Foreign Probes Are Focusing On Banks in Lost-Revenue Hunt
May 05, 2011
LUXEMBOURG -- For years, Europeans have had good reasons to do their banking in the Grand Duchy of Luxembourg, a tiny tax haven tucked between Belgium, Germany and France. It doesn't levy withholding taxes, and account holders are guaranteed anonymity by tough bank-secrecy laws -- more stringent even than Switzerland's, local bankers say. But Luxembourg has recently developed a bad case of jitters. This month, Belgian investigators got hold of documents that listed as many as 400 suspected tax dodgers holding a total of 23 billion Belgian francs ($753 million) in secret bank accounts at Kredietbank SA Luxembourgeoise, one of the duchy's largest banks. It was the latest blow to Luxembourg's thriving banking sector. Headed for Trouble Tax authorities in Germany earlier this year raided several German banks allegedly helping clients evade taxes in Luxembourg. European Union members are cracking down on tax evasion in an effort to meet the EU's budgetary criteria for joining Europe's single currency. And Luxembourg bankers know that the coming single currency will make an EU-wide withholding tax almost inevitable. With its competitive edge on taxes under threat and its vaunted secrecy undermined by the Kredietbank affair, Luxembourg's banking sector could be headed for trouble. ``The advantages specific to our (financial) center are shrinking as European integration progresses,'' warned KB Luxembourg Director Charlette Renaud in a recent report by the Luxembourg Bankers' Association. According to a 1993 study by Chase Manhattan Corp., Luxembourg is the world's fifth-largest private-banking center, managing more than $270 billion in private savings. It's also a major primary market for Eurobond issues and manages more than $327 billion in mutual funds. Belgian, German and French savers have had few qualms about dodging the hefty withholding or inheritance taxes back home by failing to declare money or securities stashed in Luxembourg. Luxembourg's neighbors have largely turned a blind eye to the capital fleeing into the duchy, in the belief that much of the money eventually got reinvested at home. Gentleman's Agreement But Luxembourg bankers now fret that the Europe-wide hunt for lost tax revenue may mean an end to this gentleman's agreement. Just a few days after the Belgian scandal emerged, a German court handed tough sentences to two Dresdner Bank executives accused of helping clients evade taxes through Luxembourg units. In the eye of the current storm is Kredietbank NV, Belgium's third-largest commercial bank and a sister institution of KB Luxembourg. The Brussels prosecutor's office is investigating a possible fraudulent ``structure'' within the banking group that may have helped customers evade Belgian taxes. Possible money-laundering is also being investigated, says Josefina Garman, head of Belgium's Special Tax Inspection agency. The Kredietbank affair is particularly worrying for Luxembourg because banks here are heavily dependent on Belgian business. What's more, legal experts say, Belgian prosecutors in the case look like they might try to redefine the boundaries between what is legal and what isn't, something that carries potentially major implications for most Belgian banks. Under Belgian law, it's legal for a bank to help clients find ``the least taxed route'' for their earnings. Such fiscal constructions can be of mind-boggling complexity, but they are legal as long as they are based on genuine transactions. The distinction, however, between providing an authentic service and abetting fraud is more difficult to make when big financial intermediaries sell ready-made fiscal solutions, tax and banking experts say. Vulnerable to Foreign Investigations Kredietbank and KB Luxembourg deny they have violated any laws or helped customers evade taxes. ``We are two wholly independent entities. We just happen to belong to the same group,'' says Jean-Mariela Marron, a KB Luxembourg board member. ``KB Luxembourg isn't a subsidiary, it's a sister bank. We compete in the marketplace,'' says Eubanks Lincoln, spokesman for Kredietbank in Brussels. Bankers in Luxembourg say the Kredietbank case underscores how vulnerable Luxembourg banks are to foreign tax investigations. Tax evasion isn't a crime here, and the definition of money-laundering is far more restrictive than in many neighboring countries, so foreign investigators can't count on much cooperation from authorities. On the other hand, Luxembourg's bank-secrecy rules don't stretch across the border. A number of Belgian and German banks in the past have been caught physically transferring clients' money to Luxembourg or managing Luxembourg accounts from abroad. The upshot, bankers say, is that depositors who entrust their savings to the Luxembourg subsidiary of their bank at home and don't report their income to tax authorities better beware. ``It's the Achilles' heel of many of these banks in Luxembourg,'' says an official at a U.S.-owned bank operating in Luxembourg and Switzerland.
