Ethics and governance in the European Financial centers

I have mentioned several times on this blog the “system”. Time is up to quote a couple of examples of this "corruption catalyst" specific to Luxembourg.

1) A litigation between a foreign legal person or individual and a local legal person or individual. The local legal person or individual causes prejudice. The foreign legal person or individual decides to be a party to legal proceedings. For that he/she/it appoints a Luxembourg lawyer. This lawyer, who is a client’s friend in the local networks, calls the local legal person or individual, meets with him/her/it and agrees to do the minimum by not raising what could make the local legal person or individual feel uncomfortable before the court.
This situation is very common:
- Foreign client of a bank v. Luxembourg bank that did not do its duty,
- foreign supplier v. Luxembourg client that does not want to pay,
- etc.

The foreign party does not win.


2) Individuals with decision making power, including in the framework of a disciplinary action, join a board of directors in an association where they meet those for which they have the decision making power or disciplinary power. A member needs a decision in his/her favour and contact the member of the board to obtain the favour. If the favour is relating to a disciplinary action he/she may raise the risk of reputation for the association.

Due to the pressure, some of these individuals with decision making power may forget their duty.


3) A member of an audit team finds a possible money laundering situation involving management of the audited company and reports the issue to the audit leader or partner. The audit leader or partner that
- meets management of the company in associations like ABBL or ALFI,
- plays the golf with management of the company,
- has possibly received a generous grant from the company with a view to providing the leader or the partner with with better time management tools : a new PDA to manage appointments, a new watch to be in time... (as neither the OECD nor the GRECO experts on corruption did repudiate the "generous grant" that the FATF officially received from the Luxembourg I guess auditors may accept such "grants" that are complementary to audit fees),
- does not forget that the relation between auditors and auditees in actually a commercial relationship, which means that if he/she report the declaration of suspicion he/she would loose the clients’ confidence (and probably prospects’ confidence).
Decides to condone the issue.

Due to the fear of exclusion, some professionals do not do their duty.

The existence of the networks is admitted page 18 of the last GRECO report about Luxembourg when underlining "the importance of relationships and networks of persons in Luxembourg society" to explain the reason why the number of cases coming before the courts appears to be very
small (Greco Eval III Rep (2007) 6E, theme I, 13 June 2008, published on 25 August 2008).

The Luxembourg government met last 4 September 2008 and approved of the draft law to introduce in the positive law the liability of legal persons as requested by the OECD. This is a good thing. Better late than never But I do think that like any sensitive text, the draft law should be emptied in the debate prior to the vote before the parliament. Last year Minister of Justice Luc Frieden confirmed before professionals he was ready go give up international Recs : "Should a large financial center like ours exaggerate or be more lax with the risk of a couple of scandals. Yes we may have exaggerated some procedures but this was a general trend in Europe. I hope we have not done badly at that is still possible to go backward. I am ready to give up some requirements"

Additionally like for AML legislation, it is no use voting texts to comply on the paper with international Recs while not enforcing them because of the "System" that hushes up or condones issues because it is a "corruption catalyst".

That is the reason why despite the new text, strong weaknesses in the fight against corruption remain, which requires a will for complementary measures to ensure that the fight against corruption is not a charade in the country :

1) Implement other OECD and GRECO Recs to prevent corruption and ensure legislation is acually enforced.

2) Fight the "system". The consequence of the "system" is that in most cases dishonest professionals never quit the business so the principle of professional standing as stated strictly in the law is not implemented. This is the post difficult thing because of the small size that creates situations of conflicts of interest. It is everyone's responsibility to repudiate every professional that do not comply with the requirements of professional standing as stated strictly in the law: every guarantee of irreproachable conduct (larger than the reasonable assurance, larger than licit).

3) Communicate on issues. Leaders in Luxembourg must be aware that only dishonest professional may fear transparency. Transparency is very important to ensure ethics in the business. It is not normal for a center like Luxembourg, which boasts such an important financial sector that big four like PwC and E&Y do not participate to studies of their brand relating to economic crime and/or corruption. As far as the CSSF is concerned, it should communicate like the FSA in the UK, which would have a salutary dissuasive effect.

4) Authorise only registered professionals in Luxembourg to certify the accounts (members of the IRE or the OEC) and prohibit dubious professionals to certify the accounts (bogus firms from BVI, Isle of Man, Seychelles...)

5) And above all accept opinions that are critics. The stake is to avoid that the center become zombie because it would have "created an insulated culture that systematically excludes any information that could contradict its reigning picture of reality".

There is today a question of credibility for everyone: In 2002 Luc Frieden stated before the IMF that "Personally, I have no doubt that my country can lead by example in promoting good governance, in fighting against the financing of terrorism and against money laundering, and in actively promoting development policies". In 2002 as well the government communicated that "Luxembourg is a founding member of the European Union and the Council of Europe and, in this capacity, implements all laws governing banking and financial activity, the fight against money laundering and financial crime as well as judicial cooperation on criminal matters. Far from hindering the fight against money laundering, Luxembourg was one of the first countries to adopt measures in order to fight against money laundering in 1989 and has continued to improve upon these measures ever since. Luxembourg cooperates fully at international level and is an active member of FATF (Financial Action Task Force), a body specializing in the fight against money laundering which, in its last evaluation report, testified that Luxembourg respected all its recommendations in full. Luxembourg will continue to work on perfecting European legislation regarding financial crime and the resources required to ensure its implementation."


What about the findings of OECD or GRECO reports on corruption since 2002 that includes items relating to AML and what is written in the reports or opinions from the Luxembourg FIU ?

I am afraid they they are useless since the FATF condone them by accepting a "generous grant" from Luxembourg.




Read minutes

The Council of Europe’s Group of States against Corruption (GRECO) has published recentyly its Third Round Evaluation Report on Luxembourg. The report, which was adopted on 13 June 2008, has been made public following the agreement of the authorities. It focuses on two distinct themes: criminalisation of corruption and transparency of party funding.

In practice, the number of convictions for corruption remains very low.

The first report is the most interesting. A footnote is very relevant to explain the reason why the number of cases coming before the courts appears to be very small: Limited police access in law and/or practice to administrative and financial information at the preliminary inquiries stage, tax data base scattered over several local authorities, lack of staff in the investigating authorities, who concentrate on important and priority cases, no "whistle blowing" arrangements and in some cases reporting hindered by professional confidentiality, excessively strict rules on the burden of proof in criminal law, room for improvement in relations between the prosecution service and investigating judges, and so on (...) A prosecutor has stated that even though banking confidentiality has been relaxed in recent years, the non-banking financial sector and financial institutions such as trust funds were still very reluctant to impart information. Certain lawyers stressed the importance of relationships and networks of persons in Luxembourg society, the difficulties faced by the police in dealing with complex economic and financial crime, particularly because of lack of legal and other resources, and the ease with which companies can be established in Luxembourg. (Cf. page 18 of the report "Criminalisation of corruption" [theme I]).

This is exactly what I keep saying :
- " the importance of relationships and networks of persons in Luxembourg society" is what I called the Luxembourg system and can be demonstrated in official and public sources that are the visible part of the iceberg,
- "the ease with which companies can be established in Luxembourg" is an example what I called the fraud catalyst with for example companies with the statutory auditor located in the BVI and therefore that is controlled neither by the Luxembourg registered accountants nor the Luxembourg registered auditors : notaries should not accept that especially when the shareholder and/or the managing director does not comply with the requirement of professional standing,
- "lack of staff in the investigating authorities" and " lack of legal and other resources" : this is one of the reasons why I said that the "generous grant" to the FATF is a problem because the jurisdiction lacks means to fight economic and financial crime all the more than such grants are not a normal funding of the FATF. Additionaly, the problem is that in its report the FATF actually provided Luxembourg with recognition while the financial center does not care of GRECO and OECD working group on bribery Recs : the sentence "Thanks to a generous grant from Luxembourg, the FATF has been working to improve its information technology systems" actually demonstrates the recognition with positive words like "thanks" and "generous". The wording should have been at least more neutral like "A grant from Luxembourg allowed the FATF to improve its information technology systems". FATF statement that promotes and congratulates Luxembourg definitely weakens the credibility of the international fight againt corruption.

By the way, the ADDENDA to Compliance Report relating to the 2nd evaluation round still remains confidential.

Read press release
Read Third Round Evaluation Report Theme I
Read Third Round Evaluation Report Theme II