Ethics and governance in the European Financial centers

Money laundering and terrorist financing: Commission adopts 'level 2' implementing measures to Third Directive. The European Commission has adopted last week (3 August) technical measures implementing the Third Directive on the prevention of money laundering and terrorist financing. The Directive was adopted in October 2005 (IP/05/682) and is to be implemented at the latest in December 2007. These technical measures were previously endorsed under the comitology procedure by the Committee for the Prevention of Money Laundering and Terrorist Financing (IP/06/605) - a regulatory committee composed of Member States and chaired by the European Commission - and by the European Parliament. The measures are based on extensive stakeholder consultation and address the following:
(a) a definition of what should be understood by the term 'Politically Exposed Person';
(b) technical criteria allowing the extension of situations in which the procedures for customer due diligence may be simplified; and
(c) technical criteria allowing Member States to exclude from the scope of the application of the Directive those persons/entities conducting financial activities on an occasional or very limited basis.

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Centre for the Study of Financial Innovation (CSFI) has recently completed its 11th Banana Skins survey of leading members of the finance industry to find out their concerns about the soundness of the financial markets.

The survey, sponsored by PricewaterhouseCoopers, puts together a league table identifying potential sources of risks to banks and ranks them by severity. This year’s survey is based on a record 468 responses in 60 countries.

The poll of top financial practitioners, regulators and analysts is dominated by the concerns around over-regulation for the second year running. Fast-rising risks this year also include concerns about commodities, interest rates, emerging markets and equity markets.

As far as over-regulation is concerned, may be this is due to the lack of responsibility of some bankers when writing officially about the AML draft law in their country : "offences such as forgery, use of forgery, false balance sheets, use of false balance sheets or unauthorised use of corporate property should not be included. These are offences with financial connotations which are confused with laundering for the sole purpose of applying exceptional powers to these vague offences.".

After cases like Enron, Worldcom..., nobody may seriously consider use of forgery, false balance sheets, use of false balance sheets or unauthorised use of corporate property as "vague offences" and therefore as usual business behaviour.

Such wording unfortunately supports officially bad management and bad governance in this country depite a communication on proper business conduct.


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To ensure the sustainability of the financial center, Governing authorities must be aware of the changes to the geopolitics and the geoeconomics : we live at a time of transparence and governance with various programs (OECD, World Bank...).

Governing authorities must ask questions and accept questions especially on compliance issues. They must tighten up the ship on issues all the more than there are alternative financial centers for investors and head offices of banks. Otherwise they weaken their international credibility.

The failure to ask or to answer questions allows these authorities (either political or professional) to operate with a distorted sense of reality. In fact, Finkelstein calls companies that are unable to question their prevailing view of reality zombies. A zombie company, he says, is “a walking corpse that just doesn’t yet know that it’s dead—because this company has created an insulated culture that systematically excludes any information that could contradict its reigning picture of reality”.

This is true as well for a financial center.

Some are aware of that. For example, Marcus Killick (Chairman and Commissioner, Gibraltar Financial Services Commission) : "Our stakeholders have a right to criticise not merely our actions but the culture an methodology that underlies them. More importantly, we believe, by understanding our approach, our actions become, in themselves, clearer and therefore more transparent." he wrote.

Other refuse and may be contemptuous enough to put on the black list mails from senders that contradict their reigning picture of reality : For example I received the message "501 5.7.1 This system is not configured to relay mail from " from an official representative body for the investment fund industry that moreover had previously never replied to my questions about public breaches of the code of ethics (that is no longer online).



To go further

Zombie Businesses: How to Learn from Their Mistakes
Reputation: Riks of risks

Bibliography

Finkelstein, Sydney. "Zombie Businesses: How to Learn from Their Mistakes" Leader to Leader. 32 (Spring 2004), pp 29-35.

Finkelstein, Sydney, Why Smart Executives Fail: And What You Can Learn from Their Mistakes. Portfolio Hardcover, 2003 ; and the translation in French : Finkelstein (S.), Quand les grands patrons se plantent . Paris, Editions d’Organisation, 2004.