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Luxembourg: Is a return to steel in its future?

March 7, 2009

Looking at Luxembourg, best known for its staunch banking laws favoring secrecy and tax haven status, one might wonder if pressure, particularly from the US and Germany (threatening to put the country on a tax haven blacklist) together with EU uniformity, will send European offshore investment protection to a fate similar to that of the Berlin Wall.  (Assuming Luxembourg’s fate to be a precursor to that of Lichtenstein.)

Luxembourg’s expanded AML (anti money laundering law) implements the EU’s Third Money Laundering Directive.  Together with amendments to the criminal code, the laws expand criminal liability to, e.g., small business owners and other non-lawyers, while also enlarging the range of predicate offenses to, inter alia, all offenses for which a term of imprisonment is prescribed.  One provision mandates that all natural and legal entitities trading goods, where more than €15,000 is paid, in cash, in a single transaction or several, apparently linked, transactions, are now subject to the expanded AML.  While provisions like the foregoing are excellent for trial lawyers operating in a “perception is reality” world, it’s not good for the small business owner unfamiliar with the new laws and how they will be interpreted, implemented, and enforced.

Because Luxembourg does not sanction a rogue banking sector like that of some countries in the Carribean, the Third Directive’s added liability concepts of “beneficial ownership,” “company and fiduciary service providers,” and “politically exposed persons” are not newly grafted concepts in its banking laws and are unlikely to be the cause of confusion or misapplication.  Similarly, the “risk-based approach” is not a new concept in the Luxembourg business sector.

Nonetheless, in terms of the cost-benefit analysis used to justify the laws, even the U.S. government conceded that among countries with offshore financial centers (OFCs), Luxembourg was among those that were “generally perceived as having legal infrastructures and supervisory practices, and/or a level of resources devoted to supervision and co-operation relative to the size of their financial activities, and/or a level of cooperation that are largely of a good quality and better than in other OFCs.”  If the regulatory system in place is seen as being “largely of a good quality,” then one must wonder whether the displaced risk (and costs) created by the AML to the unwitting small business-owner, who must now determine what “apparently linked transactions” are, is justified.  

Expect Luxembourg to be a country to watch closely with its implementation and enforcement of the expanded AMLs over the next several years, together with the EU’s interplay, being an illustration of precisely how uniform application of EU directives affecting the business and banking sector will be.

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