Ethics and governance in the European Financial centers

Reuters has reported that HSBC is being sued by the trustee liquidating the Madoff businesses, Irving Picard, who claims $578 million. Lawsuit names Herald Fund’s beneficiary bank, London-based HSBC Bank Plc, and its asset custodian  HSBC Securities Services (Luxembourg) S.A.

As Reuters observes the defendants are not accused of knowing about Madoff's vast fraud, but the trustee contends they ignored red flags and should have realized that the disgraced financier's returns were too good to

The OECD’s Centre for Tax Policy and Administration appointed in September 2007 Mr. Pascal Saint-Amans as Head of the International Co-operation and Tax Competition Division. A French national, Pascal Saint-Amans joined the CTPA from the "Direction Générale des Impôts" (DGI) of the Ministry of Finance in Paris where he has been responsible for a wide range of tax issues. He graduated from the National School of Administration (ENA) in 1996 and has held various positions within the DGI: he was in charge of following the EU work on direct taxes, responsible for legislation on wealth tax and mergers and spin offs. He was also in charge of tax treaty negotiations and mutual agreement procedures. In this capacity, he participated as the delegate for France in Working Party No. 1 (tax treaties) of the Committee on Fiscal Affairs before being elected Chair of that group in 2005. He was also a member of the UN Group of experts on international tax co-operation, and a “rapporteur” in 2006. His latest position was Deputy Director in charge of litigation at the DGI. He thus brings a wealth of international tax experience to this position.

Mr Saint-Amans last year developped his views on tax evasion.

He recently stated that for the exchange of information based on the OECD tax model, it is only required to provide the name of the person suspected, which does not comply with what's going on on the field.

I wrote a letter to him in French that I have translated below :

 

Mr Saint-Amans,

 

Having seen that you were speaker a couple of weeks ago in the framework of a conference-debate that TI France organized on April 23rd in Paris on tax havens, I allow myself to contact you to share with you my views on the OECD press release announcing that Luxembourg is no longer on the “grey list” (Press release dated 8 July 2009).

 

On the TI France site, it is specified that according to you the principal tax havens show today a real will to evolve and are at the origin of positive dynamics while involving in their wake most non co-operative financial centers.

 

The magazine L’Expansion quoted you on 3 July 2009: according to you, "Il faudra seulement fournir l'identité d'une personne soupçonnés de fraude, et c'est tout" (free translation : it will only be required to provide the identity of a person suspected to commit fraud and that's all)”. However it is not what politicians and professionals, especially in Luxembourg were saying, when they bared their thoughts last week about the essence of the agreements. Luc Frieden specified that the agreements, which do not have a retroactive effect, envisage the information exchange on request and in individual cases between the tax authorities of the two countries. They do not have as an aim an automatic exchange of banking information and do not authorize general requests (fishing expeditions). For this reason Luxembourg also signed, beside the agreements themselves, exchange of Letters which clearly specify the methods of execution of the exchange of information (Press release dated 8 July 2009).

 

In this country of 2500 km2 that doesn’t allow for internal criticism of the abuses because of the fear of exclusion (the auditee is the auditor’client and can change the auditor; the internal auditor or compliance officer have a subordination link because of the employment contract) where there is no ethical awareness of professionals:

• an influencing member of the new parliamentary majority as a former president of the ABBL (Association Banques et Banquiers Luxembourg) had stated a doctrine, that was not  repudiated, according to which it is not the duty of bankers to control if the taxpayer was honest (Lucien Thiel, L'Essentiel, 27 February 2008). More recently, his successor at the ABBL commenting a tax evasion case filmed with a hidden camera by RTBF,  including the recourse suggested by the banker to use a scam through Panama, declared that “It is not the banker who started” (RTBF, 19 February2009),
• according to the CRF,  the Luxembourg FIU, most banks (60%) never report any declaration of suspicion,
• criminal liability  for legal persons does not exist despite an injunction from the OECD last year (Press release dated 27 March 2008)
• The NGO Transparency International noted the absence of data on corruption to draw up its report relating to the OECD convention (it is the only country of the EU, in addition a founding member, that signed the convention of OECD for which there are no data),
• …

 

Money of tax evasion will be accepted without hesitation and one cannot see how the foreign tax authorities will be able to support a request filed, for which the admissibility will remain discretionary and very framed (the letters exchanged in English by Luxembourg and the States signatories enumerate 7 informations of which the identity of a person suspected of fraud). Moreover, the Swiss professionals do not hide that the OECD model of exchange of information will not work. Quoted by Le Temps dated 26 May 2009, Thomas Kalbermatten, banking analyst in Credit Suisse, thus estimated that it will be, in practice, very difficult for the foreign tax authorities which apply the OECD standards to provide this degree of details.

 

I must add that the list of tax havens that was recently published by OECD in the context of the G 20 is a joke: it is neither fair, nor coherent. 

It is not fair as it stigmatises some jurisdictions on a grey list while condoning the US Tax Havens like Delaware, but it is true that the USA are the major contributor to the OECD budget and condone as well the US tax havens in the Stop Tax Havens Abuse Act.
It is not coherent as the split of the grey list is not coherent: How a jurisdiction like Cayman Islands that had signed 8 agreements or Netherlands Antilles, Antigua and Barbuda that had signed 7 could be considered as tax havens while Austria, Chile, Guatemala, Luxembourg, Singapore, Switzerland that had signed none were only “Financial Centers”. Many jurisdictions were not considered as tax havens despite the fact that they had only stated a vague promise.

 

The real issue of the fight against tax havens but as well judiciary havens is an integrated approach of the subjects. All the parameters should be taken into account to draw up a single list taking into consideration harmful tax practices, corruption, money laundering… All these subjects are dependant.

 

The countries should be noted on 100 on the basis of 4 criteria to calculate a "cleanliness" index from 0-100:

 

1. Combination of Banking secrecy, harmful tax practices and offshore abuse, rated out of 25.

 

2. TI Barometer, rated out of 25. As far as the CPI is concerned, the methodology produces a result that is not consistent with observed facts.

 

3. International provisions enacted in the positive law, rated out of 25: every AML provision (from the FATF), every provision to fight corruption (from the OECD), every provision to fight tax evasion (from the OECD)...

 

4. Permissiveness (judicial haven), rated out of 25: absence of a legal framework, absence of credible enforcement, absence of credible sanctions, passive corruption through influence, poor means for the regulatory bodies...

 

Only objective parameters should be taken into account: figures, number of cases, CTR filings, highest sanction, number of sanctions… Ratios should be used as numbers must be weighted according to the importance of assets under control, which would reinforce objectivity.

 

For Unions, Confederations and other multi jurisdictional states, the weakest link in the chain would give the country's final grade. For Switzerland it may be Zug, Delaware for the US, Andorra for France, Hong Kong for China...

 

 

Best regards

 

Jerome Turquey

Consultant in business ethics and reputational risk

Part-time lecturer in University and business school on tax havens

 

Luxembourg was congratulated by Angel Gurria. Great.

 

Its bankers applaud the Luxembourg government for its swift implementation of the OECD standards and for getting Luxembourg removed from the so-called grey list. They state that the government has not only proven that Luxembourg’s presence on such a list was completely unnecessary in the first place, but has also demonstrated its commitment to ensuring a global level-playing field. Great.

 

The Luxembourg tax administration has displayed online the conventions and the exchange of letters.

 

To be accepted, a request shall have to specify:

 

(a) the identity of the person under examination or investigation;

(b) a statement of the information sought including its nature and the form in which the applicant State wishes to receive the information from the requested State;

(c) the tax purpose for which the information is sought;

(d) grounds for believing that the information requested is held in the requested State or is in the possession or control of a person within the jurisdiction of the requested State;

(e) to the extent known, the name and address of any person believed to be in possession of the requested information;

(f) a statement that the request is in conformity with the law and administrative practices of the applicant State, that if the requested information was within the jurisdiction of the applicant State then the competent authority of the applicant State would be able to obtain the information under the laws of the applicant State or in the normal course of administrative practice and that it is in conformity with this Convention;

(g) a statement that the applicant State has pursued all means available in its own territory to obtain the information, except those that would give rise to disproportionate difficulties.

 

This only does not comply with what Pascal Saint-Amans, Head of division for the co-operation and tax competition, quoted by L'Expansion said : "Il faudra seulement fournir l'identité d'une personne soupçonnés de fraude, et c'est tout" (free translation : it will only be required to provide with the identity of a person suspected to commit fraud and that's all) all the more than Swiss professionals admitted that "Il sera, en pratique, très difficile pour les autorités fiscales étrangères qui appliquent les standards de l’OCDE de fournir ce degré de details" (free translation: “It will be, in practice, very difficult for the foreign tax authorities which apply the OECD standards to provide this degree of details”)

  

The OECD is being fooled or it is fooling the audience.