Luxembourg fund industry is a $5.4 trillion 'black box', investigation says

LONDON (Reuters) – Luxembourg’s investment fund industry is a financial “black box” that helps people launder illicit money and avoid tax, according to an investigation published on Monday whose findings were rejected by the EU nation.

FILE PHOTO: A man holds a placard reading “Stop tax avoidance” during a protest outside the courthouse ahead of the LuxLeaks trial before an appeal court in Luxembourg, December 12, 2016. REUTERS/Yves Herman/File Photo

The OpenLux investigation by journalists from a group of media organisations, including Le Monde, Le Soir, the Miami Herald and Sueddeutsche Zeitung, sifted through four million documents and records on 260,000 companies linked to Luxembourg’s 4.5 trillion euro ($5.4 trillion) investment funds sector between 1955 and 2020.

Under Luxembourg law, investment funds must publish the names of “beneficial” or end investors – the real owner of shares – in a register to help authorities crack down on tax evasion and money laundering.

Over 80% of private investment funds examined did not declare who their end investors were, said the investigation, which also involved Transparency International and the Anti-Corruption Data Collective.

“Taken together, a significant number of Luxembourg-based funds appear to have failed to identify their owners as required by law,” the investigation said. “The industry, with the trillions of euros in assets under its management, continues to operate as a black box.”

It called on Luxembourg and the European Commission to tighten the current beneficial ownership definition.

Luxembourg’s government said it was “fully in line and compliant” with all EU and international rules on combating tax abuse and avoidance.

“Luxembourg provides no favourable tax regime for multinational firms, or digital companies, which have to abide by the same rules and legislation as any other company in Luxembourg,” the government said in a statement.

The government did not address the question of why 80% of funds examined by the investigation were found not to have declared who their end investors were, but added: “At the end of 2020, the completeness rate of the register was around 90%.”

On the alleged lack of declaration, the investigation said: “In most cases, this is likely because they (the funds) could not identify any beneficial owner following the definition provided in Luxembourg’s legislation.”

According to Luxembourg’s anti-money laundering law, a beneficial owner is someone who ultimately owns or controls an entity through direct or indirect ownership of more than 25% of shares or voting rights, or through other means. If no owner can be identified under those rules, information must be provided about people who hold senior management positions.

In 2019, the International Monetary Fund listed Luxembourg, a tiny EU state of just 600,000 people, as a world-leading tax haven that attracted as much foreign direct investment as the United States.

The European Commission, the EU’s executive body, said investigations provide important information to reform flaws that can exist in the system.

“We plan to strengthen the rules at our disposal on tax avoidance and evasion,” a Commission spokeswoman said, making no specific comment on the OpenLux investigation.

Sven Giegold, a German Green party member of the European Parliament, said Luxembourg’s “head-in-the-sand policy” did nothing to end the damage caused by tax evasion and avoidance.

($1 = 0.8317 euros)

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