Ethics and governance in the European Financial centers

To answer the parliamentary question from Lucien Thiel (former chairperson of the Luxembourg Bankers' Association) about the reputation of the financial center, Luc Frieden who is Minister of Justice, stated that "il me semble essentiel de continuer mes nombreux efforts des deux dernières années visant, à travers de nombreuses missions de promotion à l'étranger, de bien expliquer la réalité de la place financière à l'étranger" (It seems essential to to me to continue my efforts of the last couple of years aiming, through many missions of promotion abroad, to explain the reality of the financial center abroad) (June 15, 2006).

Which reality ?

In 2004, at the time of the debate about the Anti-Money Laundering And Combating Financing of Terrorism (AML/CFT) draft law Luc Frieden stated that Luxembourg has "clear and pragmatic legal rules that are fully compliant with the EU legal framework" (Fundlook, July / September 2004).

Official sources of the debate are in French and probably not taken into account by English-speaking assessors from abroad. These sources allow us to understand what pragmatism means and to what extent this kind of pragmatism is actually a threat for the Financial Community worldwide.

Luc Frieden’s draft was appreciated by the IMF that stated: "If adopted in its present form, however, it would result in a legal framework likely to fall short in some important respects of the requirements of the revised FATF recommendations, particularly as regards predicate offences, customer due diligence, and the operation of the financial intelligence unit (FIU)". (See IFM Report on Observance of Standards and Codes FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism, dated November 1, 2004)

Actually, all sensitive penal provisions were removed including those of the previous legislation.

Professionals did not agree with the draft. Bankers stated through the Chamber of Commerce as explained by Luc Frieden in an interview (d'Lëtzebuerger Land, November 14, 2003) 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" and "The evolution is at one time, since the legal initiatives of our neighbors have a clear tendency to concentrate on the laundering of this kind of ambiguous offences. But it is not a reason to imitate them in this way which caused troubles in the financial center in various cases."(see report dated September 16, 2003 to discuss the AML/CFT draft law)

To be accurate, there is a report from the ABBL I was provided by the ABBL. The original text was cut by the Chambre de Commerce. This original text was a litle more moderate : "La solution consiste à en rester au système actuel qui limite les infractions primaires à une liste déterminée d’infractions. À défaut, il faut au moins requalifier certains crimes les moins graves" (The solution is to remain the current system which limits the primary offences to a given list of offences. Otherwise, it is necessary at least to requalify some crimes the least serious). The second sentence is not in the report from the Chambre de Commerce, which is the one in the parliamentary file.

Anyway, after cases like Enron, Worldcom, Parmalat..., nobody may seriously state officially that use of forgery, false balance sheets, use of false balance sheets or unauthorised use of corporate property as "vague” or “ambiguous” offences and therefore banalised as usual business behaviour.

The "vague offences" are of the opened type, because as S. SOLER said (In "La formulation actuelle du principe ‘nullum crimen’ », Revue de Sciences Criminelles, 1952 pp.11s.) "en pratique, on peut y faire entrer n'importe quels actes" (in practice, one can take into account whatever acts). They are a sword of Damocles. A threat whose realization can be done as well by the administrative authorities as by the prosecuting authorities. For instance : glorifying terrorism, serious threats to the environment, sorcery, loitering, vagrancy, suspicion of terrorist activity, disturbs peace...

Accounting offences are certainly not of the opened type.


Are they lacking of conscience to be unable to determine fraudulent behaviours all the more as they use the wording “actual money laundering": “The Chamber of Commerce joined the Government in its intentions to protect the Financial Center as well from the defamatory gossip as of the actual money laundering and the financing of terrorism” (see report dated September 16, 2003 to discuss the AML/CFT draft law ) ?

How people that officially consider “vague” or “ambiguous” forgery, false balance sheets, use of false balance sheets or unauthorised use of corporate property may determine what an “actual” money laundering activity is?

How auditors (either internal or external), compliance officers, Chartered Financial Analysts... may deal in their assignments with such official state of mind at management level all the more as it seems that there were no repudiation of such statements (press release...)?

These questions should be asked by regulatory bodies at the international level (IFAC, CFA Institute, IIA...) and specialists in AML (FAFT, GRECO, US Department of State…). But it is true that the pragmatic comments stated in Luxembourg fustigate the “criticisms of the self-proclaimed specialists from abroad” (see report dated September 16, 2003 to discuss the AML/CFT draft law).

Is a paradigm-shift possible?

Luxembourg motto is "Mir wëlle bleiwe wat mir sin" (We want to remain what we are).

Besides publications (articles and a book), I have contacted the decisions-makers either political or professional to work on the risks, including the one of reputation in a competitive business world, all the more as I am looking for a position, but I had no answer on my management and governance issues that are critical to the sustainability and the competitivity of the financial center : "Critics" are not welcome and nobody is willing to tighten up the ship on visible problems that are either denied (see for instance the same official speech reported by the GRECO and OECD in their 2004 reports on corruption: in a small country where everyone knows everyone else and what others are doing, there may be a kind of self-policing in effect) or hushed (as stated in the report from the GRECO dated June 15, 2001, “the press, which has strong political affiliations, does not seem to exercise its role of public watchdog with the same vigour as in other countries”) Silence on issues equal no issues in their mind and actual problems are not faced, which increase risks all the more as due to the size everyone may shelter behind a complicit silence rather than running the risk of being considered indelicate (see report from the GRECO dated May 14, 2004), which may be as well demonstrated in official and/or public sources where bad management and bad governance are normalised. This is a very bad attitude as we live in a world of communication and transparence thanks to the internet and it becomes much harder to deny or hide problems instead of taking care of them.




In a nutshell, official sources and attitudes unfortunately demonstrate a high level of risks for the reputation of the financial community and the players worldwide, due to a permissive environment where many people do not care officially of proper business conduct, and are even bold enough to consider in writing their commercial objectives and bogus pragmatism more important than the AML commitments and the trends worldwide including the FAFT Recs (see their own wording: “vague”, "ambiguous”, "actual money laundering", “it is not a reason to imitate them”…). Actually only half of companies are committed to AML-CFT according to sources from the regulatory body CSSF and the prosecuting authorities.

The ethical values that are stated at the international level (IMF, GRECO, FATF, OECD, World Bank...) turned out to be charade.

Such imprudence and official lack of responsibility should not be supported anymore, from a pragmatic point of view. This is a threat for the financial community worldwide because the reality is that the appearances have gone. And as far as the financial center is concerned, this is a shame because most people are both competent and honest. But decisions-makers are disappointing or even deceiving : forewarned is forearmed.





Sources :

IMF Report

GRECO Report 2001

GRECO Report 2004

GRECO Report 2006

OECD Report 2004

Luxembourg Bankers' Association : Annual Report 2003, page 22 & 23

Original abstracts of Bankers' comments in French through the Chamber of Commerce (Report dated September 16, 2003 to discuss the AML/CFT draft law) :

Page 11 : La Chambre de Commerce ne saurait accepter cet état des choses. Elle ne veut pourtant pas remettre en cause les efforts des dernières années qui ont largement permis au Luxembourg d’échapper aux critiques des spécialistes autoproclamés de l’étranger.

Pages 18-19 : Un bon exemple pratique est fourni par l’extension des infractions primaires à des infractions comme le faux, l’usage de faux, le faux bilan, l’usage de faux bilan ou encore l’abus de biens sociaux. Il sera là encore extrêmement difficile pour le professionnel, dans le cadre de son activité professionnelle normale, d’identifier de tels faits sous-jacents à une opération. Par contre, le concept de blanchiment de l’usage par exemple d’un faux intellectuel ouvre la porte à tous les abus de la part des autorités elles-mêmes. Le fait d’appliquer à ces faits les procédures d’exception justifiées à l’égard de la prévenion du blanchiment de capitaux revient à admettre l’incursion de moyens d’exception dans les affaires de chaque entreprise.
Certes, l’évolution néfaste est dans l’air du temps, puisque les initiatives judiciaires de nos voisins ont une nette tendance à se concentrer sur le blanchiment de ce genre d’infractions équivoques. Mais ce n’est pas une raison de les imiter dans cette voie qui a assez nuit à la place financière dans différentes affaires particulières. La solution consiste à en rester au système actuel qui limite les infractions primaires à une liste déterminée d’infractions.

Page 20 : La Chambre de Commerce rejoint le Gouvernement dans ses intentions de protéger la place financière tant des ragots diffamatoires que du vrai blanchiment et du financement du terrorisme.

Page 21 : (...) des infractions comme le faux, l’usage de faux, le faux bilan, l’usage de faux bilan ou encore l’abus de biens sociaux devraient disparaître du texte. Ce sont là des infractions à connotation financière qui sont mêlées au blanchiment à la seule fin d’appliquer à ces infractions vagues des pouvoirs d’exception.

Full text in French : Projet_anti_blanchiment_-_avis_CEP_et_CC.pdf

In the late 1980s and early '90s, Harvard-educated economist Franklin Jurado ran an operation to launder money for Columbian drug lord Jose Santacruz-Londono. His was a very complex scheme. In its simplest form, the operation went something like this:

Placement: Jurado deposited cash from U.S. drug sales in Panama bank accounts.
Layering: He then transferred the money from Panama to more than 100 bank accounts in 68 banks in nine countries in Europe, always in transactions under $10,000 to avoid suspicion. The bank accounts were in made-up names and names of Santacruz-Londono's mistresses and family members. Jurado then set up shell companies in Europe in order to document the money as legitimate income.
Integration: The plan was to send the money to Columbia, where Santacruz-Londono would use it to fund his numerous legitimate business there. But Jurado got caught.

In total, Jurado funneled $36 million in drug money through legitimate financial institutions. Jurado's scheme came to light when a Monaco bank collapsed, and a subsequent audit revealed numerous accounts that could be traced back to Jurado.

Jurado's neighbour in Luxembourg filed a noise complaint because Jurado had a money-counting machine running all night. Local authorities investigated, and a Luxembourg court ultimately found him guilty of money laundering. When he'd finished serving his time in Luxembourg, a U.S. court found him guilty, too, and sentenced him to seven-and-a-half years in prison.

When authorities are able to interrupt a laundering scheme, it can pay off tremendously, leading to arrests, dirty money and property seizures and sometimes the dismantling of a criminal operation. However, most money-laundering schemes go unnoticed, and large operations have serious effects on social and economic health

The Jurado case is an example of the increasingly sophisticated means drug cartels employ to secure assets. But it also indicates that the very profits that motivate drug organizations are an Achilles heel and that national legislators, law enforcement agencies and international bodies are stepping up efforts against money laundering.

In this context, Luxembourg did a very good job.

Something striking is that the case, which is in favour of Luxembourg to demonstrate the action to refuse criminals, is forgotten in Luxembourg (it is not actually presented in the Codeplafi Database, it is not quoted by professionals to promote the ethics of the financial center) all the more as at the time of the trial, Etienne Schmit, who was deputy prosecuting attorney had said "We hope this makes the criminals understand that we do not want their money" (quoted by the International Herald Tribune). As if some pragmatic people wanted the criminals do not understand Luxembourg do not want their money. After the Jurado case Luxembourg had adopted a money-laundering law in 1989, but critics had said that it was full of holes. At the same time, the government had been concerned not to undermine the banking secrecy laws on which much of Luxembourg's wealth depends. Other text came later: Law of 5 April 1993 updated on 18 October 1999 and recently law of 12 November 2004.

We saw the same bad pragmatism in the framework of the debate relating to the current law on money laundering (12/11/2004). Luc Frieden's draft text was credible and appreciated by the IFM, but some professionals refused the wording as they wanted a text that would not have a negative impact on the commercial objectives and would be strictly limited to European requirements. The Prosecutors' Office underlined some international recommendations and especially those of the FATF-GAFI and explained it is no use having texts if the implementation is not effective. The Prosecutors' Office had even understood when reading comments on the draft that it was expected "to close the eyes on some obvious cases of dysfunction".

"Pragmatic people" won, which is a shame as Luxembourg could have anticipated some of the requirements of the new 3rd European directive. and therefore become a market leader in business ethics.



Know more

Financial havens, banking secrecy and money laundering
Watching the clothes go round
Banking Secrecy Diluted Duchy Convicts 2 in Drug Case
In Luxembourg, Drug Money Goes Down Legal Drain

Case Law as presented in the Codeplafi database (in French)

Tribunal d'arrondissement de Luxembourg, 2 avril 1992

Law 2004

Interview of Luc Frieden, Minister of Finance to justify the draft (in French)
Archives of the debate about the AML law (in French)

Table to compare the draft and the final text (in French) : an Englsh version of the essentials will be provided later, including influences in the debate.

To reject the French MPs' report about Luxembourg Luc Frieden said in Paris that Luxembourg is not a tax, banking or judiciary haven and explained that their statements were not verified on the field.

The official communication for the financial center states as well that "Contrary to a widely held misconception, Luxembourg is not a tax haven and has many other characteristics which make it internationally attractive. It is, however, stated Government policy to create conditions which will allow the Luxembourg Financial Centre to compete on equal terms with other important financial centres. Over the years, this policy has been translated into various measures such as the auspicious corporate tax of 30,38% and the different VAT rates applicable: 3%, 6%, 12% and 15%".


Let's have a look on the field.

Let's have a look on what is said by a Professional : "Despites moderate taxes rates Luxembourg is not a tax haven. There are taxes for individuals and companies. More than a tax haven, Luxembourg 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 for Holding 1929 companies, Holding companies' (SOPARFI)...".

Let's see what is said by another professional on the Benefits of the Place :
(...)
The economic policy of Luxembourg is characterized by its liberalism as regards establishment.
The policy pursued by the government encourages the private initiatives, the administration is with the service of the companies, and not the reverse.
The bank secrecy forms integral part of the Luxembourg legislative system.
Absence of local taxation for the non-residents, bearer shares, exemption of appreciations on the participations.
(...)
The abuse social good and tax evasion are non-existent in the Luxembourg law.
The majority of the daily expenses of the leaders can pass in load.
(...)
Anonymity is a paramount concept in the Grand Duchy whose keystone is the bank secrecy.
The economic recipient with the possibility of not appearing as a shareholder and/or an administrator of the company by the installation of the contract of trust.
This contract is regulated by the Luxembourg law as well as the bank secrecy.
Trust is a notion absent from the French right, it makes it possible to transfer the legal property from its goods fiduciary while preserving the economic capacity on the aforementioned goods.
The application of trust makes it possible to manage its business very by preserving anonymity.
(...)
We irremediably entered a phase of delocalization which corresponds above all to problems of tax management and say for the company to a procedure of survival.

And the professional to specify that "thanks to X and has its partners Attorney and Lawyers, you can within the framework of an economic beneficiary, own and manage your business without appearing officially. That can be practical for the detention of goods and real estate , or for the continuation of an activity

The best is the legal page where the fiduciary explains that :
- it does not support fraud, and
- it is not responsible for verifying the compliance with laws and regulation, which is up to the client.



Considering such public marketing communication, that is not repudiated, how can Luc Frieden be so affirmative when saying that Luxembourg is not a tax, banking or judiciary haven for people that do not have a proper business conduct ?