Since 1929, the development of the financial centre has been based on a policy of offshoring and the use of sovereignty niches. Pierre Dupong, at the time minister of finance, said of the adoption of the regime: “If the bill were not passed, these companies would move away from our borders to countries where they would receive greater benefits. What will we have gained? Absolutely nothing…”

Pierre Werner, Pierre Dupong’s spiritual son, said at the time of the birth of the Eurodollar market--that circumvented the American tax rules of the time--and of in the 1960s: “Investors who do not find the advantage of a favourable or free regime in Luxembourg will easily find it elsewhere.” This was the time of the creation of financing holding companies, legal vehicles allowing international groups to structure their bond issues in an attractive tax framework. The securities of these loans were exempt from withholding tax.

Let’s not forget the scandal. Buried without ceremony. Just like the Banco Ambrosiano case in 1982 and the BCCI case in 1991.

The offshore model, where niches of sovereignty guarantee prosperity, was at the heart of the political and social consensus. The was the high point of this slice of history.

In 2009, banking secrecy was in the process of being dismantled.

It was an extensively negotiated dismantling. But perhaps a little too late. . Its abolition had been on the EU’s agenda since the . There wa a gradual abolition through the introduction of a withholding tax that was supposed to protect the privacy of bank clients while satisfying the demands of the clients’ home tax authorities.

The problem is that after 2008 and the collapse of Lehmann Brothers, state budgets need to be bailed out and the fight against fraud and tax evasion became the unifying credo for national governments and public opinion. Public opinion is always impatient. As a result, the regulatory dynamic had to be accelerated and the holes in the system closed by strengthening legal cooperation.

50 shades of grey

The first warning shot was the inclusion of Luxembourg--among 38 other countries --on the OECD’s grey list on international tax cooperation on 2 April 2009. This ‘grey’ list stigmatised those states which, according to the OECD, had committed themselves to respecting the OECD framework convention on banking and tax transparency, but which had not substantially applied the criteria. In concrete terms, that meant the adoption of a number of double taxation agreements with third countries.

This listing aroused the ire of the political leaders of the time--, prime minister; , budget minister; and , deputy prime minister and foreign minister--who accused the OECD of being manipulated by the major European countries and in particular the ‘Franco-German directoire’. The absence on the list of Delaware, the US Virgin Islands, Hong Kong, Macao or the Channel Islands--recognised tax havens--supported . So did the extremely violent attacks by the then German finance minister, Peer Steinbrück.

The 2009 list also included Switzerland, Belgium and Austria, EU member states that are adept at banking secrecy. This was not insignificant in the context.

Luxembourg would be removed from the grey list after three months by concluding non-double taxation agreements with third countries requested by the OECD to reach the magic number of 12.

This does not mean that the pressure will be off.

Second alert

In 2010, it was the Financial Action Task Force, an intergovernmental body for the fight against money laundering and terrorist financing, that put Luxembourg on the blacklist. Following its inspection in 2010, the conclusions of the mutual evaluation report on Luxembourg’s anti-money laundering and anti-terrorist financing activities were bad for the financial centre. In short, the FATF criticised the grand duchy, in addition to its banking secrecy, for being too lax and pointed to the limited powers of the Luxembourg financial regulator CSSF and the small size of its financial intelligence unit.

These criticisms led to fears of renewed inclusion on the OECD’s grey list.

To avoid this, the government played the reform card and adopted a number of laws. One of them is bill 6163, whose full title shows the legislator’s all-out effort to comply with the FATF’s requirements: “Draft law strengthening the legal framework to combat money laundering and terrorist financing, organising controls on the physical transport of cash entering, transiting through or leaving the Grand Duchy of Luxembourg, relating to the implementation of United Nations Security Council resolutions and acts adopted by the European Union containing prohibitions and restrictive measures in financial matters against certain persons, entities and groups in the context of the fight against terrorist financing.” The bill amended 21 laws and several grand-ducal regulations.

This outpouring of energy bore fruit, with Luxembourg on the grey list.

Paradigm shift

The respite was short-lived. It happened on 23 November 2013, following the 6th Global Tax Forum, which was held in Jakarta under the aegis of the OECD to evaluate the tax transparency of 50 countries through a rating system between states. While Luxembourg’s legal and regulatory framework was judged to be in line with the organisation’s standards to allow for real cooperation and transfer of tax information, its practices were criticised. More specifically, the four following points were flagged: the determination of the real economic beneficiary, access to tax information, cooperation instruments allowing the exchange of information and the respect of the rights of taxpayers and third parties.

Succeeding (CSV) at the ministry of finance was (DP), who had to put the country back on track and in the right frame of mind, . This was done in , with the highlights being the abandonment of banking secrecy in 2014, the approval of the convention on mutual administrative assistance in tax matters dating from 2013, the adoption of a new regulation on bearer shares, the adoption of the procedure applicable to the exchange of information on request and the signing of the Berlin declaration on the introduction of automatic exchange of information on the basis of the new standards established by the OECD.

From then on, Luxembourg wanted to appear as the model student and be among the early adopters of tax reforms. This was notably the case for the .

This march towards transparency and a more compliant image still experienced some hiccups later. In November 2014, for example, the LuxLeaks affair and its aftershocks such as the Panama Papers,  and the accusations of the . This did not prevent the country from being removed from the OECD’s grey list for a second time on 30 October 2015. This time it took almost .

What about tomorrow? The FATF is expected to come to Luxembourg’s financial centre for a new mutual evaluation on 2 November. And a certain anxiety is palpable among the players in the financial centre.

To be continued…

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