Ethics and governance in the European Financial centers

This is the e-mail I sent today:

Dear Mr Gurria

Before the Association Luxembourgeoise des Professionnels du Patrimoine, Luc Frieden confirmed the objective to sign 20 OECD-compliant tax agreements by the end of the year.

One of these was signed with the USA this week, which was welcome by your organization that stated in a press release it is a major step forward in international efforts to counter tax evasion.

I am afraid your organisation is quite naïve to believe that data will be provided as most tax evasion funds will not be countered.

Before the Association Luxembourgeoise des Professionnels du Patrimoine Luc Frieden confirmed as well that Luxembourg will oppose the automatic exchange of tax data. The head of the Association welcomed this commitment by saying: "We rely on you. Our clients believe in us. They are there because of bank secrecy."

This is definitely an admission that bank secrecy is used for tax evasion purposes, all the more than tax evasion is neither prohibited by the "rules of conduct" nor sanctioned by e criminal law of tax havens, contrary to money laundering.

To assess to what extent the OECD Model agreement on exchange of information on tax matters is not relevant to counter tax evasion, let's use a metaphor.

Let's imagine that (Luxembourg) Financial Institutions are like a travel agency, clients being the foreign tax administrations. Should a client a want information about a destination (Are there flights to go from X to Y, what are the schedules... ?) to get a ticket, he /she would not get an answer as only accurately detailed requests would be satisfied: I want a ticket for the flight from X to Y at HH:MM, number Z.... The request is accurate and detailed enough and would be satisfied. This is exactly how the OECD tax model works for the exchange of information. Only a few tickets could be sold with the OECD tax model logic.

Additionally I do think that every topic is linked: tax evasion, corruption, money laundering... That is the reason why a new approach is needed and implemented by some NGOs as the OECD that depends on the jurisdictions is prisoner in a way of political games.


Yours sincerely

Jérôme Turquey
Consultant is business ethics and reputational risk
http://ethiquedesplaces.blogspirit.com

Before the Association Luxembourgeoise des Professionnels du Patrimoine (ALPP), Luc Frieden confirmed the objective to sign 20 OECD-compliant tax agreements by the end of the year.


The stated good intention is broken by the last sentence of the last but one paragraph which is a consent:

 “We rely on you. Our clients believe in us. They are there because of bank secrecy.”

Why on earth are clients there because of banking secrecy?

For tax evasion all the more than there will be no systematic information exchange.

Am I exaggerating?

Let's have a look on the rules of conduct of the Association Luxembourgeoise des Professionnels du Patrimoine.

Article 16 states that "Les membres seront particulièrement attentifs aux tentatives d'utilisation de leurs services aux fins de blanchiment de capitaux. Ils veilleront à s'assurer de l'identité de leurs clients au moyen d'un document probant." (free translation: Members will be particularly attentive with the attempts to use their services for purposes of money laundering. They will take care to make sure of the identity of their client by means of a documentary evidence).

What does that mean?

If money laundering is not allowed, tax evasion or fraud is definitely allowed in practice as there are no provisions in the rules of conduct to prohibit.

Can they rely on Minister Frieden?

Yes they can.

The answer was given two years ago before the same Association Luxembourgeoise des Professionnels du Patrimoine (ALPP):

Est-ce qu'une grande place financière comme la nôtre doit exagérer un peu ou bien être plus laxiste au risque de laisser passer quelques scandales ? Oui, il peut arriver que nous ayons exagéré certaines procédures, mais c'était dans une tendance générale en Europe. J'espère que nous n'avons pas mal fait et qu'il est encore possible de revenir en arrière. Je ne veux surtout pas que l'on dise que nous ne faisons plus rien et je suis prêt à abandonner certaines exigences  (free translation: "Should a large financial center like ours exaggerate or be more lax with the risk of a couple of scandals. Yes we may have exaggerated some procedures but this was a general trend in Europe. I hope we have not done badly at that is still possible to go backward. I am ready to give up some requirements")

The pragmatic state of mind remains because of  the “We rely on you” stated this year.

Even though Minister Frieden is sincere to comply on paper with the OECD requirements, it remains that most professionals in Luxembourg demonstrate that they are definitely the major power and that commitments will be of no avail in practice as tax evasion is not repudiated and will go on.

In a nutshell, the goal of the OECD to counter tax evasion (OECD wording to welcome the US-Luxembourg treaty) will be bypassed, as many pragmatic professionals knowingly support and help to commit fraud. Foreign tax administrations will be required to submit detailed and accurate queries to be informed, which is a long shot:

To understand why the OECD tax model is not a realistic framework, let’s imagine that (Luxembourg) Financial Institutions are like a travel agency, clients being the foreign tax administrations. Should a client want information about a destination (Are there flights to go from X to Y, what are the schedules… ?), he /she would not get an answer as only accurately detailed requests would be satisfied: I want a ticket for the flight from X to Y at HH:MM, number Z…. The request is accurate and detailed enough and would be satisfied. This is exactly how the OECD tax model works for the exchange of information.

That is the reason why some NGOs are rumored to build their list that complies with the reality of the support of tax evasion. Thanks to the methodology of mystery shopping, they would demonstrate that the support for tax evasion is the reality of many professionals is some jurisdictions.

Quod erat demonstrandum.

Luxembourg has signed an agreement for the exchange of bank information on request in all tax matters with the USA, marking a major step forward in international efforts to counter tax evasion. This is the first agreement by Luxembourg with an OECD country which meets the OECD standard for information exchange.

Read OECD Press Release

Read Luxembourg Press Release