Yet Another Investigation For Clearstream

by Ulrika Lomas, Tax-News.com, Brussels

20 June 2001

Luxembourg securities clearing firm Clearstream is having more investigations than John Prescott has Jaguars. Apart from the Luxembourg Government's judicial investigation, and an internal investigation carried out by KPMG and London law firm Freshfields, Clearstream has now appointed Arthur Andersen to carry out yet another investigation.

The investigations were launched after two French journalists, one of them a former Cedel employee, published a book earlier this year in which they alleged that the depository allowed clients to open accounts for the purposes of money laundering. Clearstream has denied the allegations and started legal proceedings against the journalists. However, in May the board of directors suspended three senior managers including the firm's high-profile chief executive, Andre Lussi, until the investigations have been completed.

Yves Mersch, Governor of the Luxembourg Central Bank, said last week that the investigation of securities clearing firm Clearstream had found "material evidence which would lead to a fundamental questioning of the settlement system," but that a final assessment would be made only after the results of the judicial investigation have been made public.

The KPMG and Freshfields study found "no evidence regarding these allegations," said Andre Roelants, acting chief executive of Clearstream, announcing the appointment of Arthur Andersen to 'review' the KPMG report. KPMG are Clearstream's auditors. The Andersen review will involve an evaluation of Luxembourg-based Clearstream's technology and systems and should be ready in about six weeks.

Parallel with the investigatory process, and on the assumption that the smoke will eventually clear away without damaging Clearstream too much, the dance continues between the various suitors hoping to gain control of the firm. Consolidation of the fractured and highly expensive European securities clearing system is judged vital if the costs of clearing in Europe are to be brought down to a competitive level with US costs - currently they are said to be up to seven times higher.

The declared contenders include Deutsche Borse, which owns 50% of Clearstream (but is said to be inactive pending the results of the investigations), Cedel, which owns the other 50%, and Euroclear, the Brussels-based clearing and securities custody house. Both Cedel and Euroclear are owned by a large number of banks, including the major investment banks who supply most of the liquidity to Europe's equity markets.

"We don't say yes or no to Deutsche Borse," Mr Roelants said. "We should investigate with our partners what is the best for the market."

Yves Mersch raised the possibility that there could be competition issues in any takeover of Clearstream. "As regards the future of the securities clearing and settlement industry, two different models, supported each by two different banking communities seem to be opposing: the vertical silo against the horizontal model of a merger between the ICSDs," Mersch said. "Whatever the outcome of the battle may be, a lot of issues will have to be tackled first. Any further step in the consolidation process will, for instance, raise the issue of competition and the related choice of the corporate structure of the new entity: profit-making company versus the public utilities."

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