Ethics and governance in the European Financial centers

The Wall Street Journal has reported that wealthy taxpayers have inundated the Internal Revenue Service in recent weeks with requests to come clean for past tax evasion, amid a government crackdown on undeclared income from overseas accounts.

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"Aujourd'hui la plupart des pays disposent de textes anti-blanchiment et le blanchiment n'a pas disparu. Ce qui compte c'est la mise en œuvre: quel poids a la personne chargée des vérifications au sein d'un établissement financier, peut--elle imposer ses vues, de quels moyens dispose-t--elle ?" (Thierry Godefroy, CNRS)

(free translation: “Today most jurisdictions have AML texts, and money laundering did not disappear. What counts it is the implementation: which power has the person in charge of the controls within any financial institution, can he or she to impose his or her views, what are his or her means?”

Source : Les Echos

Over the years, my focus on financial centres has been primarily on Luxembourg and occasionally on some other jurisdictions, mostly in Europe.

Knowing Luxembourg best is the starting point for a project of guide, which has as an ambition to identify characteristics both good and bad of what is generally considered a “financial centre” or a “tax haven” or a “judicial haven”.  

Luxembourg has also assumed leadership of a group of tax havens, even inviting them to a coordination meeting to Luxembourg, which offers a good starting point, as Luxembourg has been a coordinator.

Lastly, numerous reactions are available because of that leadership from institutions such as OECD, G20, European Commission or public comments on issues such as Madoff, double taxation agreements, compliance and banking secrecy.

Starting with Luxembourg as a benchmark, the guide will cast a present day picture of the Luxembourg financial center, and evolve from there into an analysis of other jurisdictions.

Jean Meyer’s open letter in the Lëtzebuerger Wort (he is the chairman of the ABBL, the Luxembourg Bankers’ Association) to my attention to decline my help gave me the idea of the guide for the clients and the investors to compare jurisdictions on the basis of precise and objective criteria:

- Wording of the laws and regulations: in particular words that were cut off or on the contrary added compared to the original directives (or other standards) and the practical effects in the implementation of the standard of origin (in particular for the EU members, law and regulation of transposition of the countries versus formulation of the OPCVM Directive, the Savings Directive and the Deposit-guarantee schemes Directive)

- System of protection for the investor and/or the client (mechanisms under the leadership of regulator, trend of the jurisprudence in the litigations banks/customers…)

- Use of ratios of comparison of the effective implementation of the regulation: for example the comparison with Monaco, with which Luxembourg has just signed an agreement for exchange of information, it appears that the ratio of Suspicious Transaction Reports per $1billion in assets for Luxembourg, fund industry excluded, is 6 times less than Monaco and the ratio of Suspicious Transaction Reports per $1billion in assets for Luxembourg, fund industry included, is almost 17 times less than Monaco. That is to be brought closer to the CRF (the Luxembourg FIU) reports every year that 50% of the banks never make Suspicious Transaction Reports. Unfortunately, the amount of assets that the aforementioned banks represent is not known

The idea is to assess the quality of the regulation in the broad sense to guide the customers and investors in their choices.

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.

I do not prejudge results but I unfortunately fear a bad classification for Luxembourg, which is being rammed by its actors themselves.