Ethics and governance in the European Financial centers

Reuters as reported that a Luxembourg court will decide in hearings starting today whether investors have the right to bring direct claims against the fund’s custodian and auditor.

The Commission de Surveillance du Secteur Financier, Luxembourg’s financial regulator, last week said it “falls exclusively to the courts” to decide whether banks must pay compensation over their role as depositary.

The head of the Luxembourg tax administration will testify before the court.

He stated that "ruling" is neither illegal nor exceptional in Luxembourg

He is right.

I will quote a comment on TJN website: Nobody dares talking about the horrendous tax advantages granted by some tax administration offices in "tax rulings" to off-shore structures, giving a "taxable income label" to next to zero taxed income, rerouted to tax heavens. (PECS, CPECS, which by a wonder transform deductible interest on one side into non taxable profit on the other).

"Ruling" is neither illegal nor exceptional in Luxembourg.

So is Tax evasion.

Fiduciaries are the heart of the scandal.

One that no longer exists stated on its website:

The economic policy of Luxembourg is characterized by its liberalism as regards establishment.
The policy pursued by the government encourages the private initiatives, the administration is with the service of the companies, and not the reverse.
The bank secrecy forms integral part of the Luxembourg legislative system.
Absence of local taxation for the non-residents, bearer shares, exemption of appreciations on the participations.
(...)
The abuse social good and tax evasion are non-existent in the Luxembourg law.
The majority of the daily expenses of the leaders can pass in load.
(...)
Anonymity is a paramount concept in the Grand Duchy whose keystone is the bank secrecy.
The economic recipient with the possibility of not appearing as a shareholder and/or an administrator of the company by the installation of the contract of trust.
This contract is regulated by the Luxembourg law as well as the bank secrecy.
Trust is a notion absent from the French right, it makes it possible to transfer the legal property from its goods fiduciary while preserving the economic capacity on the aforementioned goods.
The application of trust makes it possible to manage its business very by preserving anonymity.
(...)
We irremediably entered a phase of delocalization which corresponds above all to problems of tax management and say for the company to a procedure of survival.

And the professional to specify that "thanks to X and has its partners Attorney and Lawyers, you can within the framework of an economic beneficiary, own and manage your business without appearing officially. That can be practical for the detention of goods and real estate , or for the continuation of an activity

The best is the legal page where the fiduciary explained that :
- it does not support fraud, and
- it is not responsible for verifying the compliance with laws and regulation, which is up to the client.

PwC has just published its Economic Crime Survey.

There are no respondants from Luxembourg as officially economic crime does not exist, so corruption does not exist in this jurisdiction.

Why ? 

Thanks to the small size of the country, the fact that everyone knows everyone else (thus encouraging self-regulation) and the high level of incomes.

This is what was said by the Luxembourg authorities in OECD and GRECO reports.

This may be the reason why there are no data about corruption in Luxembourg.

In its report to assess the enforcement of the OECD Bribery Convention, TI observes that  “No TI reports were prepared for three countries, Estonia, Iceland and Luxembourg, since TI lacks experts in those countries, but TI Estonia provided current data on cases and investigations”.

It appears that in the tables data are actually missing only for two jurisdictions: Iceland, the jurisdiction that went bankrupt, and Luxembourg. Among the EU Member States that signed the OECD convention (most States) Luxembourg distinguishes itself, as it is the only jurisdiction that is unable to provide data, which is telling for a jurisdiction that is an important financial center despite it is a tiny state

The fontage is definitely cracked.

Several civil servants from the tax admuinistration are before the court in Luxembourg this week

Corruption, economic crime and tax evasion with offshore scams are on the agenda.

The tax haven is there.

Know more

A couple of months ago, after the release of Rainer Falk's report and prior to its censorship under pressure including threats on the financing of Luxembourg NGOs ABBL stated that "Luxembourg does not exploit poor countries" : ABBL said that "The study insinuates that the Luxembourg financial centre features tax practices and mechanisms that would set it apart as a tax haven and implicitly accuses Luxembourg legal vehicles - notably investment funds - of being used to make the poorest countries even poorer."

This press release was typical wooden language (like in the Madoff affair in another domain): denying the facts and not telling the truth. Any student in crisis communication knows it is no use denying and not telling the truth.

I am afraid professionals and the regulator in this jurisdiction are actually unable to make amend.

This week, the press reported that a magistrate in Switzerland sentenced Abba Abacha, General Sani Abacha's son, to a suspended jail term, and ordered the confiscation of his assets of $350m. "The money is held by his criminal organization and seized through international assistance in Luxembourg and the Bahamas" Geneva canton's justice office said in a statement.

A couple of weeks ago Luxembourg NGOs met the bankers

And as I thought, representatives of the financial sector
- did not make amend and admit tax evasion from poor countries (that did not sign agreement for exchange of tax information) exist and is not fair business for the growth of the center
- did not accept to criminalize tax evasion like money laundering
- did not accept to reinforce sanctions for those who do not abide by the rules
- did not accept to put an end to the influence of professionals on the Luxembourg Regulator.
- ...

They were definitely arrogant and of bad faith.

Jean-Jacques Rommes, Director ABBL,  stated that the NGOs suffer from the Stockholm syndrome, which would mean the NGO's are kidnapped by the criminal poor populations of the 3rd world that they want to serve and they start thinking like the poor.....

This argument is not relevant! It can be reversed immediately and credibly against the financial center. The Luxembourg banking world is captive of dirty money and illegitimate practices and suffers from a Stockholm syndrome. They think like the fraudsters and evaders and the cheaters that hold them captive with their money.

Above all, when Jean-Jacques Rommes states that "to open the doors one should not start by a slam", I am afraid he forgets that it is Luxembourg that slammed the door in the first place:

I proposed by mid 2000 a project about business ethics and corporate social responsibility. Nobody supports this proactive initiative: neither the public research (I proposed a detailed project that anticipated what happened this year) nor the private sector (big four firms and banks). They actually slammed the door.

I proposed several times in 2007-2008 to Fernand Grulms, CEO of Luxembourg For Finance, my project for a paradigm shift including in September last year the organisation of a conference about "Ethique, RSE et lutte contre la corruption dans le monde contemporain : Luxembourg face à son destin" (free translation: ethics, CSR and the fight against corruption: Luxembourg facing its destiny). He never answered and therefore slammed the door. By the way he is the one who was so agressive with NGOs by calling for financial threats.

I proposed, publicly this year in the Wort in an open letter, to Jean Meyer, Chairman ABBL, once more the paradigm shift. He answered by slamming the door and denying issues especially tax issues and questions raised by the Madoff affair: as opposed to what he said the European Commission confirmed that the automatic exchange of tax information is the objective of the UCITS directive ("The Directive envisages that all EU Member States will eventually move to automatic information exchange") and however Luxembourg is not implementing correctly the UCITS directive;

In a nutshell, even benevolent advice, such as the one I gave on this blog or articles, seems to be not at all welcome "free" contributions. (Cf. what I said in the Financial Times last January)

While they go on ignoring clear-sighted advice, they have been building for two years their deceptive so-called ethics "made in Luxembourg" that however lacks credibility:

1. IMS

To reject Rainer Falk's study, they communicate that they support poor countries with generous grants. As I explained two years ago when IMS Luxembourg was launched, Corporate Social Responsibility in Luxembourg is limited to prestige operations that are much more an opportunity to promote the brand than an enforcement of actual ethics in business practices with specific CSR issues in the financial sector as defined by ORSE (the areas of interest are: patronage, companies and territories, management of diversity and societal innovation). Since 2007 they organized a couple of events.

2. LIGFI

LIGFI was launched last May. The domain ligfi.org was actually reserved in December last year by a professional from a firm whose activity is economic intelligence. As I said, 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:

Most LIGFI founders are Luxembourg people, live and work in Luxembourg, in or close to the financial sector. Academe were not involved in the project team except Gilbert McNeill who seems to bear alone the project. He is the contact person for General Information, Press and Membership.

The Board of Directors and Executive Committee include neither pure Academe nor NGOs that therefore do not participate to the definition of the policy of the institute.

This may explain the reason why in a recent press release LIGFI only explicitly calls for banks, other financial services and service providers to the financial sector to join the association.

However should academe and NGOs join they would have ridiculous voting rights whereas those who have the money (financial institutions) have the most rights.

Critics and those who are not right-minded are excluded or will be excluded and lose their money

LIGFI ignores powerhouses like GFI or TJN in the debate on financial integrity

The first speaker at the LIGFI Monthly Finance Lunch will be this Wednesday Luc Frieden: the best evidence that LIGFI is a Luxembourg political tool. There are critical issues for the reputation of Luxembourg, and especially Madoff and the implementation of agreements to exchange tax information. In both cases Luc Frieden was disappointing because of the business view on ethics and the decision-making power:

On the one hand his draft law to enforce double taxation agreements opens the condition for a drift with a dubious "discharging fine",

And on the other hand the way the Madoff affair is handled since its beginning under the supervision of his Ministry is a disaster for the reputation of the jurisdiction:

Claude Kremer, Chairman ALFI, is no longer talking of "faithful transposition" of the directive like Luc Friden but of a "transposition as it was needed", which complies with the influence of professionals on the regulator that is in my opinion the key problem.

Luc Frieden suggested arbitration. "An international arbitration will be a more professional and fast solution that is probably more satisfactory to all (...) I prefer an arbitration of two, three years than having 100 court cases decided in 10 years", he said. Does that mean that the "strong relationships with regulatory authorities, the government and the legislative body" that "enable ALFI [it is true as well for ABBL] to make an effective contribution to decision-making through relevant input for changes to the regulatory framework, implementation of European directives" (wording of the ALFI brochure: "Your bridge between Europe and China: Luxembourg", October 2009) created the conditions for a justice denied. This is the reason why is so complicated to enforce a criminal liability for legal persons that would have been very useful in the Madoff affair as CSSF seems to state in its latest press release that the bank provide inaccurate information in the framework of the authorization process. A criminal procedure against the legal person is not possible and I cannot imagine either a criminal procedure against the individuals that created Luxalpha as they are supported by the business community and the government despite what CSSF states now that was however known since the beginning of the Madoff affair. E.g. :

- Conference: Post Crisis - Opportunities for the Luxembourg Financial Sector (11 November 2009)

Guest speakers: Roger Hartmann, Partner, Ernst & Young and former Managing Director for UBS and Luxalpha ; Michael Hornsby, Partner, Ernst & Young ; Claude Kremer, Chairman, ALFI ; Keith O'Donnell, Partner, Atoz ; Jean-Jacques Rommes, Director, ABBL ; David Steinegger, CEO, Lombard International Assurance S.A. ; Prof. Christian Wolff, Director, Luxembourg School of Finance

- Luxembourg For Finance Roadshow to Hong Kong, Singapore and Bejing (20 to 26 October 2009)

Speakers: Luc Frieden, Minister of Finance of Luxembourg ; Fernand Grulms, CEO Luxembourg For Finance ; Roger Hartmann, Partner, Ernst & Young and former Managing Director for UBS and Luxalpha ; Clude Kremer, Chairman ALFI... 

Jean Guill, Managing Director CSSF , who is said to be close to Luc Frieden, communicates in a very bad way as the regulator does not state the accurate situation. In its last press release, CSSF states that, "The documents submitted to the CSSF in the framework of the authorisation procedure for each of the three Sicav,1 on the basis of which they were registered on the official list of UCIs, included no reference neither to the identity of BMIS nor, more importantly, to the multiplicity of functions carried on de facto by one entity". "One entity" does not refer to BMIS otherwise CSSF would have said "This entity". It refers to the bank, and it is clearly stated in the prospectus that the bank carried on de jure multiplicity of functions, and especially management company and depositary, which is clearly prohibited by the directive but not prohibited by the Luxembourg law of transposition that transposed so-called faithfully the UCITS directive.

We can conclude that CSSF did not read seriously the documents submitted in the framework of the authorisation procedure as it is hostage of professionals that have a close and direct say and participate to the drawing up of the regulation.

I am afraid the Luxembourg regulator is not doing a correct job of regulator in Luxembourg and does not make amend contrary to SEC that is willing to tighten up the ship (Cf. recent SEC report:  Program Improvements Needed Within the SEC's Division of Enforcement).

Such introspection on the regulation is only impossible in Luxembourg.

Go on like that guys in Luxembourg, and in a couple of years your financial center will go bust and it will be YOUR responsibility.

The Luxembourg regulator yesterday communicated on the Madoff affair once more in a very bad way.

Nothing about the influence of professionals that opened the drift.

But inaccurate statements at the end:

Finally, as regards the three Luxembourg investment companies affected by the Madoff case and currently in judicial liquidation (the "Sicav", cf. CSSF press releases of 15 April 2009 and of 13 May 2009), the CSSF wishes to recall and specify the following points:

• During an authorisation process, the CSSF approves a UCI's incorporation documents, i.e.: the prospectus and the articles of incorporation or the management regulations of the UCI in question. In accordance with the law of 20 December 2002 relating to undertakings for collective investment, a UCI's prospectus has to contain all the necessary information for an investor to reach a properly informed decision on the proposed investment. Internal documents which merely govern the practical terms and conditions between professionals (such as operating memoranda) have to comply with the contents of the approved and published prospectus and cannot deviate therefrom. These internal documents are not submitted to the CSSF.
• The documents submitted to the CSSF in the framework of the authorisation procedure for each of the three Sicav,1 on the basis of which they were registered on the official list of UCIs, included no reference neither to the identity of BMIS nor, more importantly, to the multiplicity of functions carried on de facto by one entity. Between the launch of the various Sicav and the breakout of the Madoff affair in December 2008, the CSSF was never informed in a transparent manner, by the professionals involved, of the structure actually set in place nor of the role played in practice by BMIS at different levels of this structure.

Let's have a look on the original prospectus page 7:

( Click to enlarge)

Can CSSF seriously state it was not aware of the multiplicity of functions carried on de facto by one entity as it was not de facto but actually de jure?

Who was Portfolio Manager, Custodian and main Paying agent, Distributor ? The same entity located at the same address.

Once more stakeholders, and especially investors, are considered as idiots in this secrecy jurisdiction that is unable to make amend.

Les Echos yesterday reported that Patrick Littaye, co Access International Advisors, has summoned before courts CSSF and every UBS entities involved with Luxalpha (UBS Luxembourg, UBS Third Party Management, UBS Fund Services, UBS AG).

In his opinion CSSF could not ignore the links between UBS and Madoff.

I am sad for Luxembourg: they were not courageous enough at the begining to admit that they the local functioning opened the drift with Madoff as I demonstrated.

I stated the solution early this year: The only way for investors that are victims of a lax legal and regulatory framework to be respected would be a payment by the Luxembourg State that would go later before the court for the refund in the legal and regulatory framework it enforced.

Should they have compensated the clients, the issue would be over. The reality is that for clients recovering their money lost will be a "long shot" with expenses to pay for the lawyers that anyway will not be included in the surplus of the winding-up.

Know more

Some foreign readers of this blog may be surprised by my findings about the disclosure of UBS' OPMEM in the media.

I will state three observations about the functioning of Luxembourg as a judiciary and regulatory haven.

1. Filing a criminal complaint and file of a civil action is a common tactic to stop other procedures before courts.

Because of the principle that "criminal law supersedes over civil laws", 80% of criminal complaints are lodged in Luxembourg to delay justice despite the fact that justice delayed is justice denied.

As far as UBS OPMEM is concerned, as it is an internal document, this may be an opportunity to lodge a criminal complaint and file a civil action to stop some investors' procedures.

Cf. annual report 2008, Ministry of Justice, page 134:

Previous annual reports stated the same thing.

2. Luxembourg courts filter evidences

Courts in Luxembourg filter evidences.

To be acceptable the evidence should be legally obtained and not support a value judgement.

2.1. Legal evidences

There are only a few judgements that are published in Luxembourg.

Of which, the following before the Court of Appeal: N°128/07 XD dated 28 February 2007

The debate was about the evidence before courts. The conclusion is that evidence that is obtained in the framework of an illegal action should not be admitted:

It is true as well in France and in many jurisdictions: but in Luxembourg the abuse of the legal and regulatory framework relating to professional secrecy is not in favor of the truth before the courts.

As I said the business community crafts laws and regulations and especially the extent of professional secrecy. "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."(Cf. Alfi brochure "Your bridge between Europe and China: Luxembourg", October 2009). What is true for ALFI is true as well for ABBL.

 2.2. Value judgements

The author of a book was cited before the Criminal Court by a Luxembourg lawyer for calumny, libel or, at the least, proffering insults, through the publication of a couple of statements in a footnote of the book.

What was said in the litigious footnote: "[Mr N.S.] was known for his contacts with [M.S.] and [R.C.], former bankers for the Mafia and the Vatican respectively (cf. [F.C.] and [L.S.], op.cit. p. 288), and he was suspected of having forged ties with organised crime, particularly in the United States. He also maintained excellent personal relations with [G.A.], dating from the period when he was president of the European Association of Christian-Democrat Students. As Grand Master of the main Masonic Lodge in Luxembourg, he was responsible for admitting [R.C.] to its ranks."

The author was acquitted with regard to three of these statements, but convicted only of the offence of proffering insults on the ground that he had written that "[N.S.] was suspected of having forged ties with organised crime, particularly in the United States". He was ordered to pay a fine of  EUR 1,500 euros and the symbolic amount of one euro to the civil party in respect of damages. The Court of Appeal and the Court of Cassation confirmed: the sentence was considered as a value judgement.

The author went before the CEDH (the "the Court of Human Rights for Europe"): relying on Article 10, he alleged that his conviction for proffering insults had violated his right to freedom of expression. Under Article 6 § 1, he further complained that inadequate reasons had been given in the decisions by the domestic courts with regard to his arguments under Article 10.

Having regard to the modest nature of the sentence imposed and the content of the disputed statements, the CEDH considered that the measures taken against the applicant had not been disproportionate to the legitimate aim pursued. Accordingly, there had not been a violation of Article 10. The CEDH noted that the domestic courts had not explicitly ruled on the applicant's arguments under Article 10 of the Convention. Having examined the reasoning in the decisions by the domestic courts, the CEDH concluded that the applicant did not have grounds for alleging that insufficient reasons had been given for the decisions by the Luxembourg courts, even if, in the applicant's case, more substantial reasoning with regard to Article 10 would have been desirable. Consequently, there had not been a violation of Article 6 § 1.

Dissident opinions of judges found a restrictive conception of the freedom of expression that deny the right to bring evidence (s) when the behaviour of a leader of the jurisdiction is criticised by considering the statement(s) as "value judgement" (Cf. for example Judge Sajô's analysis - CEDH, No 24261/05, BACKES v. LUXEMBOURG, 8 July 2008).

The case was rejected by the Grand Chamber.

Read judgement (French)

3. Criminal liability for legal persons does not exist

The legal framework that is decided by professionals does not organise the criminal lability for legal persons.

As I said, 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 but 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.  

I have analysed in the previous article that the Operating Memorandum (OPMEM) that quotes Madoff over 20 times should not exonerate a collective responsibility in Luxembourg because of the so-called "relevant input" of professionals in the drawing up of laws and regulations that actually opened and facilitated the drift with Madoff.

I would like to lay emphasis on the consequences that result from the public disclosure in the media of an internal document that was not intended to circulate outside the bank.

UBS is a PSF (Professional of the Financial Sector) that is regulated by CSSF. The PSF statute requires confidentiality i.e. respect of professional secrecy (Cf. article 61-22 of law of 5 April 1993 as amended). Because of the disclosure in the media of an internal document that was not intended to circulate outside the bank, there is a reputational risk for UBS.

If I were UBS I would lodge a criminal complaint and file of a civil action.

The key questions to investigate are:
1. Who circulated the OPMEM outside the bank?
2. Did this person inform UBS he/she had the document outside the bank
3. If yes, when (statute of limitation?)?

Anyway the courts should disregard the OPMEM should an investor want to use it against UBS and even stop the procedure because of the principle "criminal law supersedes over civil laws".

Luxembourg as a jurisdiction, after the episode of prosecutions for the disclosure of internal documents in the framework of the Clearstram affair early 2000s, cannot accept the use of the OPMEM against UBS. Even though it is a seducing opportunity to discharge the collective responsibility in the jurisdiction for the so-called "relevant input" of local professionals in crafting laws and regulations.

A very interesting games theory case study...

The French newspaper La Tribune has reported that in the third version of an internal operating memorandum, the name of Bernard Madoff is quoted more that twenty times whereas it appears neither in the prospectus nor in the subscription form even though the subscription form evokes a vague US broker.

And La Tribune to conclude that it is UBS' responsibility to compensate investors. So did many articles based on the operating memorandum.

The story is more complicated in the pragmatic jurisdiction.

La Tribune writes that « Pour sa défense, la banque suisse indique n'avoir qu'un rôle de 'surveillance' » (free translation: "For its defense, the Swiss bank indicates it had only a role of 'supervision'".

As I said, the Luxembourg regulation is influenced by local professionals:

This influence was admitted in 2005:

"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 as well as on the introduction of new legislation in this specific field of financial product (...) 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" (article "Shaping the regulatory environment". Fundlook, 2005)

Unfortunately nothing has changed and the business community continues on making laws and regulations.

"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."(Alfi brochure "Your bridge between Europe and China: Luxembourg", October 2009)

Among the professionals that influenced the regulator, was the former management of UBS-Luxalpha.

This influence of UBS, that had a direct say on the regulation in Luxembourg like every professional, is traced in the CSSF documents and especially in the composition of  internal committees:

• Alain Hondequin, Executive Director, UBS (Luxembourg) S.A and Luxalpha director was member of the compliance Committee with reputable and competent professionals like Jean-Marie LEGENDRE (Chairman, Association of Compliance Officers), Vafa MOAYED (Partner - Reputation & Risk Leader, Deloitte) , Didier MOUGET (Territory Senior Partner, PwC), Jean-Jacques ROMMES, (Director, The Luxembourg Bankers' Association) Jean-Nicolas SCHAUS (General Manager, CSSF).
• Roger Hartmann, Managing Director, UBS (Luxembourg) S.A.and of Luxalpha was member of the Consultative committee Anti-Money Laundering with reputable and competent professionals like Jean-Jacques ROMMES (Director, The Luxembourg Bankers' Association), Thomas SEALE (former Chairman, ALFI), Lucien THIEL (former director, The Luxembourg Bankers' Association), Pierre Krier (Chairman, Institut des Réviseurs d'Entreprises) and of the Committee Banks with reputable and competent professionals Pierre KRIER (Chairman, Institut des Réviseurs d'Entreprises), Jean MEYER (Chairman, The Luxembourg Bankers' Association), Paul MOUSEL (Partner, Arendt & Medernach Law firm). 

There is a collective responsibility in the wording that opened the drift with Madoff. Article 7 of the UCITS directive states that "1. A unit trust's assets must be entrusted to a depositary for safekeeping". The word "safekeeping" (that is missing is the French version of the article) was removed in the transposition (Cf. article 17 of the Luxembourg Law of 20 December 2002). Above all, Circular IMS 91/75 (as amended by Circular CSSF 05/177) dated 21 January 1991 states that "The concept of custody used to describe the general mission of the depositary should be understood not in the sense of "safekeeping", but in the sense of "supervision" (...) The depositary has discharged its duty of supervision when it is satisfied from the outset and during the whole of the duration of the contract that the third parties with which the assets of the UCI are on deposit are reputable and competent and have sufficient financial resources."

Madoff was reputable and competent and had sufficient financial resources, which may discharge UBS responsibility. This wording that created the current confusion is the result of the very close and direct say for a relevant input in the drafting of law and regulation.

 La Tribune writes that « la réglementation européenne, qui s'applique aussi au Luxembourg, interdit la double fonction dépositaire-gérant. UBS Luxembourg ne pouvait pas ignorer le règlement. » (free translation:  "the European regulation, which also applies to Luxembourg, prohibits the double role depositary-manager. UBS Luxembourg could not ignore the regulation")

As I said, this provision that is clearly stated in the UCITS directive, is not included in the Luxembourg law because of the business community very close and direct say for a relevant input in the drawing up of laws and regulation.

Article 10 of the UCIT directive states that " 1. No single company shall act as both management company and depositary". This provision is not in the Luxembourg text. This first paragraph was removed to only transpose literally paragraph 2 that states that "2. In the context of their respective roles the management company and the depositary must act independently and solely in the interest of the unit-holders." (Cf. article 20 of the Luxembourg law of 20 December 2002).
What is not clearly prohibited by the law is possible and UBS hence acted as both Management Company and depositary.

One can understand better what Claude Kremer, Chairman ALFI, said: " Nous sommes d'avis que le Luxembourg a transposé la directive comme il le fallait"  (free translation : Our opinion is that Luxembourg transposed the directive as it was needed) (Source: Paperjam, 23 September 2009) :

"As it was needed" means the close and direct say for a relevant input for changes to the regulatory framework and implementation of European directives.

Read my detailed analysis abut the Luxembourg legal and regulatory framework for UCITS

A draft law is before the Chambre des Députés (Luxembourg legislature) to enforce agreements that Luxembourg signed based on OECD's Model Agreement on the Exchange of Information on Tax Matters.

The text states that the Luxembourg tax administration
- will examine the requests from foreign tax administration to assess if they comply with the law and the agreement, and if so
- will request officially (registered letter) the data from the entity.

Should the entity not provide the data within one month, it would be fined up to EUR 250,000 by the Luxembourg tax administration, on the director's discretion.

What does that mean from a practical point of view?

1. A fine is not coercive: why not introduce a criminal liability and authorise an investigation to look for the data?

2. This amount of EUR 250 000 is ridiculous when one knows the amounts of tax evasion and anyway is a maximum that will never be  fined (See administrative fines by CSSF).

Above all, this fine is actually a way to bypass the agreements based on the OECD tax model. Luxembourg bankers are very creative. One can imagine a new service for clients that would be charged a fixed price of EUR 250,000 for the bank to keep secrecy ; and I do not think a new request from foreign tax administration on the same data will be accepted.

I will quote again ALFI in a recent brochure knoking that it is true as well for ABBL:

« 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. »

(Source ALFI brochure: " Your bridge between Europe and China: Luxembourg".

This draft law is perfect implemnetation of that "influence" and explain the reason why many professionals communicate that the agreements do not change things for clients:

- money of evasion will be accepted
- there is a way in the law to keep secrecy

Let's read again what Angel Gurria said in the OECD press release dated 8 July 2009: “I commend Luxembourg for its swift implementation of the OECD standards on exchange of information. In three months, Luxembourg has turned into reality its commitment to fully cooperate in tax matters. I would like to congratulate Minister Luc Frieden for his leadership in this process”.

Fully cooperate ?

I wonder what is OECD's opinion (Pascal Saint Amans and Angel Gurria's opinion) about that?