Ethics and governance in the European Financial centers

A couple of weeks ago, I posted an article about the figure of Luxembourg in the TI Barometer : 6% of respondents admitted they paid a bribe to obtain a service, which is the highest figure in Western Europe. As I wrote this figure only takes into account money corruption but not other situations that can be met everywhere but that are both particularly common and visible in Luxembourg:

Networks

There are many associations in Luxembourg, but the center is very small so everybody meets in the same associations and when there is an issue involving a member a couple of phone calls to fellow member may help to hush up the issue. Everybody in the network knows the issue but there is no need to repudiate the bad professional that is supported by the group. To consolidate the support fellow members may knowingly join a board with the member in question. The problem in Luxembourg is that it is visible because of the small size, which is not the case in a bigger country where the bad professional may move up to another state to join the same kind of association but with new fellow members.

Intimidation

This situation is met when people do not do their duty because they fear for their job. This is particularly verified
- for internal auditors and compliance officers because of the subordination in the framework of the employment contract,
- for external auditors because of the business contract especially in a country where the leader of audit focuses on its growth and clients' confidence (not stakeholders'), which is not compatible with international professional provisions relating to audit ethics. This situation may explain the reason why there are so few declarations of suspicion (only 4) from auditors, which was considered suspect by the CRF, the Luxembourg FIU (Cf. for example Report 2003-2004, page 8 , were the number of 3 (close to 4) was said "ridiculously low for a profession composed of 304 members individual and having access to all the financial information of the center")

Fame

This last type of situation is met when people may hesitate to do or do not at all do their duty because they do not want to involve people that gain a professional standing because of professional, political or academic supports (in a board, in an association...). In other word, the will is to protect the frontage of the reputation of the center and its professional in any case. This is particularly verified
- for the media that have a public financing and globally do not have the culture to criticise the "system" and to tighten up the ship (even though there are exceptions),
- for justice, that lacks means (Cf. report "Petita Pro Nova Justitia" issued by the Cercle Joseph Bech), .a perfect illustration of this problem being the delay to judge sensitive affairs (e.g. the case of the former chairman of the Chambre des Comptes since 1999) or the restrictive conception of the freedom of expression that deny the right to bring evidence (s) when the behaviour of a leader of the center is criticised by considering the statement(s) as "value judgement" (Cf. Judge Sajô's analysis in a recent judgement from the CEDH, the “the Court of Human Rights for Europe”, involving Luxembourg(No 24261/05, BACKES v. LUXEMBOURG, 8 July 2008).



In a nutshell, at a time when tax haven are more and more contested and especially banking secrecy rules, corrective actions for the sake of the Luxembourg financial center are impossible. This functioning is what is called locally the "system" and is the reason why people that do not comply with the requirements of professional standing and experience (with the meaning of competence), as stated Law of 5 April 1993 on the financial sector, are not repudiated when those who dare to question are.

The problem is when there is an accumulation of "red flags" are unfortunately observed in public and official sources all the more than Luxembourg is a small center.

But fortunately, as explains a professional in Luxembourg, the center gathers the advantages of an on shore jurisdiction because it is in Europe and the advantages of off shore states taxes of which are similar to a tax haven.
Additionnaly the country is in the good books with the FATF thanks to a generous grant for the financing of FATF IT systems, that is mentioned in the FATF 2006-2007 annual report (paragraph 54 page 17) unless it is definitely not compatible with the role of auditor of the FATF, state members being like auditees, all the more than the FATF has its proper funding as described paragraph 55 of the same report.

The "system" can go on and the international speech against corruption, fraude or money laundering is a charade.

Among the Territories of the Crown, the BVI wants commenting. A local professional describes the advantages by underlying a couple of qualities from fraudsters' point of view:
1) Not only are there no currency controls, but with the US$ used as the BVI currency, it is essentially impossible for the government to regulate the money supply and hence to ever impose currency controls.
2) Despite its international popularity as an offshore financial centre, the BVI does not have the high profile, attention getting reputation of other centres. It represents an ideal offshore location for clients seeking confidentiality without the 'red flags' that are often raised through the use of more well publicised centres.
3) IBC formation legislation in the BVI requires only one shareholder and one director (both of which may themselves be other corporations); no corporate officers are required; bearer shares are permitted; there is no requirement for an annual general meeting; the company need only keep such accounts and records as the Director(s) think appropriate.
4) The BVI government need not be informed of the identity of the IBC's shareholders or directors.

An to conclude that many of the benefits of the BVI flow from this combination of a very high level of flexibility and the unquestioned confidentiality.


The BVI are identified as a tax haven by US Senators.

So it is a risk for the reputation of another jurisdiction when its professionals or shareholders choose an auditor from the BVI when such professionals or shareholders are neither competent nor honest, all the more than it is demonstrated in public and official sources and than the jurisdiction is small.

We find such situations in the Corporate Registration in Luxembourg, which is a risk for reputation of the Luxembourg financial center in the context of the hunt against tax havens and of an increasing transparency.

In this blog I have raised the question of the promotion in Luxembourg (you known the small place where everybody knows everyone and that is self-regulated as stated to the OECD and GRECO assessors) of employees that are neither competent nor honest despite evidences in public and official sources that may be crossed like judiciary sources and corporate registration.

Former employers of such professionals, that are major companies in Luxembourg supported by the leaders either political of professional, may be upset by my researches that demonstrate that experience and professional standing are a charade in Luxembourg. It is very amazing to see that they remove from their website keywords that are not compatible with the recruitment and the support of such employees. I have kept screens of the former communication and the screens of a google search of keywords.


First case

The communication at the time of an employee that was neither competent nor honest was:
• “the system of values by which our company lives is simple : build trust”,
• our teams are “accurate and efficient” and “highly qualified” .

After the employee was finally fired after he had been supported several months despite a lack of competence and a bad behaviour since the beginning, the company has changed its communication to state that “Integrity defines our business, our company, our people, the information we process and the words we use. Our Professionalism is at work every day striving for excellence to exceed your expectations".

I find it amazing that now some keywords should have been removed as they were not compatible with the management of the case of the employee (recruitment, support): ): the whole sentences were removed and keywords like “trust”, “accurate”, “professionalism”, “qualified”, “integrity” are no longer stated.


Second case

Another company that hired the employee communicated that when he was responsible for the recruitment of experts in legal matters that “Recruiting high quality staff is essential to the success of the firm. X undergoes a rigorous and demanding selection process, which takes the long-term perspective into account (…) Particular attention is paid to constantly updating the knowledge and technical skills of partners, lawyers and associates whilst assuring the highest possible ethical standards are adhered to”

I find it amazing that some keywords should have been removed as they were not compatible with the management of the case of the employee (hired despite he went to the court at a director’s level to contest his dismissal + he lost at the court of appeal where his bad behaviour was demonstrated): the whole sentence was removed and the keywords “high quality staff”, “rigorous”, “ethical” are no longer stated.


What can we conclude?

In this center that gave a “generous grant” to the FATF to pay for an improvement of the information technology systems (as if for example a litigant would give a generous grant to pay for an improvement of the information technology systems to a court that is gonna judge his or her litigation, which would be a problem), experience, and above all professional standing as defined, are actually not sought.

Furthermore those who deplore this lax behaviour before public and official sources are excluded from the labour market, which means that whistleblowing provisions cannot be credible in their implementation in Luxembourg.

A the time when the US senate is gonna investigating on tax havens targeting explicitly Switzerland and Liechtenstein, this is not fair for these centers that do not do not gather the advantages of an on shore jurisdiction because they do not belong to Europe and the advantages of off shore states that are similar to a tax haven (taxes and banking secrecy).

As I already wrote low taxes and banking secrecy are criteria of tax havens: but the determining criterion is permissiveness that is definitely met in Luxembourg when observing what is going on in the small place where everybody knows everyone.