Ethics and governance in the European Financial centers

The ALFI has today published the Interim report of the ALFI Madoff Task Force in Luxembourg and technical guidelines for Fund of Funds concerning the valuation of investment Funds affected by Madoff.

The report states that Lxembourg legislation on fund depositaries faithfully reflects the provisions of European Council Directive 85/611/EEC (the UCITS Directive) and that Luxembourg has a suitable framework for a proper protection of investment fund assets and investors in line with European standards. The Luxembourg legal and regulatory environment is equivalent to that of the other major European jurisdictions.ynop
This statement does nor comply with the synoptic table of the UCTIS directive and the luxembourg legislation.

The reports states that the group wishes to issue practical industry guidance on the due skills, care and diligence (initial as well as ongoing) a depositary should apply when entering into a relationship with third parties. This means that the current texts are not clear enough or rather may create opportunities for drifts.

If I were the ALFI I would investigate WHO introduced Madoff in Luxembourg despite "red flags".


Report
Technical guidelines

In a speech yesterday Luc Frieden said he met Angel Gurria, to discuss the blacklist of tax havens. Luc Frieden stated that Angel Gurria confirmed that Luxembourg is not a tax haven according the OECD criteria. But Luc Frieden said at the same time in his speech that
- Luxembourg decided to conclude bilateral conventions of non-doubled tax in accordance with the model of convention of OECD. This would mean that is was not the case before.
- Secrecy does not protect from the infringements with the law : which law ? Luxembourg law that does not admit the penal liability of legal persons for example ?
- Within sight of the decision to adopt OECD standards, Luxembourg requires that this exchange, according to rules OECD, become the only principle which will be applied to the level of the European Union : This would mean that Luxembourg did not accept before OECD standards.

How can Luxembourg not be a tax haven while not respecting OECD standards?

The four OECD criteria to determine wether a jurisdiction is a tax haven or not are:
- insignificant or non-existent tax levels,
- absence of transparency in tax matters,
- absence of fiscal data exchange with other countries and
- attractiveness for straw companies with fictitious activities.

The three last criteria are met in Luxembourg.

What is remarkable is that it seems impossible for the Luxembourg leaders to see reality from the interior of their community. A such goldfish in its bottle, they see the outside world only by the walls of the bottle. That would take an considerable effort to think to look at the bottle of outside.

As I already wrote the experience of the Luxembourg jurisdiction with the OECD unfortunately inclines with mistrust vis-a-vis these declarations:

For example, Luxembourg cooperates in the framework of the Anti-Bribery Convention that was adopted in 2001 in the Luxembourg legislation: but it is reluctant to implement international Recs. For example penal liability of legal persons required since a couple of years and today still neither enacted nor enforced.

Definitely reluctant, because the jurisdiction :
- is able to transpose any European text pro-business very quickly, and recently
- was able to change its constitution in a couple of months with a unanimous vote : The Grand Duke announced his refusal to sign a legal text on 2 December 2008. The project of revision of the constitution was filed in on 3 December 2008. The first vote took place on 11 december 2008. The second vote took place on 12 March 2009.

In is answer to MPs the day before yesterday, Luc Frieden said that "en ce qui concerne les paradis fiscaux, il y a, à notre connaissance, une organisation internationale, à savoir l’OCDE, qui a établi des critères de qualification des paradis fiscaux. Parmi ces critères, le point de départ est qu’il faut qu’il s’agisse d’un territoire dans lequel il n’y a pas de fiscalité, ou une fiscalité très faible" (with regard to the tax havens, there is, to our knowledge, an international organization, namely OECD, which established criteria of qualification of the tax tavens. Among these criteria, the starting point is that it is necessary that it is about a territory in which there is no taxation, or a very weak taxation)

This is not the actual OECD framework on tax havens.

Four key factors are actually used by the OECD to determine whether a jurisdiction is a tax haven. These factors to be considered are :

Wether the jurisdiction imposes no or only nominal taxes.

The no or nominal tax criterion is not sufficient, by itself, to result in characterisation as a tax haven. The OECD recognises that every jurisdiction has a right to determine whether to impose direct taxes and, if so, to determine the appropriate tax rate.

An analysis of the other key factors is therefore needed for a jurisdiction to be considered a tax haven.

Whether there is a lack of transparency

Transparency ensures that there is an open and consistent application of tax laws among similarly situated taxpayers and that information needed by tax authorities to determine a taxpayer’s correct tax liability is available (e.g., accounting records and underlying documentation).
The absence of balance sheets database is evidence of lack of transparency in Luxembourg. Secrecy is opposable to foreign tax administration in Luxembourg while the professionals of the financial sector help with tax avoidance


Whether there are laws or administrative practices that prevent the effective exchange of information for tax purposes with other governments on taxpayers benefiting from the no or nominal taxation.

With regard to exchange of information in tax matters, the OECD encourages countries to adopt information exchange on an “upon request” basis. Exchange of information upon request describes a situation where a competent authority of one country asks the competent authority of another country for specific information in connection with a specific tax inquiry, generally under the authority of a bilateral exchange arrangement between the two countries. An essential element of exchange of information is the implementation of appropriate safeguards to ensure adequate protection of taxpayers’ rights and the confidentiality of their tax affairs. Banking secrecy is opposable to foreign tax administration in Luxembourg while the professionals of the financial sector help with tax avoidance

Whether there is an absence of a requirement that the activity be substantial

The no substantial activities criterion was included in the 1998 Report as a criterion for identifying tax havens because the lack of such activities suggests that a jurisdiction may be attempting to attract investment and transactions that are purely tax driven. In 2001, the OECD’s Committee on Fiscal Affairs agreed that this criterion would not be used to determine whether a tax haven was co-operative or unco-operative.
It is a key problem in the Luxembourg jurisdictions where the Corporate Registration is full of possible scams connected to other tax havens like the Seychelles, the BVI, Panama...


When Luc Frieden says that the starting point is that it is necessary that it is about a territory in which there is no taxation, or a very weak taxation, this is not what the OECD is stating : the OECD specifies that it recognises that every jurisdiction has a right to determine whether to impose direct taxes and, if so, to determine the appropriate tax rate. An analysis of the other key factors is needed for a jurisdiction to be considered a tax haven. I am afraid that the three additional criteria are met in Luxembourg.

Read OECD criteria