Ethics and governance in the European Financial centers

Senator Levin started his speech with the following words:

About 50 tax havens operate in the world today. Their twin hallmarks are secrecy and tax avoidance. Some tax havens are little known places like Andorra and Vanuatu that few Americans have heard of. Others, like Switzerland and Liechtenstein, are notorious for operating behind an iron ring of secrecy. Billions and billions of dollars worth of U.S. assets find their way into these secrecy tax havens, aided by banks, trust companies, accountants, lawyers, and others. Each year, the United States Treasury loses an estimated $100 billion in tax revenues from offshore tax abuses. Tax havens are engaged in economic warfare against the United States and honest, hardworking American taxpayers.

The offshore tax evasion problem faced by the US is of "staggering proportions (...) by exploiting gaping loopholes, these foreign banks are enabling felony tax evasion. Simply put, foreign banks should not be Al Capone safe-houses for evading taxes."
," said Republican Senator Norm Coleman, the panel's ranking Republican.

The Permanent Subcommittee on Investigations will continue its hearings, "Tax Haven Banks and U. S. Tax Compliance," on Friday, July 25, 2008, at 9:30 a.m.,to call Peter S. Lowy as a witness. Mr. Lowy was originally scheduled to be a witness at the Subcommittee’s July 17th hearing.

Read Opening Statement

Documents relating to the hearing

Here are the paragraphs about Luxembourg in the US Senate report that was publised today in the framework of the hearing.

In 2006, the OECD issued a new report assessing the legal and administrative frameworks for tax transparency and tax information exchange in 82 countries. The purpose of this assessment was to help the OECD determine “what is required to achieve a global level playing field in the areas of transparency and effect exchange of information for tax purposes.” In October 2007, the OECD updated its 82-country assessment. The OECD wrote: “Significant restrictions on access to bank [information] for tax purposes remain in three OECD countries (Austria, Luxembourg, Switzerland) and in a number of offshore financial centres (e.g. Cyprus, Liechtenstein, Panama and Singapore). Moreover, a number of offshore financial centres that committed to implement standards on transparency and the effective exchange of information standards developed by the OECD’s Global Forum on Taxation have failed to do so.
(...)
Three EU members, Austria, Belgium, and Luxembourg, currently do not participate in the Directive’s automatic information exchanges. Instead, under a special arrangement approved as part of the Directive, these three EU countries levy a withholding tax on the interest payments made to nonresident individuals and, once per year, remit 75% of the amounts withheld to the individuals’ reported State of residence. The three countries are allowed to retain 25% of the amount withheld to cover their administrative costs of applying the withholding tax. The three countries are not required to provide client-specific information to any other country, such as the names of the individuals who received the interest payments or the amounts of interest paid; they are thereby able to preserve bank secrecy.
(...)
The transitional period does not have a specified ending date, but is designed to continue until the three EU countries, Austria, Belgium, and Luxembourg, as well as six other countries, Andorra, Liechtenstein, Monaco, San Marino, Switzerland, and the United States, agree to exchange tax information upon request, as set out in the OECD Model Agreement for exchanging information in tax matters
(...)
The EU Savings Directive applies to all 27 countries in the European Union. By agreement, it also applies to a number of countries outside the European Union, including ten overseas dependent territories associated with the United Kingdom and the Netherlands, as well as Andorra, Liechtenstein, Monaco, San Marino, and Switzerland. Four of these non-EU countries, Anguilla, Aruba, the Cayman Islands, and Montserrat, have agreed to participate in the Directive’s automatic information exchanges. The rest, however, comply with the EU Savings Directive in the same manner as Austria, Belgium, and Luxembourg, by applying a withholding tax during the specified transitional period rather than by supplying information about nonresident individuals who received interest payments on savings accounts within their jurisdictions.
(...)
The documents show that LGT used BTS Management Ltd., formed in the British Virgin Islands (BVI), to establish a number of the transfer corporations. The documents indicate that LGT typically asked BTS Management to form a BVI corporation which then opened an account at LGT or another bank, such as Bank du Gothard in Luxembourg. The transfer corporation then received funds or securities from an LGT client and immediately transferred those funds or securities to LGT, if its account was at an outside bank. In some instances the transfer corporation was then dissolved; in other instances, it continued in existence. Once the funds or securities were delivered to LGT bank, they were moved internally within the bank, using a mechanism called “journaling” to transfer them from one LGT account to another, here from the transfer corporation’s LGT account to the client’s LGT account. This internal transfer mechanism makes it much more difficult to trace the movement of funds and securities, since it leaves no record outside of the bank showing that the assets were transferred to the ultimate recipient, the LGT client.


We can see that a bank located in Luxembourg is quoted. Luxembourg in quoted 3 times in the exhibits document (page 245, 246, 270). Luxembourg definitely supports officially tax evasion and is functioning in a way that helps fraud because of a daily corruption and of lax business behaviours that are traced in official and public sources.



Read report

The Financial Services Commission (FSC) is the regulatory authority for all financial services business operating in and from within the BVI.

It regulates all financial services activities conducted in and from within the BVI pursuant to relevant BVI laws to ensure compliance with the relevant international standards and best conduct of business practices.

Its motto is "Vigilance, Integrity and Accountability".

Let's have a look on the content :

If we click Sanction, Enforcement action, the page is empty.

If we search the keywords "enforcement" there are only 4 articles listed with no evidence of actual sanctions.

If there are no enforcement actions, there are only 15 advisory warnings (The older advisory is dated 18/04/2006) especially on professional that are no longer licensed.

The last warning online dated 09/06/2008 wants commenting as it targets jurisdictions that may not be fully meeting the FATF standards on Anti-Money Laundering and Countering The Financing of Terrorism.
It is interesting to see the delay to implement FATF warning : on 28 February, 2008, the Financial Action Task Force (FATF) issued a public statement but the warning is dated 09/06/2008.
This is amasing to see such warning as the US Department of State concludes in the last Narcotic Control Strategy Report that "The Government of the British Virgin Islands should criminalize the financing of terrorism. The GOBVI should continue to strengthen its anti-money laundering regime by fully implementing its programs and legislation. The BVI should also extend the provisions of its anti-money laundering and counter-terrorist financing regulations to a wider range of entities, including money remitters. The GOBVI should ensure that there are a sufficient number of regulators and examiners to exercise effective due diligence and regulation of its more than 800,000 offshore entities in a manner compliant with international standards."

There are big gaps between what assessors (FATF, FMI) state and what's actually going on in the financial centers.



FSC website