Ethics and governance in the European Financial centers - comparison

The visible differences between Switzerland and Luxembourg as far as business ethics is concerned

noreply@blogspirit.com (jturquey) — Wed, 23 Jul 2008 07:30:00 +0200

As I wrote low taxes and banking secrecy are clues of tax haven, but the determining criterion is definitely permissiveness.

To demonstrate this permissiveness. It would compare below Switzerland, that the US Senate targeted explicitly, and Luxembourg; that said to have one of the most stringent anti-money laundering legislation in the world (Cf. Luxembourg Propaganda).

To begin with, the FATF admits links between corruption and money laundering. The FATF Plenary meeting that took place in Paris in October 2005 discussed the two-fold links between corruption and money laundering/terrorist financing: the proceeds of corruption are likely to be laundered; corrupt institutions are liable to impede efforts to stop money laundering or to counter terrorist financing.

Let's analyse a couple of items.

Communication of big four firms on fraud, corruption and other criminal business behaviours

PwC et E&Y in Switzerland participated to « Global Economic Crime Survey » for PwC and « Corruption or compliance – weighing the costs » for E&Y.
They are free to talk about criminal business behaviours.

PwC et E&Y in Luxembourg did not participate to « Global Economic Crime Survey » for PwC and « Corruption or compliance – weighing the costs » for E&Y. These surveys are even not communicated.

Communication of the regulatory body

The Swiss Federal Banking Commission largely and regularly communicates on its investigations, its sanctions and cases law especially in the Bulletins.

The CSSF communicates only once a year in its annual report with no details. The small number of sanctions is telling. The CRF, the Luxembourg FIU, does a pretty good job and does not hide issues. The CSSF and the CRF do not describe the same situations.

Communication of judiciary judgements in general

They are available on www.bger.ch in Switwerland.

They are not available in Luxembourg. What exists currently officially is a selection of jurisprudence considered as interesting (Cf. parliamentary question Nº2550 dated 21 May 2008 and Minister of Justice’s answer dated 2 July 2008).

Number of declarations of suspicion while the center is growing

It increased in 2007 in Switzerland (Cf. MROS report dated 2008).

It decreased in 2007 Luxembourg (Cf. Minister of Justice report 2007 pp. 136 to 140)
“Although Luxembourg has steadily enacted anti-money laundering and terrorist finance laws, policies, and procedures, the lack of prosecutions and convictions is telling, particularly for a country that boasts such a large financial sector”. (International Narcotics Control Strategy Report, US Departement of State, March 2007)
“The scarce number of financial crime cases is of concern, particularly for a country that has such a large financial sector.” (International Narcotics Control Strategy Report, US Departement of State, March 2008).

Quality of media as watchdog

Media play the role of watchdog in Switzerland.

Because of a public financing the press does not act as a watchdog in Luxembourg all the more than because of conflicts of interest due to the small size there is a pressure. There is no culture of investigation.
This was stated by the GRECO in a report early 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. ” (GRECO Report dated 15 June 2001).
This was stated as well by the OECD in a report in 2004 : “The “watchdog” role of the media is also very limited in Luxembourg, although in some cases they have played a part, when detailed information fell in to their hands, in bringing to light suspicious behaviour. (…) According to media representatives interviewed, the shortage of financial and human resources available to the Luxembourg media generally preclude investigative journalism and consequently prevent the revelation of bribery cases” (OECD Report dated 28 May 2004).
It is interesting to see that the press in Luxembourg did not cover the hearing of the US Senate.

Liability of legal persons

GRECO took a particularly positive view of the seizure and confiscation system and of criminal liability on the part of legal persons (See GRECO Evaluation report dated 4 April 2008).

Luxembourg urgently needs to establish liability against legal persons for foreign bribery and put in place sanctions that are effective, proportionate and dissuasive, according to a report by the OECD's Working Group on Bribery (SEE OECD report dated 20 March 2008)
Luxembourg did not authorise the publication of latest GRECO report that remains confidential (see GRECO press release dated 9 – 13 June 2008).

Transparency International

There is a TI Chapter in Switzerland
1 % of respondents in Switzerland reported they paid a bribe to obtain a service (Cf. TI Global Corruption Barometer 2007)

There is no TI Chapter in Luxembourg
6 % (5% European average) of respondents in Luxembourg reported they paid a bribe to obtain a service (Cf. TI Global Corruption Barometer 2007)

The difference between both centers with banking secrecy is telling and allows to conclude that professional standing is a charade in Luxembourg despite clear legislation that business and political leaders says to be pragmatic, with definitely the meaning of lax

I have been warning leaders either political or professional in Luxembourg since 2003 to implement corrective actions to fight permissiveness, dysfunctions and deficiencies that weaken the business of investment funds and the country in general: Academic project of research about ethics and CSR that was not accepted late 2004, articles as of December 2005, book in May 2006, blog...

But there is definitely no will to do so and I have a feeling that there is a kind of headlong flight because there is a strong feeling of impunity because of the "system" that does not exist in Switzerland.

Cyprus, Ireland Switzerland and Malta have most attractive corporate tax regimes in Europe, finds KPMG International poll

noreply@blogspirit.com (jturquey) — Tue, 18 Dec 2007 14:00:00 +0100

Cyprus, Ireland, Switzerland and Malta are the top (over 80% attractiveness) four countries in a league table of European tax systems, compiled by KPMG International, in which major business organizations across Europe assessed the attractiveness of their domestic tax regimes.

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Actual CSR in the Finance sector

noreply@blogspirit.com (jturquey) — Mon, 12 Nov 2007 13:50:00 +0100

The guide « Finance and sustainable development », that has been elaborated by the Club Finance of ORSE (Observatoire sur la Responsabilité Sociétale des Entreprises), focuses on themes regarding sustainable development in the finance sector. Based on the input of various experts, ORSE has developed an educational guide that insists on issues and responsibilities that are issues and responsibilities specific to banks, insurance companies and asset managers.

We are very far away from CSR in Luxembourg all the more than an active member of the ORSE is a PwC partner in France.

PwC France does not have the same view on CSR as PwC Luxembourg.

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See no evil, hear no evil, speak no evil

noreply@blogspirit.com (jturquey) — Sat, 10 Nov 2007 13:30:00 +0100

I have contacted with complete confidence some PwC professionals to ask what they think of the dysfunctions at PwC Luxembourg: focus on the growth, client-oriented rather than stakeholder-oriented, no issuance of data on economic criminality, financial director that does not comply with the stated ethics…

One of these expert answered: Thanks to stop sending such inopportune e-mails.

I was very disappointed. The attitude definitely means that PwC professionals do not dare to face internal issues and to tighten up the ship for dysfunctions that are public and furthermore emphasized by the small size of a country where they are observed.

Is it actually “inopportune” to be willing to protect and save the reputation of a brand like PwC?

Who protect the best the reputation? Those who tolerate dysfunctions and relating risks by denying public issues or refusing to repudiate such issues like the professionals I contacted? Or those acting as watchdogs like I do who call for responsibility and credibility of the profession: there must be no gap between what is stated and what is done publicly. There must be no support for those who behave publicly in a way that does not comply with business ethics and a "code of conduct".
What about dysfunctions in the framework of the audits with the professional secrecy? What about the implementation of whistleblowing for unethical behaviors?

Clients should definitely consider to fire all professionals that are not credible anymore in their assignments as they support public situations that does not comply with the stated ethics.

Stakeholders should not rely anymore on companies audited by professionals that do not repudiate public and official facts of bad management and bad governance.

Trust is definitely broken and I am sad of that.

"He who is faithful in a very little is faithful also in much; and he who is dishonest in a very little is dishonest also in much" (Lk 16: 10)

PwC's Know Your Customer quick reference guide

noreply@blogspirit.com (jturquey) — Fri, 26 Oct 2007 19:30:00 +0200

PwC has developed an Anti-Money Laundering: Know Your Customer quick reference guide.

This excellent work is a quick and easy way of comparing anti-money laundering issues for nearly 50 countries and includes additional links to useful information such as Financial Action Task Force (FATF) reports and country evaluations.

Know more

PwC Global Economic Crime Survey

noreply@blogspirit.com (jturquey) — Wed, 24 Oct 2007 08:10:00 +0200

We have seen in a previous article that PricewaterhouseCoopers has released its fourth Global Economic Crime Survey, based on interviews with more than 5,400 senior executives in more than 40 countries.

PwC in two major centers of tree contributed to the study : PwC UK and PwC Switzerland.

PwC Luxembourg did not contribute. Their name is missing in the main report and they did not publish a country report. More interesting, their website does not seem to quote the Global survey.

This raises a couple of questions :
- Does that mean that economic crime does not exist in Luxembourg? Of sure definitely no.
- how auditors that hide so a sensitive topic may be reliable? Does that mean that they never face economic crimes in the framework of their assignments? Of sure definitely no.

Once more this is perfect illustration that in Luxembourg issues are either hidden or denied. Including by the leader.

This is not serious.

Switzerland

The United Kingdom

Auditor's independence at a glance

noreply@blogspirit.com (jturquey) — Fri, 19 Jan 2007 21:00:00 +0100

The websites of bankers associations in the financial centres show that the Big Four are often members of these associations (Cf. British Bankers Association , Swiss Bankers Associations, and Luxembourg Bankers Associations)
This membership may be a problem for the independence because Big Four are the auditors and banks are the auditees.
The risk for the independence and the reputation depends on values that are shared and stated in the framework of the associations.

As far as the British Bankers Association is concerned it is involved in the FATF works (BBA response to FATF consultation paper on the review of the FATF 40 recommendations , Proposed Amendments to the Money Laundering Regulations 2001 . The wording of the contributions demonstrates a responsibility of professionals in this center.

As far as the Swiss Bankers Association is concerned, it does not seem involved in the FATF works and wants to minimize requirements for professionals.

As far as the Luxembourg Bankers Association is concerned it is not involved in the FATF works. Above all the ABBL standardized accounting frauds by stating 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 Report 2003)
Auditors in Luxembourg should have disapproved of the wording, which involves every member of the ABBL, and especially them. The consequence is that after cases like Enron, Parmalat, and Worldcom... there are some auditors that standardize accounting offences through their membership in business networks, and are therefore much more on auditees' side than on the controlling side.

AML penal provisions for professionals : Lichtenstein v. Luxembourg

noreply@blogspirit.com (jturquey) — Sun, 06 Aug 2006 21:15:00 +0200

Some national legislation relating to anti money laundering is gathered on the Council of Europe website.

It is interesting to compare the (anti-money laundering) AML law in Luxembourg (which is not on the website) and the one in Lichtenstein that were both voted in November 2004 based on the same European directive.

As far as effectiveness of such legislation is concerned, sanctions must be effective, otherwise AML legislation turns to be charade.

Penal provisions are stipulated
- in article 30 of the law of 26 November 2004 on Professional Due Diligence in Financial Transactions in Lichtenstein
- in article 9 of the law of 12 November 2004 on the fight against money laundering and the financing of terrorism in Luxembourg.

The article is longer and more detailed in the applicable text in Lichtenstein where provisions for non respect are either imprisonment of up to six months or a fine of up to 360 daily rates. Only a fine from 1.250 euros to 125.000 euros is applicable in Luxembourg.

In both cases the wording limits the effectiveness : The text in Lichtenstein requires that the person should act intentionally and the text in Luxembourg requires that the person should act knowingly.

These are two different degrees of culpability.

A person acts intentionally with respect to a material element of an offence when:
- if the element involves the nature of his/her conduct or a result thereof, it is his/her conscious object to engage in conduct of that nature or to cause such a result; and
- if the element involves the attendant circumstances, he/she is aware of the existence of such circumstances or he/she believes or hopes that they exist.

A person acts knowingly with respect to a material element of an offence when:
- if the element involves the nature of his/er conduct or the attendant circumstances, he/she is aware that his conduct is of that nature or that such circumstances exist; and
- if the element involves a result of his/her conduct, he/she is aware that it is practically certain that his/her conduct will cause such a result.

There are two other degrees:

A person acts recklessly with respect to a material element of an offence when he/she consciously disregards a substantial and unjustifiable risk that the material element exists or will result from his/her conduct. The risk must be of such a nature and degree that, considering the nature and intent of the actor's conduct and the circumstances known to him/her, its disregard involves a gross deviation from the standard of conduct that a reasonable person would observe in the actor's situation.

A person acts negligently with respect to a material element of an offence when he/she should be aware of a substantial and unjustifiable risk that the material element exists or will result from his/her conduct. The risk must be of such a nature and degree that the actor's failure to perceive it, considering the nature and intent of the actor's conduct and the circumstances known to him/her, involves a gross deviation from the standard of care that a reasonable person would observe in the actor's situation

In a nutshell:
- A person causes a result purposely/intentionally if the result is his/her goal in doing the action that causes it,
- A person causes a result knowingly if he/she knows that the result is virtually certain to occur from the action he/she undertakes,
- A person causes a result recklessly if he/she is aware of and disregards a substantial and unjustifiable risk of the result occurring from the action, and
- A person causes a result negligently if there is a substantial and unjustifiable risk he/she is unaware of but very much should be aware of.

When a statute provides that criminal negligence suffices to establish an element of an offence, such element also is established if a person acts intentionally, knowingly, or recklessly. When recklessness suffices to establish an element, such element also is established if a person acts intentionally or knowingly. When acting knowingly suffices to establish an element, such element also is established if a person acts intentionally.

The definitions of specific crimes refer to these degrees to establish the necessary mens rea (mental state) necessary for a person to be guilty. The stricter the culpability requirements, the harder it is for the prosecution to prove its case.

As stated in a report from the United Nations "Many lawyers, accountants and bankers are (often unselfconsciously) adept at not asking questions that would require them to refuse business or even to report their clients or potential clients to the authorities. But a major component of the motivation for crime is also the expected probability and scale of reward, while the reverse is the expectation (if contemplated) of prevention and/or salient punishment. Any form of crime for economic gain can have its relative attractiveness rating altered significantly by changes in detection and sanction levels both for it and for other crimes such as narcotics sales." (Financial Havens, Banking Secrecy and Money Laundering. Issued as: Double issue 34 and 35 of the Crime Prevention and Criminal Justice Newsletter, Issue 8 of the UNDCP Technical Series, 1998)

The prosecution authorities in Luxembourg wrote in the last report dated March 2006 that it is almost impossible to prove the "knowingly".

Know more

UN Source :
Financial Havens, Banking Secrecy and Money Laundering (1998)

Applicable texts in Lichtenstein:
Due Diligence Act (November 2004)
Ordinance on the DDA (January 2005)

Applicable text in Luxembourg:
Law of 12 November 2004 (in French)

Transparence on issues : Luxembourg v. Switzerland

noreply@blogspirit.com (jturquey) — Wed, 26 Jul 2006 14:35:00 +0200

An analysis of the websites of the CSSF (www.cssf.lu) in Luxembourg and the SFBC (www.ebk.admin.ch) in Switzerland demonstates that the body responsible for the control of the financial sector in Switzerland has no problem to communicate on issues in the framework of press releases or bulletins, which is not the case in Luxembourg where issues are usually either denied or dropped. Hence, the CSSF is unfortunately mute on issues : no example will be provided because this blog is not intended to chuck names. but only to assess if regulation may be effective.

Examples of press releases in Switzerland :
SFBC_orders_removal_of_bank’s_general_manager.2.pdf
SFBC_Reprimands_UBS_over_US_Dollar_Banknotes_Trading.2.pdf
SFBC_has_withdrawn_its_pending_investigation_against_Mr_J._Fischer.2.pdf

Examples of Bulletin in Switzerland :
bull47_Suisse.pdf

Due to the exemplarity thanks to the transparence on issues, the financial sector may be much more ethical in Switzerland than in Luxembourg.

Proper conduct : Luxembourg v. Switzerland

noreply@blogspirit.com (jturquey) — Tue, 25 Jul 2006 20:30:00 +0200

Both Switzerland and Luxembourg have the same requirement for professionals in their law : all the guaranties of an irreprocheable activity i.e. all the guaranties of proper conduct of business operations :
- for Switzerland, see notably article 3 of Federal Act of 8 November 1934 on Banks and. Savings Banks and article 3 of Federal Act of 24 March 1995 on Stock Exchanges and Trading in Securities.
- for Luxembourg see articles 7 and 19 of the Law of 5 April 1993 on the financial sector, as amended.

We may state three observations :
- The wording is similar
- The requirement is stricter than the audit requirement that whould be a "raisonnable assurance" of an irreprocheable activity.
- the word irreprocheable itself is more extensive than licit and accept no drift in the behevior.

It seems that Switzerland is much more serious in the implementation of the requirement :
- thanks to a stronger communication and transparence on the issue that can be traced on the Web with a search engine,
- thanks to evidences of the implementation, especially in public judgements.

There are no evidence of an actual implementation in Luxembourg, especially on www.codeplafi.lu, which is the official extensive database, of all laws, regulations and circulars governing the regime and the activities of banks, of investment firms and other professionals of the financial sector, of insurance and reinsurance companies, the financial markets and instruments and the Luxembourg monetary status as well as to indications on case law and writings. We find only the text of the law and regulation. Most cases that are presented are relating to Bank secrecy.

On the opposite, there are many evidence that the system is actually living in Switzerland beyond the official texts. There is especially a circular that summerise the requirement and the implementation including law cases. This document is unfortunately available only in French and German.
Irreprocheable_activity_French_text_.pdf
Irreprocheable_activity_German_text_.pdf