Ethics and governance in the European Financial centers

 

The Luxembourg Institute for Global Integrity (LIGFI) that was launched last week turns out to be a charade.

The acronym LIGFI seems actually to stand for: Luxembourg Is Going to Fool the Institutions/Investors.

 

As I explained:

- The fees with the relating voting rights are prohibitive and exclude those that are not wealthy,

- Its powerhouses did not demonstrate in a recent past a true involvement for ethical business behaviour.

 

 

Who could bear such initiative to promote ethics in Luxembourg?

 

Only new leaders (“homines novi”), with a proved capacity to question and not to condone or hush up issues, could promote with a minimum of credibility the initiative.

 

- The think tank Cercle Joseph Bech
- Marco Zwick, Luxembourgish,  who is Director at PRIM, Head of Compliance and Risk for Schroder Investment Management and author of a book about money laundering and banking secrecy where he did a relevant SWOT analysis of the Luxembourg Financial Center

- Carlo Damge, Luxembourgish,  former chairman of the Chartered Accountants that raised publicly the issue of the abuse of fiduciaries, which is not solved.
- Georges Gudenburg, Luxembourgish,  who admitted recently the end of banking secrecy and raised issues
- Egide Thein, Luxembourgish,  who is Founder and Chairman of Truth Technologies, Inc., a Vienna, VA based company providing anti money laundering and anti fraud solutions to the financial industry (www.truthtechnologies.com).
- Laurent Halbgewachs, French, who organises the ALFI Spring Conferences

- Luc Henzig, Luxembourgish, although he is involved in the stillborn project, he is credible in the field of ethics

...
and maybe myself as I have been calling for the paradigm shift since 2004 and as I have identified what is to be done to enhance the good reputation of Luxembourg that deserves to be a successful jurisdiction.

 

 

 

In a nutshell, LIGFI in its design shows that nothing was understood.

I wrote an article last week to comment the launch of an UFO in the international debate about business ethics: the Luxembourg Institute for Global Financial Integrity (LIGFI).

I raised a couple of issues. The first one was: Will the institute be a tool to change the business culture or is it an opportunist ethical frontage for the center? A clue to assess the credibility is the project team: is the project team relevant to promote stronger ethical practices and standards based on the principles of integrity: transparency, fairness, responsibility and accountability.  Should there be team members involved in corruption issues or promotion of fraud or tax evasion or other dubious business behaviour (verifiable public lie to mislead the investors...), the institute would not be credible. Another clue will be the capacity to welcome "critics" especially when they lay emphasis on public and official dysfunctions that are the visible part of the iceberg. The word critic comes from the Greek κριτικός (kritikós), "able to discern", which in turn derives from the word κριτής (krités), meaning a person who offers reasoned judgment or analysis, value judgment, interpretation, or observation. In practice critics are blacklisted in the Luxembourg business.

Is the project team relevant to promote stronger ethical practices and standards based on the principles of integrity: transparency, fairness, responsibility and accountability?

The project team is the founder-members that are quoted in the statutes:

 

Jacques Santer, Luxembourger, Honorary Minister of State and former Prime Minister of Luxembourg, former President of the European Commission: his commission failed and resigned on 16 March 1999 because of the findings of an independent report on Allegations regarding Fraud, Mismanagement and Nepotism in the European Commission. As far as Mr Santer is concerned, the report states that "6.5.7. In the Security Office case, the Commissioner responsible, Mr Santer, acted swiftly after the allegations of fraud appeared in the press. This said, audit results as early as 1993, if followed up, could have made it possible to identify the nature of the problems in the Security Office much sooner. The prime responsibility of Mr Santer in this case is that neither he, as the official nominally responsible for the Security Office, nor his private office took any meaningful interest in its functioning. As a result no supervision was exercised and a ’state within a state’ was allowed to develop, with the consequences described in this report." What is described is exactly the problem in Luxembourg: no action to correct dysfunctions, trend to condone issues. In his statement the day after the resignation of the Members of the Commission Mr Santer states that he “notes that on the basis of a tiny number of cases of fraud and malfunctioning, which did indeed merit criticism, the Committee’s report paints a picture of total absence of responsibility on the part of the institution and its officials. This picture is distorted. I consider the tone of the report’s conclusions to be wholly unjustified”. Such wording reminds me of what politicians and professional in Luxembourg said when critics raise issues in the jurisdictions. (see for example Luc Frieden last week: we would like that the description of our jurisdiction corresponds to the reality)

Michel Maquil, Luxembourger, President of the Luxembourg Stock Exchange. The Principles of Corporate Governance of the Luxembourg Stock Exchange allows company to find reasons why integrity of accounts should not be applicable: integrity is not a principle but a recommendation (the 9th recommendation under the 9th principle which requires "rigorous rules": all the companies that were involved in the scandals of the last years had "rigorous rules"). Only principles are mandatory (comply).

Lucien Thiel, Luxembourger, Member of Parliament of Luxembourg and Honorary Director of the ABBL. He is the one who stated at the begining of the Liechenstein scandal in February 2008 that “it is not our duty to control if the taxpayer was honest” and "we are not compelled to communicate clients' data" without being repudiated for such wording. In the annual report 2003, at the time when he was Director of the ABBL, it was written page 21 that "offences such as forgery, use of forgery, false balance sheets, use of false balance sheets or unauthorised use of corporate property should not be included. These are offences with financial connotations which are confused with laundering for the sole purpose of applying exceptional powers to these vague offences".  Are forgery, use of forgery, false balance sheets, use of false balance sheets or unauthorised use of corporate property, vague offences?

Patrick Zurstrassen, Belgian, Chairman of the Institut Luxembourgeois des Administrateurs. I was unable to find any declaration where he would repudiate dysfunctions in Luxembourg, especially the strange code of governance of the Luxembourg Stock Exchange that makes facultative the integrity of accounts or the so-called vague offences that are forgery, use of forgery, false balance sheets, use of false balance sheets or unauthorised use of corporate property.

Yves Wagner, Luxembourger, President of the Association des Analystes Financiers et Gestionnaires de Portefeuilles. He is as well Member of the EFAMA Working Group on Risk Indicators and Member of the Board, The Directors' Office, Luxembourg. I was unable to find any declaration where he would make amend of the inaccurate transposition of UCITS directive, which definitely caused drifts in the jurisdiction.

François Schanen, Luxembourger, Manager of the BCEE. He is a brilliant linguist. He manages an agency of the BCEE downtown in Luxermbourg.

Gilbert McNeill, Swiss, Professor and Counselor. He defended a thesis in 1976 in Economics. He does not seem expert in business ethics.

Luc Henzig, Luxembourger, Senior Partner of PricewaterhouseCoopers Luxembourg. His firm unfortunately did not participated to the global crime survey despite Luxembourg is a large financial center. No press release on the Survey but a commercial webpage quoting the 2007 survey and promoting PwC services.

Guy Harles, Luxembourger, Senior Partner of Arendt & Medenach: the law firm is in a touchy situation for the Madoff case in Luxembourg  as there is one partner that chairs the ALFI and another partner that is UBS's lawyer.

Jed Grant, Irish, Senior Partner of Sandstone S.A: he used to be Director of Club Monnet. Club Monnet went banckrup in 2002 because it did not pay its rents.

René Brülhart, Swiss, Director of the Financial Intelligence Unit of the Principality of Liechtenstein: According to the annual report 2007, a total of 205 suspicious activity reports (SARs) were submitted under the Due Diligence Act in 2007. There were 52 cases more than in the previous year, representing an increase of more than 25% in the area of due diligence. Nearly 95% of the SARs in 2007 were triggered by banks and professional trustees. 12 of the 15 banks operating in Liechtenstein submitted one or more SARs.

 

 

 

Most people in this team are unfortunately not homines novi all the more than they

-          did condone, and/or

-          did support at least by their silence or inaction

corruption issues, or promotion of fraud or tax evasion or other dubious business behaviours and therefore are not credible to promote stronger ethical practices and standards based on the principles of integrity: transparency, fairness, responsibility and accountability

 

 

Is there a capacity to welcome "critics"?

 

Richard Murphy was contacted. I was not. In his answer, Richard observes that the fees to participate are prohibitive.

He explains that there’s one reason for these fees: and that is to ensure the opinion offered is those of the wealthy alone.

 

In other words, opinion of those that are not critics and do not repudiate drifts in the business.

In a recent interview in German, Luc Frieden, the Luxembourg Luc Frieden, Minister of Treasury and Budget, stated that “Wir sind ein internationaler Finanzplatz, der internationale Regeln liebt. Und es gibt internationale Regeln zum Steuerparadies. Das ist nach OECD-Regeln ein Ort, an dem man keine oder fast keine Steuern zahlt. Das trifft auf Luxemburg nicht zu. Deshalb möchten wir, dass die Beschreibung unseres Staates der Realität entspricht, und das ist nicht immer der Fall”, which means (free translation)  “We are an international financial center, which abides by international rules. And there are international rules to define tax havens. That is according to OECD rules, a place where one pays no or nearly no taxes. That does not apply to Luxembourg. Therefore we would like that the description of our state corresponds to the reality, and that is not always the case”

 

A couple of comments about the reality of the state:

 

When Luc Frieden states that a tax haven is according to OECD rules, "a place where one pays no or nearly no taxes”, it is not accurate.

 

According to the OECD, four key factors are used to determine whether a jurisdiction is a tax haven.  The first is that the jurisdiction imposes no or only nominal taxes. This is what Frieden has in mind.

 

But the OECD adds that the no or nominal tax criterion is not sufficient, by itself, to result in characterisation as a tax haven as the OECD recognises that every jurisdiction has a right to determine whether to impose direct taxes and, if so, to determine the appropriate tax rate.  An analysis of the other key factors is needed for a jurisdiction to be considered a tax haven.  The three other factors to be considered are:  

• Whether there is a lack of transparency
• Whether there are laws or administrative practices that prevent the effective exchange of information for tax purposes with other governments on taxpayers benefiting from the no or nominal taxation.
• Whether there is an absence of a requirement that the activity be substantial

 

The description of his state that corresponds to the reality is that:

 

There is no culture of transparency: otherwise PwC and E&Y in Luxembourg would have participated to « Global Economic Crime Survey » for PwC and « Corruption or compliance – weighing the costs » for E&Y. These surveys are even not communicated. Otherwise there would be a balance sheet database like in any modern democracy. Otherwise there would be a database of judiciary judgements like in any modern democracy. And so on.

 

There are laws or administrative practices that prevent the effective exchange of information for tax purposes. In a speech before the Luxembourg Parliament on 13 March 2009, Luc Frieden announced that Luxembourg will conclude Double Taxation Agreements that conform to the OECD Model Tax Convention., which means that this was not the case before. Conventions are being signed.

But it remains that the request of information must be made on concrete, clear and precise evidence of tax evasion which excludes any “fishing expedition”. This is a problem in Luxembourg as leaders support tax evasion:

-         Cf. what stated Lucien Thiel, former director of the Luxembourg Bankers’ Association: “It is not our duty to control if the taxpayer was honest” (L’Essentiel, 27 February 2008)

-         Cf. what stated Jean-Jacques Rommes, current director of the Luxembourg Bankers’ Association to comment a tax evasion case: “It is not the banker who started” (RTBF, 19 February 2009)

Banking administrative practices actually prevent the effective exchange of information for tax purposes (Additionally in a connected field, which is AML, 60% of banks never report declarations of suspicion according to the Luxembourg FIU and ratios of comparison with other jurisdiction demonstrate a poor level of declarations of suspicion in Luxembourg : Cf. for example the comparison with Monaco).

 

There is an absence of a requirement that every activity be substantial. The Luxembourg corporate registration is full of Luxembourg-based companies that are linked to exotic jurisdictions and that exist only in the Luxembourg Corporate registration. In the tax evasion case Jean-Jacques Rommes was asked to comment on the banker who suggested a scam through Panama without even being asked to do so by the client.

 

 

At the time when the USA seem to be willing to ensure that U.S. states like Delaware and Nevada do not replace offshore countries like Switzerland, Luxembourg and the Cayman Islands as tax havens for wealthy individuals and businesses, Luxembourg goes on ignoring the paradigm shift in the world.

 

This it is not very good omen for the Luxembourg Institute For Global Financial Integrity, that is said to be intended to solve the challenges faced by the global financial sector pertaining to crime, such as fraud, tax evasion, and money laundering, and to the funding of criminal activity and terrorism.