Ethics and governance in the European Financial centers

The New York Times has reported that he Securities and Exchange Commission’s internal watchdog said in an extensive report released Wednesday that an inexperienced staff and examination delays prevented the agency from uncovering the huge fraud perpetrated by Bernard L. Madoff. H. David Kotz, the S.E.C.’s inspector general said the agency received many warnings about Mr. Madoff’s business over 16 years, but missed numerous chances to uncover the scheme by approaching investigations “too narrowly.”

A quotation page 19: "For example, when Enforcement staff asked the critical question of how he was able to achieve his consistently high returns, Madoff never really answered the question but, instead, attacked those who questioned his returns, particularly the author of the Barron's article. Essentially, Madoff claimed his remarkable returns were due to his personal "feel" for when to get in and out of the market, stating, "Some people feel the market. Some people just understand how to analyze the numbers that they're looking at." Because of the Enforcement staffs inexperience and lack of understanding of equity and options trading, they did not appreciate that Madoff was unable to provide a logical explanation for his incredibly consistent returns. Each member of the Enforcement staff accepted as plausible Madoff’s claim that his returns were due to his perfect "gut feel" for when the market would go up or down."

Richard Murphy said, "regulators must assume those they regulate are crooks. Why would they need regulation if they weren’t? Which is also why self regulation can never work."

I can confirm that especially in a small jurisdiction where everybody knows everyone self regulation can never work.

As far as Luxembourg is concerned, Madoff is officially an American scandal.

I wish they were intelligent enough to realise that the small size of the jurisdiction creates the risk all the more than professionals decide what is to be done for the regulation:

“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."

In other words professionals require changes in the transposition of directives and other international texts whatever matter (AML, tax, audit...) and influence the regulator in its duties.

I am afraid my sources are not "dubious", the magic word to disregard issues raised.

They never really answer the question but, instead, attacked those who questioned . Rainer Falk from the Cercle de cooperation and I we know that.

"Don't ask, don't tell" is the business culture in Luxembourg where many professionals are like Madoff was : respectable.

Read the SEC's internal watchdog Report

The Spiegel has reported that Germany becomes tax haven for firms and wealthy.

A completely legal tax avoidance industry is flourishing right in Germany. It is an industry that thrives on the mistakes made by ministries and the parliament in drawing up tax legislation: millionaires and corporations use aggressive tax models to make themselves appear to be artificially poor, which is completely legal.

Germany is a tax haven for large companies," says Wiesbaden-based economist Lorenz Jarass quoted by the Spiegel. "People with normal incomes are being robbed.

Germany qualified in the “white list” in April.

So did France where there are similar advantages (les “niches”)

This is the reason why the no or nominal tax criterion is not sufficient, by itself, to result in characterisation as a tax haven.

The three other factors to be considered are:  

- Whether there is a lack of transparency

- Whether there are laws or administrative practices that prevent the effective exchange of information for tax purposes with other governments on taxpayers benefiting from the no or nominal taxation.

- Whether there is an absence of a requirement that the activity be substantial

This is the difference between France and Germany and other jurisdictions, that are actual tax havens where controls are perfectible despite a so-called regulation and above all where freedom of expression on issues does not exist.

Neither in France nor in Germany, would NGOs be blocked and threaten in their financing for reporting issues, as they were in Luxembourg.

Martin De Forest-Brown, director of international finance for the Chief Minister's Department in Jersey, recently published an article that is worth commenting.

The title was : "Don't demonise Jersey, it stands with the good guys on regulation".

To comment the list the list published by the OECD in April, he observes: "Jersey qualified as a jurisdiction that had substantially implemented the internationally agreed tax standard alongside the UK, US, Germany and France. But Austria, Luxembourg, Belgium and Switzerland, alongside Liechtenstein, Panama and Singapore did not. "

Luxembourg and the other jurisdictions that did not qualify in April will appreciate. But Luxembourg is now using the same communication as Jersey.

The point is the effectiveness of the exchange of information based on the OECD tax model.

The figures demonstrates it does not work.

Read Richard Murphy to know more