Ethics and governance in the European Financial centers

Thanks to smart professionals and politicians, Luxembourg was the first jurisdiction that transposed the UCITS directive of 1985 with a deserved business success.

 

The UCITS directive was revised and the fourth version is about to be implemented in the European Union and it definitely is a business opportunity for Luxembourg.

 

The amendments to the UCITS Directive will:

• Remove administrative barriers to the cross-border marketing of UCITS: Marketing can start without delay once the regulator of the fund has notified the financial regulator in the EU country where he wants to sell its product;
• The simplified prospectus will be replaced by the Key Investor Information (KII) concept: This will be a simple document giving key facts to investors in a clear and understandable manner. It will assist them in making an informed investment decision;
• Mergers between UCITS funds will become easier: There will be single rules across the EU on the requirements for authorisation of a fund merger and on the information that will have to be made available to investors;
• Provide for 'master-feeder' structures, where a UCITS fund (feeder) will be allowed to fully invest its assets into another fund (master);
• Improve cooperation mechanisms between national supervisors.

 

The European Commission is not willing to clarify the role of the depositary prior to the implementation of UCITS IV as it did not regard harmonisation of depositary missions and responsibilities as a priority because it was considered that the depositary role was sufficiently robust and well-understood. However there is like a contradiction with what the European Commission stated in 2004 : the identified issues in 2004 remain to enhance the worldwide reputation of the EU's fund management industry: prevention of conflicts of interests, clarifying depositaries' liability, convergence of national prudential requirements and enhancing transparency and investor information.

 

The Madoff story in Luxembourg did not occur by chance in the jurisdiction that did not transpose faithfully the directive and where:

• conflicts of interests (that can turn into corruption) are common because of the small size, which requires precautions and preventive actions that are not needed in bigger jurisdictions,
• the depositaries' liability was rephrased in a way that does not comply with the other jurisdictions and especially Ireland, the other jurisdiction victim of Madoff,
• the regulator’s powers of sanction are ridiculous compared to other jurisdiction (this was admitted recently by the managing director who is retiring who said: It would be better indeed to have more means, especially taking into consideration what exists in other jurisdictions),
• transparency on issues is not of a quality comparedable to other jurisdictions.

 

Additionally there are many activities in the jurisdiction, that have nothing to do with investment funds, but that may harm the reputation of the Luxembourg financial center. To preserve the investment funds industry from collateral damage, time is up to control what is going on in some Luxembourg-registered firms where there are red flags indicating that they may be scams for money laundering and/or tax fraud.

 

  

 

The same causes produce the same effects.

 

I am afraid current leaders did not tell the truth, and the registration of Luxembourg on a list is their failure as it could have been avoided if they had been more aware of the rise of business ethics in the 2000s: I find it is a bad omen that even in the context of the crisis, business ethics remains out of the scope of CSR in Luxembourg, though it is the cornerstone for the financial sector (See the ORSE “Finance and Sustainable Development” pages): the chairman of IMS Luxembourg (Institut pour le Mouvement Sociétal, Luxembourg) does not quote in his recent interview issues and responsibilities specific to banks, insurance companies and asset managers.

 

The same professionals and politicians that are in business for years can only produce the same way of thinking, behaving and acting wrongly.

 

 

The jurisdiction needs new leaders with smart advisors who do not have a view of the world like a fish from inside its bowl and who smell in advance changes and who understand what is to be done.

 

 

UCITS IV in Luxembourg will be a failure is the jurisdiction does not brush up its governance.

In a press release, the Luxembourg government has informed that Luxembourg and the USA were in agreement on the provision of a new convention relating to the exchange of information.
This is good for Luxembourg.

It is clear enough that from the Luxembourg point of view, membership in international organizations was intended to avoid sanctions and controls in the business. Hence the current feeling of impunity mixed today with the anger without an attempt even to review one’s positions.

Best of the recent speeches and interviews:

Jean-Jacques Rommes :
La marque OCDE se retrouve corrompue et la crédibilité de cette organisation internationale est remise en cause pour longtemps
The OECD brand is now corrupted and the credibility of this international organization is called into question for a long time.

Fernand Grulms
La publication d’une liste “grise” est un très sérieux revers pour l’UE Cela laissera des traces dans les années à venir
The publication of a “grey” list is a very serious setback for the EU. That will leave traces in the coming years.

Jean-Claude Juncker
Le Luxembourg n’est pas un problème
Luxembourg is not a problem
Je crois que l’Union européenne a cessé de fonctionner correctement. Nous avons eu, je le répète, un débat au Conseil dont le résultat fut que, dans le communiqué même faisant suite à cette réunion, il y a eu une phrase disant qu’aucun Etat membre ne figurerait sur une liste de paradis fiscaux au G20 de Londres. Avec l’accord, sinon la complicité, de certains Etats membres, la Belgique et le Luxembourg y figurent malgré tout. Ceux qui croient que cela ne portera pas à conséquence se trompent.
I believe that the European Union ceased functioning correctly. We had, I repeat it, a debate with the Council whose result was that, in the official statement made following thisvery meeting, there was a sentence saying that no member State would be included on a list of tax havens at the G20 meeting in London. With the agreement, if not the complicityof certain member States, Belgium and Luxembourg appear in itnevertheless. Those who believe that this will not have any consequence are wrong.

Jean Claude Juncker just after the G 20
J’ai beaucoup de raisons de critiquer la gouvernance de l’OCDE, puisque l’OCDE publie une liste sans en référer à ses États membres. Voilà quatre États membres de l’OCDE qui se retrouvent sur une liste de l’OCDE mais le secrétaire général de l’OCDE n’a pas pris soin de contacter les gouvernements de ces quatre pays. Ce sera son problème.
I have many reasons to criticize the OECD governance, since OECD publishes a list without referring about it to its Member States. Here we have four Member States of OECD which are found on an OECD list, but the secretary general of OECD did not bother to contact the governments of these four countries. It will be his problem.

Jean Asselborn
Je suis content qu’on ait redéfini le secret bancaire. Mais détruire… Nous sommes membres de l’Union européenne. Juste un mot, si vous permettez. Il y a une désolidarisation dans l’Union européenne
I am glad that we redefined the bank secrecy. But to destroy… We are members of the European Union. Just a word, if you allow. There is de-solidarity in the European Union.



Every current speech or interview is worrying because they demonstrate that leaders in Luxembourg, either politicians or professionals, did not understand what is going on. I have never ever read any criticism of the current functioning of the jurisdiction.

They are exactly like one of the characters, called Ham, in Who Moved My Cheese as they do not admit that THEIR CHEESE with its feature characteristics is not accepted anymore:
- Banking secrecy is not accepted anymore all the more that in Luxembourg professional secrecy may be used by some PSF (Professionals of the Financial Sector) to sue former employees and commit what is called in the USA obstruction to justice,
- Little control and little sanctions, proven thanks to comparison with other jurisdictions, is not accepted anymore
- Tolerance for banks that help to commit fraud is not accepted anymore,
- Tolerance for scams linked to exotic jurisdictions is not accepted anymore
- Will to hush up issues or dysfunctions because of the conflicts of interests that turn into corruption is not accepted anymore
- Memberships to FATF, OECD, European Union… is no longer a way to lock the decision making process towards control and regulations.
- And so on.


If they were displayed on the OECD list it is entirely their fault as they did not make the required aggiornamento despite warnings the last years and especially the last months.


To be positive, in the next articles, I will develop how Luxembourg can find new cheese to make money.