Ethics and governance in the European Financial centers

A couple of months ago, Véronique Poujol from the Lëtzebuerger Land published a lucid analysis of the situation in Luxembourg.

She underlined the contradiction of the Luxembourg model. Nothing is more volatile than the capital. The success of the Luxembourg business model, it is to be business friendly, flexible and pragmatic with the economic operators, including in the banking legislation. Luxembourg was flexible with the investors, more slackness with the savers that have a poor level of the guarantees. There will not be doubt in the arbitration which these people will make between the safety of their funds and discretion with which they are managed. The State have reserves which are not inexhaustible.

The guarantee of the deposits will remain limited to 20 000 EUROS as the director of the ABBL confirmed quoted by L'Essentiel. today



Who is lying ?

Minister Frieden today confirmed the amount of 100 000 EUR as reported l'Essentiel in contradiction with what the director of the ABBL said.




Doubts about the protection of the investor with the Madoff case, Doubts about the protection of the client's deposits with the Kaupthing case...

This is the reality of this pragmatic Luxembourg that anyway despises the client as demonstrated the reference book written by Alex Schmitt : in a book called La Responsabilité du Banquier en droit prive luxembourgeois (Banker’s liability in Luxembourg private law) he concludes that one could be pleased with what Luxembourg jurisprudence generally shows very clear-sighted vis-a-vis the investors from day to day (“L'on pourra se féliciter de ce que la jurisprudence luxembourgeoise se montre généralement très clairvoyante face aux investisseurs à la petite semaine”). In other words in case of litigation because of a bank failure, there is a country risk as the foreign investor will not win.

In a nutshell the investor is consirered as a sucker.

The Luxembourg regulator yesterday published a press release about the Madoff case.

The wording is worth commenting :

(...)
The CSSF would like to stress that the Luxembourg law applicable to Luxembourg based depositary banks in their role of safe-keepers of investment funds' assets reflects faithfully the provisions of the European Council Directive 85/611/EEC
(...)
the Commission does not limit its analysis to the depositary banks concerned but verifies that all the other parties involved with the funds concerned have acted with the diligence imposed by Luxembourg law
(...)


What kind of law ? The law that is presented officially as clear and Prag-mac-tic, the fetish word.


This is for instance what Luc Frieden wrote in 2004 (Cf. article « The art of Communication », Fundlook, july-september 2004, page 3) : "I want to ensure that Luxembourg remains a leading player in the world of investment funds. Based on clear and pragmatic legal rules that are fully compliant with the EU legal framework as well as on the unique international experience built up over the past decades, the Grand-Duchy of Luxembourg will continue to undertake every effort to develop Luxembourg as the European hub for investment funds both for European and non-EU financial operators."

Pragmatic means that the actual enforcement in the jurisdiction is at least perfectible as there are many red flags that demonstrate a lax jurisdiction.

Quod erat demonstrandum with the Madoff case .

When looking the Corporate Registration in Luxembourg one may find evidences of a perfectible governance.

When the company the management and the governance of which is perfectible is the audit leader of investment funds, it is definitely worrying in the context of the financial crisis that demonstrates day after day auditors' responsibility (and especially big four firms ) because they failed in their duty to control the quality of their auditees' governance.

PwC Luxembourg is a very good example because the small size of the jurisdiction emphasizes dysfunctions all the more than the territory senior partner is member of PwC Global Board : one cannot tolerate any dysfunction.

I have already mentioned the issue of a financial director who definitely does not comply with the speech of competence of the firm (including ethics that is a required competence for the actors in a financial center) which raises questions about management and governance.

The Management Committee of PwC Luxembourg reviewed the directors' delegations a couple of weeks ago and realised that directors who left the firm were not removed (see infra) : two directors for instance left late 2001. This dysfunction raises the question of the values of decisions or actions in the framework of the delegations of these directors that left without being removed of the published list.

Additionally the Management Committee of PwC Luxembourg decided for the transparency that directors' names and their respective delegations will no longer be published (they may be asked). In this center of expertise in investment funds, let's imagine a fund that would not publish names of manager of assets. Investors that discovered they invested in Madoff without being aware of it (Madoff not only acted as manager of assets never mentioned in the Luxalpha documents but also insisted on being custodian the press reported) may understand the risk when informations are not spontaneously communicated. Transparency is a key principle to protect the investors and the stakeholders and auditors must be an example.


No principles, no rules except the rule of money (money over ethics), poor protection for the investor (a book was published by a lawyer to explain that the jurisprudence is not in favor of the investor), poor transparency, poor communication on issues (the problem of Luxalpha was only communicated in the media but never quoted by the ALFI, the ABBL or the CSSF).


When selecting a jurisdiction to invest, the investor must consider a couple of criteria :
- Does the jurisdiction demonstrated a culture of transparency (publication of judgements, publication of balance sheets, ability of the actors to face publicly the issues),
- Does the auditor of the fund targetted to invest demonstrated a rigorous management and a rigorous governance ,

If the answer is no to one of these questions client only cannot trust to invest.



Text in the Corporate Registration (French)

PricewaterhouseCoopers, Société à responsabilité limitée.

Siège social: L-1471 Luxembourg, 400, route d'Esch.
R.C.S. Luxembourg B 65.477.
Il résulte des décisions prises par le Conseil de Gérance de PricewaterhouseCoopers S.à r.l. le 8 septembre 2008 que
- le Conseil de Gérance met à jour la liste des directeurs publiée et constate que M. Amaury Evrard, M. Nicolas Gasztonyi, M. Manoj Kashyap, M. Georges Kioes, M. Walter Koob, M. Robert Lejoly, M. Laurent Marx, Mme Valérie Piastrelli, M. Philippe Sergiel et M. Günter Simon, dont les pouvoirs de directeur avaient été fixés le 27 avril 1999, et Mme Eidine Bossy, M. Etienne Boulard, M. Yves Decoster, M. Laurent Fedrigo, M. David Godin, M. Michel Guilluy, Mme Emmanuelle Caruel-Henniaux, M. Claude Jacoby, M. Steven Libby, M. Vincenzo Lomonaco, M. Marc Minet, M. Paul Neyens, M. Dariusz Nowak, M. Philippe Pierard, M. Wim Piot, M. Christophe Pittie, M. Didier Prime, Mme Odile Renner, M. Michiel Roumieux, M. Serge Saussoy et M. Stephan Schmitz, dont les pouvoirs de directeur avaient été fixés le 26 septembre
2000, et M. Luc Trivaudey, dont les pouvoirs de directeur avaient été fixés le 2 juillet 2001, ont été retirés de la liste des directeurs.
- le Conseil de Gérance ne publiera plus ni la liste des directeurs nommés depuis lors ni les changements de pouvoir et les départs des trois directeurs restant des listes publiées antérieurement. Les noms et pouvoirs des directeurs peuvent être obtenus auprès du Secrétaire Général du Conseil de Gérance.

Luxembourg, le 8 septembre 2008.

Didier Mouget
Président du Conseil de Gérance
Référence de publication: 2008132089/1026/25.
Enregistré à Luxembourg, le 10 octobre 2008, réf. LSO-CV03502. - Reçu 14,0 euros.
Le Receveur (signé): G. Reuland.
(080154522) Déposé au registre de commerce et des sociétés de Luxembourg, le 17 octobre 2008.