Ethics and governance in the European Financial centers

Here are the paragraphs about Luxembourg in the US Senate report that was publised today in the framework of the hearing.

In 2006, the OECD issued a new report assessing the legal and administrative frameworks for tax transparency and tax information exchange in 82 countries. The purpose of this assessment was to help the OECD determine “what is required to achieve a global level playing field in the areas of transparency and effect exchange of information for tax purposes.” In October 2007, the OECD updated its 82-country assessment. The OECD wrote: “Significant restrictions on access to bank [information] for tax purposes remain in three OECD countries (Austria, Luxembourg, Switzerland) and in a number of offshore financial centres (e.g. Cyprus, Liechtenstein, Panama and Singapore). Moreover, a number of offshore financial centres that committed to implement standards on transparency and the effective exchange of information standards developed by the OECD’s Global Forum on Taxation have failed to do so.
(...)
Three EU members, Austria, Belgium, and Luxembourg, currently do not participate in the Directive’s automatic information exchanges. Instead, under a special arrangement approved as part of the Directive, these three EU countries levy a withholding tax on the interest payments made to nonresident individuals and, once per year, remit 75% of the amounts withheld to the individuals’ reported State of residence. The three countries are allowed to retain 25% of the amount withheld to cover their administrative costs of applying the withholding tax. The three countries are not required to provide client-specific information to any other country, such as the names of the individuals who received the interest payments or the amounts of interest paid; they are thereby able to preserve bank secrecy.
(...)
The transitional period does not have a specified ending date, but is designed to continue until the three EU countries, Austria, Belgium, and Luxembourg, as well as six other countries, Andorra, Liechtenstein, Monaco, San Marino, Switzerland, and the United States, agree to exchange tax information upon request, as set out in the OECD Model Agreement for exchanging information in tax matters
(...)
The EU Savings Directive applies to all 27 countries in the European Union. By agreement, it also applies to a number of countries outside the European Union, including ten overseas dependent territories associated with the United Kingdom and the Netherlands, as well as Andorra, Liechtenstein, Monaco, San Marino, and Switzerland. Four of these non-EU countries, Anguilla, Aruba, the Cayman Islands, and Montserrat, have agreed to participate in the Directive’s automatic information exchanges. The rest, however, comply with the EU Savings Directive in the same manner as Austria, Belgium, and Luxembourg, by applying a withholding tax during the specified transitional period rather than by supplying information about nonresident individuals who received interest payments on savings accounts within their jurisdictions.
(...)
The documents show that LGT used BTS Management Ltd., formed in the British Virgin Islands (BVI), to establish a number of the transfer corporations. The documents indicate that LGT typically asked BTS Management to form a BVI corporation which then opened an account at LGT or another bank, such as Bank du Gothard in Luxembourg. The transfer corporation then received funds or securities from an LGT client and immediately transferred those funds or securities to LGT, if its account was at an outside bank. In some instances the transfer corporation was then dissolved; in other instances, it continued in existence. Once the funds or securities were delivered to LGT bank, they were moved internally within the bank, using a mechanism called “journaling” to transfer them from one LGT account to another, here from the transfer corporation’s LGT account to the client’s LGT account. This internal transfer mechanism makes it much more difficult to trace the movement of funds and securities, since it leaves no record outside of the bank showing that the assets were transferred to the ultimate recipient, the LGT client.


We can see that a bank located in Luxembourg is quoted. Luxembourg in quoted 3 times in the exhibits document (page 245, 246, 270). Luxembourg definitely supports officially tax evasion and is functioning in a way that helps fraud because of a daily corruption and of lax business behaviours that are traced in official and public sources.



Read report

At its 38th Plenary Meeting (Strasbourg, 9 – 13 June 2008), GRECO adopted the Addenda to the Second Round Compliance Reports on Finland (public), Luxembourg, the Slovak Republic and Slovenia. An evaluation report becomes public once the authorities of the country concerned express their agreement to the lifting of the report's confidentiality. For the first time Luxembourg did not authorised the publication of its report.

The previous report dated 12 May 2006 concluded that has implemented satisfactorily. or satisfactorily dealt with less than one-quarter of the recommendations. In 2006 the OECD used the same wording to conclude on deficiencies in Luxembourg.

Luxembourg probably did not appreciate the OECD report that was published earlier this year.

Because of the "system", it is difficult to implement recommendations to prevent daily corrupution.


See list of reports

A couple of weeks ago, I posted an article about the figure of Luxembourg in the TI Barometer : 6% of respondents admitted they paid a bribe to obtain a service, which is the highest figure in Western Europe. As I wrote this figure only takes into account money corruption but not other situations that can be met everywhere but that are both particularly common and visible in Luxembourg:

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. This is particularly verified
- for internal auditors and compliance officers because of the subordination in the framework of the employment contract,
- for external auditors because of the business contract especially in a country where the leader of audit focuses on its growth and clients' confidence (not stakeholders'), which is not compatible with international professional provisions relating to audit ethics. This situation may explain the reason why there are so few declarations of suspicion (only 4) from auditors, which was considered suspect by the CRF, the Luxembourg FIU (Cf. for example Report 2003-2004, page 8 , were the number of 3 (close to 4) was said "ridiculously low for a profession composed of 304 members individual and having access to all the financial information of the center")

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. This is particularly verified
- for the media that have a public financing and globally do not have the culture to criticise the "system" and to tighten up the ship (even though there are exceptions),
- for justice, that lacks means (Cf. report "Petita Pro Nova Justitia" issued by the Cercle Joseph Bech), .a perfect illustration of this problem being the delay to judge sensitive affairs (e.g. the case of the former chairman of the Chambre des Comptes since 1999) or the restrictive conception of the freedom of expression that deny the right to bring evidence (s) when the behaviour of a leader of the center is criticised by considering the statement(s) as "value judgement" (Cf. Judge Sajô's analysis in a recent judgement from the CEDH, the “the Court of Human Rights for Europe”, involving Luxembourg(No 24261/05, BACKES v. LUXEMBOURG, 8 July 2008).



In a nutshell, at a time when tax haven are more and more contested and especially banking secrecy rules, corrective actions for the sake of the Luxembourg financial center are impossible. This functioning is what is called locally the "system" and is the reason why people that do not comply with the requirements of professional standing and experience (with the meaning of competence), as stated Law of 5 April 1993 on the financial sector, are not repudiated when those who dare to question are.

The problem is when there is an accumulation of "red flags" are unfortunately observed in public and official sources all the more than Luxembourg is a small center.

But fortunately, as explains a professional in Luxembourg, the center gathers the advantages of an on shore jurisdiction because it is in Europe and the advantages of off shore states taxes of which are similar to a tax haven.
Additionnaly the country is in the good books with the FATF thanks to a generous grant for the financing of FATF IT systems, that is mentioned in the FATF 2006-2007 annual report (paragraph 54 page 17) unless it is definitely not compatible with the role of auditor of the FATF, state members being like auditees, all the more than the FATF has its proper funding as described paragraph 55 of the same report.

The "system" can go on and the international speech against corruption, fraude or money laundering is a charade.