Ethics and governance in the European Financial centers

Luxembourg, Switzerland and Austria are to meet this week end in Luxembourg.

The meeting will take place in Luxembourg and will serve primarily to coordinate points of common interest of the financial centres in the international environment. The talks will cover a range of issues including the debate surrounding a possible blacklist of so-called `tax havens'

Even though Luxembourg, Switzerland and Austria share banking secrecy, by comming in Luxembourg Switzerland and Austria are unfortunately supporting a jurisdiction that does not have the same level of business ethics than them, which weakens the legitimacy of their arguments.

By acting like this they encourage Luxembourg to refuse the brushing up of the country toward ethics and good governance.

Let's compare the three jurisdictions on a couple of items :


Size

Luxembourg : 2.586 Km²
Switzerland : 41 285 km2
Austria : 83 858 km2

Luxembourg is the smallest jurisdiction of the three, which means a jurisdiction where everybody knows everyone with a high level of conflicts of interests.

GNP per capita in international$ (Source : World's Richest Countries in Gross National Product - Daniel Workman)

GNP per capita based on global purchasing power parity (PPP). GNP per capita based on PPP represents the statistic converted to international dollars using purchasing power parity rates.

Luxembourg : $61,610 (based on 2004 PPP GNP per capita in international$)
Switzerland : $35,660 (based on 2004 PPP GNP per capita in international$)
$31,800 (based on 2004 PPP GNP per capita in international$)

Luxembourg is the richest jurisdiction of the three.


GDP (Source : CIA World Factbook)

Luxembourg : GDP - per capita (PPP): $85,100 (2008 est.)
Switzerland : GDP - per capita (PPP): $40,900 (2008 est.)
Austria: GDP - per capita (PPP): $39,600 (2008 est.)

Luxembourg is the richest jurisdiction of the three.


Transparency International Chapter (Source : TI Website)

Luxembourg: no chapter
Switzerland: TI Switzerland, located Schanzeneckstrasse 25, P.O. Box 8509, CH-3001 Bern. Contact Person(s): Ms Anne Schwöbel
Austria: TI Austria, located Operngasse 20B/9, 1040 Wien. Contact Person(s): Dr. Eva Geiblinger

Luxembourg that is the richest jurisdiction of the three, which means that has more opportunities for corruption and fraud because of conflicts of interests, does not have a TI Chapter.


Transparency International Global Corruption Barometer 2007 (Source : Report)

Luxembourg: 6% of respondents reported they paid a bribe to obtain Service
Switzerland: 1% of respondents reported they paid a bribe to obtain Service
Austria: 1% of respondents reported they paid a bribe to obtain Service

Luxembourg that is the richest jurisdiction of the three that does not have a TI Chapter is the one where more respondents reported they paid a bribe to obtain Service.


Liability of legal persons (Source : OECD and GRECO reports on corruption)

Luxembourg: "“Luxembourg has still not responded to key Phases 1 and 2 recommendations; these recommendations relate to the establishment of a clear, effective and dissuasive system of liability of legal persons and efforts to raise awareness of the foreign bribery offence among the private sector. Considering the seriousness of the situation, the Working Group has decided that, within one year, Luxembourg will report,in writing, on measures taken to fulfil the recommendations of the Group, and reserves the right, in the event of continued failure to implement the Convention, to take further steps.” (Source: OCDE Working Group on Bribery, Phase 2 bis, 20 March 2008, p. 4)
Switzerland: “Article 100quater of the Criminal Code institutes two systems of criminal liability for enterprises. Both establish defective organisation as a condition for corporate criminal liability.” (Source: OCDE Working Group on Bribery, Phase 2, 20 December 2004, p. 36)
Austria: “In October 2005, shortly after the Phase 2 on-site visit, the Austrian Parliament adopted legislation establishing general criminal liability of legal persons, including for bribery offences.” (Source: OCDE Working Group on Bribery, Phase 2: Report on Implementation of the OECD Anti-Bribery Convention, 16 February 2006, p. 4)

Luxembourg that is the richest jurisdiction of the three, which means that has more opportunities for corruption and fraud because of conflicts of interests, does not have a liability for legal persons.


PwC Global Economic Crime Survey 2007 (Source : Survey 2007, p. 40)

Luxembourg: PwC Luxembourg did not participate to the survey.
Switzerland: PwC Switzerland participated to the survey
Austria: PwC Austria participated to the survey

PwC Luxembourg that is located in the richest jurisdiction of the three, which means that has more opportunities for corruption and fraud, did not participate to the survey

Luxembourg: No press release on the Surveys but a commercial webpage quoting the Survey 2007 to sell PwC services
Switzerland: Issued a press release on the Survey 2007 in French and German
Austria: Issued a press release on the Survey 2007 in German.

Luxembourg:

Switzerland:

Austria:


PwC Luxembourg that is located in the richest jurisdiction of the three, which means that has more opportunities for corruption and fraud because everybody knows everyone, did not communicate either on previous Economic Crime Surveys contrary to the colleagues in Switzerland and Austria. They communicated on the Survey in a commercial web page to sell their services the first time for the Global Economic Crime Survey 2007.


E&Y Corruption or compliance – weighing the costs 10th survey (Source: Survey page 23)

Luxembourg: E&Y Luxembourg did not participate to the survey.
Switzerland: E&Y Switzerland participated to the survey
Austria: E&Y Austria participated to the survey

E&Y Luxembourg that is located in the richest jurisdiction of the three, which means that has more opportunities for corruption and fraud, did not participate to the survey




There are more criteria but the above may be summarised on a synoptic table :



Large picture



This comparison demonstrates that there is a scale of permissiveness in the jurisdictions. This is the reason why the Narcotic Control Strategy Reports 2008 observes “the scarce number of financial crime cases is of concern, particularly for a country that has such a large financial sector” or the the GRECO report Round III observes that “the number of cases coming before the courts appears to be very small”


This permissiveness increases more or less the negative effect of secrecy. There are recurrent scandals through Luxembourg: scams, tax evasion… Luxembourg clear and pragmatic framework is actually used to commit various frauds and ML cases.

E.g.

Fraud vis-à-vis the USA

Cipriani
Fraud with Liechtenstein

Fraud vis-à-vis France

Eurolux Gestion
AOL

Fraud vis-à-vis Italy

Consorte
Parmalat

Fraud vis-à-vis Spain

Esperito Santo with a sumary in English




Did professionals in the jurisdiction of 2500 Km2 where everybody knows everyone and what the others are doing realise the paradigm shift after the Liechtenstein scandal? As far as tax evasion is concerned I am afraid not as their behaviour demonstrates that in Luxembourg, secrecy is first a tool for fraud and obstruction to justice and tax administrations.

As I said in a previous article the Luxembourg regulator is doing a much better communication on Madoff than the Irish regulator in a context of both jurisdictions are in question because of their investment funds.

The feeling of this better communication on the Madoff case is confirmed by a google search on the keyword "Madoff" with site:.ie and site:.lu.

The result is today the following :

- site:.ie : 3 200 results for a country of 70 283 km² (+ 14 148 km² for Northern Ireland)
- site:.lu : 5 430 results for a country of 2 586 km².

In my opinion this may be an indicator that the debate on Madoff is more active in Luxembourg than in Ireland despite the wording of the law of transposition of the UCITS directive is morefaithfull in Ireland than in Luxembourg.

In my past articles I have underlined that the CSSF, the Luxembourg regulator, and the financial center of Luxembourg in general had and stil have an inadequate communication by:
- not telling the truth on the transposition of the directive,
- not communicating on all the aspects of the issue involving the jurisdiction.

I am afraid the Irish regulator is worse in its communication on Madoff case than the Luxembourg regulator.

When going through the websites of the regulators (CSSF and IFS ) it appears that the IFS has a poor communication. The Irish Regulator communicated on Madoff the first time only a couple of weeks after the Luxembourg regulator.

The IFS issued only one laconic press release dated 7 January 2009 entitled “Bernard L Madoff Investment Securities LLC (“Madoff”) “ that does not quote the involved investment funds in Ireland : “Two funds, one UCITS and one non-UCITS, have exposures to Madoff arising from the appointment of Madoff as sub-custodian to the assets of the funds by the Irish trustee”

It is not the first time that I point out that the Luxembourg regulator is better that the Irish Regulator for the communication (see my article dated 14 October 2006).

A search on the website with the keyword Madoff confirms the feeling:
Search Results
• News (1)
• Remainder of site (1)
Both results are about the only press release dated 7 January.


Even though the CSSF communication in Luxembourg is not sufficient enough in a world of transparency, there is a communication that shows a minimum of respect for the investor:

11 February 2009: Withdrawal of the sicav HERALD (LUX) from the official list
6 February 2009: The Madoff case
6 February 2009: Meeting between UBS and the CSSF regarding the Madoff case
3 February 2009: Withdrawal of Luxalpha Sicav from the official list
23 January 2009: The Madoff case
2 January: The Madoff case
22 December 2008: Bernard L. Madoff and Bernard L. Madoff Investment Securities LLP

A search on the website with the keyword Madoff confirms the positive feeling with nine results.


I wish Luxembourg realised that it must target and fix dysfunctions and “red flags” that harm the Ethical credibility of the center and create the risk with periodic involvement of the jurisdiction.