Ethics and governance in the European Financial centers

When one analyses the laws and regulations relating to compliance that professionals must abide by, either from international sources (FATF, European Union…) or national sources (circulars from the body responsible for the prudential supervision), these are both costly and/or do not reach the expected goal: the result may be a Potemkine Village: apparent laws, regulations, training, compliance function, audits… but a pragmatic effect i.e. a limited effect in practice. Anyway, compliance is much more a question of “touch” than a question of knowledge.

The creation of the FATF was positive. Unfortunately the assessments do not comply with the reality as many financial centers despite the fact they belong to the FATF do not respect the recommendations, and even their professionals do not respect the authority of the FATF: the FATF list does not reflect the AML reality as there are actually objectively many more non cooperative countries than the official list. Furthermore, it is not fair to impose strong requirements when a center and its professionals do not condone issues and are willing to tighten up the ship of dysfunctions.

A certification to ethics for financial center should be implemented taking into account the evidence of the fight against money laundering.

I. The model of certification

A certification to ethics could be based on 6 criteria.

1. Credibility of the statements

A financial center cannot be ethic when official statements doe not comply with the reality. In such case, the center cannot be trusted. This area is probably more sensitive for small centers where such dysfunctions are much more visible than in a larger center.
Requirements are not easy to define objectively but they could be for instance the absence of contradiction between what is stated and what is seen...

2. Means for detection

A financial center cannot be ethic if organizations that are responsible for the detection and sanctions either administrative (regulatory body) or judiciary (FIU) do not have the relevant means.
Requirements could be for instance the rate of staff responsible for the control compared to the staff in financial institutions, the rate of staff responsible for the control compared to the assets in financial institutions...
International comparisons should be very interesting.

3. Credibility of sanctions

A financial center cannot be ethic if sanctions for professionals that do not have a proper business conduct are not dissuasive enough. If the sanctions are ridiculous compared to the amounts of money laundering or frauds, there is no dissuasion.
Requirements could be for instance a dissuasive minimum for fines, the effective communication of cases...

4. Transparency

A financial center cannot be ethic if issues are hidden or denied to show a Potemkine village. Two sub areas should be especially taken into account:
- On the one hand, the behavior of the media: do they play their role of fourth power or not?
- On the other hand, the transparency of Justice: are cases easily available or not?
Requirements are not easy to define objectively but they could be for instance the availability of judgments online, the presence of articles on the issues relating to the center in the media...

5. Independence of auditors

A financial center cannot be ethic if auditors are close to auditees because there may be influences. This area is probably more risky for small centers where such dysfunctions are much more visible than in a larger center.
Requirements are not easy to define objectively but they could be for instance the absence of personal links between the management of auditors and the management of auditees to prevent any conflict of interest, the capacity of auditors to raise issues relating to the financial center...

6. Protection of the client

A financial center cannot be ethic is the client is not protected.
Requirements are not easy to define objectively but they could be the jurisprudence in favor of the client when there is litigation with a financial institution, the active role played by the regulatory body to actually protect client's interests...

II. Customized requirements

It is not fair to impose strong requirements when professionals and politicians do not condone issues and are willing to tighten up the ship of dysfunctions in their company and their financial centre: when tolerated negligence has unfortunately replaced pragmatism and when professionals including auditors are upset when dysfunctions are stated or condone issues even from public and official sources, this definitely means they do not have the Professional standing they claim they have.

Furthermore, as far as the SOX requirement relating to the institution of whistleblowing is concerned, how can the subsidiaries be reliable in their ethics when every professional in the centre deny or condone even public and official issues? In this perspective, the Luxembourg case in very interesting : a dishonest employee has more opportunities to he hired than an honest one, which can be traced in official sources in this small centre where everyone knows everyone else and what others are doing, which would allow a kind of self-policing in effect (See official statements in the OECD and the GRECO reports on corruption in 2004) and where professionals and administrators are not clear with offences such as forgery, use of forgery, false balance sheets, use of false balance sheets or unauthorized use of corporate property (See ABBL (Bankers’ association) annual report 2003). There are many "red flags" that demonstrate the observation of the GRECO in 2004 that everyone sheltering behind a complicit silence rather than running the risk of being considered indelicate (GRECO, Evaluation report on Luxembourg, 14 May 2004). Professional standing and experience turned out to be charade, so turned out to be charade the myth of the self regulated place. As the proverb says: “Once a liar, always a liar” (See Cf. Naturam expellas furca, tamen usque recurret - Horace, liv. I, ep. Ix).

Such behaviors and thoughts that are not repudiated are not acceptable in a business world where transparency and ethics are more and more required and where means of communication allow the dissemination of news worldwide in a fraction of second. How can such professionals be aware of what money laundering and corruption are if they are not clear enough with basic offences?

Compliance requirements should be adapted to financial centers and financial institutions taking into account the ethics and compliance awareness: the more credible is a centre/company the less pressure it should have.

But there should be no tolerance for professionals that have replaced pragmatism by negligence and who deny dysfunctions, which standardize bad management and bad governance with all potential risks. By excluding those who do not condone even public or official issues, professionals demonstrate that their ethical and compliance framework turn out to be charade, which weaken the credibility of financial centers and financial institutions worldwide.



A rough analysis of the financial centers shows that there is currently none that meets every area despite the FATF positive assessments. Among these, Luxembourg is probably not the worst financial centre but the size and the lack of responsibility of many actors allows identifying ethical weaknesses, and realizing the limits of current international assessments in business ethics and compliance.

The Canadian Centre for ntelligence and Security Studies, The Norman Paterson chool of International Affairs, Carleton University published a very interesting article on the topic "Terrorism Financing and Financial System Vulnerabilities: Issues and Challenges".
Terrorist activities require access to funds at all stages of planning preceding an attack. The paper reviews the fraudulent acquisition of funds by terrorists and the potential vulnerabilities of our financial system.

See article

Stanley Sienkiewicz published a paper to discuss the potential money laundering threat that prepaid cards face as they enter the mainstream of consumer payments. Over the past year, several government agencies have issued reports describing the threat to the U.S. financial system, including the use of prepaid cards by money launderers. Also, this paper incorporates the presentations made at a workshop hosted by the Payment Cards Center at which Patrice Motz, executive vice president, Premier Compliance Solutions, and Paul Silverstein, executive vice president, Epoch Data Inc., led discussions. These two leading anti-money laundering strategists explained how money laundering occurs in financial payments and how firms can mitigate and detect money laundering activities. This paper provides an overview of money laundering, describes how prepaid cards could be abused, and outlines how both the government and the payment sectors have responded to mitigate risks.

Read paper