Ethics and governance in the European Financial centers

Greg Gordon, McClatchy Newspapers, has observed that "Underscoring the role of tax havens as a Wall Street marketing tool, a Treasury Department report found that as of June 30, 2008, $164 billion in U.S. mortgage-backed securities were held in the Cayman Islands and $22 billion more were held in Luxembourg, another tax-friendly zone".

Know more

 

As I expected, ABBL issued a press release to state that Luxembourg is not a “secrecy jurisdiction”:and respond to the Tax Justice Network jurisdiction index that ranks Luxembourg the as second secrecy jurisdiction.

As I said they are not asking the right question that is "What is to be done to solve issues that harm the reputation" : they are trying to fool (once more) the audience with a very bad faith that I can demonstrate.

A couple of paragraphs wants commenting.

ABBL states "the report argues that because there is apparently no data available on the number of lawyers and accountants that “Luxembourg may exhibit a significant number of lawyers and accountants when compared to other secrecy jurisdictions”. Not only is the reasoning itself undertaken in bad faith, but a simple web search would have revealed that the data on lawyers and accountants is very much publicly available, since anyone exercising any of these professions in Luxembourg is required to register with the Luxembourg Bar or the Order of Accountants, respectively (lawyers are listed on www.barreau.lu, while accountants are listed on www.oec.lu).

TJN is based in England. As far as I know, in England and Wales, "lawyer" is used loosely to refer to a broad variety of law-trained persons. It includes practitioners such as barristers, solicitors, legal executives and licensed conveyancers; and people who are involved with the law but do not practise it on behalf of individual clients, such as judges, court clerks, and drafters of legislation.

TJN defines a lawyer as a person providing advice on the law, who prepares legal agreements or who pursues disputes through the legal system of a jurisdiction. The use of the term and the entitlement to practice as a lawyer is regulated in many jurisdictions

The word lawyer is used with this meaning in the Luxembourg corporate registration and ABBL cannot ignores that.

Examples:

In 2008
English text: "The Meeting elects Ms. Charou Anandappane, lawyer, residing professionally in Luxembourg as Scrutineer"
French text: "L'Assemblée désigne Mlle Charou Anandappane, lawyer, juriste, de résidence à Luxembourg en qualité de scrutateur"
Ms. Charou Anandappane is not a lawyer listed on www.barreau.lu
In 2009

English text: "here represented by Claire Benedetti, Lawyer, with professional address in Luxembourg"

French text: "représentée par Claire Benedetti, Juriste, avec adresse professionnelle à Luxembourg"

Claire Benedetti is not a lawyer listed on www.barreau.lu

As far as accountants are concerned an accountant is a practitioner of accountancy, which is the measurement, disclosure or provision of assurance about financial information that helps managers, investors, tax authorities and other decision makers make resource allocation decisions.
TJN defines an accountant as a person, usually but not always qualified by examination, who prepares accounts, offers taxation and commercial advice and who may audit the accounts of companies and other limited liability entities when that is required by law
As anyone can be a statutory auditor in Luxembourg, of which accountants, one cannot knows the number.

Minister Krecke raised the issue of accounting jobs 10 years ago. The problem remains.


ABBL states "The report fails to point out, however, that there are no trusts in Luxembourg. And while it is true that trusts can be managed out of Luxembourg, this is also the case in many non-reviewed jurisdictions (like Germany or France, for instance, which has its own trust law). Moreover, banks in Luxembourg keep track of beneficial owners"

There are many Luxembourg-registered companies where the shareholder(s) is(are) from secrecy jurisdictions and only exist in Luxembourg. So there are many statutory auditors from secrecy jurisdictions and that only exist in Luxembourg.

Controls are very weak.

 

ABBL states "we strongly oppose is the accusation that Luxembourg does not participate in the European Savings Directive. Just because TJN believes that only those countries that apply an automatic exchange of information participate in the European Savings Directive, does not make it so. Not only does Luxembourg apply one of the systems foreseen by the European Savings Directive, namely a withholding tax, the jurisdiction also offers clients the possibility to opt for tax declarations"
Automatic exchange of information is only part of the problem.What about the procedure initiated by the European Commission?

What does LIGFI think of the above regarding the principles of fairness, transparency, responsibility and accountability?

As LIGFI is calling to recruit member, I state again that I do not believe that LIGFI is a sincere initiative.

 

There are many red flags that it is actually an economic intelligence operation born by both Luxembourg professionals in or close to the financial sector and the government of Luxembourg:

 

1. Most LIGFI founders are Luxembourg people, live and work in Luxembourg, in or close to the financial sector.

 

2. LIGFI states it is engaged in recruiting members and partners within and outside the global financial sector, but it only explicitly calls for banks, other financial services and service providers to the financial sector to join the association (in bold)

 

LIGFI just sent a press release that demonstrates once more it is a Luxembourg deceptive economic intelligence operation with no intelligence as it ignores facts in a jurisdiction that does not like critics.

 

 

A couple of sentences want commenting:

 

 

 

1. If LIGFI is engaged in recruiting members and partners within and outside the global financial sector, it calls for banks, other financial services and service providers to the financial sector to join the association

 

They are not calling for for academics, NGOs… It is definitely a body for the business in the financial sector, member outside the global financial sector being a frontage of opening.

 

 

 

2. Members will be called upon to financially support the LIGFI association through membership dues and/or grants

 

The fees are prohibitive and there is a dubious hierarchy by money that is not compatible with the spirit of ethics (See statutes).

 

The initial fee is fixed at:

- EUR 10,000 for charter members

- EUR 5,000 for public and private institutions

- EUR 2,500 for the financial sector and professional services

- EUR 1,250 for academe

The yearly fee is fixed at:

- EUR 2,000 for charter members

- EUR 1,000 for public and private institutions

- EUR 500 for the financial sector and professional services

- EUR 250 for Academe

 

 

Regular members assume the commitment to provide assistance and support to the a.s.b.l. and its activities. Any regular member has the ability to become a charter member. A charter member is a member recognized as committed at the highest level to the a.s.b.l., providing it with increased support and financial assistance (article 8 of the Statutes)

 

Charter members have eight voting rights each; public and private institutions have four voting rights each; financial sector and professional services have two voting rights each, and academe have one voting right each (article 28 of the Statutes)

 

 

 

3. Founded by private citizens from Europe and The United States

 

It is not accurate in the statutes, where founders and members of the board of regents are quoted:

 

- Jacques Santer, Luxembourger, Honorary Minister of State and former Prime Minister of Luxembourg, former President of the European Commission, residing in Luxembourg

- Michel Maquil, Luxembourger, President of the Luxembourg Stock Exchange, residing in Luxembourg

- Lucien Thiel, Luxembourger, Member of Parliament of Luxembourg and Honorary Director of the ABBL, residing in Luxembourg

- Patrick Zurstrassen, Belgian, Chairman of the Institut Luxembourgeois des Administrateurs, residing in Luxembourg

- Yves Wagner, Luxembourger, President of the Association des Analystes Financiers et Gestionnaires de Portefeuilles, residing in Luxembourg

- François Schanen, Luxembourger, Manager of the BCEE, residing in Luxembourg

- Gilbert McNeill, Swiss, Professor and Counselor, residing in the USA, residing in Luxembourg

- Luc Henzig, Luxembourger, Senior Partner of PricewaterhouseCoopers, Luxembourg, residing in Luxembourg

- Guy Harles, Luxembourger, Senior Partner of Arendt & Medenach, residing in Luxembourg

- Jed Grant, Irish, Senior Partner of Sandstone S.A, residing in Luxembourg

- René Brülhart, Swiss, Director of the Financial Intelligence Unit of the Principality of Liechtenstein, residing in Liechtenstein.

 

 

A private citizen is one who does not possess or exercise any authority or power of court, government, law enforcement, or military.

 

Lucien Thiel, Luxembourger, Member of Parliament of Luxembourg and Honorary Director of the ABBL, residing in Luxembourg is not a private citizen.

  

Furthermore founders are quoted with their job title and company. Most of them are acting in the Luxembourg financial sector directly or indirectly. They are acting as stakeholders of the Luxembourg financial sector.

 

Additionnaly members of the board of regents are definitely not "private citizens".

Jean-Claude Juncker,  Honorary Chairman of the Board, is Prime Minister.

Lucien Thiel, Honorary Member, is member of parliament.

 

 

A brochure was published by the Luxembourg government in 1999 at a period where Jean-Claude Juncker was already Prime Minister. It states : "In Luxembourg direct contact with Cabinet members is a normal procedure. This produces quick and timely decisions. Avoiding over-regulation and excessive red tape has certainly prompted the emergence of Luxembourg as financial center in the nineteen sixties"

 

Professionals of the banking sector decide of policies.

 

Nothing has changed in the perfectible governance.

 

The day after the pre-announcement for the “Luxembourg Monthly Finance Lunch” a new ALFI brochure: " Your bridge between Europe and China: Luxembourg" was online

This brochures states page 2 : "Shape regulation. An up-to-date, innovative legal and fiscal environment is critical to defend and improve Luxembourg’s competitive position as a centre for the domiciliation, administration and distribution of investment funds. Strong relationships with regulatory authorities, the government and the legislative body enable ALFI to make an effective contribution to decision-making through relevant input for changes to the regulatory framework, implementation of European directives and regulation of new products or services."

 

 

When the Luxembourg Institute for global Financial Integrity was launched in May, Richard Murphy was contacted by Gibb McNeil, its Executive Director (also board member and president of the executive committee).

Richard noted the extraordinary fees they propose charging which are way beyond most NGOs, let alone academics or others who might have interest.

LIGFI has officially announced (with a delay) the Luxembourg Monthly Finance Lunch that is held at the Cercle Munster, 5-7, rue Munster, L-2160 Luxembourg City. The event starts at 11:45 h with drinks, followed by lunch at 12:15 h. The event is concluded by 14:00 h.
The lunch fee of 50 € is to be paid at the Cercle Munster prior to the lunch.

The lunch fee is telling of what Richard observed 6 months ago and raises a couple of questions:

The lunch fee for LIGFI is 50 € whereas the lunch fee for AMCHAM for example is 40 €


Why is it so expansive ? Such fee is way beyond most NGOs, let alone academics or others who might have interest.

Will NGOs and academics be invited by banks and other financial institutions ? If yes, what about their independance?

The pre-announcement for the “Luxembourg Monthly Finance Lunch” was online on Wednesday, 21 October 2009.

The day after a new ALFI brochure: " Your bridge between Europe and China: Luxembourg" by ALFI whose members would be wealthy enough to invite NGOs and academics.

This brochures states page 2 : Shape regulation. An up-to-date, innovative legal and fiscal environment is critical to defend and improve Luxembourg’s competitive position as a centre for the domiciliation, administration and distribution of investment funds. Strong relationships with regulatory authorities, the government and the legislative body enable ALFI to make an effective contribution to decision-making through relevant input for changes to the regulatory framework, implementation of European directives and regulation of new products or services.

This sounds like a renewal of what Rafik Fischer said a couple of years ago that I have quoted several times.

What is the practical consequence?
Professionals confirm they decide of the regulatory framework : hence for example poor sanctions compared to what is done in other jurisdictions ; this is the reason why the crime pays in Luxembourg.
Professionals confirm they decide of the implementation of European directives : hence for example the changes to the UCITS directive that introduced the flexibility (the so-called
innovative legal and fiscal environment) that facilitated the drift with Madoff.
Professionals confirm they decide of regulation of new products or services.


In this context, regulation is a frontage in the jurisdiction. So is the recent talk on ethics through LIGFI.

QED.

Will FATF and OECD smell the coffee?

 

According to LIGFI website, the Luxembourg Institute for Global Financial Integrity is launching “the first cycle of the Luxembourg Monthly Finance Lunch. The purpose of the lunch is twofold: (1) providing the opportunity of hearing a personality of authority and international recognition present his opinion on current issues affecting the global financial center; and, (2) serving as a venue at which people can meet and engage in dialogue.

The lunch is open to all. LIGFI hopes to attract participants from Luxembourg, its neighboring countries and beyond.

The first Keynote Speaker at the lunch, set for Wednesday 25th of November 2009, will be Luxembourg Finance Minister Luc Frieden who will start off the lunch cycle on the theme 'A political view on ethics in business.'”

 

 

 

 

I am very happy to see that professionals and politicians in Luxembourg demonstrate once more their close link in the jurisdiction where professionals have a close and direct say in the drawing up of laws and regulations that are enforced and fustigate thos who dare question (see reactions after the publication of Rainer Falk's study).

 

As I said, we have three Luxembourg politicians in the Board of Regents, that belong to the same political party that leads the jurisdiction for years.

 

The first Keynote Speaker at the lunch, set for Wednesday 25th of November 2009, will be Luxembourg Finance Minister Luc Frieden, who belongs to the same political party that leads the jurisdiction for years.

 

I am afraid Minister Frieden failed to implement ethical provisions that were required when he was Minister of Justice whereas the jurisdiction communicates that one on its quick decision-making process (see for example PwC Luxembourg brochure: "Why Luxembourg", page 39, and page 93 of a brochure that was published by the Luxembourg government in 1999, the year when Luc Frieden was reappointed Minister of Justice: "In Luxembourg direct contact with Cabinet members is a normal procedure. This produces quick and timely decisions. Avoiding over-regulation and excessive red tape has certainly prompted the emergence of Luxembourg as financial center in the nineteen sixties") and that was able to change the constitution in a couple of weeks.

 

“What we all are missing are facts, rather than the continuous outflow of innuendos, unsubstantiated attacks and emotional outbreaks”, an article posted recently by LIGFI said.

Let’s see two examples that are not exhaustive of the so-called “quick decision-making process” in areas related to ethics in business.

 

Criminal liability for legal persons

 

Criminal liability for legal persons is required both by the OECD Anti-Bribery Convention, which was signed on 17 December 1997 and came into force on 15 February 1999, and by many OECD reports (and GRECO reports) in the 2000s.

 

Parliamentary question Number 466 dated 3 April 2000 (Xavier BETTEL and Gusty GRAAS) was about the criminal liability of legal persons. Luc Frieden’s answer was the following : “ J'ai l'honneur de vous confirmer que le Luxembourg va légiférer en vue d'introduire le principe de la responsabilité pénale des personnes morales. Le groupe de travail "Réforme du droit des sociétés" est chargé d'élaborer le concept. » (free translation : I have the honor of assuring you that Luxembourg will legislate in order to introduce the principle of the criminal liability for legal persons. The work group “Reforms of business law” is charged to work out the concept”.

 

I love the idea that criminal liability for legal persons is a “concept” i.e. something conceived in the mind or an abstract or generic idea generalized from particular instances.

 

 

The Luxembourg government has filed on 20 April 2007 Bill number 5718. There are only 22 pages.

 

What is the status?

 

Nothing enforced and OECD is getting nervous:

- "OECD urges Luxembourg to introduce liability of legal persons for foreign bribery" (OECD Working Group on Bribery, 27 March 2008)

- "Toutefois, force est de constater que plus de deux ans se sont écoulés depuis le dépôt du projet de loi, sans que celui-ci n’ait encore franchi une étape décisive dans la procédure  parlementaire. Le Groupe de travail de l’OCDE sur la corruption reste donc sérieusement préoccupé par l’absence de responsabilité des personnes morales en droit luxembourgeois, dix ans après l’entrée en vigueur de la Convention sur la lutte contre la corruption d’agents publics étrangers dans les transactions commerciales internationales. Cette situation constitue un manquement grave et continu aux obligations du Luxembourg par rapport à la Convention." (Mark Pieth-OECD Working Group on Bribery, 22 July 2009)

 

 

 

 

 

 

 

 

 

 

 

Mutual Assistance in Criminal Matters between the Member States of the European Union

 

The Luxembourg government has filed on 20 March 2009 the Bill N°6017 bearing
1. Approval of the Council Act of … 29 May 2000 establishing in accordance with Article 34 of the Treaty on European Union the Convention on Mutual Assistance in Criminal Matters between the Member States of the European Union.
2. Approval of the Council Act of ... 16 October 2001 establishing, in accordance with Article 34 of the Treaty on European Union, the Protocol to the Convention on Mutual Assistance in Criminal Matters between the Member States of the European Union
3. Change to certain provisions of the criminal Instruction code and the law of 8 August 2000 on Mutual Assistance in Criminal Matters

 

There are only 22 pages.

 

What is the status?

Sent to the “legal committee” (Commission juridique) twice: 16 April and 8 October.

Nothing enforced.

 

 

 

 

 I am exaggerating when I state that in Luxembourg business view is over ethics in policies?

 

Definitely not.

 

I will quote again what the first Keynote Speaker said before the Association Luxembourgeoise des Professionnels du Patrimoine (ALPP).

 

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. But the stated good intention is broken by the last sentence of the last but one paragraph that quote the professionals:  “We rely on you. Our clients believe in us. They are there because of banking secrecy.”

 

Why on earth are clients there because of banking secrecy? For tax evasion all the more than there will be no automatic information exchange.

 

One understands better the reason why Luxembourg is not in favor of automatic exchange.

 

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 aand that it is still possible to go back. I am ready to give up some requirements"), Luc Frieden said.

 

In this context, the "level playing field" concept that was stated a couple of days ago (the European Union is a zone where rules differ from those applied outside, but given the volatility of capital and the free circulation of capital, we must take care that these rules do not work to the detriment of financial centres within the European Union) to block an agreement with Liechtenstein sounds like foot-dragging tactics. If the issue is actual, Luxembourg should have asked for measures to control the flows outside the European Union. Luxembourg and Austria had actually a selfish attitude as banking secrecy and limited exchange (that was accepted under pressure) favor tax evasion that is not repudiated.

 

A business view on ethics in policies rather than a political view on ethics in business, for the first lunch.

 

Quod erat Demonstrandum.

 

Happy lunch !!!!!

 

.

 

 

 

I have posted a couple of articles about LIGFI to observe it is an empty shell with a deceptive goal that was launched in a jurisdiction:
- where critics are repudiated (Cf. censorship of a report after pressure and threats),
- where regulation is perfectible because of the conflicts of interests and the direct say of professionals in the drawing up of laws and regulations that are applicable to them, which is practically an assent,

It is amazing to observe that 3 members out of 4 of the board of regents are both Luxembourgish and politicians (Jean-Claude Juncker, Jacques Santer and Lucien Thiel). The last member is Swiss.

LIGFI remains an empty shell despite the first articles are online on its website.

“What we all are missing are facts, rather than the continuous outflow of innuendos, unsubstantiated attacks and emotional outbreaks”, an article posted this week says.



Let’s see facts just on the LIGFI website to analyse the culture behind the project:

The “Publications” page starts with these words: The Luxembourg Institute for Global Financial Integrity will post publications that it deems of particular interest and significance in the support and promotion of professional excellence, ethics and integrity in the global financial sector.

And they list :

CFA Institute
The CFA Institute Centre for Market Integrity published so far in 2009 six Financial Market Integrity Index Surveys on the United States, Canada, the United Kingdom, Switzerland, Japan and Hong Kong. On a scale of one (not ethical at all) to five (very ethical), the United States is scored in the 2 range for “slightly ethical” and the other countries typically at or around 3 for “somewhat” ethical.
http://www.cfapubs.org/loi/ccb

Transparency International
Transparency International published 2009 updates to its Global Corruption Barometer (GCB), Corruption Perceptions Index (CPI) and Briber Payers Index (BPI). All three documents paint an unsatisfactory picture of the levels of corruption that prevail around the world.
http://www.transparency.org/policy_research/surveys_indices/gcb
http://www.transparency.org/policy_research/surveys_indices/cpi
http://www.transparency.org/policy_research/surveys_indices/bpi

Global Witness
Global Witness published in 2009 its study “Undue Diligence: How banks do business with corrupt regimes” that highlights corrupt funds finding their way into the global financial system and the lack of resolve of certain banks to address compliance in dealing with the sources of such funds given the lack or ambiguity of regulation and law.
http://www.globalwitness.org/media_library_detail.php/735/en/undue_diligence_how_banks_do_business_with_corrupt

Financial Stability Board (FSB)
The Financial Stability Board, whose Charter was endorsed by the G20 at the September 2009 Pittsburgh meeting, has published in September 2009 three recent reports on “Improving Financial Regulation”, “Overview of Progress in Implementing, the London Summit Recommendations for Strengthening Financial Stability”, and “FSB Principles for Sound Compensation Practices”. The reports are a forewarning to the regulatory and oversight environment that banking and other financial services worldwide can expect over the coming months and years. They capture the political will expressed by the G20 to firmly address the issues of financial behavior and systemic risk that are the root cause of the current financial and economic crises. http://www.financialstabilityboard.org/

 

 

 

 

 

 

 

Comments

1. They use an interesting report from the CFA Institute but in a biased perspective as the study focuses on big jurisdictions whereas many issues relating to money laundering tax evasion and/or fraud in a general rule are in small jurisdictions.

2. LIGFI write that Transparency International published 2009 updates to its Global Corruption Barometer (GCB), Corruption Perceptions Index (CPI) and Briber Payers Index (BPI). They ignore that the CPI no longer exists as I explained.

3. To be honest, they quote Global Witness that published a report that is critical for Luxembourg.

4. Finally, the Financial Stability Board, which is successor to the Financial Stability Forum, was established in April 2009 following the 2009 G-20. It comprises senior representatives of national financial authorities (central banks, regulatory and supervisory authorities and ministries of finance), international financial institutions, standard setting bodies, and committees of central bank experts. It is therefore vulnerable to “political games” like the OECD.


But above all, three major actors in the debate are missing in the list:

Global Financial Integrity. As the LIGFI team members live in the bowl they did not know that a body with similar title already exist since September 2006. Global Financial Integrity promotes national and multilateral policies, safeguards, and agreements aimed at curtailing the cross-border flow of illegal money. In putting forward solutions, facilitating strategic partnerships, and conducting groundbreaking research, GFI is leading the way in efforts to curtail illicit financial flows and enhance global development and security. This body has just completed a conference on “Increasing Transparency in Global Finance: A Development Imperative”.

Tax Justice Network promotes transparency in international finance and opposes secrecy. We support a level playing field on tax and we oppose loopholes and distortions in tax and regulation, and the abuses that flow from them. They promote tax compliance and they oppose tax evasion, tax avoidance, and all the mechanisms that enable owners and controllers of wealth to escape their responsibilities to the societies on which they and their wealth depend. Tax havens, or secrecy jurisdictions as we prefer to call them, lie at the centre of their concerns, and they oppose them. They just launched their website for the Mapping the Faultlines project (see www.secrecyjurisdictions.com), which explores the furtive world of secrecy jurisdictions where furtive types get up to all sorts of dubious business and another website (see www.financialsecrecyindex.com) which takes reader step-by-step into the details of their new ranking of secrecy jurisdictions. The ranking results will be published early November.

The Task Force on Financial Integrity and Economic Development is a consortium of Governments and NGOs that focuses on achieving greater transparency in the global financial system for the benefit of developing countries. It addresses the inequalities in the global financial system that penalize billions of people, and will advocate for greatly improved transparency and accountability

In a nutshell, according to LIGFI none of the above powerhouses in the debate - that proved reliable contrary to LIGFI - deems of particular interest and significance in the support and promotion of professional excellence, ethics and integrity in the global financial sector.

 

Yesterday I quoted European Tax Commissioner Laszlo Kovacs who said that the actions of Austria and Luxembourg were hampering progress in cracking down on global tax fraud, an issue he said was “high on the political agenda of the EU.

The question is: what is to be done to achieve the goal of automatic exchange?

I have an idea: the services of clearing house are done in Luxembourg by Clearstream. Clearstream International was formed in January 2000 through the merger of Cedel International and Deutsche Börse Clearing.

I suggest that EU governements encourage their banks to chose another clearing house for the clearing services, in a jurisdiction that play the truth and fair competition game.

 

Late July I announced the launch of a personal project that appears to be complementary to the one of TJN.

 

The last paragraph of my article was: On a subsidiary basis, for the jurisdictions which lodge an activity of general interest for the international financial sector (for example, clearing), will be posed logically and practically the question of the relevance of the maintenance of the activity if it appears a deficit of regulation compared to what is done in the other jurisdictions

 

A trial is currently taking place before the French court. It involves a Luxembourg-based Company that is called Clearstream. Clearstream is a clearing house like its competitor Euroclear. It is amazing to observe that both clearing houses are located in secrecy jurisdictions: according to TJN, Luxembourg is scored 87% secrecy and Belgium is scored 73% secrecy.  

 

TJN assessment relates to 12 indicators reflecting the legal and financial arrangements of the jurisdiction (Key Financial Secrecy Indicators, KFSI):

 

1. Is legal banking secrecy banned (i.e. Is there no legal right to banking secrecy)? (OK for Belgium)

2. Is there a Public Trust and Foundations Registry?

3. Does the FATF rate 90% largely compliant and with no non-compliant ratings?

4. Are company accounts available for inspection by anyone for a fee of less than US$10? (OK for Luxembourg)

5. Are details of the beneficial ownership of companies available on public record online for less than US$10?

6. Are details of the beneficial ownership of companies submitted to and kept updated by a competent authority?

7. Did the jurisdiction participate in the TJN Survey in 2009 (1=both questionnaires; 0.5 one questionnaire)? (OK for Luxembourg)

8. Does the jurisdiction fully participate in Automatic Information Exchange (the European Savings Tax Directive)?

9. Has the jurisdiction at least 60 bilateral treaties providing for broad information exchange clauses covering all tax matters (either DTA or TIEA)? (OK for Belgium)

10. Has the jurisdiction's authority effective access to bank information for information exchange purposes?

11. Does the jurisdiction prevent company redomiciliation?

12. Does the jurisdiction prevent protected cell companies from being created in its territory? (OK for Belgium)

 

Clearing is definitely an activity of general interest for the international financial sector. As Clearstream explains, the world's entire financial system is built on trust. When assets are traded, both parties must be sure they will receive their part of the transaction. Given the complexity, speed and quantity of assets involved, a fast, secure and trusted third-party is absolutely essential for settling transactions. The business of a clearing house is therefore to ensure that cash and securities are promptly and effectively delivered between trading parties. It also manages, safekeeps and administers the securities that it holds on behalf of its customers.

It results that every financial flow uses such services including criminal flows.

 

The question is: should such services be born by the private sector?

 

I would say definitely no, especially if there is a weak regulation in the jurisdiction where the clearing house is located. 

 

The experience in Luxembourg corroborates the need to “supra-nationalize” the activity under the supervision of an international body (OECD, IMF…).

 

 

Clearstream is a PSF (Professional of the Financial Sector) that is regulated by the CSSF.

 

The regulator is a stakeholder in the promotion of the jurisdiction

 

The Law of 23 December 1998 establishing a financial sector supervisory commission (“Commission de surveillance du secteur financier”), as amended, states:

 

Art. 3. The CSSF shall:

 

(a) examine all requests from undertakings or persons seeking to establish themselves in the Grand Duchy of Luxembourg to engage in one or more of the activities enumerated in Article 2 which require authorisation from the Minister responsible for the CSSF;

(b) carry out prudential supervision of undertakings and persons coming under its authority in accordance with the laws and regulations governing such supervision;

(c) coordinate the implementation of government initiatives and measures aimed at achieving an orderly expansion of the activities of the financial sector in the Grand Duchy of Luxembourg;

(d) monitor dossiers and participate in negotiations at a Community and international level relating to problems affecting the financial sector;

(e) present to the Government any suggestions likely to improve the financial sector’s legislative and regulatory environment;

(f) examine any other question relating to financial activities which the Minister responsible for the CSSF might submit to it.

 

This situation had been pointed out with relevance by the Commission that was mandated to determine solutions to fight the crisis. « le rôle de la CSSF, défini à l’époque comme celui non seulement d’un contrôleur du secteur financier mais encore d’un promoteur de la place doit être revu afin d’éviter tout équivoque sur sa mission essentielle qui est celle de la surveillance prudentielle » (free translation : “the role of the CSSF, defined at the time as both a controller of the financial sector and as a promoter of the financial center, must be re-examined in order to avoid any ambiguity on its essential mission which is that of the prudential monitoring”) (In report « Vers un nouveau modèle de croissance », 23 March 2009, page 13)

 

What has been done? Nothing.

Does the CSSF require the change? No.

 

Professionals in Luxembourg do not provide an opinion on laws and regulation that are applicable to them: it is actually an assent.

 

Article 3 is very interesting when one keeps in mind what Rafik Fischer stated and what the CSSF confirms on its website.

- “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 (...) This INFLUENCE has been exerted directly and indirectly by the LOBBYING initiatives taken on the level of the different professional associations, be it ALFI or ABBL , but also and more importantly, trough a DIRECT ASSOCIATION with the Luxembourg Supervisory Authorities by means of a number of standing committees" (Cf. Rafik Fischer, « Shaping the regulatory environment ». Fundlook, July 2005, page 6);

- "The internal committees assist the CSSF in the analysis of the development of the different financial sector segments, give their advice on any question relating to their activities and participate in the DRAWING-UP and the INTERPRETATION of regulations relating to their specific field."(Cf. Site internet de la CSSF, page « Comités internes »).

 

 

Article 3 must be rephrased in this perspective.

 

The CSSF shall

(a) examine all requests from undertakings or persons seeking to establish themselves in the Grand Duchy of Luxembourg to engage in one or more of the activities enumerated in Article 2 which require authorisation from the Minister responsible for the CSSF;

(b) carry out prudential supervision of undertakings and persons coming under its authority in accordance with the laws and regulations governing such supervision for which regulated entities had a very close and direct say  in the drawing up and the interpretation  of regulations relating to their specific field;

(c) coordinate with different professional associations, be it ALFI or ABB,L the implementation of government initiatives and measures aimed at achieving an orderly expansion of the activities of the financial sector in the Grand Duchy of Luxembourg;

(d) monitor dossiers and participate in negotiations at a Community and international level relating to problems affecting the financial sector;

(e) present to the Government any suggestions likely to improve the financial sector’s legislative and regulatory environment resulting from lobbying initiatives taken on the level of the different professional associations, be it ALFI or ABBL , but also and more importantly, from a direct association with by means of a number of standing committees;

(f) examine with different professional associations, be it ALFI or ABB,L any other question relating to financial activities which the Minister responsible for the CSSF might submit to it.

 

 

This is actually how works the regulated jurisdiction of Luxembourg.

 

I do not think this is the regulated entities’ role to have a very CLOSE AND DIRECT SAY on the evolution of the Luxembourg prudential regulatory environment that is opposable to them, and to exert directly and indirectly LOBBYING initiatives. Such “close and direct say” and “influence” and “direct association “apply not only for the regulator bus as well for the parliament (many members of parliament are business lawyers).

The direct consequence is the delay to transpose Recs or regulations despite international commitments.

A very good current example is the difficulty to enforce the criminal liability of legal persons whereas it was possible to change the constitution in a couple of weeks.

 

The result is that in case of trial (money laundering, fraud…) courts in Luxembourg cannot use legal provisions that are delayed. In other words, the crime does not exist because of the CLOSE AND DIRECT SAY and LOBBYING and DIRECT ASSOCIATION.

 

After the generous grant to the FATF which is in situation exactly as if a Court received a generous grant from a litigant it is gonna judge, a commission tender received a generous grant from a tender it is gonna assess, an auditor received a generous grant from an auditee it is gonna audit…, Luxembourg has imagined a regulation that is as if auditees had a close and direct say on how the auditors must work…

 

By the way, it is about to be the case.  The CSSF bases its work on audit reports. The draft law to transpose the 8th directive on audit as modified appoints the CSSF for the public supervision of auditors (An ad to hire staff is online on the CSSF website)

 

The situation will be: professionals will be controlled by auditors that will be controlled by the CSSF that will be controlled by professionals that will control themselves in fine.

 

 

Don’t you smell the coffee?

 

I personally do.

John Christensen visited Luxembourg this week.

Two articles from TJN are online about this visit:
- Taboos and blood sports in Luxembourg
- Downtrodden dentists and banker heroes in Luxembourg

The same week:
- Paul Chambers, from Atoz Tax Advisers, advised banks not to disclose data on request and to wait for a court decision to authorise such disclosure whereas nothing is enforced in Luxembourg to organise the practical implementation of OECD agreements; but Paul Chambers admitted that the offshore business model is ending (original quotation : “Le modèle offshore touche vraiment à ses limites”)
- Luc Frieden would have stated that he could imagine automatic exchange of information with jurisdictions with which Luxembourg signed an agreement.

I wish politicians and professionals in Luxembourg were proactive and receptive enough to do the aggiornamento when I suggested it a couple of years ago.

The drop excavates the stone, not with force but by falling often...