Ethics and governance in the European Financial centers

Luxembourg is not willing to implement the automatic exchange of tax information in the European Union despite this is exactly what is targeted in the Savings Directive and agreed to by the Luxembourg Government as observed by the US Senate one year ago:

“Au niveau européen, il existe une pression pour un abandon total du secret bancaire. Or, si des mesures plus strictes sont adoptées seulement en Europe, nous serions défavorisés face à d'autres centres financiers comme Singapour” (free translation : At the European level, there exists a pressure to give up banking secrecy. However, should stricter rules be adopted only in Europe, we would be disadvantaged vis-à-vis other financial centers like Singapore” the former Chairman of ABBL said a couple of weeks ago.

He is right. But I had commented that I wish he had a much more European collective view on the issue

Since the article the ABBL and its president confirmed that they refuse what was agreed to in the Savings Directive: For example « je refuse un échange d'informations automatique onéreux, peu efficace et excessivement intrusif, ceci ne comporte en aucun cas un refus d'application d'une directive alors que nos banques 1'appliquent à la lettre chaque jour qui passe. » (free translation : I refuse an expensive automatic information exchange, not very effective and excessively intrusive, this does not at all mean I refuse the application of a directive which our banks apply with accuracy each day which passes.), Jean Meyer Chairman ABBL has just said in the Lëtzebuerger Wort, in an open letter to my attention.

Luxembourg banks would apply the directive with accuracy each day which passes? What about the fact that The European Commission has just referred Luxembourg to the European Court of Justice over its incorrect application of the Savings Directive?

I am afraid such blatant biased view of the reality actually sows the doubt and depreciates Luxembourg’s credibility (Jean Meyer’s wording in his open letter).

However the issue raised about Singapore and other alternative centers is perfectly right and there is a solution, a definitive solution.

The solution is to have Clearstream and similar organizations under public control to be able to identify all the transfers to Singapore or other jurisdictions in order to detect and sanction tax evasion.

By nature the activity of Cleastream and other similar companies cannot belong to the strict private sector because there is a kind of mission of general interest for every state whose economic development rests on the banking system. It follows that a public control is mandatory to regulate the flows worldwide and protect the Luxembourg financial center.

Thanks to the Luxembourg clever bankers who raised a true problem, this solution should be considered and they cannot seriously oppose it, as this is an effective answer to their fears about Singapore.

The Cercle de Cooperation this week published a study, the findings of which made the ABBL upset. Once again their reaction is pure wooden language.

 

The ABBL has acknowledged the study made for the “Cercle de cooperation”, which accuses Luxembourg of siphoning off considerable amounts of money from developing countries by illegal or at the least illegitimate means.

 

The ABBL underlines that the study insinuates that the Luxembourg financial centre features tax practices and mechanisms that would set it apart as a tax haven and implicitly accuses Luxembourg legal vehicles – notably investment funds – of being used to make the poorest countries even poorer. It also claims that finance professionals ignore their essential obligations of identifying their clients.

 

The ABBL’s bad faith is easy to demonstrate at two levels:

 

1)

 

To depreciate the study, ABBL observes that in the study the financial centre supposedly collected around 500 billion euros in defrauded money originating from developing countries, even though in Private Banking the centre manages a total that amounts to less than 300 billion euros.

But in the previous paragraph ABBL mentions investment funds, which amount around 1 500 billion euros. This does not take into account these assets in the total assets present in Luxembourg, nor does it consider other financial vehicles available. ABBL’s reaction is definitely entirely biased.

 

2)

 

Additionally, according to the CRF (the Luxembourg FIU), the total number of open STR files within the CRF increased appreciably in 2008 (+24.4%), this increase being however more moderate if we disregard a bank the activity of which is centred on the electronic field (+8%). As a result, small number of banks represent the majority of the declarations of the sector. A large number of banks file no or very few declarations of suspicion. (See report 2008)

 

There are 152 banks registered of which 75 only reported one or more STR (50%)

 

What I know is that these finance professionals that never ever reported any declaration of suspicion may ignore their essential obligations of identifying their clients.

 

 

The above are facts and not an unhealthy combination of gratuitous assertions, hearsay, half-truths and concocted lies (ABBL wording to comment the study)

 

What is extraordinary with these professionals in Luxembourg is that they are unable to make amend as they have developed an insulated culture that excludes any information that would contradict their reigning picture of the reality, their reality in the bowl.

 

In a video, J.-M. Goy, CSSF, is developing the Responsibility of a Luxembourg Depositary bank in the framework of a conference that took place on 4 March 2009 with the participation Peter de Proft, EFAMA, under the leadership of KPMG Luxembourg. 

What the CSSF says is very interesting even  more so that the ALFI admitted that The relationship between the Luxembourg Commission de Surveillance du Secteur Financier Luxembourg ( CSSF ) and the Financial centre it supervises has always been described, and rightly so, as being heavily influenced by a true common interest approach. (...) The Luxembourg Investment Fund Industry has regularly had a very close and direct say on the evolution of the Luxembourg prudential regulatory environment governing the collective Investment Industry.

 

J.-M. Goy stated:

 

The principles are perfectly clear. In Luxembourg we consider that our legal and regulatory framework is absolutely on line with the principles set up by the directive and provides for an appropriate level for investor protection.

 The rules are practically the same in all the European jurisdictions.

 

 Practically means in Merriam Webster: 

1 : in a practical manner <look practically at the problem>

2 : almost, nearly <practically everyone>

 

 

Practically has as its basic and primary sense "in a practical manner”. Language critics sometimes object when the notion of practicality means "almost, nearly" but this usage is widely used by reputable writers and must be considered acceptable.

 

Mr Goy is using the first meaning.

 

The problem is that in the transposition Luxembourg dropped some critical keywords under the influence of the financial sector so that their legal and regulatory framework cannot be on line with the principles set up by the directive to provide for an appropriate level for investor protection.

 

Which was confirmed late May by Mr McCreevy.

 

And they are unable to admit that there is a direct link between the changes and the Madoff affair in Luxembourg. Especially:

1. UBS was both management company and depositary, which is proscribed by the directive to prevent the conflicts of interest but is authorized by the Luxembourg law that keeps silence on the provision;
2. There is no safekeeping duty in the Luxembourg law whereas it is explicitly prescribed by the directive. Only the duty of supervision exists.
3. The way to discharge the duty of supervision to a third party does not comply with basic meaning of the word supervision: It is considered that the depositary has discharged its duty, 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, which is not consistent with a critical watching and directing as defined in Merriam Webster.

Additionally in a survey dated 20 February 2009 provided by the EFAMA itself to compare the jurisdiction, it appears that Luxembourg is the only jurisdiction with such strange wording for the depositary to discharge its duties.

 

These are facts.

 

Therefore who actually sows the doubt and depreciates the Luxembourg credibility (Jean Meyer’s wording)?

 

Those who are telling the truth on facts and want to correct dysfunctions in the jurisdiction, or those who are not telling the truth?

 

Investors will judge.

 

Subsidiary observation. I bet that according to the CSSF, their legal and regulatory framework is absolutely on line with the principles set up by the FATF and the European Directive and provides for an appropriate level for AML-CFT.

 

Should I be the FATF or the European Commission, I would definitely have a look on the transposition into the Luxembourg legal and regulatory framework…