Ethics and governance in the European Financial centers

The ethical one always happens to be right, and proof of this will be immediate.

In a press release dated 28 May, it is stated that: Commissioner McCreevy initiates clarification of UCITS (Undertakings for Collective Investment in Transferable Securities) regulations regime. Commissioner McCreevy announced today in Brussels that he intends to clarify and strengthen provisions of the UCITs regime particularly as regards the liability of depositories. He announced he will launch a consultation before the end of June to deal with inconsistencies in the application of the UCITS directive which were shown up by the Madoff scandal. One of the consequences of the Madoff scandal in the EU is that it affected retail investors who had invested in certain UCITS funds the assets of which had been entrusted to a Madoff entity as a sub-custodian. Last December (MEMO/09/27) Commissioner McCreevy informed Ministers of Finance that he had asked his services to work closely with the Committee of European Securities Regulators (CESR) to look into the liability of the UCITS depositories in the 27 Member States. The outcome of this review by CESR is now known and it shows that the minimum high level principles of the UCITS Directive have been transposed in very diverging ways by Member States. The outcome is an unlevel playing field. This means that some EU investors in UCITS funds are better protected than others. On the other hand, the Commission has made stringent proposals on the regulation of depositories, their liability, eligibility, etc in its recent proposal for Alternative Investment Fund Managers (AIFM) (MEMO/09/211). According to this proposal, depositories should be credit institutions based, authorised and supervised in the EU. Their liability has been strengthened, including an inversion of the burden of proof, and there are clear provisions on delegation as well as on the conditions under which assets can be entrusted to depositories outside the EU. Mr McCreevy wants to extend such provisions to UCITS funds. The new proposal should at least cover what the AIFM proposal covers. It would not be appropriate to have a less stringent approach for retail investors than for professional investors.

It seems that the embarassing findings were not circulated in Luxembourg, the jurisdiction that aims to promote, through the LIGFI, stronger ethical practices and standards based on the principles of integrity: transparency, fairness, responsibility and accountability. However the ABBL published information, which is to its credit.

"The minimum high level principles of the UCITS Directive have been transposed in very diverging ways by Member States."

This is what I have explained on this blog several times. I had contacted Commissioner McCreevy in a letter dated 13 February 2009 to report and demonstrate the pragmatic transposition in Luxembourg that opened the drift with Madoff. In the answer on behalf of Comissionner McCreevy, which is dated 19 March 2009, Niall Bohan confirmed that the European Commission attaches great importance to addressing the questions relating to the way in which the depositaries of the UCITS funds have discharged their responsibility, as the role  of the depositary is a cornerstone of the UCITS regulatory framework by ensuring the safe-keeping of assets.

I cannot understand that politicians and professionals in Luxembourg claim, and are still claiming, that the transposition was faithful all the more than the recent CSSF decision on UBS was disappointing, but so compliant with the business culture of the center: the CSSF stated again that "Luxembourg law applicable to Luxembourg depositary banks in their role as safe-keepers of UCI's assets reflects faithfully the provisions of the European Council Directive 85/611/EEC ".

This statement only does not comply with facts, legal and regulatory facts.

As I demonstrated for deposit-guarantee schemes, the business culture to fool the client and international organisations, thanks to a misleading wording in the local texts,  has not changed, which build a country risk for the client as the outcome is once more an unlevel playing field.

Some leaders in Luxembourg should definitely quit the business on the principles of integrity: transparency, fairness, responsibility and accountability. 

Le temps has reported that Switzerland is willing to introduce specific provisions in the tax agreements that are to be signed.

- On the one hand, the request of the foreign jurisdiction would describe the behaviour in question, the name of the author, as well as the documents on which the jurisdiction bases its suspicions. If the foreign authority seeks to make raise the bank secrecy protecting the author from supposed tax evasion, the name of the Swiss bank should also be indicated in the request. This requirement of precision aims at preventing fishing with information by foreign tax authorities.

- On the other hand, Switzerland should negotiate the way in which the foreign jurisdiction can collect evidence to refuse requests that are based on evidence on an unlawful basis, according to the Swiss law.

I know that there is a change in progress in Luxembourg. Not with the LIGFI which is an association of the past as it is promoted by leaders of the jurisdictions that never ever repudiated, at least publicly, drifts and abuses in Luxembourg. It is about a major change which transcends the parties. The stake is to substitute the best elements for an old guard.

Luxembourg signed a tax agreement on the OECD tax model with France to improve its image.

I am afraid this will not hush up litigious issues at is seems that they did not sign up for the same purpose.

Let’s have a look on their respective press release:

The French press release states that: “les dispositions de cet article permettront à la France d’obtenir des renseignements sans limitation quant à la nature des impôts, des personnes et des renseignements visés par la demande de renseignements. Ces demandes de renseignements pourront ainsi désormais porter sur des renseignements bancaires sans que la législation interne luxembourgeoise puisse y faire obstacle (...) La signature de cet avenant contribue à la lutte contre la fraude et l’évasion fiscales, puisqu’il permet désormais à la France d’obtenir des renseignements de la part des autorités luxembourgeoises sans limitation quant à la nature des impôts, des personnes et des renseignements visés par la demande de renseignements. »

(free translation: the provisions of this article will make it possible for France to obtain information without limitation relating to the  nature of the taxes, the people and the information targeted by the request for information. These requests for information will be able from as of now to be about banking information without the Luxembourg national legislation being opposable to it (...) the signature of this endorsement contributes to the fight against fraud and tax evasion, since it makes it possible as of now for France to obtain information from the Luxembourg authorities without limitation as for the nature of the taxes, the people and the information aimed at by the request for information.”)

The Luxembourg press release states that: « Le protocole prévoit l'échange d'informations sur demande dans des cas individuels entre les administrations fiscales des deux pays. Il s’applique aux années fiscales 2010 et suivantes. L’accord n’a pas pour objet un échange automatique d’informations bancaires et n’autorise pas des demandes générales (fishing expeditions)."

(free translation: “The protocol envisages the information exchange on request in individual cases between the tax authorities of both countries. It applies to the financial years 2010 and following. The agreement does not have as an aim an automatic exchange of banking information and does not authorize general requests (fishing expeditions).”)

While Luxembourg does want neither the automatic exchange of banking information nor fishing expeditions, France believes that it will get “without limitation” (“information without limitation relating to nature of the taxes, the people and the information aimed at by the request for information “ is repeated twice in the press release) information on any taxpayer (its taxes, its bank accounts…).

What a charade.