Ethics and governance in the European Financial centers

I have mentioned several times on this blog the “system”. Time is up to quote a couple of examples of this "corruption catalyst" specific to Luxembourg.

1) A litigation between a foreign legal person or individual and a local legal person or individual. The local legal person or individual causes prejudice. The foreign legal person or individual decides to be a party to legal proceedings. For that he/she/it appoints a Luxembourg lawyer. This lawyer, who is a client’s friend in the local networks, calls the local legal person or individual, meets with him/her/it and agrees to do the minimum by not raising what could make the local legal person or individual feel uncomfortable before the court.
This situation is very common:
- Foreign client of a bank v. Luxembourg bank that did not do its duty,
- foreign supplier v. Luxembourg client that does not want to pay,
- etc.

The foreign party does not win.


2) Individuals with decision making power, including in the framework of a disciplinary action, join a board of directors in an association where they meet those for which they have the decision making power or disciplinary power. A member needs a decision in his/her favour and contact the member of the board to obtain the favour. If the favour is relating to a disciplinary action he/she may raise the risk of reputation for the association.

Due to the pressure, some of these individuals with decision making power may forget their duty.


3) A member of an audit team finds a possible money laundering situation involving management of the audited company and reports the issue to the audit leader or partner. The audit leader or partner that
- meets management of the company in associations like ABBL or ALFI,
- plays the golf with management of the company,
- has possibly received a generous grant from the company with a view to providing the leader or the partner with with better time management tools : a new PDA to manage appointments, a new watch to be in time... (as neither the OECD nor the GRECO experts on corruption did repudiate the "generous grant" that the FATF officially received from the Luxembourg I guess auditors may accept such "grants" that are complementary to audit fees),
- does not forget that the relation between auditors and auditees in actually a commercial relationship, which means that if he/she report the declaration of suspicion he/she would loose the clients’ confidence (and probably prospects’ confidence).
Decides to condone the issue.

Due to the fear of exclusion, some professionals do not do their duty.

The existence of the networks is admitted page 18 of the last GRECO report about Luxembourg when underlining "the importance of relationships and networks of persons in Luxembourg society" to explain the reason why the number of cases coming before the courts appears to be very
small (Greco Eval III Rep (2007) 6E, theme I, 13 June 2008, published on 25 August 2008).

The Luxembourg government met last 4 September 2008 and approved of the draft law to introduce in the positive law the liability of legal persons as requested by the OECD. This is a good thing. Better late than never But I do think that like any sensitive text, the draft law should be emptied in the debate prior to the vote before the parliament. Last year Minister of Justice Luc Frieden confirmed before professionals he was ready go give up international Recs : "Should a large financial center like ours exaggerate or be more lax with the risk of a couple of scandals. Yes we may have exaggerated some procedures but this was a general trend in Europe. I hope we have not done badly at that is still possible to go backward. I am ready to give up some requirements"

Additionally like for AML legislation, it is no use voting texts to comply on the paper with international Recs while not enforcing them because of the "System" that hushes up or condones issues because it is a "corruption catalyst".

That is the reason why despite the new text, strong weaknesses in the fight against corruption remain, which requires a will for complementary measures to ensure that the fight against corruption is not a charade in the country :

1) Implement other OECD and GRECO Recs to prevent corruption and ensure legislation is acually enforced.

2) Fight the "system". The consequence of the "system" is that in most cases dishonest professionals never quit the business so the principle of professional standing as stated strictly in the law is not implemented. This is the post difficult thing because of the small size that creates situations of conflicts of interest. It is everyone's responsibility to repudiate every professional that do not comply with the requirements of professional standing as stated strictly in the law: every guarantee of irreproachable conduct (larger than the reasonable assurance, larger than licit).

3) Communicate on issues. Leaders in Luxembourg must be aware that only dishonest professional may fear transparency. Transparency is very important to ensure ethics in the business. It is not normal for a center like Luxembourg, which boasts such an important financial sector that big four like PwC and E&Y do not participate to studies of their brand relating to economic crime and/or corruption. As far as the CSSF is concerned, it should communicate like the FSA in the UK, which would have a salutary dissuasive effect.

4) Authorise only registered professionals in Luxembourg to certify the accounts (members of the IRE or the OEC) and prohibit dubious professionals to certify the accounts (bogus firms from BVI, Isle of Man, Seychelles...)

5) And above all accept opinions that are critics. The stake is to avoid that the center become zombie because it would have "created an insulated culture that systematically excludes any information that could contradict its reigning picture of reality".

There is today a question of credibility for everyone: In 2002 Luc Frieden stated before the IMF that "Personally, I have no doubt that my country can lead by example in promoting good governance, in fighting against the financing of terrorism and against money laundering, and in actively promoting development policies". In 2002 as well the government communicated that "Luxembourg is a founding member of the European Union and the Council of Europe and, in this capacity, implements all laws governing banking and financial activity, the fight against money laundering and financial crime as well as judicial cooperation on criminal matters. Far from hindering the fight against money laundering, Luxembourg was one of the first countries to adopt measures in order to fight against money laundering in 1989 and has continued to improve upon these measures ever since. Luxembourg cooperates fully at international level and is an active member of FATF (Financial Action Task Force), a body specializing in the fight against money laundering which, in its last evaluation report, testified that Luxembourg respected all its recommendations in full. Luxembourg will continue to work on perfecting European legislation regarding financial crime and the resources required to ensure its implementation."


What about the findings of OECD or GRECO reports on corruption since 2002 that includes items relating to AML and what is written in the reports or opinions from the Luxembourg FIU ?

I am afraid they they are useless since the FATF condone them by accepting a "generous grant" from Luxembourg.




Read minutes

€200-250 billion that should reach national budgets is thought to be lost to fiscal fraud. VAT fraud alone accounts for some €40 billion a year – ten per cent of the total receipts. Parliament says it is time for Member States to get serious in tackling this problem and is calling for reform to the VAT system and the Savings Tax Directive.

A report drawn up by Sharon BOWLES (ALDE, UK) and adopted yesterday with 391 votes in favour to 93 against with 178 abstentions says some Member States have shown a “blockading attitude” in the last ten years when it comes to tackling tax fraud.

VAT system based on taxation in country of origin?

It says that in the long run a VAT system based on taxation in the country of origin of goods would be a solution to VAT fraud in cross-border supplies, but this would require a clearing system for sharing revenue. The best solution, say MEPs, would be to impose a 15 per cent tax on intra-community supplies (they are presently exempt with tax charged when they are sold on in the destination country). A decentralised clearing house system for rebalancing payments between Member Sates (because of the differential rates of VAT) could be rapidly developed.

Caution over the reverse charge mechanism

Another much discussed proposal to tackle missing-trader fraud in the VAT system (where the company selling goods or services, which should pay VAT receipts to the tax system, is a sham organisation which vanishes) is to make the customer account for the tax instead of the supplier, except where the customer is a private individual. This “reverse-charge” mechanism would indeed solve this missing-trader problem, MEPs note, but they are concerned it might create new opportunities for fraud elsewhere as well as a heavy administrative burden for businesses and are cautious about introducing it on a wide scale.

The report also calls for more cooperation between Member States’ tax authorities in tacking fraud.

Remove loopholes in Savings Tax Directive; eliminate tax havens

Turning to taxation of savings and other financial income, MEPs want to see action against tax avoidance, a widening of the scope of the Savings Tax Directive and action through the OECD to tackle uncooperative tax havens. The EU should keep the elimination of tax havens at worldwide level on the agenda.

Parliament regrets that Member States are hindering reform of the Savings Tax Directive and says it needs to be updated to remove loopholes and deficiencies. They ask the Commission to investigate some widening of its scope regarding legal entities and sources of financial revenue.


Abstract about tax evasion

Tax evasion

33. Regrets that the Member States are hindering reform of the Directive 2003/48/EC by their continual new objections and delaying tactics and urges the Commission to put forward its proposals as soon as possible in spite of the signs of resistance;

34. Points out that reform of Directive 2003/48/EC must tackle its various loopholes and deficiencies, as they prevent discovery of tax evasion and fiscal fraud operations;

35. Calls on the Commission, in the context of reform of Directive 2003/48/EC, to examine options for reform, including investigating some widening of the scope of the Directive with regard to types of legal entity and sources of financial revenue;

36. Urges the European Union to keep the elimination of tax havens at a worldwide level on the agenda, having regard to their detrimental effects on the tax revenue of individual Member States; invites the Council and the Commission to use the leverage of EU trade power when negotiating trade and cooperation agreements with the governments of tax havens, in order to persuade them to eliminate tax provisions and practices that favour tax evasion and fraud; welcomes, as a first step, the recommendations set out in the Council conclusions following its meeting on 14 May 2008 to include in trade agreements a clause on good governance in tax matters; asks the Commission to put forward such a clause with immediate effect in its negotiations of future trade agreements;


The critical question is what is the credibility of organisations like the OECD or the FATF to actually sanction jurisdiction that have their growth based on clear (to comply and not be registered as uncooperative country) but lax (in Luxembourg one says "pragmatic") regulation to attract people.

Unfortunately or fortunately (it depends on the point of view) despite the culture of confidentiality, the Corporate Registration in Luxembourg is full of "red flags" of dubious situations that may be the marker of fraud:

Example 1 : when same individuals create several companies in the sector of real estate with exactly the same object (wording copied), this does not make sense.
Example 2 : when a statutory auditor ("commissaire" in the law) of a registered company in the sector of real estate comes from a country like the BVI or the Seychelles or other exotic jurisdiction there is a risk all the more than is doe not make sense because of travelling expenses.
Example 3 : many companies in Luxembourg whatever sector are only an address. Where does the business come from as there is no actual office? And no teams anyway? And that are not in the professional phonebook anyway?
And so on.

Should one of these companies be involved in a fraud, the conséquence would be twofold : for the country : "once more Luxembourg" with a damage for the investment fund industry; and for registered professionals (registered auditors or chartered accountants) as nobody makes the difference between "auditors" and these local institutions do not control the statutory auditor that is not committed to the sames requirements and control.


Source : European parliament

Coordinated strategy to improve the fight against fiscal fraud
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