Banquier en droit prive luxembourgeois (Banker’s liability in Luxembourg private law) he concludes that one could be pleased in that Luxembourg jurisprudence generally is very clear-sighted vis-a-vis the small investors (original text: “L'on pourra se féliciter de ce que la jurisprudence luxembourgeoise se montre généralement très clairvoyante face aux investisseurs à la petite semaine”).

The quotation is no longer online, but I had copied the screen:

 

 

 

 

 

 

Luxembourg: a well regulated center with high investor protection?

Caveat emptor.

A couple of months after the withdrawal of Rainer Falk’s study, the Cercle de Cooperation has just advertised a roundtable with Lucien Thiel and Jean-Jacques Rommes.



The agenda sounds interesting. The last paragraph summarised the stake: “Plus fondamentalement, la dépendance de la Nation toute entière du commerce de l’argent nous oblige-t-elle, pour ne pas sombrer collectivement dans la dépression, de faire l’impasse sur toute réflexion critique sur les effets éventuellement pervers de ce qui constitue notre plus importante source de revenus ?" (free translation: More basically, does the dependence of the very whole Nation of the trade on the money oblige us, not to sink collectively into depression, to escape any critical reflection on the possibly perverse effects of what constitutes our most important source of revenue?)

Lucien Thiel is a member of parliament. He used to be general manager of ABBL (the Luxembourg Bankers’ Association) and advisor of its board after he left to become member of parliament.
He is the one who stated last year just after the beginning of the Liechtenstein scandal that “it is not our duty to control if the taxpayer was honest”

Jean-Jacques Rommes is Lucien Thiel’s successor as General Manager of the Luxembourg Bankers’ Association
He is the one who stated this year when commenting on an evidence of tax evasion, just prior to the G 20 meeting that took place in April and the release of the famous OECD list of tax havens and other financial centers, that “It is not the banker who started”.


At the same period (11 March 2009) Global Witness published a report the finding of which corroborates Rainer Falk’s findings: Undue Diligence: How banks do business with corrupt regimes.


A couple of paragraphs about Luxembourg are worth quoting:

Page 8: HSBC and Banco Santander hid behind bank secrecy laws in Luxembourg and Spain to avoid revealing the owners of accounts they held which received suspicious transfers of millions of dollars of Equatorial Guinea’s oil money.

Page 21: Other Abacha funds were located or had been transferred through banks in Switzerland, Luxembourg, Liechtenstein, Austria and the US. As a consequence, the anti-money laundering regulations now explicitly recognise private banking as a specific risk.

Page 30: According to US Senate investigators President Obiang, pictured here, may have owned companies whose bank accounts at HSBC in Luxembourg and Banco Santander in Spain received suspicious transfers of millions of dollars from the Equatorial Guinea oil accounts at Riggs.

Page 33: Another ten transfers worth $8.1 million to the accounts of a company called Apexside Trading Ltd, nine of them at Credit Commercial de France in Luxembourg, and one at HSBC in Luxembourg, between July 2000 and August 2001.

Page 34: Global Witness wrote to Luxembourg’s regulator, the Commission de Surveillance du Secteur Financier, to ask whether it had investigated this matter and if so what action was taken, and whether Credit Commercial de France or HSBC made any suspicious activity reports regarding these transfers. It replied to say that it could not respond !

Page 35: Global Witness has a number of concerns about the effectiveness of FATF (see Chapter 9 on page 105), but even by FATF’s current standards, Spain and Luxembourg’s regulatory regimes have failed to achieve compliance with FATF’s Recommendations (…) When Luxembourg’s anti-money laundering controls were evaluated by the IMF in 2004, the legal requirement to identify customers was found to be ‘generally in line with international standards,’ but that ‘given the variety of structures operated in and from Luxembourg to legally separate the apparent from the real ownership of bank accounts and other assets managed by financial professionals there, identification of the true beneficial owner in each case, as required by law, can present a difficult challenge… this is an important risk factor ... and a threat to the reputation of Luxembourg.’ There were also ongoing risks with customer due diligence on accounts opened by ‘lawyers, notaries, accountants, auditors and other such professionals… given the scale and importance in Luxembourg of business sourced through these professionals (…) So there are question marks hanging over the issue of customer due diligence standards in Spain and Luxembourg. But that is not the only problem. Even more disturbing is the impact of bank secrecy in these jurisdictions (…) Once the questioning from the Senate investigators started, Riggs wrote under Section 314 of the Patriot Act to Banco Santander and HSBC USA, asking them to share information about the beneficial owners of these accounts. But both banks said they could not provide this information, because the accounts were opened at their affiliates in Spain, for Banco Santander, and Luxembourg and Cyprus, for HSBC. Bank secrecy laws in these jurisdictions, they both said, barred disclosure of information not only to third parties, but to staff of the same bank who were outside that country.

Page 37: HSBC USA has accepted HSBC Luxembourg as a correspondent client. HSBC Luxembourg has a client, Apexside, over whom serious questions have been raised in the US regarding the source of its funds (ie a state’s oil revenue, potentially diverted by its president), and the identity of its beneficial owner (potentially the president of Equatorial Guinea) to the point where HSBC USA might not be able to accept this client. HSBC USA cannot, however, find out about this client, and who its ultimate owner is, from its own branch in Luxembourg. How, then, can HSBC US claim to know its correspondent bank HSBC Luxembourg – which is effectively a correspondent client because HSBC US holds accounts for it – if it has no means of finding out who HSBC Luxembourg’s clients are? And how can it assess how effective HSBC Luxembourg’s due diligence is when it cannot find out anything about the clients that it chooses to take? They’re playing the jurisdiction game with their own branch standards,’ one US banking expert told Global Witness. ‘When you have cases that indicate different sets of standards, how can you accept their standards, yet say you’re upholding the higher standards?’ Global Witness wrote to HSBC to ask on what basis HSBC USA can claim to know its correspondent customer HSBC Luxembourg, when, according to bank secrecy laws which prevent the sharing of information, it has no means of finding out who HSBC Luxembourg’s clients are.

Page 38: When Luxembourg was evaluated in 2004 (against the previous version of the FATF recommendations, which were updated in 2003), it was found to be ‘largely compliant’ with the equivalent recommendation, although it was noted that ‘further steps are needed to ensure that secrecy laws do not inhibit effective implementation of AML/CFT measures.’




I will quote what Fernand Grulms (Jean-Jacques Rommes and Lucien Thiel’s fellow leader in Luxembourg) said to criticize Rainer Falk’s study: Dass nun luxemburgische ONGs ebenfalls auf diesen Zug aufspringen, ist mehr als bedenklich. Dass sie sich dabei auf derart unseriöse “Studien” stützen, ist mehr als nur peinlich. Und dass sie dafür auch noch öffentliche Gelder ausgeben – denn besagte nicht-Regierungsorganisationen werden auch mit luxemburgischen Steuergeldern finanziert – kann man als skandalös bezeichnen (free translation: The fact that Luxembourg NGOs now also get onboard that train is more than questionable. The fact that they thereby use such un-serious “studies”, is more than embarrassing. And the fact that they spent taxpayers’ money on this – because these NGOs are also funded with tax payers’ money – is outright scandalous)




Jean-Jacques Rommes and Lucien Thiel will have the opportunity to demonstrate that Luxembourg is sincere to fight tax evasion and financial crime in general, by:
- Making amend and admitting tax evasion is not fair business for the growth of the center
- accepting to criminalise tax evasion like money laundering : as tax evasion is accepted banking secrecy cannot be defended,
- accepting to reinforce sanctions for those who do not abide by the rules as sanctions are not dissuasive enough,
- accepting to cut the influence of professionals on the regulator as professionals are not supposed to give their assent to regulations that are applicable to them.
- …

I guess they probably won’t.

And watchdogs and I will continue to put their blunders in the spotlight