Ethics and governance in the European Financial centers

An interesting conference took place in Luxembourg a few days ago.

It was organised by PRiM (the association of Risk Management Professionals in Luxembourg) in association with POG (the Personnel Officers' Group) and Hudson on a topic which is becoming of increasing importance : People Risk.

Unfortunately the critical point of the topic for Luxembourg was not on the agenda : why dishonest professionals in Luxembourg are knowingly hired and supported when ethical professionals are fired or repudiated in the recruitment process ?

This support of dishonest professionals was underlined by the CSSF in its annual report 2004 and is unfortunately still verified on the field in crossed public and official sources (judiciary and corporate registration) that are the visible part of the iceberg .

Read press release

" Small countries survive as financial centres because they are more agile, because they can act more quickly, and because there is this close cooperation between the actors." , Lucien Thiel said at the “Panel discussion: How can privacy survive in an environment of increasing information exchange?”, in the framework of the Liechtenstein Dialogue that took place in 2007.

Lucien Thiel is the best representative of the Luxembourg financial center as Member of the Luxembourg Parliament (same party as the Prime Minister) and Former General Manager, Luxembourg Bankers’ Association (ABBL). And what is says definitely express the deep business culture of the Luxembourg financial Center.

After the Liechtenstein scandal early this year he is the one who said that "It is not our duty to control if the tax payer was honest" and "Banking secrecy remains: Luxembourg is not compelled to communicate its clients' data".

In the framework of the transposition of the Second European Directive relating to AML it is the Luxembourg Bankers’ Association (ABBL) he chaired that wrote in an annual report that "offences such as forgery, use of forgery, false balance sheet, use of false balance sheet or unauthorised use of corporate property are vague and ambiguous" (ABBL, Annual Report 2003, page 22).

Knowing the business stake of audits with a commercial relationship between auditors and auditees, and that audit firms, and especially every big four firm, are members of the ABBL this means that in Luxembourg auditors consider that offences such as forgery, use of forgery, false balance sheet, use of false balance sheet or unauthorised use of corporate property are vague and ambiguous as they did not repudiate the statement. Furthermore there are very little declarations of suspicion from auditors in Luxembourg as observed the Annual Report 2007 from the Minister of Justice: only 4 declarations of suspicion for a profession that has 350 professionals plus 280 trainees. Such figure is not realistic all the more than a declaration of suspicion means the loss of the client and of prospects (how can they rely on an auditor that is not pragmatic enough?) in a country where there is a business model for growth from the audit leader that do not care of the IFAC warning about that culture.

We are no longer talking about banking secrecy or tax advantages. As I already wrote it is a mistake to focus on these.

We are talking about what was called "this close cooperation between the actors" at the Liechtenstein Dialogue 2007. But this "close cooperation" unfortunately appears much more like complicity to act quickly to hide dysfunctions and hush up issues: complicity for the “reason of business”.

Outcomes of the Liechtenstein Dialogue 2007

The Minister of Justice in Luxembourg recently published the Annual Report 2007.
There are a couple of pages relating to AML (pages 136 to 140).

As I already wrote, the FIU in Luxembourg is the prosecuting authorities and does do a good job that limit the risk of scandal in a lax business environment where issues are hidden or hushed up.

If the number of declarations of suspicion in Switzerland increased, this is not the case in Luxembourg despite the center is growing.

Year Number Percentage
1998 114 2,08
1999 109 1,99
2000 158 2,88
2001 413 7,54
2002 631 15,11
2003 828 15,11
2004 943 17,20
2005 831 15,16
2006 754 13,76
2007 700 12,77
Total 5481 100


To assess the lax environment one must take into account the financial power of the Center and not the size of the country.

The ratio in Luxembourg compared to Switzerland demonstrates the lax business environment, what is called locally prag-ma-tism.

Read report (in French)

Xavier Bettel, who is member of parliament in Luxembourg has recently asked a parliamentary question relating to the absence of publication online of judiciary cases in Luxembourg compared to other countries.
I dont know what the minister is gonna answer but the actual answer is simple : in Luxembourg leaders either professionals or politiciens do not like transparency on issues that are either hidden or hushed up.

Evidences ?

- No TI chapter in Luxembourg compared to Switzerland and the UK,
- no involvement of the Luxembourg big four entities in international surveys of their brand relating to fraud or corruption : for example "Global Economic Crime Survey" for PwC and "Corruption or compliance – weighing the costs" for E&Y
- CSR without ethics in Luxembourg compared to Switzerland and the UK
- etc.

Xavier Bettel's question

A German TV channel wanted to know if German banks would agree to discreetly move money of clients having an account in Liechtenstein towards Luxembourg ; according to a documentary diffused last Monday evening, three banks reached at the request of a journalist playing the prospective client.
The adviser of the first bank praised the high standards of safety of the country which allowed anonymous placements with numbered accounts. This adviser even proposed the discrete transfer of the money from Liechtenstein to Luxembourg.
The adviser the second bank specified that the bank had great experience in the field and that there was nothing to fear coming from its head office.
The adviser of the third bank was more careful, informing the factitious clients of the risks on bleaching but presented the various means possible to place money without paying tax.
The adviser of the fourth bank refused to advise the customer.

The documentary is perfect implementation of Lucien Thiel's doctrine : that's to say
- It is not our duty to control if the tax payer was honest,
- Banking secrecy remains : Luxembourg is not compelled to communicate its clients'data.


As far as professionals and politicians in Luxembourg are concerned, they underlined that the TV documentary was only based on the German point of view that is not the Luxembourg point of view and that it was a trap against Luxembourg to weaken the country in the debate relating to banking secrecy.

While the Liechtenstein scandal is recent, what is extraordinary the absence of guilt-feelings and the feeling of impunity.


I guess the FATF enjoys Luxembourg's generous grant that shoul have never ever taken place.


Know more :

Article in French from L'Essentiel

Script of the documentary in German

Documentary in German : Wie die Landesbanken in Luxemburg helfen, Geld am deutschen Fiskus vorbeizuschleusen (As the Landesbank in Luxembourg help to smuggle through money at the German treasury)

Debate in German : Landesbanken in Luxemburg helfen Geld am deutschen Fiskus vorbeizuschleusen (Landesbank in Luxembourg help to smuggle through money at the German treasury)

Sofia Dimoulis wrote an interesting analysis about Luxembourg.

Read article

As I already explained last year, the CSSF in Luxembourg is not transparent enough on dysfunctions and does not sanction professionals in a credible way.

The only public information relating to sanctions is provided by the annual report in its 9th chapter.

Let’s see is stated in the 2007 report that was released this week.
First of all, the 2007 report is currently only available in French. Reports were available in English the previous years.
Chapter 9 describes the disciplinary actions undertaken by the CSSF in 2007.
It can be summarised in one word: nothing, except for 7 professional that were not authorised to do business.

Does that mean that the CSSF is doing nothing? Definitely not, but the way it does its duty is not strict enough to clean the financial center and make the requirement of professional standing and qualification a reality.

According to the last OECD report that was approved and adopted by the Working Group on Bribery
in International Business Transactions on 20 March 2008, Luxembourg urgently needs to establish liability against legal persons for foreign bribery and put in place sanctions that are effective, proportionate and dissuasive, according to a report by the OECD's Working Group on Bribery. The bill currently before Parliament, designed to introduce this responsibility in Luxembourg law, should be amended to ensure that it meets the requirements of the OECD Anti-bribery Convention.

Despite a couple of improvements, the Group is seriously concerned that Luxembourg has still not responded to key Phases 1 and 2 recommendations; these recommendations relate to the establishment of a clear, effective and dissuasive system of liability of legal persons and efforts to raise awareness of the foreign bribery offence among the private sector. Considering the seriousness of the situation, the Working Group has decided that, within one year, Luxembourg will report, in writing, on measures taken to fulfil the recommendations of the Group, and reserves the right, in the event of continued failure to implement the Convention, to take further steps.
The Working Group is particularly concerned about the continuing absence of liability for legal persons that engage in bribery. While a bill has been placed before Parliament dealing with the criminal liability of legal persons, the report highlights gaps in the bill which, if adopted in its current state, would fall short of the requirements of the Convention. Luxembourg should establish a rule for attributing acts of bribery to legal persons that is sufficiently broad to give full effectiveness to the liability of legal persons: the criterion of an act committed "by one of the legal bodies or by one or more members of its legal bodies", as included in the bill before Parliament, seems too restrictive, as it excludes most operational organs or structures. It is also essential that the liability of legal persons be subject to effective sanctions: the fine imposed must be severe enough to be dissuasive. Furthermore, the bill should expressly recognise the jurisdiction of the Luxembourg courts over offences committed outside the national territory by legal persons of the Grand Duchy.
It is also important for Luxembourg to take a more proactive approach in encouraging SMEs to comply with stricter ethical standards when they are looking for business abroad. A system for protecting whistleblowers should also be introduced. Furthermore, the report asks Luxembourg to take whatever steps are needed to facilitate the work of the judicial authorities in obtaining information from Luxembourg financial institutions.

The same 20 March PwC Luxembourg, the audit leader that does not like to tell about economic crime in Luxembourg, published a report called "Opportunities and Competitive Re-positioning of Luxembourg Private Banking by 2012 and 2015 " with the view of providing a sense of purpose shared by all the Luxembourgish stakeholders of the private banking sector and guidance for the development of coherent capacities to sustain the cluster in the long-term.

The publication at the same time of both reports wants commenting: on the one hand the OECD points out persistent dysfunctions, on the other hand PwC Luxembourg and actors do not care of international recommendations or requirements, and go on in their headlong flight. It is telling that PwC Luxembourg report do not points out the risks because of the lax environment. It is only stated
page 9, the « high commitment to regulatory compliance », which is by the way not compatible with the OECD report ,
page 37, the contact person for compliance assignments,
page 27-28, tax fraud and tax evasion but in the limited framework of the Double Tax Treaties.

The delay to implement the OECD recs in a country where the small size should facilitate the legal and regulatory reactivity is telling. Financial stakes are so important that everyone including local big four firms do not take their actual responsibilities, and are delighting with conflicts of interests not to say corruption that they do not repudiate.

Time is up for head offices, either bank head offices or audit head offices, so smell the coffee and realise the risks for their brand in a center where both politicians and professionals definitely do not do their duty.

I explained last week that a country cannot base its growth on banking secrecy, tax evasion and frauds in general.

This is less and less accepted worldwide, German Finance Minister Peer Steinbruck' statement about Liechtenstein but as well Switzerland, Luxembourg or Austria being the last example after American Senators, Transparency International.

A financial center needs credibility and in this context its politicians needs to be clever for the sustainability of the center.

I am afraid this is not the case in Luxembourg where nothing has changed in the business culture as demonstrated by parliamentary questions.

Eight Months months ago to face the American Senators' Stop Tax Haven Abuse Act MP Laurent Mosar asked "What necessary steps are planed to protect the interests of the financial center?" instead of asking the relevant question which is "What is to be done to correct the dysfunctions which definitely harm the reputation of the financial center?"

Last week, we could read in the Press MP Lucien Thiel's interview about Peer Steinbruck' statement. Lucien Thiel is the former chairman of the Luxembourg Bankers' Association (ABBL), the association that explained in the framework of the transposition of the second directive that offences such as forgery, use of forgery, false balance sheet, use of false balance sheet or unauthorised use of corporate property are vague and ambiguous (See ABBL report 2003 page 22 for instance). A couple of sentences of this interview Lucien Thiel that is is French are worth translating :

Ce n'est pas notre devoir de contrôler si le contribuable a été honnête: It is not our duty of control if the tax payer was honest
What about AML provisions? I guess it is not banks’ duty to control if money is laundered.

Il existe toujours un secret bancaire, le Luxembourg n'est pas obligé de communiquer les informations de ses clients. : Banking secrecy remains : Luxembourg is not compelled to communicate its clients'data.
What about international cooperation?

In two sentences Luxcien Thiel explains that Luxembourg actually does not care of the fight against fraud and of the international cooperation.

This feeling is shared by politicians. A member of the opposition last week asked a question that fustigate "German Finance Minister's allegations".

Everyone is forgoting that there is a proved permissiveness in Luxembourg that weakens the sustainability of the center.
The point to qualify as tax haven a financial center is neither banking secrecy nor attractive tax rules even these are clues.

The critical point is permissiveness because of conflicts of interests not to say corruption: because of this corruption, nobody is willing to tighten up the ship on issues that are hushed up and nobody is willing to eliminate negligent people : This is not responsible because of the small size emphasizes dysfunctions.

Mosar, Thiel and Wagner's statements are a message for other countries: up yours! Let us make money! This a collective responsibility.


I guess the FATF enjoys Luxembourg's generous grant.

Read more about the topic : Swiss and Luxembourg tax havens next in firing line

A couple of days ago IMS Luxembourg published a press release.
The society is alive despite the lack of events in 2007.
There are new members (24 registered and 20 in the pipe) which is a good thing.
Unfortunately they did not change the areas of interest that are rather limited for a financial center as I already explained.
Especially areas like AML and ethics that are critical areas for CSR in the financial sector, are ignored to focus on money given.

Know more (french)