Ethics and governance in the European Financial centers

The Luxembourg regulator yesterday published a press release about the Madoff case.

The wording is worth commenting :

(...)
The CSSF would like to stress that the Luxembourg law applicable to Luxembourg based depositary banks in their role of safe-keepers of investment funds' assets reflects faithfully the provisions of the European Council Directive 85/611/EEC
(...)
the Commission does not limit its analysis to the depositary banks concerned but verifies that all the other parties involved with the funds concerned have acted with the diligence imposed by Luxembourg law
(...)


What kind of law ? The law that is presented officially as clear and Prag-mac-tic, the fetish word.


This is for instance what Luc Frieden wrote in 2004 (Cf. article « The art of Communication », Fundlook, july-september 2004, page 3) : "I want to ensure that Luxembourg remains a leading player in the world of investment funds. Based on clear and pragmatic legal rules that are fully compliant with the EU legal framework as well as on the unique international experience built up over the past decades, the Grand-Duchy of Luxembourg will continue to undertake every effort to develop Luxembourg as the European hub for investment funds both for European and non-EU financial operators."

Pragmatic means that the actual enforcement in the jurisdiction is at least perfectible as there are many red flags that demonstrate a lax jurisdiction.

Quod erat demonstrandum with the Madoff case .

When looking the Corporate Registration in Luxembourg one may find evidences of a perfectible governance.

When the company the management and the governance of which is perfectible is the audit leader of investment funds, it is definitely worrying in the context of the financial crisis that demonstrates day after day auditors' responsibility (and especially big four firms ) because they failed in their duty to control the quality of their auditees' governance.

PwC Luxembourg is a very good example because the small size of the jurisdiction emphasizes dysfunctions all the more than the territory senior partner is member of PwC Global Board : one cannot tolerate any dysfunction.

I have already mentioned the issue of a financial director who definitely does not comply with the speech of competence of the firm (including ethics that is a required competence for the actors in a financial center) which raises questions about management and governance.

The Management Committee of PwC Luxembourg reviewed the directors' delegations a couple of weeks ago and realised that directors who left the firm were not removed (see infra) : two directors for instance left late 2001. This dysfunction raises the question of the values of decisions or actions in the framework of the delegations of these directors that left without being removed of the published list.

Additionally the Management Committee of PwC Luxembourg decided for the transparency that directors' names and their respective delegations will no longer be published (they may be asked). In this center of expertise in investment funds, let's imagine a fund that would not publish names of manager of assets. Investors that discovered they invested in Madoff without being aware of it (Madoff not only acted as manager of assets never mentioned in the Luxalpha documents but also insisted on being custodian the press reported) may understand the risk when informations are not spontaneously communicated. Transparency is a key principle to protect the investors and the stakeholders and auditors must be an example.


No principles, no rules except the rule of money (money over ethics), poor protection for the investor (a book was published by a lawyer to explain that the jurisprudence is not in favor of the investor), poor transparency, poor communication on issues (the problem of Luxalpha was only communicated in the media but never quoted by the ALFI, the ABBL or the CSSF).


When selecting a jurisdiction to invest, the investor must consider a couple of criteria :
- Does the jurisdiction demonstrated a culture of transparency (publication of judgements, publication of balance sheets, ability of the actors to face publicly the issues),
- Does the auditor of the fund targetted to invest demonstrated a rigorous management and a rigorous governance ,

If the answer is no to one of these questions client only cannot trust to invest.



Text in the Corporate Registration (French)

PricewaterhouseCoopers, Société à responsabilité limitée.

Siège social: L-1471 Luxembourg, 400, route d'Esch.
R.C.S. Luxembourg B 65.477.
Il résulte des décisions prises par le Conseil de Gérance de PricewaterhouseCoopers S.à r.l. le 8 septembre 2008 que
- le Conseil de Gérance met à jour la liste des directeurs publiée et constate que M. Amaury Evrard, M. Nicolas Gasztonyi, M. Manoj Kashyap, M. Georges Kioes, M. Walter Koob, M. Robert Lejoly, M. Laurent Marx, Mme Valérie Piastrelli, M. Philippe Sergiel et M. Günter Simon, dont les pouvoirs de directeur avaient été fixés le 27 avril 1999, et Mme Eidine Bossy, M. Etienne Boulard, M. Yves Decoster, M. Laurent Fedrigo, M. David Godin, M. Michel Guilluy, Mme Emmanuelle Caruel-Henniaux, M. Claude Jacoby, M. Steven Libby, M. Vincenzo Lomonaco, M. Marc Minet, M. Paul Neyens, M. Dariusz Nowak, M. Philippe Pierard, M. Wim Piot, M. Christophe Pittie, M. Didier Prime, Mme Odile Renner, M. Michiel Roumieux, M. Serge Saussoy et M. Stephan Schmitz, dont les pouvoirs de directeur avaient été fixés le 26 septembre
2000, et M. Luc Trivaudey, dont les pouvoirs de directeur avaient été fixés le 2 juillet 2001, ont été retirés de la liste des directeurs.
- le Conseil de Gérance ne publiera plus ni la liste des directeurs nommés depuis lors ni les changements de pouvoir et les départs des trois directeurs restant des listes publiées antérieurement. Les noms et pouvoirs des directeurs peuvent être obtenus auprès du Secrétaire Général du Conseil de Gérance.

Luxembourg, le 8 septembre 2008.

Didier Mouget
Président du Conseil de Gérance
Référence de publication: 2008132089/1026/25.
Enregistré à Luxembourg, le 10 octobre 2008, réf. LSO-CV03502. - Reçu 14,0 euros.
Le Receveur (signé): G. Reuland.
(080154522) Déposé au registre de commerce et des sociétés de Luxembourg, le 17 octobre 2008.

The CSSF has this week published a press release relating to the Madoff case.

The Commission de Surveillance du Secteur Financier (CSSF) informs having collected relevant data in order to analyze the impact of the Madoff fraud case on the Luxembourg financial sector. It has to be noted that it has not yet been possible to analyze this fraud case entirely due to its complexity.
However, on basis of the information currently available, the CSSF notes that the Luxembourg credit institutions are slightly impacted by this case, the direct and indirect exposures being 160 million EUR. This amount does not include possible exposures due to contractual or legal responsibility.
The impact on Luxembourg law undertakings for collective investment which are directly or indirectly exposed to the Madoff case amounts to 1.9 billion EUR, which represents only 0.15% of the total net assets of undertakings for collective investment as at 30 November 2008.
It should also be noted that the aforementioned figures do not imply that these amounts are entirely lost, but they represent the maximum responsibility at stake.
The CSSF continues moreover its work to analyze possible infringements to legal and contractual provisions.

The wording is worth analysing.

While everyone in the other jurisdictions is talking about LUXALPHA, a luxembourg-based fund, the CSSF is unable to quote the fund LUXALPHA that might be responsible for a loss of money for many investors.

This fund is already responsible for the death of a French money manager, Thierry de la Villehuchet, who committed suicide early last Tuesday.

European fund managers who knew de La Villehuchet described him to ABCNews.com as a man who inspired "a lot of respect, honour, humanity, kindness and generosity." They said that despite misgivings on the part of his colleagues, Villehuchet had a strong belief in Madoff and had not only committed his own money to Madoff, but did so with 150 percent leverage - in effect his potential losses were greater than his actual wealth.

Access International's LUXALPHA SICAV-American Selection fund invested solely with Madoff, and is one of several large funds that has been the subject of the ongoing federal investigation into what prompted them to place large amounts of client money with Madoff despite red flags that were ignored.

As far as the CSSF is concerned, the problem comes from the lack of controls, because of the local pragmatism, compared to other regulators.

This is what underlines Gérard Rameix, the General Secretary of the French regulator (AMF) in Les Echos :

En France, la responsabilité du dépositaire des fonds est entière, mais ce n'est malheureusement pas autant le cas au Luxembourg et en Irlande
(In France, the agent of the funds is fully responsible, but it is unfortunately not as much the case in Luxembourg and in Ireland).

[La commercialisation du fonds luxembourgeois mis en cause dans cette affaire] était parfaitement légale, dans la mesure où il s'agissait d'un fonds coordonné au sens de la directive européenne, dont l'agrément et le contrôle relèvent des autorités du pays d'origine. Dès lors, nous n'avions pas la possibilité d'en interdire la commercialisation.
([the marketing of the Luxembourg funds blamed in this business] was perfectly legal, insofar as they were funds coordinated within the meaning of the European directive, whose approval and control concern the authorities of the country of origin. Consequently, we did not have the possibility of prohibiting marketing of it.

Furthermore, in Luxembourg the jurisprudence is not in favor of the investor. As explained the lawyer 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 with what Luxembourg jurisprudence generally shows very clear-sighted vis-a-vis the investors from day to day (“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 have win.

Finally as in Luxembourg the liability of legal persons does not exist...

Instead of seeking to trap the investor by a misleading communication (see Luxembourg propaganda ) while denying issues and dysfunctions, Luxembourg should realise that is is not a safe place for the investor and not only on the ethical side.

If Luxembourg leaders do not realise the paradigm shift to do the required aggiornamento, give them a couple months and look them go bust.


And by the way what are doing the politicians during these days of financial crisis ?

As a result of the Grand Duke's opposition, Article 34 of Luxembourg's constitution has been changed by the Parliament to bypass his sanction of the law. Every polician was in agreement to vote nearly unanimously for a constitutional change that would reduce the ability of its Grand Duke to block laws.

I wish they demonstrated such agreement and such a speed to implement international Recs : liability of legal persons...