Ethics and governance in the European Financial centers

Yesterday Czech Finance Minister Miroslav Kalousek, whose country currently holds the EU presidency, said he personally wanted to apologize to EU nations on the OECD list because "in no way are they non-cooperative jurisdictions or tax havens" and it was not fair to put them on the list.

As I said, banking secrecy is not a problem in itself. The problem is the use of it. Even so low taxes are not a problem in themselves. The problem is the lax framework of the jurisdiction.

The European Union was neither intended for some jurisdictions to trap finances of the others nor to provide these jurisdictions with a kind of impunity and untouchability.

 It  is because of this feeling of impunity and untouchability thanks to their memberships to organisation (OECD, European Union…) that the EU nations on the list were so upset.

I was just wondering about the reasons why the Czech Republic condones that there are jurisdictions in the European Union that are a problem, and especially Luxembourg, not only because of banking secrecy, but as well and above all because of a lax environment compared to other European jurisdictions including Belgium and Austria.

Unless one finds it normal that, like in Luxembourg, in a small jurisdiction where everybody knows everyone:

-          the corporate registration is full of companies with no economic reality and/or exotic statutory auditors or firms,

-          banks knowingly help to commit fraud especially since the Liechtenstein scandal without being officially repudiated,

-          business ethics does not exist in the vision of CSR,

-          transparency is not sought : some key databases donot exist (balance sheet database, judiciary judgements) compared to other jurisdictions

-          leaders, either politicians or professionals, do not question the demonstrated dysfunctions: they show their psittacism as they repeat  “Luxembourg is not a tax haven” while they keep silence on the above issues.

-          etc.

Why does the Czech Republic condone that?

There may be one good reason for the Czech Republic: BU-SI-NESS.

“Czech Open Days” are taking place today in Luxembourg at the Chambre de Commerce.

The event was in the pipe early this year prior to the G 20:

 

 

Thanks to smart professionals and politicians, Luxembourg was the first jurisdiction that transposed the UCITS directive of 1985 with a deserved business success.

 

The UCITS directive was revised and the fourth version is about to be implemented in the European Union and it definitely is a business opportunity for Luxembourg.

 

The amendments to the UCITS Directive will:

• Remove administrative barriers to the cross-border marketing of UCITS: Marketing can start without delay once the regulator of the fund has notified the financial regulator in the EU country where he wants to sell its product;
• The simplified prospectus will be replaced by the Key Investor Information (KII) concept: This will be a simple document giving key facts to investors in a clear and understandable manner. It will assist them in making an informed investment decision;
• Mergers between UCITS funds will become easier: There will be single rules across the EU on the requirements for authorisation of a fund merger and on the information that will have to be made available to investors;
• Provide for 'master-feeder' structures, where a UCITS fund (feeder) will be allowed to fully invest its assets into another fund (master);
• Improve cooperation mechanisms between national supervisors.

 

The European Commission is not willing to clarify the role of the depositary prior to the implementation of UCITS IV as it did not regard harmonisation of depositary missions and responsibilities as a priority because it was considered that the depositary role was sufficiently robust and well-understood. However there is like a contradiction with what the European Commission stated in 2004 : the identified issues in 2004 remain to enhance the worldwide reputation of the EU's fund management industry: prevention of conflicts of interests, clarifying depositaries' liability, convergence of national prudential requirements and enhancing transparency and investor information.

 

The Madoff story in Luxembourg did not occur by chance in the jurisdiction that did not transpose faithfully the directive and where:

• conflicts of interests (that can turn into corruption) are common because of the small size, which requires precautions and preventive actions that are not needed in bigger jurisdictions,
• the depositaries' liability was rephrased in a way that does not comply with the other jurisdictions and especially Ireland, the other jurisdiction victim of Madoff,
• the regulator’s powers of sanction are ridiculous compared to other jurisdiction (this was admitted recently by the managing director who is retiring who said: It would be better indeed to have more means, especially taking into consideration what exists in other jurisdictions),
• transparency on issues is not of a quality comparedable to other jurisdictions.

 

Additionally there are many activities in the jurisdiction, that have nothing to do with investment funds, but that may harm the reputation of the Luxembourg financial center. To preserve the investment funds industry from collateral damage, time is up to control what is going on in some Luxembourg-registered firms where there are red flags indicating that they may be scams for money laundering and/or tax fraud.

 

  

 

The same causes produce the same effects.

 

I am afraid current leaders did not tell the truth, and the registration of Luxembourg on a list is their failure as it could have been avoided if they had been more aware of the rise of business ethics in the 2000s: I find it is a bad omen that even in the context of the crisis, business ethics remains out of the scope of CSR in Luxembourg, though it is the cornerstone for the financial sector (See the ORSE “Finance and Sustainable Development” pages): the chairman of IMS Luxembourg (Institut pour le Mouvement Sociétal, Luxembourg) does not quote in his recent interview issues and responsibilities specific to banks, insurance companies and asset managers.

 

The same professionals and politicians that are in business for years can only produce the same way of thinking, behaving and acting wrongly.

 

 

The jurisdiction needs new leaders with smart advisors who do not have a view of the world like a fish from inside its bowl and who smell in advance changes and who understand what is to be done.

 

 

UCITS IV in Luxembourg will be a failure is the jurisdiction does not brush up its governance.

In a press release, the Luxembourg government has informed that Luxembourg and the USA were in agreement on the provision of a new convention relating to the exchange of information.
This is good for Luxembourg.