Ethics and governance in the European Financial centers

Persian Letters (Lettres persanes) is a satirical work, by Charles de Secondat, baron de Montesquieu, recounting the experiences of two Persian noblemen, Usbek and Rica, who are traveling through France. In Paris, the Persians express themselves on a wide variety of subjects, from governmental institutions to salon caricatures. http://en.wikipedia.org/wiki/Persian_Letters

 

As this is summer time, I would like to offer some goodies on this blog with a couple of Venezuelan letters. These will be an exchange of e-mail between two Venezuelans, the first one, Manuel, residing in Venezuela and the second one, Jose, travelling in Europe.

 

 

 

From: Manuel

To: Jose

Sent: Monday, August 3, 2009 6:02 PM

Subject: Draft law threatens to jail those who 'harm' state interests

Dear Jose,

President Chavez is taking steps to tighten restrictions on the media despite mounting opposition by private media to a series of proposed reforms that would expose them to criminal prosecution.

The reforms seek to ensure that the media better reflect public opinion.

As the draft law states, they will constitute Media crimes, the actions or omissions that injure the right to the opportune, truthful and impartial information, which they attempt against social peace, the security and independence of the nation, the public order, stability of the institutions of the State, the public health mental or moral, that generate insecurity or impunity sensation and that is committed through social mass media.

Will be prosecuted the false news that cause a serious alteration to the public tranquillity, panic in the population, will have maintained it in sinking, that it has altered the public order, that will have produced damage to the interests of the State and false perception of the facts or creating a matrix of opinion in the society, whenever in this way social peace, the national security, the public order or public the mental or moral health are injured.

You are lucky to live in Europe, in jurisdictions that are states under the rule of law.

 

Cheers.

 

Manuel

 

From: Jose

To: Manuel

Sent: Wednesday, August 5, 2009 9:02 PM

Subject: RE: Draft law threatens to jail those who 'harm' state interests

 

Dear Jose,

 

I am currently in Luxembourg, a small state under the rule of law.

 

Here there is a big scandal. The Cercle de Cooperation published a report a couple of days ago to state that the jurisdiction is a tax haven that was withdrawn today from the Cercle’s website.

 

Do you realise to what extent such publication produce damage to the interests of the State? This is exactly what means the Luxembourg Bankers’ Association press release that deeply regretted that, after the various attacks from outside, it is now also en vogue in Luxembourg to attack the flagship of their economy. (ABBL Press Release)

Luxembourg is not a tax haven. Those who dare to say that attempt against social peace, the security and independence of the nation, the public order, stability of the institutions of the State, the public health mental or moral. They disseminate false news that cause a serious alteration to the public tranquillity, panic in the population or have false perception of the facts.

This is exactly what means the Luxembourg Bankers’ Association press release that fustigated an unhealthy combination of gratuitous assertions, hearsay, half-truths and concocted lies. (ABBL Press Release). This is as well what means Fernand Grulms, CEO LuxembourgForFinance, that fustigated in Tageblatt shortcomings, false statements and false and self-proclaimed experts and bloggers, who smear the Luxembourg financial center (again).

 

And I am not quoting Prime Minister Juncker before the parliament.

 

Fortunately as I said, the report was withdrawn thanks to Fernand Grulms that explained the fact that they thereby use such un-serious “studies”, is more than embarrassing. And the fact that they spent taxpayers’ money on this – because these NGOs are also funded with tax payers’ money – is outright scandalous.

But I dont’ understand the reason why Fernand Grulms’ article was withdrawn as well.

As you see, even states under the rule of law have to ensure that the media better reflect public opinion.

 

Cheers.

 

Jose

 

  

 

Jean-Jacques Rommes said that « Umso überraschter zeigte sich der ABBL-Chef gestern wiederum über die rezent vom „Cercle des ONG“ vorgestellte Studie, die den Finanzplatz als Hafen für Steuerflüchtlinge aus Dritt-Welt-Ländern darstelle und die Luxemburger Bemühungen in Sachen Entwicklungshilfe diskreditiere. Bekanntlich hat der „Cercle“ sich mittlerweile von der Studie, die laut Rommes schon „faktisch falsch“ war, distanziert. Die ABBL sei aber bereit, den Dialog über die Problematik weiter zu führen, sagte er, Gespräche mit der Vertretung der Nichtregierungsorganisationen hätten bereits stattgefunden” 

(free translation: The ABBL Managing Director appeared again yesterday to be surprised about a recent study presented by the„Cercle de Cooperation “, which tended to represent the financial center as a tax haven for tax refugees from third world countries and to discredit Luxembourg’s efforts in development assistance. As it is well known in the meantime, the Cercle dissociated itself meanwhile from the study, which was factually wrong according to Rommes „“. The ABBL is however ready to continue the dialog about the problem he further said.  Discussions with  representatives of the non-governmental organizations would have already taken place”

 

 

“discussions with representatives of the non-governmental organizations would have already taken place” ?

 

Everyone saw it. The consequence was a censorship

 

By the way, there were no reactions when the Cercle de Cooperation presented its findings in Bern on 16  June.

 

 

This communication is still online and states that:

La politique officielle de démenti selon laquelle le Luxembourg ne serait pas un paradis fiscal ne tient pas la route. Elle peut être facilement contredite sur la base même des standards de l’OCDE. Les facteurs principaux qui permettent de considérer le Luxembourg comme un paradis fiscal sont le secret bancaire pour les revenus de non-résidents et les dispositifs financiers d’exception fiscale pour les entreprises étrangères.

 

(free translation : The official policy of denial according to which Luxembourg would not be a tax haven does not make sense. It can be easily contradicted on the basis of OECD standards. The principal factors which make it possible to consider Luxembourg as a tax haven are the bank secrecy for the incomes of non-residents and the financial devices of tax exception for the foreign companies.)

 

Etant donné ses nombreuses dérogations en faveur des (gros) investisseurs étrangers, le Luxembourg porte en tout cas les traits marquants d’un paradis fiscal. En effet, dans sa définition du paradis fiscal, l’OCDE ne se réfère pas seulement à une imposition inexistante ou basse, mais aussi à trois critères supplémentaires : le manque de transparence, une entrave – ancrée dans la loi – à l’échange, et le fait d’autoriser des activités économiques non « substantielles ».

(free translation: Given its many exemptions in favor of (big) foreign investors, Luxembourg in any case carries the outstanding features of a tax haven. Indeed, in its definition of the tax haven, OECD does not refer only to non-existent or low taxes, but also to three additional criteria: lack of transparency, an obstacle - anchored in the law - with the exchange of information, and the fact of authorizing no substantial activities.) (See OECD definition)

 

En ce qui concerne la transparence, le droit des entreprises offre de nombreuses possibilités à l’investisseur étranger pour rester anonyme. Il est possible d’organiser les activités économiques et la gestion de fortune par le biais de sociétés fiduciaires (« Fiducies ») – un système similaire à celui des fondations et des trusts dans d’autres paradis fiscaux. Cela donne des avantages économiques aux investisseurs, des droits complets de propriété et la possibilité de gérer les affaires sans devoir apparaître officiellement ou publiquement.

(free translation: With regard to the transparency, the law offers many possibilities to the foreign investor to remain anonymous. It is possible to organize the economic activities and the management of wealth by the means of fiduciary companies (“Trusts”) - a system similar to that of the foundations and trusts in other tax havens. That gives economic advantages to the investors, complete rights to the  property and the possibility of managing the business without having to appear officially or publicly.)

 

Sur la question de l’échange d’informations, le Luxembourg a réagi positivement début mars 2009 aux critiques internationales, en se déclarant prêt à reconnaître les standards de l’OCDE. Ces derniers ne prévoient cependant qu’une diffusion de l’information sur demande. Un échange d’informations automatique, tel qu’il figure dans la directive de l’Union européenne sur la fiscalité de l’épargne, n’est pas exigé.

(free translation: On the question of the information exchange, Luxembourg reacted positively at the beginning of March 2009 to international criticisms, while declaring itself ready to recognize the OECD standards. These however only consider the exchange upon request. An automatic information exchange, such as it appears in the directive of the European Union on the taxation on savings, is not required.)

 

Les pays pauvres disposeraient de moyens supplémentaires considérables pour le financement du développement, si les puissances économiques renonçaient au secret bancaire et si la soustraction fiscale internationale ainsi que le « transfer pricing » des entreprises étaient efficacement combattus. Pour cela, il faut avant tout plus de transparence des centres offshore et des places financières, c’est-à-dire une meilleure information sur la provenance des flux de capitaux et une obligation de rendre des comptes plus sévère pour les entreprises multinationales. Le secrétaire général de l’OCDE, Angel Gurria, le souligne, lorsqu’il affirme que la construction d’un système fiscal efficace dans le Tiers monde est « un nouveau front de la politique de développement. A long terme, on peut faire plus pour la promotion du développement en aidant les pays en développement à lever des impôts qu’à travers l’aide extérieure ». Mais pour y parvenir, les trous fiscaux dans des pays comme le Luxembourg doivent être énergiquement comblés.

(free translation: Poor countries would have considerable additional means for the financing of their development, if the economic powers gave up bank secrecy and if the international tax avoidance as well as the “transfer pricing” of the companies were effectively fought. For that, more transparency in offshore centers and financial centers is required, i.e. better information on the source of flows of capital and an obligation  for more accountability of the multinational corporations. The Secretary General of OECD, Angel Gurria, underlines this, when he proclaims that the construction of an effective tax system in the Third world is “a new front in the development policy. In the long run, one can do more for promotion of development by helping the developing countries to raise taxes through outside assistance”. But to reach that point, the tax holes in countries like Luxembourg must be vigorously filled)

 

 

The above is probably for the ABBL “an unhealthy combination of gratuitous assertions, hearsay, half-truths and concocted lies”  whereas critical issues, that create a lax business environment which is attractive for fraudsters, are ignored:

 

• Why is it that in this tiny jurisdiction, works that dare question on the dysfunctions are repudiated like the study from the Cercle de Cooperation?
• Why is it that in this tiny jurisdiction the penal liability of legal persons does not exist?
• Why is it that in this tiny jurisdiction, bogus professionals, that are neither regulatory auditors nor chartered accountants, go on creating firms that are actual scams?
• Why is it that in this tiny jurisdiction anybody can be a statutory auditor including exotic firms from the BVI, the Seychelles and so on, that are not controlled?
• Why is it that in this tiny jurisdiction ethics is not part of CSR, which is limited to promotion actions?
• Why is it that in this tiny jurisdiction the PSF status is used by some firms, and especially confidentiality, to prevent the manifestation of the truth before the justice by intimidating former employees with a complaint even though the testimony is fair (e.g. fraud or money laundering cases)?
• Why is it that in this tiny jurisdiction professionals who demonstrated their poor ethics and governance while having financial resources remain reputable and competent for the fellow members in their business networks?
• Why is it that in this tiny jurisdiction money from foreign taxpayers is accepted without control?
• Why is it that is this tiny jurisdiction parliamentary parties agree quickly to change the constitution against the Grand Duke while tergiversating to implement all the international recommendations (AML, fight against corruption)?

• Why is it that in this tiny jurisdiction 50% of banks never report a Suspicious Transaction Report?
• Why is it that in this tiny jurisdiction the financial sector that is an actual power influences the political decision-making process and the regulator?

• Etc.

 

 

As I said, believing that the signature of some agreements will solve the reputational risk of being considered as a tax haven, is wrong. Definitely wrong. Absolutely wrong. Tragically wrong.

  

Give them a couple of months and watch them go bust.

The AP has reported that the  U.S. government and Swiss banking giant UBS AG have reached a long-awaited agreement in a case over secret Swiss bank accounts for alleged American tax evaders, lawyers for both sides told a federal judge Wednesday.

 

The deal was announced during a telephone conference with the judge that lasted only long enough for lawyers to say an agreement had been reached. No details were announced.

 

However OBAMA tax views are clear enough: as a US law firm observes:

 

The Qualified Intermediary ("QI") program seeks to ensure that appropriate U.S. withholding is imposed on foreign persons. The proposed rules would require foreign financial institutions to withhold and report on foreign income and accounts of U.S. and foreign persons. Foreign financial institutions would be required to enter into agreements with the IRS to share information about their U.S. customers. Currently, the IRS has the burden to show that an account holder of a QI is a U.S. person if the account holder attests to being a non-U.S. person.

 

The President's plan would require QIs to identify all account holders that are U.S. persons and file IRS Form 1099 with respect to payments to U.S. account holders, including income from foreign sources. Any withholding agent making a payment to a nonqualified intermediary would be required to withhold 30 percent. Withholding agents paying gross proceeds from the sale of any security to a non-qualified intermediary not located in an income tax treaty jurisdiction would be required to withhold 20 percent. To get a refund of the amount withheld, account holders would be required to disclose their identities and demonstrate compliance with U.S. tax laws.

 

As Richard Murphy observes, this wording looks like something close to Automatic Information Exchange. If so, why not roll it out? After all, once people have systems in place for the US the extra cost for the rest of the world is marginal.