Ethics and governance in the European Financial centers

The Isle of Man was targetted by US Senate subcommittee report (see article "Tax Haven Abuses: The Enablers, The Tools & Secrecy (US Senate hearing)").

A spokesman for the Financial Supervision Commission (FSC), said: "'Any financial institution doing any business in the Island is required to understand the nature of the transaction being done and also has to ensure that the transaction is not deliberately breaking the laws of another country. We do not tolerate misuse of the financial system in any circumstance".

Know more

The standards that pragmatic professionals are using in Luxembourg are incumbent upon them. They have admitted officially that business objectives are more important than business ethics and governance. They have made knowingly the choice in 2004 not to comply with some FATF Recs and have expressed their poor governance concerns notably by normalising financial frauds (forgery, use of forgery, false balance sheets, use of false balance sheets or unauthorised use of corporate property) that are considered as "vague” or “ambiguous” (Sic) offences and even by justifying possible money laundering when saying "actual money laundering" (Sic) which implies there may be dubious transactions they do not consider as money laundering (see articles "Clear and Pragmatic legal rules" and "Luxembourg and CFT" for the detailed analysis).

These standards of business behavior are up to them. But these people did not realise the paradigm shift worldwide and that their bogus pragmatism that is deep enough to be publicly expressed in official reports does not comply with the international ethical and governance trends or requirements, notably:
1) Those from the FATF and the IFM relating to AML/CFT.
2) Those from the IFAC (International Federation of Accountants), the IIA (The Institute of internal Auditors), the CFA Institute and other international professional organisation relating to business ethics and governance.
3) Those from the GRECO, the OECD and the World Bank relating to bribery. 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 remarquable : “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.
4) Those from the European Union that is willing to prevent tax evasion. That is the reason why Luxembourg was required to abolish the H29 legislation and moreover an Amended proposal for a Council Directive amending Directive 77/388/EEC as regards the place of supply of services is in the pipe. Many frauds are based in Luxembourg where a fiduciary states that “the abuse of social goods and tax evasion are non-existent in the Luxembourg law” (see article “Is Luxembourg a tax haven?). The same fiduciary sell secrecy to attract business: "The bank secrecy forms integral part of the Luxembourg legislative system" or "Anonymity is a paramount concept in the Grand Duchy whose keystone is the bank secrecy".
5) Those from the US Senate, which is willing as well to fight tax havens that "sell secrecy to attract business" (Senator Carl Levin) and "have become the Wild West of the financial world, havens for fraud and evasion" (Senator Norm Coleman) (see article "Tax Haven Abuses: The Enablers, The Tools & Secrecy (US Senate hearing)"). Luxembourg was not targeted by the investigation, but senators pointed out the link between tax havens and money laundering. US Senators might assess what is going on in Luxembourg and tighten up the ship on the reality of Luxembourg.

One may find it logical that decisions and actions should be taken at the international level: the credibility, the authority and the reputation of supranational organisations is in question. The risk is to encourage "the Wild West of the financial world havens for fraud and evasion".

Decisions and actions should be taken as well at the national level to rebuild trust, being aware that there is a collective responsibility, as statements are official, and nobody repudiated such wording in the chain of responsibility, except the prosecuting authorities that do an excellent job with little means.

From a management and governance point of view, to rebuild the international trust, decision-makers (either professionals or politicians) at the time of the AML/CFT debate should leave the business under the international pressure as they do not accept the paradigm shift and one cannot rely on them to support the international trends and requirements: Naturam expelles furca, tamen usque recurret (You can drive out nature with a pitchfork, but it always returns, which gives a pragmatic proverb in English: "Once a liar, always a liar").

The Permanent Subcommittee on Investigations scheduled a hearing last August 1, 2006, entitled Offshore Abuses: The Enablers, The Tools & Offshore Secrecy. The Subcommittee had held a number of hearings addressing the issue of tax havens and offshore abuses which are undermining the integrity of the federal tax system, diverting tens of billions of dollars each year from the U.S. Treasury, and undermining U.S. law enforcement. Hearings held in 2001 had examined the historic and ongoing lack of cooperation by some offshore tax havens with international tax enforcement efforts and their resistance to divulging information needed to detect, stop and prosecute U.S. tax evasion. A hearing held in December 2002 and Report issued in January 2003 had provided an in-depth examination of an abusive tax shelter used by Enron. Two days of hearings in November 2003, and a bipartisan report issued in 2005, had provided an inside look at how some respected accounting firms, banks, investment advisors, and lawyers have become engines pushing the design, sale, and implementation of abusive tax shelters to corporations and individuals across the country.
The Subcommittee’s upcoming August 1st hearings presented case histories on the use of offshore trusts and corporations to circumvent U.S. tax, securities and anti-money laundering laws. Witnesses for the upcoming hearing were securities firms, banks, law firms, U.S. taxpayers, a trust protector, and tax and securities experts.


Statement of Senator Norm Coleman (abstract):

"Today’s hearing continues this effort by examining the extent to which U.S. individuals are abusing
offshore jurisdictions to circumvent compliance with U.S. tax, securities, and anti-money laundering laws. (...) While these jurisdictions claim to offer limited financial disclosures, light regulation, enhanced asset protection, and financial privacy, in reality they have become the Wild West of the financial world, havens for fraud and evasion"

Statement of Senator Carl Levin (abstract):

"The key features of offshore tax havens are low or no taxes and a legal system that favors secrecy over transparency. Tax havens sell secrecy to attract business. And they are very successful. About 50 tax havens operate in the world today. Those tax havens have, in effect, declared war on honest U.S. taxpayers, by giving tax dodgers the means to avoid their tax bills and leave them for others to pay. These schemes are shrouded in the secrecy of tax havens because they can’t stand the light of day. Trusts and shell corporations established in offshore secrecy jurisdictions operate in a legal black box that allows them to hide assets, mask who controls them, and obscure how their assets are used. An armada of “offshore service providers,” lawyers, bankers, brokers, and others then joins forces to exploit the black box secrecy and help clients skirt U.S. tax, securities, and anti-money laundering laws"

As far as European financial centers are concerned, only the Isle of Man, Gibraltar, the British Virgin Islands, the Cayman Islands and Switzerland are quoted in the framework of the report. It would be interesting for American Senators to investigate the other financial centers : Jersey, Cyprius, Liechtenstein, Monaco and Luxembourg.

Know more

Detail of the hearing

Download Report

View the hearing (real player)