Ethics and governance in the European Financial centers

The CSSF has this week published a press release relating to the Madoff case.

The Commission de Surveillance du Secteur Financier (CSSF) informs having collected relevant data in order to analyze the impact of the Madoff fraud case on the Luxembourg financial sector. It has to be noted that it has not yet been possible to analyze this fraud case entirely due to its complexity.
However, on basis of the information currently available, the CSSF notes that the Luxembourg credit institutions are slightly impacted by this case, the direct and indirect exposures being 160 million EUR. This amount does not include possible exposures due to contractual or legal responsibility.
The impact on Luxembourg law undertakings for collective investment which are directly or indirectly exposed to the Madoff case amounts to 1.9 billion EUR, which represents only 0.15% of the total net assets of undertakings for collective investment as at 30 November 2008.
It should also be noted that the aforementioned figures do not imply that these amounts are entirely lost, but they represent the maximum responsibility at stake.
The CSSF continues moreover its work to analyze possible infringements to legal and contractual provisions.

The wording is worth analysing.

While everyone in the other jurisdictions is talking about LUXALPHA, a luxembourg-based fund, the CSSF is unable to quote the fund LUXALPHA that might be responsible for a loss of money for many investors.

This fund is already responsible for the death of a French money manager, Thierry de la Villehuchet, who committed suicide early last Tuesday.

European fund managers who knew de La Villehuchet described him to ABCNews.com as a man who inspired "a lot of respect, honour, humanity, kindness and generosity." They said that despite misgivings on the part of his colleagues, Villehuchet had a strong belief in Madoff and had not only committed his own money to Madoff, but did so with 150 percent leverage - in effect his potential losses were greater than his actual wealth.

Access International's LUXALPHA SICAV-American Selection fund invested solely with Madoff, and is one of several large funds that has been the subject of the ongoing federal investigation into what prompted them to place large amounts of client money with Madoff despite red flags that were ignored.

As far as the CSSF is concerned, the problem comes from the lack of controls, because of the local pragmatism, compared to other regulators.

This is what underlines Gérard Rameix, the General Secretary of the French regulator (AMF) in Les Echos :

En France, la responsabilité du dépositaire des fonds est entière, mais ce n'est malheureusement pas autant le cas au Luxembourg et en Irlande
(In France, the agent of the funds is fully responsible, but it is unfortunately not as much the case in Luxembourg and in Ireland).

[La commercialisation du fonds luxembourgeois mis en cause dans cette affaire] était parfaitement légale, dans la mesure où il s'agissait d'un fonds coordonné au sens de la directive européenne, dont l'agrément et le contrôle relèvent des autorités du pays d'origine. Dès lors, nous n'avions pas la possibilité d'en interdire la commercialisation.
([the marketing of the Luxembourg funds blamed in this business] was perfectly legal, insofar as they were funds coordinated within the meaning of the European directive, whose approval and control concern the authorities of the country of origin. Consequently, we did not have the possibility of prohibiting marketing of it.

Furthermore, in Luxembourg the jurisprudence is not in favor of the investor. As explained the lawyer Alex Schmidt the investor is not protected in Luxembourg when banks failed in their duty. 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 have win.

Finally as in Luxembourg the liability of legal persons does not exist...

Instead of seeking to trap the investor by a misleading communication (see Luxembourg propaganda ) while denying issues and dysfunctions, Luxembourg should realise that is is not a safe place for the investor and not only on the ethical side.

If Luxembourg leaders do not realise the paradigm shift to do the required aggiornamento, give them a couple months and look them go bust.


And by the way what are doing the politicians during these days of financial crisis ?

As a result of the Grand Duke's opposition, Article 34 of Luxembourg's constitution has been changed by the Parliament to bypass his sanction of the law. Every polician was in agreement to vote nearly unanimously for a constitutional change that would reduce the ability of its Grand Duke to block laws.

I wish they demonstrated such agreement and such a speed to implement international Recs : liability of legal persons...

Luc Frieden's answer on a recent parliamentary question relating to an article about the BCEE and Lehman Brothers is very worrying: He answers only one third of the question: insinuations with regard to Lehman. Nothing about the exposure as regards doubtful debts and nothing about the publication of the situation of the BCEE.

Above all Luc Frieden's answer is based on work of the credit rating agencies, which evaluated the BCEE positively.

Who give today any credit to rating agencies?

That is not to reassure on Luxembourg.


Read parliamentary question and answer

The Madoff case does not exist in Luxembourg... when observing officials and leaders' attitude.

I find it interesting to observe that officials and leaders in Luxembourg keep silence despite the fact that a luxembourg-based fund is involved in the Madoff scandal.

Unfortunately this attitude does not remove problems and confirms once more the lack of ethical credibility of the Luxembourg financial Center.

Such an attitude can only reinforce the lack of confidence of the investor.

But it is true that the Madoff case dramatically illustrates the drifts and dysfunctions that are visible in Luxembourg, and especially :
- canted standing,
- canted CSR
- conflicts of interests
- failure of self regulation
- etc.

In this context the recent communication on LFF (cf ) is completely surrealist.