Ethics and governance in the European Financial centers

Over the years, my focus on financial centres has been primarily on Luxembourg and occasionally on some other jurisdictions, mostly in Europe.

Knowing Luxembourg best is the starting point for a project of guide, which has as an ambition to identify characteristics both good and bad of what is generally considered a “financial centre” or a “tax haven” or a “judicial haven”.  

Luxembourg has also assumed leadership of a group of tax havens, even inviting them to a coordination meeting to Luxembourg, which offers a good starting point, as Luxembourg has been a coordinator.

Lastly, numerous reactions are available because of that leadership from institutions such as OECD, G20, European Commission or public comments on issues such as Madoff, double taxation agreements, compliance and banking secrecy.

Starting with Luxembourg as a benchmark, the guide will cast a present day picture of the Luxembourg financial center, and evolve from there into an analysis of other jurisdictions.

Jean Meyer’s open letter in the Lëtzebuerger Wort (he is the chairman of the ABBL, the Luxembourg Bankers’ Association) to my attention to decline my help gave me the idea of the guide for the clients and the investors to compare jurisdictions on the basis of precise and objective criteria:

- Wording of the laws and regulations: in particular words that were cut off or on the contrary added compared to the original directives (or other standards) and the practical effects in the implementation of the standard of origin (in particular for the EU members, law and regulation of transposition of the countries versus formulation of the OPCVM Directive, the Savings Directive and the Deposit-guarantee schemes Directive)

- System of protection for the investor and/or the client (mechanisms under the leadership of regulator, trend of the jurisprudence in the litigations banks/customers…)

- Use of ratios of comparison of the effective implementation of the regulation: for example the comparison with Monaco, with which Luxembourg has just signed an agreement for exchange of information, it appears that the ratio of Suspicious Transaction Reports per $1billion in assets for Luxembourg, fund industry excluded, is 6 times less than Monaco and the ratio of Suspicious Transaction Reports per $1billion in assets for Luxembourg, fund industry included, is almost 17 times less than Monaco. That is to be brought closer to the CRF (the Luxembourg FIU) reports every year that 50% of the banks never make Suspicious Transaction Reports. Unfortunately, the amount of assets that the aforementioned banks represent is not known

The idea is to assess the quality of the regulation in the broad sense to guide the customers and investors in their choices.

On a subsidiary basis, for the jurisdictions which lodge an activity of general interest for the international financial sector (for example, clearing), will be posed logically and practically the question of the relevance of the maintenance of the activity if it appears a deficit of regulation compared to what is done in the other jurisdictions.

I do not prejudge results but I unfortunately fear a bad classification for Luxembourg, which is being rammed by its actors themselves.

Richard Murphy has detected an interesting message on Youtube posted by someone who put her life savings on deposit with Kaupthing Isle of Man after being assured that my money was safe. With the backing of the Financial Supervision Commission the directors put over 50% of the bank's assets into Kaupthing UK which subsequently went into Administration. She received no letter of explanation or apology from the directors, and now she has to wait 6 years before she gets a fraction of her money back. Her message to anyone who is thinking of depositing in the IoM is: "don't bank on the Isle of Man"

Richard comments his guess is she’s one of at least 10,000 who have lost out by doing so. That’s what comes from relying on ‘well regulated’ jurisdictions made of straw.   
 

Jean Guill, CSSF, is quoted by Reuters.

What is said by the Luxembourg regulator seems very naïve as Jean Guill implicitly admits that Luxembourg regulation opened the drift with Madoff

It is said that the watchdog had been aware that Luxalpha and other funds' assets were managed by Madoff. It did not oppose the contracts the custodian banks signed with investors limiting their responsibility as custodian.

"People did not invest with Mr Madoff because they thought he was a thief, but precisely because he had a very good reputation. People thought that explained why he could give good results," Guill said.

Circular IML 91/75 states that

1) The concept of custody used to describe the general mission of the depositary should be understood not in the sense of “safekeeping”, but in the sense of “supervision”

2) The depositary has discharged its duty of supervision, when it is satisfied from the outset and during the entire duration of the contract that the third parties, with which the assets of the collective undertaking are on deposit, are reputable and competent and have sufficient financial resources

Additionally EFAMA published a survey on the main tasks and responsibilities of depositaries at national level across Europe. The purpose of this survey was to identify a number of important aspects related to the legal and operating status of depositaries and to emphasize on the principal duties and liabilities of these institutions with respect to the investors and the fund (see page 6 ).

As regards the extent of the duty of supervision, it appears in this survey that among the jurisdiction in the framework of the survey (Austria, Czech Republic, Finland, France, Germany, Ireland, Italy, Luxembourg, Norway, Portugal, UK), Luxembourg seems the only one with such lax clause for the depositary to discharge its duty of supervision (while the duty of safekeeping does not exist) to a third party all the more than it does not comply with the definition of the word supervision : the effective critical watching and directing is no longer done with such clause.

I do think that if the clause had not existed in the Luxembourg regulatory framework, precisely the very good reputation (Jean Guill’s wording) would definitely not have been the criteria to invest with Mr Madoff.

If Luxembourg continues to deny the realities of the world and to disregard the fact that it is in an awkward position vis-à-vis the other jurisdictions, the financial center will collapse.

In his recent open letter in the Lëtzebuerger Wort Jean Meyer questionned “« Dois-je accepter que la réputation affaiblie des banquiers du monde entier serve de cheval de Troie a ceux qui veulent enfoncer la place financière luxembourgeoise? (free translation : “Should I have to accept that the weakened reputation of the bankers worldwide would be use as a Trojan horse for those that  want to ram the Luxembourg financial center?)

However the problem is that the financial center is being rammed by its actors themselves.