Ethics and governance in the European Financial centers

Some national legislation relating to anti money laundering is gathered on the Council of Europe website.


It is interesting to compare the (anti-money laundering) AML law in Luxembourg (which is not on the website) and the one in Lichtenstein that were both voted in November 2004 based on the same European directive.

As far as effectiveness of such legislation is concerned, sanctions must be effective, otherwise AML legislation turns to be charade.

Penal provisions are stipulated
- in article 30 of the law of 26 November 2004 on Professional Due Diligence in Financial Transactions in Lichtenstein
- in article 9 of the law of 12 November 2004 on the fight against money laundering and the financing of terrorism in Luxembourg.

The article is longer and more detailed in the applicable text in Lichtenstein where provisions for non respect are either imprisonment of up to six months or a fine of up to 360 daily rates. Only a fine from 1.250 euros to 125.000 euros is applicable in Luxembourg.

In both cases the wording limits the effectiveness : The text in Lichtenstein requires that the person should act intentionally and the text in Luxembourg requires that the person should act knowingly.

These are two different degrees of culpability.

A person acts intentionally with respect to a material element of an offence when:
- if the element involves the nature of his/her conduct or a result thereof, it is his/her conscious object to engage in conduct of that nature or to cause such a result; and
- if the element involves the attendant circumstances, he/she is aware of the existence of such circumstances or he/she believes or hopes that they exist.

A person acts knowingly with respect to a material element of an offence when:
- if the element involves the nature of his/er conduct or the attendant circumstances, he/she is aware that his conduct is of that nature or that such circumstances exist; and
- if the element involves a result of his/her conduct, he/she is aware that it is practically certain that his/her conduct will cause such a result.

There are two other degrees:

A person acts recklessly with respect to a material element of an offence when he/she consciously disregards a substantial and unjustifiable risk that the material element exists or will result from his/her conduct. The risk must be of such a nature and degree that, considering the nature and intent of the actor's conduct and the circumstances known to him/her, its disregard involves a gross deviation from the standard of conduct that a reasonable person would observe in the actor's situation.

A person acts negligently with respect to a material element of an offence when he/she should be aware of a substantial and unjustifiable risk that the material element exists or will result from his/her conduct. The risk must be of such a nature and degree that the actor's failure to perceive it, considering the nature and intent of the actor's conduct and the circumstances known to him/her, involves a gross deviation from the standard of care that a reasonable person would observe in the actor's situation

In a nutshell:
- A person causes a result purposely/intentionally if the result is his/her goal in doing the action that causes it,
- A person causes a result knowingly if he/she knows that the result is virtually certain to occur from the action he/she undertakes,
- A person causes a result recklessly if he/she is aware of and disregards a substantial and unjustifiable risk of the result occurring from the action, and
- A person causes a result negligently if there is a substantial and unjustifiable risk he/she is unaware of but very much should be aware of.

When a statute provides that criminal negligence suffices to establish an element of an offence, such element also is established if a person acts intentionally, knowingly, or recklessly. When recklessness suffices to establish an element, such element also is established if a person acts intentionally or knowingly. When acting knowingly suffices to establish an element, such element also is established if a person acts intentionally.

The definitions of specific crimes refer to these degrees to establish the necessary mens rea (mental state) necessary for a person to be guilty. The stricter the culpability requirements, the harder it is for the prosecution to prove its case.

As stated in a report from the United Nations "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, while the reverse 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." (Financial Havens, Banking Secrecy and Money Laundering. Issued as: Double issue 34 and 35 of the Crime Prevention and Criminal Justice Newsletter, Issue 8 of the UNDCP Technical Series, 1998)

The prosecution authorities in Luxembourg wrote in the last report dated March 2006 that it is almost impossible to prove the "knowingly".


Know more

UN Source :
Financial Havens, Banking Secrecy and Money Laundering (1998)

Applicable texts in Lichtenstein:
Due Diligence Act (November 2004)
Ordinance on the DDA (January 2005)

Applicable text in Luxembourg:
Law of 12 November 2004 (in French)

To ensure the sustainability of the financial center, Governing authorities must be aware of the changes to the geopolitics and the geoeconomics : we live at a time of transparence and governance with various programs (OECD, World Bank...).

Governing authorities must ask questions and accept questions especially on compliance issues. They must tighten up the ship on issues all the more than there are alternative financial centers for investors and head offices of banks. Otherwise they weaken their international credibility.

The failure to ask or to answer questions allows these authorities (either political or professional) to operate with a distorted sense of reality. In fact, Finkelstein calls companies that are unable to question their prevailing view of reality zombies. A zombie company, he says, is “a walking corpse that just doesn’t yet know that it’s dead—because this company has created an insulated culture that systematically excludes any information that could contradict its reigning picture of reality”.

This is true as well for a financial center.

Some are aware of that. For example, Marcus Killick (Chairman and Commissioner, Gibraltar Financial Services Commission) : "Our stakeholders have a right to criticise not merely our actions but the culture an methodology that underlies them. More importantly, we believe, by understanding our approach, our actions become, in themselves, clearer and therefore more transparent." he wrote.

Other refuse and may be contemptuous enough to put on the black list mails from senders that contradict their reigning picture of reality : For example I received the message "501 5.7.1 This system is not configured to relay mail from " from an official representative body for the investment fund industry that moreover had previously never replied to my questions about public breaches of the code of ethics (that is no longer online).



To go further

Zombie Businesses: How to Learn from Their Mistakes
Reputation: Riks of risks

Bibliography

Finkelstein, Sydney. "Zombie Businesses: How to Learn from Their Mistakes" Leader to Leader. 32 (Spring 2004), pp 29-35.

Finkelstein, Sydney, Why Smart Executives Fail: And What You Can Learn from Their Mistakes. Portfolio Hardcover, 2003 ; and the translation in French : Finkelstein (S.), Quand les grands patrons se plantent . Paris, Editions d’Organisation, 2004.

In the late 1980s and early '90s, Harvard-educated economist Franklin Jurado ran an operation to launder money for Columbian drug lord Jose Santacruz-Londono. His was a very complex scheme. In its simplest form, the operation went something like this:

Placement: Jurado deposited cash from U.S. drug sales in Panama bank accounts.
Layering: He then transferred the money from Panama to more than 100 bank accounts in 68 banks in nine countries in Europe, always in transactions under $10,000 to avoid suspicion. The bank accounts were in made-up names and names of Santacruz-Londono's mistresses and family members. Jurado then set up shell companies in Europe in order to document the money as legitimate income.
Integration: The plan was to send the money to Columbia, where Santacruz-Londono would use it to fund his numerous legitimate business there. But Jurado got caught.

In total, Jurado funneled $36 million in drug money through legitimate financial institutions. Jurado's scheme came to light when a Monaco bank collapsed, and a subsequent audit revealed numerous accounts that could be traced back to Jurado.

Jurado's neighbour in Luxembourg filed a noise complaint because Jurado had a money-counting machine running all night. Local authorities investigated, and a Luxembourg court ultimately found him guilty of money laundering. When he'd finished serving his time in Luxembourg, a U.S. court found him guilty, too, and sentenced him to seven-and-a-half years in prison.

When authorities are able to interrupt a laundering scheme, it can pay off tremendously, leading to arrests, dirty money and property seizures and sometimes the dismantling of a criminal operation. However, most money-laundering schemes go unnoticed, and large operations have serious effects on social and economic health

The Jurado case is an example of the increasingly sophisticated means drug cartels employ to secure assets. But it also indicates that the very profits that motivate drug organizations are an Achilles heel and that national legislators, law enforcement agencies and international bodies are stepping up efforts against money laundering.

In this context, Luxembourg did a very good job.

Something striking is that the case, which is in favour of Luxembourg to demonstrate the action to refuse criminals, is forgotten in Luxembourg (it is not actually presented in the Codeplafi Database, it is not quoted by professionals to promote the ethics of the financial center) all the more as at the time of the trial, Etienne Schmit, who was deputy prosecuting attorney had said "We hope this makes the criminals understand that we do not want their money" (quoted by the International Herald Tribune). As if some pragmatic people wanted the criminals do not understand Luxembourg do not want their money. After the Jurado case Luxembourg had adopted a money-laundering law in 1989, but critics had said that it was full of holes. At the same time, the government had been concerned not to undermine the banking secrecy laws on which much of Luxembourg's wealth depends. Other text came later: Law of 5 April 1993 updated on 18 October 1999 and recently law of 12 November 2004.

We saw the same bad pragmatism in the framework of the debate relating to the current law on money laundering (12/11/2004). Luc Frieden's draft text was credible and appreciated by the IFM, but some professionals refused the wording as they wanted a text that would not have a negative impact on the commercial objectives and would be strictly limited to European requirements. The Prosecutors' Office underlined some international recommendations and especially those of the FATF-GAFI and explained it is no use having texts if the implementation is not effective. The Prosecutors' Office had even understood when reading comments on the draft that it was expected "to close the eyes on some obvious cases of dysfunction".

"Pragmatic people" won, which is a shame as Luxembourg could have anticipated some of the requirements of the new 3rd European directive. and therefore become a market leader in business ethics.



Know more

Financial havens, banking secrecy and money laundering
Watching the clothes go round
Banking Secrecy Diluted Duchy Convicts 2 in Drug Case
In Luxembourg, Drug Money Goes Down Legal Drain

Case Law as presented in the Codeplafi database (in French)

Tribunal d'arrondissement de Luxembourg, 2 avril 1992

Law 2004

Interview of Luc Frieden, Minister of Finance to justify the draft (in French)
Archives of the debate about the AML law (in French)

Table to compare the draft and the final text (in French) : an Englsh version of the essentials will be provided later, including influences in the debate.