Ethics and governance in the European Financial centers

Luxembourg authorities and especially the regulator are definitely considering other authorities and investors as idiots.

Let’s compare what the CSSF wrote in its last press release and what the pragmatic Luxembourg regulatoru framework states clearly.

What the CSSF wrote on 2 January 2009

(...) When a fund's assets are deposited by the depositary bank with a third party, these deposits are under the monitoring and supervisory responsibility of the depositary bank, implying that the latter must know at all times in which manner the assets are invested and where and how these assets are available. This responsibility is not affected by the fact that the depositary has entrusted to a third party all or part of the assets in its safe-keeping. (...)

What the regulatory framework actually states (this text is not on the list of removed texts):


(…)
La notion de garde, telle qu'elle est employée pour désigner la mission générale du dépositaire, n'est pas à comprendre dans sa signification de "conserver", mais dans sa signification de "surveiller", ce qui implique que le dépositaire doit savoir à tout moment de quelle façon les actifs de l'opc sont investis et où et comment ces actifs sont disponibles.
(…)
A celui qui a subi un préjudice, il échet dès lors de prouver la faute du dépositaire dans son obligation de surveillance et la relation de cause à effet
Cette surveillance du dépositaire s'exerce notamment à l'égard des tiers auprès desquels les actifs de l'opc se trouvent en dépôt.
Quant au contenu de l'obligation de surveillance du dépositaire, l'on peut considérer que le dépositaire satisfait à son obligation de surveillance lorsqu'il est convaincu dès le départ et pendant toute la durée du contrat que les tiers auprès desquels les actifs de l'opc sont en dépôt, sont honorables et compétents, et bénéficient d'un crédit suffisant.
A celui qui a subi un préjudice, il échet dès lors de prouver la faute du dépositaire dans son obligation de surveillance et la relation de cause à effet.
Le devoir de surveillance quant aux actifs de l'opc, et partant la responsabilité pour cette surveillance subsiste toujours dans le chef du dépositaire. Toute clause du règlement de gestion et des statuts respectivement ou tout autre accord tendant à exclure ou à limiter cette responsabilité sont nuls.
Il s'ensuit que le dépositaire ne peut en aucun cas se décharger de sa responsabilité de surveillance. Ainsi, le dépositaire ne peut notamment pas se prévaloir de ce que le dépôt des actifs de l'opc aurait été effectué de l'accord général ou spécifique de celui-ci. La responsabilité du dépositaire n'est de plus affectée ni par le fait qu'il se fait assister par des tiers dans l'exécution des tâches qui lui sont imparties, ni par le fait qu'il confie à des mandataires l'exécution de ces tâches.


The official translation (Codeplafi)

(…)
The concept of custody used to describe the general mission of the depositary should be understood not in the sense of “safekeeping”, but in the sense of “supervision” which implies that the depositary must have knowledge at any time of how the assets of the UCI have been invested and where and how these assets are available
(...)
Anyone suffering damages must prove the depositary's negligence in respect of its duty of supervision and the correspondence between cause and effect.
This supervision by the depositary is in particular exercised over the third parties with which the assets of the UCI have been deposited with.
As regards the extent of the duty of supervision of the depositary, one can consider that the depositary has discharged its duty of supervision when it is satisfied from the outset and during the whole of the duration of the contract that the third parties with which the assets of the UCI are on deposit are reputable and competent and have sufficient financial resources.
The duty of supervision of the assets of the UCI and consequently the liability for such supervision always resides with the depositary. Any provision of the management regulations and the articles or any other agreement aiming to exclude or limit this liability are null and void.
It follows from there that the depositary may, in no case, release itself from its duty of supervision. Therefore the depositary may in particular not argue that the deposit of the assets of the UCI has been carried out with its general or specific approval. The liability of the depositary is furthermore unaffected by the fact either that it has been assisted by third parties in the execution of its tasks or that it has entrusted the execution thereof to its representatives.


The key sentences

Affirmative CSSF

When a fund's assets are deposited by the depositary bank with a third party, these deposits are under the monitoring and supervisory responsibility of the depositary bank, implying that the latter must know at all times in which manner the assets are invested and where and how these assets are available. This responsibility is not affected by the fact that the depositary has entrusted to a third party all or part of the assets in its safe-keeping.

versus

Pragmatic regulatory text

The concept of custody used to describe the general mission of the depositary should be understood not in the sense of “safekeeping”, but in the sense of “supervision”

The depositary has discharged its duty of supervision when it is satisfied from the outset and during the whole of the duration of the contract that the third parties with which the assets of the UCI are on deposit are reputable and competent and have sufficient financial resources.




When reading the official regulatory text that is pragmatic like AML provisions in Luxembourg, if UBS was satisfied from the outset and during the whole of the duration of the contract that Access was :

- reputable : but everyone is reputable in Luxembourg, the small place where everybody knows everyone, and where economic crime officially does not exist.
- competent : everyone is competent in Luxembourg where many statutory auditors are not controlled (exactly like Madoff’s auditor)
- and have sufficient financial resources : everyone makes money in Luxdembourg where the motto is definitely money over ethics

It has discharged its duty of supervision



I am telling you. There are other Luxalpha cases in the pragmatic jurisdiction. Many others.

On 15 January 2009, it was admitted unofficially that Luxembourg Funds are exposed up to EUR 7 Billion to Madoff.

“The experts have tallied the amount between five and seven billion euros," a MP said, speaking on condition of anonymity. Does he fear to be repudiated to tell the truth to speak on condition of anonymity?

As I wrote this exposure us 20% of the Madoff Fraud of USD 50 billion for a jurisdiction of... 2500 Km2 (about 1000 sq miles)

How the authorities are handling the situation ?

Let’s have a look on the agenda of the last Council of Goverment that took place on 16 January 2009. There is not a word about Madoff despite the exposure.

Let’s have a look on the CSSF website. Luxembourg's financial sector monitoring commission, the CSSF, had initially estimated at the end of December that Luxembourg funds had EUR1.9 billion invested in funds managed by Bernard Madoff. The CSSF did not issue a press release to update the figure.
This attitude demonstrate that Luxembourg is unable to face the situation, to take decisions in time, to communicate fairly for the investors on disfunctions... The last press release about the Madoff cas is dated 2 January 2009 only to confirm that Luxembourg complies with the European legislation. But it did not specify that rules are clear but prag-ma-tic. For example a circular states that : "Pursuant to the commentary of the Articles of the Law of 30th March, 1988, the concept of custody used to describe the general mission of the depositary should be understood not in the sense of “safekeeping”, but in the sense of “supervision” which implies that the depositary must have knowledge at any time of how the assets of the UCI have been invested and where and how these assets are available. In accordance with the meaning thus attributed to the concept of custody, the physical deposit of all or part of the assets may be made either with the depositary itself (which represents the most prudent solution) or with any professional designated by the UCI in agreement with the depositary (...) As regards the extent of the duty of supervision of the depositary, one can consider that the depositary has discharged its duty of supervision when it is satisfied from the outset and during the whole of the duration of the contract that the third parties with which the assets of the UCI are on deposit are reputable and competent and have sufficient financial resources" (Know more).

I do not think that official's attitude is responsible. This attitude remind me of Louis XVI : on the day the Bastille was seized by revolutionaries, he wrote in his diary, "Rien," "Nothing happened."

The AFP reported that Luxembourg authorities ordered UBS Luxembourg on Thursday to compensate French brokerage Oddo et Cie for EUR3 0 million invested in funds managed by Bernard Madoff.
Oddo had invested EUR30 million in investment fund Lux Alpha, for which UBS Luxembourg was the custodian. Lux Alpha in turn invested the money in Madoff's funds.
Luxembourg authorities gave UBS Luxembourg 24 hours to disburse the money from the moment the order was issued and told the bank to pay EUR 10,000 to cover Oddo's legal fees.
Oddo took legal action against UBS on the grounds that it had sold its clients' shares in Lux Alpha on Nov. 4, 2008 - more than a month before the Bernard Madoff scandal blew up - but had never received the money.

In my opinion, the case is not a question of responsibility because of Madoff for UBS.
As I already wrote, it will be a long shot of investors who lost their money in Luxalpha to have it back:
1) From the administrative point of view, when processing a client complaint, the regulator CSSF’s positions are not binding on the professionals (See CSSF annual report 2007 page 162),
2) From a penal point of view, the penal liability of legal persons does not exist,
3) From the civil point of view, the civil jurisprudence in not in favour of the investor “from day to day”

As far as one the one management of UBS/Luxalpha and on the other hand the auditor are concerned, they definitely ignored red flags because of the local lax business culture in Luxembourg.

There were at least three red flags for any clever professionnal, either banker or auditor :
1) Madoff was at the same time intermediate and manager, which involves risks of important conflict of interest but it is true that in Luxembourg one lives with the conflict of permanent interest without taking precautionary measures,
2) His auditor was very a small structure but it is true that in Luxembourg no matter who can be the statutoty auditor and accounts are in the dark as there is no balance sheet database,
3) The interest yield of the fund was suspect but Luxembourg is a country where the short term and the growth take precedence over the critical spirit and the independent mindset.


Know more