Ethics and governance in the European Financial centers

TJN has reported that on the morning of August 5 there was a meeting in the Luxembourg foreign ministry between the Luxembourg Bankers' Association ABBL and heads of Cercle de Cooperation, which recently issued a study of Luxembourg as a tax haven. Curiously, they did not even invite study's author to the meeting. The issue comes from the author.

That afternoon the study was wiped off the Cercle's website and the Cercle was threatened with withdrawal of funds. (All member organisations of the Cercle have cooperation agreements with the Luxembourg foreign or development ministry, and the Cercle itself is financed 85% out of state money)

 

 

 

 

 

 

 

Source of the Picture: Bujago types and termiks'[termites] nest. (1890-1893)

New York Public Library, The earth and its inhabitants, Africa. Elisée Reclus (1830-1905), facing page 188

Author: Achille Sirouy (1834-1904)

This image is in the public domain because its copyright has expired

 

 

 

 

 

 

 

In the context of the censorship of the Cercle de Cooperation, I now have the answers to the questions I raised a couple of months ago when the LIGFI (Luxembourg Institute for Global Financial Integrity) was launched:

  

Will the institute be a tool to change the business culture or is it an opportunist ethical frontage for the center? 

 

The story of the Cercle de Cooperation demonstrates it definitely cannot be a tool to change the business culture and its launch was definitely a tool for the promotion of an ethical frontage.

There is no capacity to welcome "critics" especially when they lay emphasis on public and official dysfunctions that are the visible part of the iceberg. The word critic comes from the Greek κριτικός (kritikós), "able to discern", which in turn derives from the word κριτής (krités), meaning a person who offers reasoned judgment or analysis, value judgment, interpretation, or observation.

In practice critics are blacklisted in the Luxembourg business.

 

How the institute will handle specific issues in Luxembourg due to the small size: conflicts of interest that can turn into corruption defined as an impairment of integrity, virtue, or moral principle?

 

The story of the Cercle de Cooperation as described above demonstrates the standardisations of  the conflicts of interest and what I called last year the “system”.

 

Networks: There are many associations in Luxembourg, but the center is very small so everybody meets in the same associations and when there is an issue involving a member a couple of phone calls to fellow member may help to hush up the issue. Everybody in the network knows the issue but there is no need to repudiate the bad professional that is supported by the group. To consolidate the support fellow members may knowingly join a board with the member in question. The problem in Luxembourg is that it is visible because of the small size, which is not the case in a bigger country where the bad professional may move up to another state to join the same kind of association but with new fellow members.

 

Intimidation : This situation is met when people do not do their duty because they fear for their job or contract, or financing with the Cercle de Coopération.

 

Fame : This last type of situation is met when people may hesitate to do or do not at all do their duty because they do not want to involve people that gain a professional standing because of professional, political or academic supports (in a board, in an association...). In other word, the will is to protect the frontage of the reputation of the center and its professional in any case.

 

How the institute will handle issues relating to businesses that do not belong to the financial sector but may cause a collateral damage for the reputation of the financial sector?

 

The story of the Cercle de Cooperation demonstrates there is no will to correct dysfunctions that create the image of tax haven beyond banking secrecy (offshore, capital earnings of non-residents and the exceptional tax regime for corporate offices of foreign companies by means of financial engineering...)

The cercle de Cooperation was positive as it states recommendations based on the observations on the field depite figures that may be inaccurate : but how to be accurate when information in under banking or professional secrecy?

 

 

 

I do think that the jurisdiction has reached a point where many of its professionals and politicians are no longer reliable or trustable in the promotion of business ethics and will be responsible before the history for the collapse of the jurisdiction that cannot afford the same lax attitude as bigger jurisdictions.

 

Head offices of banks cannot invest anymore in this context in the jurisdiction.

 

 

 

 

Know more

Only right-minded experts are sought in Luxembourg

Luxembourg, a jurisdiction of censorship : evidences

 

 

The press today reported that Luxembourg did not provide yet the money that was agreed to rescue Dexia.

 

Know more

A couple of months ago, LFF published the following press release:

 

According to the recently published World Economic Forum global ranking index for - countries with safe banking practices, Luxembourg ranks in second place worldwide, alongside Sweden, Australia, Denmark, Belgium and the Netherlands. The ranking is based on the opinions of executives in the industry and banks were scored between 1.0 (insolvent or in need of government aid) and 7.0 (healthy with sound balance sheets).  Luxembourg scored 6.7, in recognition of its healthy banking sector and high level of investor protection


There are 6 jurisdictions that rank in second place worldwide with the score of 6.7 but the 20th jurisdiction is scored 6.5, which is not a significant gap (See Global Competitiveness Report 2008-2009 page 469)

In the same report there are other topics for which the rank is not so good. For example:

- Efficacy of corporate boards page 393 is ranked 22nd (Corporate governance by investors and boards of directors in your country is characterized by (1 = management has little accountability, 7 = investors and boards exert strong supervision of management decisions).

- Protection of minority shareholders’ interests page 395 is ranked 31st. (Interests of minority shareholders in your country are (1 = not protected by law, 7 = protected by law and actively enforced). This is the same score as Namibia and Tunisia but this score is less important than... Ghana that is scored 5.4.

 

A new report is scheduled for release on Tuesday 8 September 2009. I will post an article on the possible evolution when it is released.

 

Above all there is like a discrepancy with another table that LFF could not ignore at it is quoted in its source : Top Twenty international Safest Banks.

 

There is no Luxembourg bank among the Top Twenty International Safest Banks:

 

Ranking index for - countries with safe banking practices	Top Twenty International Safest Banks
Canada (6.8)	2
Sweden (6.7)
Luxembourg (6.7)
Australia (6.7)	4
Denmark (6.7)
Netherlands (6.7)	2
Belgium (6.7)
New Zealand (6.6)	1
Ireland (6.6)
Malta (6.6)
Hong Kong(6.6)
Finland (6.5)
Singapore (6.5)
Norway (6.5)
South Africa (6.5)
Switzerland (6.5)
Namibia (6.5)
Chile (6.5)
France (6.5)	3
Spain (6.5)	3
Germany (6.1)	4
United Kingdom (6,0)	1

 

And there is no Luxembourg bank among the Top Fifty International Safest Banks.

 

 

 

What is therefore the issue with the Luxembourg communication?

 

The World Economic Forum's Global ranking index for countries with safe banking practices is based on the opinions of executives in the industry and banks were scored between 1.0 (insolvent or in need of government aid) and 7.0 (healthy with sound balance sheets) and does not take into account the issues raised by banks located in Luxembourg late 2008 (Landsbanki Luxembourg, Kaupthing Bank Luxembourg)

It was stupid to focus on a figure that underlines strong balance sheets of Luxembourg banks in the context of the fight against banking secrecy and to conclude it is evidence of a high level of investor protection.

 

The visible truth in public and official sources is that the client does not come first in Luxembourg:

-         the client does not exist in the regulator’s Committees: The members of these Committees represent the companies subject to the prudential supervision of the CSSF, professional associations representing the various segments of the financial sector as well as external auditors and legal advisers active in the financial field.

-         the regulator does not inform of every complaint filed with the State Prosecutor’s office.

-         the jurisprudence is not in favor of the investor : despite the fact that there is poor transparency on judgements, as explained attorney Alex Schmidt, the investor is not protected in Luxembourg when banks failed in their duty. In a book called La Responsabilité du Banquier en droit prive luxembourgeois (Banker’s liability in Luxembourg private law) he concludes that one could be pleased in that Luxembourg jurisprudence generally is very clear-sighted vis-a-vis the small investors (original text: “L'on pourra se féliciter de ce que la jurisprudence luxembourgeoise se montre généralement très clairvoyante face aux investisseurs à la petite semaine”). In other words in case of litigation because of a bank failure, there is a country risk as the foreign investor will not be successful before the court.

NB : The view of the pahe of the book with the critical quotation is no longer online, but the quotation is readable thanks to a google search:

 

 

I am afraid the above are definitely not an unhealthy combination of gratuitous assertions, hearsay, half-truths and concocted lies, unless one considers that sources from the CSSF and the justice in Luxembourg are dubious.

 

On the contrary gratuitous assertions, hearsay, half-truths and concocted lies are what are doing those who condone disfunctions and failures in public and official sources and are unable to make amend.

 

In a nutshell, the communication about high level of investor protection is deceptive. Definitely deceptive to fool clients.