Ethics and governance in the European Financial centers

A couple of weeks ago I noted a dubious grant to the FATF from a state member to be audited all the more than there are many visible dysfunctions in the jurisdiction. The grant is mentioned in the 2006-2007 Annual Report (paragraph 54 page 17). Such grants are not a financing of the FATF : as explained paragraph 55 "Funding for the FATF is provided by its members on an annual basis and in accordance with the scale of contribution to the OECD. The cost of the secretariat and other services is met by the FATF budget, using the OECD as the channel for these operations. This scale is based on a formula related to the size of the country’s economy. Non-OECD members’ contributions are calculated using the same scale of OECD members. The two member organisations also make contributions to the FATF budget". According to the FATF public sources it is the first time that a grant took place and I hope the last time. And grants are definitely not part of the funding.


Paragraphs 32 and 33 of the FATF previous Annual Report (2005-2006) are worth reading again:

The effective implementation of international AML/CFT standards requires not just appropriate legislative, regulatory and organisational structures but a robust system of governance to ensure the integrity of the systems in place. Corruption poses an important threat to good governance and is therefore a major threat to the effective implementation of AML/CFT regimes.

The link between AML/CFT and corruption is twofold. Firstly, the proceeds of corruption, which may be considerable, are susceptible to being laundered. Secondly, corruption, and poor governance arising from corrupt institutions (such as the judiciary, the police, or regulatory authorities) and/or individuals, can substantially blunt the effectiveness of an AML/CFT system.
While some consideration has already been given to the link between AML/CFT and corruption, there is a critical need to (i) develop a greater understanding of how corruption damages the effectiveness of AML/CFT systems, and (ii) develop appropriate strategies to deal with the issue.

No comments.

The last report from the FATF that was issued a few days ago is definitely very interesting.

Besides a dubious grant from Luxembourg I have already commented, the report states that "The FATF remains vigilant on international co-operation issues and will not hesitate to act if a country poses a serious threat to the international effort to combat money laundering and terrorist financing" (paragraph 46 page 10 of the English version).

"Serious threat" : this is the risk-based approach as implemented at the FATF's level.
According to the dictionnary, serious means " having important or dangerous possible consequences"

Therefore a "single threat" is not enough for the FATF to do its duty. The threat must be "serious". Nobody knows what serious means as it is a subjective word. The serious threat is not enacting laws and regulations to please the FATF, as explained paragraph 45: "The FATF NCCT process has been very successful. All 23 jurisdictions that were identified as NCCTs in 2000 and 2001 are no longer on the NCCT list as they have made significant progress and many others have strengthened their anti-money laundering and counter-terrorist financing systems to ensure they would not be listed by the FATF as non-cooperative." Strengthening the anti-money laundering and counter-terrorist financing systems (legal and regulatory framework) does not mean implementing or enforcing laws and regulations as explained by a OECD speaker in the framework of the ten-year anniversary of the adoption of the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions : "It is one thing to enact laws, and another to enforce them" (Angel Gurría, OECD Secretary-General).

This explains many things about negligence and/or inertias in some financial centers. They do not care of the FATF's Recs as the FATF does not take into account the implementation and the enforcement.

Let's imagine what the FATF's approach means at a center's level :

For the prudential supervision authority : The supervision autorities remains vigilant on AML issues and will not hesitate to act if a bank poses a serious threat to the center effort to combat money laundering and terrorist financing.

For a FIU : The FIU remains vigilant on international co-operation issues and will not hesitate to act if a bank poses a serious threat to the international effort to combat money laundering and terrorist financing.

For a bank : The bank remains vigilant on AML issues and will not hesitate to act if a client poses a serious threat to the bank effort to combat money laundering and terrorist financing.



At a center's level the serious threat is a sanction from the FATF. But as the FATF is willing to act only when a jurisdiction does not have a frontage of laws and regulations, it is not difficult to please the FATF and be compliant.

Everyone should admit once for all, by following the example of the laid-back and negligent current leaders of the financial center of Luxembourg, that ethics principles are a charade and what actually counts is making money as there is only one rule : MONEY OVER ETHICS.

I must add to be fair with Luxembourg that many professionals in this center do not agree with inertias and negligence but they have a feeling of fear for their job (compliance officers or internal auditor) or contracts (auditors), which I can understand : as an OECD report noted "There would seem to be very little likelihood in Luxembourg that a company employee who has been witness to misappropriation of funds will report this to the authorities. According to the union representatives interviewed by the examining team, the main reason for this is the country’s small size: everything becomes known very quickly, and so anyone who reports an offence will soon find himself labelled as an informant and excluded from the labour market". Should they feel supported by international organisations with an actual pressure to clean the center and eliminate negligent people either auditors or professionals of the financial sector, they might do their duty and break the silence for the sake of the center and of the international finance.

As explained in the previous articles, I was surprised to read in the FATF report 2006-2007 the text " Thanks to a generous grant from Luxembourg, the FATF has been working to improve its information technology systems, with a view to providing FATF delegations with better access to confidential documents. This system will be strengthened over the coming year and the FATF will then be in a position to enhance its public website." (paragraph 54 page 17 of the English text)

Let's adapt the text to other contexts:

Variation 1: for a tribunal

Thanks to a generous grant from a litigant to be judged next year, the tribunal has been working to improve its information technology systems, with a view to provide those to be tried with better access to information. This system will be strengthened over the coming year and the tribunal will then be in a position to provide with judgement online.

Variation 2: for an external auditor

Thanks to a generous grant from one of its auditees, the audit firm has been working to improve its information technology systems, with a view to providing auditees with better access to confidential documents. This system will be strengthened over the coming year and the audit firm be in a position to enhance its public website.

Variation 3: for a commission tenders

Thanks to a generous grant from a tender, the commission tenders has been working to improve its information technology systems, with a view to providing tenders with better access to confidential documents. This system will be strengthened over the coming year and the audit firm will be in a position to enhance its communication.

Variation 4: for a City Hall

Thanks to a generous grant from a citizen who may ask for a building permit, the City Hall has been working to improve its information technology systems, with a view to providing citizens with better access to confidential documents. This system will be strengthened over the coming year and the City Hall will be in a position to enhance its communication.

Variation 5: for a bank

Thanks to a generous grant from a rich client to be assessed in the framework of AML procedures, the bank has been working to improve its information technology systems, with a view to providing clients with better access to confidential documents. This system will be strengthened over the coming year and the bank will be in a position to enhance its communication.

Variation 6: for a disciplinary committee of a regulatory body

Thanks to a generous grant from a bank/audit firm, the committee has been working to improve its information technology systems, with a view to providing members with better access to confidential documents. This system will be strengthened over the coming year and the committee will be in a position to enhance its communication.



All the situations are definitely corruption situations: a tribunal, an audit firm, a commission tenders, a City Hall, a bank or a regulatory body have their proper financing (income tax, salary, fees...) and are not supposed to receive a “generous grant” especially when they have a decision making power or a control to do relating to the one who provides the “extra money”.

That is the reason why the FATF should not have accepted a Grant from Luxembourg all the more than there are many public red flags in this jurisdiction including corruption behaviours that are the visible part of the iceberg, and unfortunately, because of this corruption, nobody is willing to tighten up the ship and eliminate negligent people, which is not responsible as the small size emphasizes dysfunctions.

Finance it too serious to be untrusted to negligent people that have become a threat for the financial community worldwide unless they cut all visible "rotten branches" in the small center where everybody knows everyone and where self regulation is a charade.

The frontage of business ethics is definitely cracked because of Luxembourg. Time is up for international organisations to wake up and smell the coffee. I have been warning them since a couple of years.

International organisations play their credibility.

Unless they find it normal, like in Luxembourg, that a tribunal/a judge should receive "extra financing" from a litigant, an auditor receive "extra financing" from an auditee, a commission tenders receive "extra financing" from a tender, a City Hall/Mayor receive "extra financing" from a citizen who may ask for a builing permit...