Ethics and governance in the European Financial centers

According to Eurostat GDP per inhabitant in Luxembourg, expressed in terms of purchasing power standards 3 (PPS), was more than two-and-a-half times the EU27 average in 2006, while Ireland was nearly 50% above the average. The Netherlands, Austria, Denmark, Sweden and Belgium were between around 20% and 30% above the average. The United Kingdom, Finland, Germany and France recorded figures between 10% and 20% above the EU27 average, while Spain, Italy and Greece were around the average.

The critical question is : to what extent the exceptional figure may result of dirty money in the local economy thanks to proved public or official lax behaviours and poor enforcements of rules that are the visible part of the iceberg?

As I already wrote, to determine wether a country is a tax haven or not, attractive banking or tax regulations are necessary conditions but not sufficient. The point is permissiveness that facilitate the growth.

The leader of the audit in Luxembourg is unfortunately in an awkward position with the IFAC by promoting the growty without ethics. Let's read again what IFAC Deputy President Robert Bunting said on the importance of the tone at the top in finding the right balance between governance, oversight and business growth: "If the CEO’s message is aggressive growth and ‘make the numbers’ first and foremost, then the organization will reflect those priorities. If the CEO emphasizes transparency and integrity, as well as performance, then the organization will respond accordingly". Let's read the latest press release about the growth and what the Territory Senior Partner said early 2007 : "We evolve in a business model based on growth, it remains a preference.". I alredy said a couple of words about the latest press release about growth without ethics.

What is true a the level of a firm is true as well at the level of a financial center: If the communication is aggressive growth and ‘make the numbers’ first and foremost, then the center will reflect those priorities. If the communication emphasizes transparency and integrity, as well as performance, then the center will respond accordingly.

In Luxembourg the communication is definitely aggressive growth and 'make the numbers' in a lax environment.

If the Corruption Perceptions Index (CPI) issued by Transparency International, was not bad for Luxembourg (12 / 179 countries in 2007), according to the Global Corruption Barometer 2007 issued as well by Transparency International, 6 % of respondents in Luxembourg reported they paid a bribe to obtain a service. To be compared to 1 % of respondents in France or Switzerland, 2 % in the UK or in the Netherlands and 5% European average. Luxembourg is in the third quintile (6 – 18%) with countries like Bulgaria, Croatia, Czech Republic, Malaysia, Panama, Russia, Turkey, Venezuela, and Vietnam.

But this percentage does not take into account influences and friendships to obtain a service in the framework of the local networks. Only paid services are assessed in the survey. But corruption may result of mutual services: I do what my fellow friend wants; he will give me back later the service. This may be definitely as well corruption when the service is for example to hush up an issue with a judiciary impact (money laundering...) for the one who asks for the service or to vote in favor in a competition of tenders . The mutual service may not be needed : once someone has accepted to do something he/she may be "locked" for the future in a kind of blackmail.

Should influences and friendships be taken into account, Luxembourg would definitely move to the first quintile (More than 32%) because of the conflicts of interests that can't help turning into corruption all the more than:

1) professionals are not aware of offences : when the local professionals stated officially that “offences such as forgery, use of forgery, false balance sheets, use of false balance sheets or unauthorised use of corporate property should not be included. These are offences with financial connotations which are confused with laundering for the sole purpose of applying exceptional powers to these vague offences” (See for instance the ABBL Annual Report 2003, p. 21), the question is how these people may be aware of what corruption is? Corruption must be as well a vague offence from their point of view. Corruption has actualy become standardised; so are standardised bad management and bad governance, which is not acceptable because everything is clear because of the small size (the networks, the conflict of interests...) .

2) there is no TI chapter in Luxembourg to act as a watchdog (but there is one in the UK or in Switzerland the two other European centers with significant offshore assets).

3) like in many small financial centers, the media are not doing there job to investigate, analyse and inform, with the consequence that the decision making processes in those places are equally shoddy and ill-informed. This is what Richard Murphy explained about the Isle of Mans and this is true as well for Luxembourg.

4) Everyone feels the fear to lose contrats or job should he/she dare to say something to repudiate the "system". That's the reason why, despite actual improvement thanks to the Financial Intelligence Units, negligent people - very often those who corrupt the "system" - are unfortunately neither repudiated nor eliminated.

Press release

Report

Christmas goodies relating to corruption

The ALFI reported that Luxembourg-domiciled funds continued to attract positive inflows in the third quarter While eleven European countries recorded net outflows.

I hope professionals in Luxembourg are aware that the risk (money laundering and fraud) is growing as well in parallel.

The worst attitude would be to be self-satisfied of the grow of the center.

I am afraid this is the case. Most professionals can’t accept the evidence of failures in the system as presented to them. So they seek to shoot the messenger instead. Those who work in the sector want to deny the truth and issues although the evidence is beyond question. To protect the reputation in the short term everyone including the media agrees to hush up issues if any.

And therefore guys who do not behave well have no reasons to change because of the support, because of a complicit silence, because of what is called "pragmatism".

So there is a difference between the legal and regulatory framework and what is actually enforced. And where there are sanctions these are so little compared to other jurisdiction that there is no dissuasive effect at all.

As I already said when there are gaps between what is said and what is seen publicly, on knows when the lie starts but one ignores where it stops. The credibility collapses.

That's why the risk is definitely growing in parallel.

And I am sad of that for this center.