Luxembourg’s Minister of the Treasury, Luc Frieden, gave an interview recently at Bloomberg (1), in which he discusses the ins and outs of the Madoff case in Luxembourg. Referring to disputes between investors in Luxembourg investment funds linked to Madoff, and custodians, he has something to say to everyone:
1. “The principle is very clear: the custodian bank has to indemnify investors,”
2. “An international arbitration will be a more professional and fast solution that is probably more satisfactory to all,” said Frieden, who may become Luxembourg’s finance minister after the June 7 elections. “I prefer an arbitration of two, three years than having 100 court cases decided in 10 years.”
I wholeheartedly agree. That is what I thought myself, but here it is confirmed, clearly and frankly by the Minister of the Treasury and Justice, and according to some, future Minister of Finance.
By subscribing to the minister’s opinion, I would also assert some personal expertise in these areas, and certainly also similar objectivity in my comments. They are based on my unique perspective of a former "insider," now fairly distant geographically from Luxembourg for the last twenty years, which makes me a neutral observer. At the same time, at this very moment, unfortunately, I am also a “consumer” of Justice in Luxembourg, which provides me with another unique expertise.
Both statements by the Minister implicitly are a diagnosis of TJH, tax and judicial haven.
The tax haven attracts capital, clean and unclean, and those attract all kinds of Madoffs. Madoff operations in the world can only work in specific ecosystems, where those favorable legal, regulatory and financial environments meet. At this intersection we find money searching for easy income, tax exemption, lax regulations, secrecy and indeed vulnerable investors. Fraud quickly takes on its own momentum with handlers and facilitators, who often will be locals and will be inadvertently or willfully blind.
The Luxembourg judicial haven reduces the risk of consequences if ever someone gets caught. There is no doubt that we are in a judicial haven, if the Minister of Justice says that it is best to resort to private arbitration, rather than the formal justice of his own country, because it will take 10 years to reach a conclusion. He does not exclude that justice could be called biased, which I don’t think it is so far. We know there are other criteria by which the OECD defines a judicial haven, but they are minor compared to such a candid statement.
What are the risks to the participants in the Luxembourg Madoff scenario? It depends on which actor is considered, and there are three categories: the investor, the fraudster and Luxembourg State.
1. The investor of course, loses all, his capital, his sleep and his quality of life. A lawsuit in his home jurisdiction is precarious, especially when it comes to "black money" hiding in the tax haven. The gangsters know that. Luxembourg remains the only way to obtain a remedy, but it took already more than six months for any Luxembourg authority to establish clear principles surrounding the Madoff case. The impressionistic blur created by the unfortunate intersection of the rules and regulations of the financial center and Luxembourg civil law does not allow for quick fixes that are essential in such disputes. But the minister said it himself: procedures can last 10 years. This is totally unacceptable, but he spoke the truth. I can personally attest to it by the following:
In 2004 I filed a civil lawsuit against two business associates, two well known characters in Luxembourg, for breach of contract. As there is a suspicion of abuse of corporate assets and fraudulent bankruptcy, a criminal complaint was filed and received by the Luxembourg Court. I was told that Luxembourg curators generally ignore evidence of fraud in bankruptcy, and almost never file criminal charges. Impunity is almost guaranteed! It is also true that courts lack the means that would be commensurate with the size of the financial center. This applies also to an inadequately understaffed Judicial Police, and certainly also the country’s “Financial Investigation Unit”, or FIU. One result is that in my case, justice has yet to be done, whereas we write 2009 already. This starkly confirms the minister's quote that it might take ten years to reach a verdict. Justice is delayed, and as the proverb says: "Justice delayed, is justice denied." (2)
2. The fraudster has a good chance to get away with his crime cheaply. Thus, Madoff could go on until the collapse of his infernal machine, which gave him more than 35 years of impunity. This is not really due to a deficiency of Luxembourg supervision. But let’s admit what stroke of brilliance it would have been, if Luxembourg had unmasked Madoff several years ago! Luxembourg operators, banks and professionals involved had certainly even a higher chance than regulators to uncover the fraud, if only they had considered further that the investment opportunity was too good to be true. And who knows, maybe Madoff has been unmasked, but then the fraud buster became an accomplice, well knowing that he had the same level and probability of impunity than Madoff. I learned from Luxembourg sources that are usually well informed, because information is not publicly available due to the notorious lack of transparency that in a recent case of a financial scandal the local "handler" in chief, who is prominently known, got away with a fine of € 1500 for his personal violations of the law. There is no cheaper lottery in the world, where you win a prize every time. Who says crime does not pay?
In my personal case, described above, the two defendants are conducting a public life without hindrance for more than 5 years already, a bit like Madoff did before his fall.
There is still something to be said about sanctions for fraudsters in Luxembourg: they generally do not exist, because no complaint is filed at all, or a complaint does get filed and sanctions are handed out. But they are anemic in international comparison and in no relation with the extent of the fraud or misconduct committed.
3. Luxembourg is the big loser in these recent incidents, which are real scandals. First there was the loss of reputation for being singled out on the OECD grey list, and then there is the forever brewing Madoff scandal. As investors are feeling betrayed, Luxembourg loses its "friends". Compounded with bad news came a strong loss of tax revenues to which a rich budget was used. Luxembourg also spent several billion Euros on securing two local banks “too big to fail”. And what if all of this was not only due to the economic crisis, but to a general loss of attractiveness? In these times of ongoing negotiations for the formation of a Government coalition, one can only hope that the alarms are seen and heard by the future leaders. The rigors of the law, essential to good governance at the financial center, and adequate means of investigation and the capacity to render justice without delay should be at the top of the list of priorities. This would be an extraordinary achievement, to avoid Luxembourg being included on yet another list that will not fail to come: the list red with shame of the judicial havens. It is a bad omen that the European Commission filed already two complaints against Luxembourg in this year alone: one related to money laundering regulations, another again about tax laws.
Egide Thein
2009.06.23.
(1) Bloomberg article: http://www.bloomberg.com/apps/news?pid=20601087&sid=a8KUxW1cXdvU
(2) A satire of the case is developing: http://peckvillchen.blogspot.com
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