Ethics and governance in the European Financial centers

The Financial Services Authority (FSA) fined UBS AG (UBS) £8million for systems and controls failures that enabled four employees to carry out unauthorised transactions involving customer money on at least 39 accounts. The £8m fine is the third largest the FSA has ever imposed.

The FSA investigation found that UBS had failed to:

• manage and control the key risks, and the level of risk, created by its international wealth management business model;
• implement effective remedial measures in response to several warning signs that suggested the business' systems and controls were inadequate; and
• provide an appropriate level of supervision over customer-facing employees.

By the way, what was the pragmatic solution for UBS in Luxembourg in the context of the Madoff affair, with issues similar to the ones that are fined by FSA (poor execution of the due diligence obligation, failure of human and technical means and of internal rules) ?

Let's read again a press release from CSSF and the happy end in another press release:

On 25 February 2009 the Commission de Surveillance du Secteur Financier (the "CSSF") ordered UBS (Luxembourg) SA ("UBSL") to implement, within a period of three months, the necessary infrastructure, i.e. sufficient human and technical means and the necessary internal rules in order to fulfil all the tasks relating to its function of depositary bank of a Luxembourg UCI in accordance with the Law of 20 December 2002 on undertakings for collective investment, as amended, and Circular IML 91/75, and to provide evidence and guarantees thereof.

After several updates of a draft, UBSL submitted to the CSSF by post dated 25 May 2009 a final detailed report regarding improvements made to its infrastructure and substantial amendments to its internal procedures relating to the function of depositary bank. After analysing said report, the CSSF is of the opinion that UBSL has now delivered evidence and guarantees of having the necessary infrastructure and the necessary rules for its internal organization in place, in line with the injunction imposed on it and in compliance with professional standards applicable in the Grand Duchy of Luxembourg.

The media have reported that around 30 million US dollars of the Medellin drug cartel are still lying dormant since 1989 in several bank accounts worldwide of which in Switzerland, Panama and Luxembourg.

BGL and BNP Paribas confirmed, so did the Luxembourg prosecuting authorities.

This affair should not be used against Luxembourg for two reasons:

- on the one hand, in the 1980s and early 1990s  Luxembourg demonstrated its commitment in the fight against money laundering in the framework of the Jurado affair : 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 New York Times);

- on the other hand, FATF was created later, in 1990 : AML rules were not defined when the money from the Medellin drug cartel was put in Luxembourg accounts.

In the context of the publication of the Financial Secrecy Index last week, the Medellin drug cartel's money should not be used as evidence in disfavour of the jurisdiction even though there were significant changes later towards the so-called pragmatism in the regiulation and the legislation.

TJN has commented a new report from ALTER-EU that addresses a wide range of concerns relating to the way Expert Groups dominated by large private banks, insurance giants and a range of financial enterprises wield significant power within the EU legislative process - from the drafting of EU strategies and laws to their implementation.

Paul de Clerck member of ALTER-EU's steering committee, said: "The Commission only seems to be interested in listening to the advice of the finance industry, rather than acting in the interests of society. Light touch regulation may have made it easier to do business, but it has not protected our savings and our pensions from being gambled away. Now the Commission tells us they are tightening the rules but in reality their proposals still leave many loopholes. If the Commission wants to restore confidence in our financial systems, it must break free of this stranglehold of partial advice."

I agree with him. What happened with Madoff in the European jurisdiction is the result of poor controls and will at the European level (see my Fault Tree Analysis).