Ethics and governance in the European Financial centers

The Jersey Financial Services Commission recently added the Cayman Islands to its list of countries and territories considered to have an equivalent anti-money laundering framework.

The move is being seen by the Cayman Islands Monetary Authority as being of significant benefit to Cayman-based financial institutions and their clients which do business with financial institutions in Jersey.

The recognition allows Jersey's customer identification procedures to be satisfied if the client has met Cayman's customer identification requirements. This potentially saves time and resources that would otherwise have to be spent processing and supplying duplicate know-your-customer documentation to Jersey.

Jersey's anti-money laundering legislation and guidance provide in certain circumstances for a financial services business to place reliance on another institution to conduct customer identification procedures, where the institution is subject to obligations equivalent to those in Jersey, and where an overseas regulatory authority supervises the institution.

The listing of Cayman comes after months of discussion between the Cayman Islands Monetary Authority (CIMA) and its Jersey counterpart, as well as CIMA's lobbying at international forums such as the Overseas Group of Banking Supervisors for reciprocal recognition of equivalent anti-money laundering/counter terrorist financing (AML/CFT) frameworks among jurisdictions.

"We are pleased that Jersey has now added us to its list. The issue of equivalency listings relating to AML/CFT regimes is something CIMA has been concerned about for some time," commented CIMA Managing Director Cindy Scotland.

"We continue to engage in bilateral negotiations with regulators in countries where Cayman is not currently listed as having equivalent AML/CFT regimes," she added.

Mrs Scotland further explained that collaboration between CIMA and the Jersey Financial Services Commission was being further extended through a memorandum of understanding on information exchange and cooperation, which has been approved by the Cabinet and is now being finalised


Source : Amanda Banks, Tax-News.com, London 16 August 2006

As regards money-laundering, Article 218.1 of Monaco's Penal Code states that "any person who knowingly, in any manner whatsoever, for himself or for another person, acquires movable or real assets by directly or indirectly using assets or funds of unlawful origin or knowingly possesses or uses such assets", and "any person who knowingly assists any transaction to transfer, invest, conceal or convert assets or funds of unlawful origin" is liable to imprisonment for five to ten years.
Under Article 218.1, paragraphs 2 and 3, any person who attempts to commit the abovementioned offences or conspires with others with a view to doing so is liable to the same penalty.
The offences referred to at Article 218 of Monaco's Penal Code are constituted even if the offence from which the laundered funds derive was committed in another country, provided that it is a criminal offence there.
Attempt, conspiracy or complicity with a view to committing the abovementioned offences are also punishable under Article 218.1 of Monaco's Penal Code.
If the perpetrator of the money-laundering offence acts as a member of a criminal organisation, takes part in other international organised criminal activities, occupies a public office that helps him to commit the offence, takes part in other unlawful activities facilitated by perpetration of the offence, involves minors or has been convicted of a money-laundering offence by a foreign court, that is deemed to constitute an aggravating circumstance in Monegasque law and is punishable by a heavier sentence (Article 218.2).
Article 219 provides for the confiscation of assets and funds of unlawful origin and sets out the conditions of confiscation.

The word "Kowingly" is difficullt to prove for prosecuting authorities. Professionals may deliberately not ask questions as explained in a study from the United Nations that is still up to date in the issues that are addressed :
"Many lawyers, accountants and bankers are (often unselfconsciously) adept at not asking questions that would require them to refuse business or even to report their clients or potential clients to the authorities. But a major component of the motivation for crime is also the expected probability and scale of reward: the reverse side of this is the expectation (if contemplated) of prevention and/or salient punishment. Any form of crime for economic gain can have its relative attractiveness rating altered significantly by changes in detection and sanction levels both for it and for other crimes such as narcotics sales." (See study "Financial havens, banking secrecy and money laundering", Double issue 34 and 35 of the Crime Prevention and Criminal Justice Newsletter, Issue 8 of the UNDCP Technical Series)

To answer the parliamentary question from Lucien Thiel (former chairperson of the Luxembourg Bankers' Association) about the reputation of the financial center, Luc Frieden who is Minister of Justice, stated that "il me semble essentiel de continuer mes nombreux efforts des deux dernières années visant, à travers de nombreuses missions de promotion à l'étranger, de bien expliquer la réalité de la place financière à l'étranger" (It seems essential to to me to continue my efforts of the last couple of years aiming, through many missions of promotion abroad, to explain the reality of the financial center abroad) (June 15, 2006).

Which reality ?

In 2004, at the time of the debate about the Anti-Money Laundering And Combating Financing of Terrorism (AML/CFT) draft law Luc Frieden stated that Luxembourg has "clear and pragmatic legal rules that are fully compliant with the EU legal framework" (Fundlook, July / September 2004).

Official sources of the debate are in French and probably not taken into account by English-speaking assessors from abroad. These sources allow us to understand what pragmatism means and to what extent this kind of pragmatism is actually a threat for the Financial Community worldwide.

Luc Frieden’s draft was appreciated by the IMF that stated: "If adopted in its present form, however, it would result in a legal framework likely to fall short in some important respects of the requirements of the revised FATF recommendations, particularly as regards predicate offences, customer due diligence, and the operation of the financial intelligence unit (FIU)". (See IFM Report on Observance of Standards and Codes FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism, dated November 1, 2004)

Actually, all sensitive penal provisions were removed including those of the previous legislation.

Professionals did not agree with the draft. Bankers stated through the Chamber of Commerce as explained by Luc Frieden in an interview (d'Lëtzebuerger Land, November 14, 2003) that "offences such as forgery, use of forgery, false balance sheets, use of false balance sheets or unauthorised use of corporate property should not be included. These are offences with financial connotations which are confused with laundering for the sole purpose of applying exceptional powers to these vague offences" and "The evolution is at one time, since the legal initiatives of our neighbors have a clear tendency to concentrate on the laundering of this kind of ambiguous offences. But it is not a reason to imitate them in this way which caused troubles in the financial center in various cases."(see report dated September 16, 2003 to discuss the AML/CFT draft law)

To be accurate, there is a report from the ABBL I was provided by the ABBL. The original text was cut by the Chambre de Commerce. This original text was a litle more moderate : "La solution consiste à en rester au système actuel qui limite les infractions primaires à une liste déterminée d’infractions. À défaut, il faut au moins requalifier certains crimes les moins graves" (The solution is to remain the current system which limits the primary offences to a given list of offences. Otherwise, it is necessary at least to requalify some crimes the least serious). The second sentence is not in the report from the Chambre de Commerce, which is the one in the parliamentary file.

Anyway, after cases like Enron, Worldcom, Parmalat..., nobody may seriously state officially that use of forgery, false balance sheets, use of false balance sheets or unauthorised use of corporate property as "vague” or “ambiguous” offences and therefore banalised as usual business behaviour.

The "vague offences" are of the opened type, because as S. SOLER said (In "La formulation actuelle du principe ‘nullum crimen’ », Revue de Sciences Criminelles, 1952 pp.11s.) "en pratique, on peut y faire entrer n'importe quels actes" (in practice, one can take into account whatever acts). They are a sword of Damocles. A threat whose realization can be done as well by the administrative authorities as by the prosecuting authorities. For instance : glorifying terrorism, serious threats to the environment, sorcery, loitering, vagrancy, suspicion of terrorist activity, disturbs peace...

Accounting offences are certainly not of the opened type.


Are they lacking of conscience to be unable to determine fraudulent behaviours all the more as they use the wording “actual money laundering": “The Chamber of Commerce joined the Government in its intentions to protect the Financial Center as well from the defamatory gossip as of the actual money laundering and the financing of terrorism” (see report dated September 16, 2003 to discuss the AML/CFT draft law ) ?

How people that officially consider “vague” or “ambiguous” forgery, false balance sheets, use of false balance sheets or unauthorised use of corporate property may determine what an “actual” money laundering activity is?

How auditors (either internal or external), compliance officers, Chartered Financial Analysts... may deal in their assignments with such official state of mind at management level all the more as it seems that there were no repudiation of such statements (press release...)?

These questions should be asked by regulatory bodies at the international level (IFAC, CFA Institute, IIA...) and specialists in AML (FAFT, GRECO, US Department of State…). But it is true that the pragmatic comments stated in Luxembourg fustigate the “criticisms of the self-proclaimed specialists from abroad” (see report dated September 16, 2003 to discuss the AML/CFT draft law).

Is a paradigm-shift possible?

Luxembourg motto is "Mir wëlle bleiwe wat mir sin" (We want to remain what we are).

Besides publications (articles and a book), I have contacted the decisions-makers either political or professional to work on the risks, including the one of reputation in a competitive business world, all the more as I am looking for a position, but I had no answer on my management and governance issues that are critical to the sustainability and the competitivity of the financial center : "Critics" are not welcome and nobody is willing to tighten up the ship on visible problems that are either denied (see for instance the same official speech reported by the GRECO and OECD in their 2004 reports on corruption: in a small country where everyone knows everyone else and what others are doing, there may be a kind of self-policing in effect) or hushed (as stated in the report from the GRECO dated June 15, 2001, “the press, which has strong political affiliations, does not seem to exercise its role of public watchdog with the same vigour as in other countries”) Silence on issues equal no issues in their mind and actual problems are not faced, which increase risks all the more as due to the size everyone may shelter behind a complicit silence rather than running the risk of being considered indelicate (see report from the GRECO dated May 14, 2004), which may be as well demonstrated in official and/or public sources where bad management and bad governance are normalised. This is a very bad attitude as we live in a world of communication and transparence thanks to the internet and it becomes much harder to deny or hide problems instead of taking care of them.




In a nutshell, official sources and attitudes unfortunately demonstrate a high level of risks for the reputation of the financial community and the players worldwide, due to a permissive environment where many people do not care officially of proper business conduct, and are even bold enough to consider in writing their commercial objectives and bogus pragmatism more important than the AML commitments and the trends worldwide including the FAFT Recs (see their own wording: “vague”, "ambiguous”, "actual money laundering", “it is not a reason to imitate them”…). Actually only half of companies are committed to AML-CFT according to sources from the regulatory body CSSF and the prosecuting authorities.

The ethical values that are stated at the international level (IMF, GRECO, FATF, OECD, World Bank...) turned out to be charade.

Such imprudence and official lack of responsibility should not be supported anymore, from a pragmatic point of view. This is a threat for the financial community worldwide because the reality is that the appearances have gone. And as far as the financial center is concerned, this is a shame because most people are both competent and honest. But decisions-makers are disappointing or even deceiving : forewarned is forearmed.





Sources :

IMF Report

GRECO Report 2001

GRECO Report 2004

GRECO Report 2006

OECD Report 2004

Luxembourg Bankers' Association : Annual Report 2003, page 22 & 23

Original abstracts of Bankers' comments in French through the Chamber of Commerce (Report dated September 16, 2003 to discuss the AML/CFT draft law) :

Page 11 : La Chambre de Commerce ne saurait accepter cet état des choses. Elle ne veut pourtant pas remettre en cause les efforts des dernières années qui ont largement permis au Luxembourg d’échapper aux critiques des spécialistes autoproclamés de l’étranger.

Pages 18-19 : Un bon exemple pratique est fourni par l’extension des infractions primaires à des infractions comme le faux, l’usage de faux, le faux bilan, l’usage de faux bilan ou encore l’abus de biens sociaux. Il sera là encore extrêmement difficile pour le professionnel, dans le cadre de son activité professionnelle normale, d’identifier de tels faits sous-jacents à une opération. Par contre, le concept de blanchiment de l’usage par exemple d’un faux intellectuel ouvre la porte à tous les abus de la part des autorités elles-mêmes. Le fait d’appliquer à ces faits les procédures d’exception justifiées à l’égard de la prévenion du blanchiment de capitaux revient à admettre l’incursion de moyens d’exception dans les affaires de chaque entreprise.
Certes, l’évolution néfaste est dans l’air du temps, puisque les initiatives judiciaires de nos voisins ont une nette tendance à se concentrer sur le blanchiment de ce genre d’infractions équivoques. Mais ce n’est pas une raison de les imiter dans cette voie qui a assez nuit à la place financière dans différentes affaires particulières. La solution consiste à en rester au système actuel qui limite les infractions primaires à une liste déterminée d’infractions.

Page 20 : La Chambre de Commerce rejoint le Gouvernement dans ses intentions de protéger la place financière tant des ragots diffamatoires que du vrai blanchiment et du financement du terrorisme.

Page 21 : (...) des infractions comme le faux, l’usage de faux, le faux bilan, l’usage de faux bilan ou encore l’abus de biens sociaux devraient disparaître du texte. Ce sont là des infractions à connotation financière qui sont mêlées au blanchiment à la seule fin d’appliquer à ces infractions vagues des pouvoirs d’exception.

Full text in French : Projet_anti_blanchiment_-_avis_CEP_et_CC.pdf