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05/12/2016

Luxembourg drops bank secrecy rules after years of pressure

Euro & Finance

Luxembourg drops bank secrecy rules after years of pressure

Luxembourg's Finance Minister Pierre Gramega told EU ministers his country would end bank secrecy. [EU Council/Flickr]

Luxembourg agreed on Tuesday (14 October) to end its bank secrecy rules from 2017, yielding to a decade of pressure from Germany and the United States, marking a breakthrough in global efforts to reduce tax evasion.

Luxembourg, whose banks hold deposits worth ten times the nation’s annual economic output, said it would adopt an international standard for the automatic exchange of bank data, meaning EU citizens can no longer routinely hide money away in the Grand Duchy.

“We do this with the understanding that all are committed to a single global standard,” Luxembourg’s Finance Minister Pierre Gramegna told his EU peers at a meeting in his country, which nestles between Germany and France.

Italy’s Economy Minister Pier Carlo Padoan hailed the decision as a “milestone” in the campaign against tax evasion, a strategy that has intensified following the global financial crisis that left governments needy of tax revenues.

The Group of 20 leading developed and emerging economies is formulating plans for a legal framework to improve the exchange of information in order to stamp out tax avoidance that could involve more than 50 countries.

“Bank secrecy is dead,” the EU’s Tax Commissioner Algirdas Šemeta told a news conference after the meeting.

Luxembourg’s decision will leave Austria as the only country in the European Union with rules that allow an EU citizen to open a bank account in another EU member state without the tax authority in the person’s country of origin being informed.

At the EU finance ministers meeting, Austria said it could not agree to scrap its rules by 2017 but signalled it may be willing to do so by 2018. Austrian Finance Minister Hans Joerg Schelling said he would “do it earlier, if technically feasible”.

Decades of bank secrecy in Luxembourg helped the country establish itself as one of Europe’s biggest financial centres, making its citizens the EU’s wealthiest in terms of per-capita income.

Germany and the United States, backed by France and other major developed economies, have spent years trying to convince Luxembourg and Austria to end bank secrecy.

Luxembourg’s position was made untenable by the fate of Cyprus, whose banking sector also dwarfed the economy. When the eurozone had to bail Cypriot banks out last year, it forced losses on wealthy depositors.

Automatic exchange of information allows tax authorities to more easily spot tax evasion or illicit money flows.

Most developed countries share information on taxpayers and depositors “on demand”. But since this requires the authorities in the requesting jurisdiction to suspect wrongdoing, it has only limited impact in uncovering unlawful behaviour.