Ethics and governance in the European Financial centers

New York State Attorney General Andrew Cuomo Thursday brought a multi-billion dollar civil lawsuit against the Swiss banking giant UBS for allegedly pushing everyday investors into buying troubled auction-rate securities.

It is interesting to observe that UBS seems to have removed its videoclip on CSR from its website.

Read press release
Read UB complaint

In various articles of this blog I have underlined dysfunctions and deficiencies in the Luxembourg financial center to demonstrate poor ethics and poor governance despite an official speech on the compliance with FATF Recs and positive IMF assessment on the legal and regulatory framework to fight ML and the financing of terrorism.

Critical actions

To justify and protect the principles of banking secrecy and attractive taxation Luxembourg must take the following actions that are not exhaustive:

1) Implement OECD and GRECO Recs to prevent corruption. Luxembourg does not care of the Recs, which is the reason why the "generous grant" to the FATF, that cannot ignore the GRECO and OECD reports, is a huge problem as by accepting the grant the FATF unfortunately ignored de facto the issues of the reports including AML concerns while promoting Luxembourg in its report ("Thanks to a generous grant...").

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. 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 foreign professionals to certify the accounts (bogus firms from BVI, Isle of Man...)

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".

The stake

When I start my researches in business ethics and CSR in 2004, these were considered "political" by some people or "not pragmatic" by other people that did not realise the paradigm shift.

1) What happened the following years ?

A report from the US Senate and a project against tax havens : the Stop Tax Haven Abuse Act supported by representative of both parties.
The Liechtenstein scandal that has opened the Pandora Box with its current known main consequences : the discussions about the Savings directive and ongoing investigations by the US Senate.

2) What is the situation today?

Despite Switzerland is targeted by the US Senate for UBS, it is in a better situation to justify and protect its principles of banking secrecy and attractive taxation because it can prove there is no permissiveness when Luxembourg cannot.

3) Will Luxembourg be supported anymore?

The reason why there are no changes is that many professionals in Luxembourg feel they are supported in Luxenbourg and outside Luxembourg. So they play the Game Theory. But :

In a competitive environment , investors that look honestly for banking secrecy and tax advantages cannot support permissiveness that is not sought. These major investors might move there assets to another center that is less lax and therefore safe for their reputation.

Other financial center might consider Luxembourg as a weak link that provides opponents of banking secrecy and low taxes with arguments.

If Institutions that fight corruption want to keep their authority and credibility they might sanction Luxembourg. It is amazing to read again the previous OECD report and compare it with the previous GRECO report: The GRECO report dated May 12, 2006 stated that "Luxembourg has implemented satisfactorily or satisfactorily dealt with less than one quarter of the recommendations: “GRECO notes a fairly significant shortfall in the implementation of the recommendations contained in the second-round evaluation report. It nonetheless expects the Luxembourg authorities to do everything necessary to bring to completion the numerous legislative initiatives referred to in this respect. It urges the authorities of Luxembourg to speed up the reform process so as to show tangible results in the effective implementation of the recommendations as soon as possible”. The OECD report dated August 2, 2006 concludes with almost the same wording: “Noting a substantial shortfall in Luxembourg’s satisfactory handling of the recommendations given in the Phase 2 report, the Working Group urged the Luxembourg authorities to speed up the process of reforms in order to deliver tangible results with respect to the implementation of these recommendations as soon as possible“. The convergence of the wording is telling: “fairly significant shortfall”, “urges the authorities of Luxembourg”, "speed up the reform process", “show tangible results”, "as soon as possible” for GRECO and “substantial shortfall”, “urged the Luxembourg authorities”, "speed up the process of reforms", “deliver tangible results, “as soon as possible” for OECD. As far as bribery is concerned there are resistances to implement international Recs so there are to implement AML/CFT Recs. Reports pointed out the link between corruption and money laundering.
The OECD warned Luxembourg in a press release dated 27/03/2008 after the release of the last report of the Working group against bribery: “Luxembourg has not responded to some key recommendations issued by the Working Group since 2001. The Working Group has exceptionally decided to conduct a review of measures taken by Luxembourg to fulfill the recommendations of the Group again one year from now and reserves the right to take further steps in the event of continued failure to implement the Convention”. The last GRECO report in 2008 remains confidential.

If Institutions that fight money laundering want to keep their authority and credibility they might sanction Luxembourg. As far as the FATF is concerned, accepting the “generous grant” from an "audited state" that do not care of the FATF or GRECO Recs, was a huge mistake and I hope the FATF governance has been or will be reviewed. When the FATF visit Luxembourg in the next months, it might consider what is behind the frontage of compliance.

4) Will the general elections next year in Luxembourg be the opportunity to start the aggiornamento for the sustainability of the center?

It is up to the politicians.

Kevin McCoy, from USA TODAY reported that Senate Finance Committee leaders announced plans for new laws against offshore tax evasion Thursday after a new federal report found American ties to thousands of firms registered in the Cayman Islands.

Several senators criticized the Internal Revenue Service for not taking a tougher approach against offshore havens.

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