May 20 2013

Luxembourg versus Ireland: tax havens competing to be more rotten than each other

Posted by: Nick Shaxson in: Thoughts

The FT has a story this morning entitled Investors attack ‘lax’ Luxembourg fund rules. But Luxembourg is a scuzzy little tax haven: what else where these investors expecting?

A bit over year ago I wrote a short blog pointing to a letter from recovery specialists Deminor to Luxembourg’s Finance Minister, on behalf of 2,500 disgruntled investors around the world who’d lost tons of money at the hands of the fraudster Bernie Madoff. The letter is well worth reading in its entirety: it’s a real shocker.

The investors had pumped cash into Madoff-created offshore investment funds set up and supervised in Luxembourg, which promised “optimal protection for investors.” The trouble is, of course, is that Luxembourg is a tiny little country that isn’t in a position to offer — even if it wanted to — any kind of financial backstop to those trillions that come freewheeling into this wild west financial playground. The funds’ accounts had been permanently false: they were mere letter box companies that were ‘nothing more than a scam.’ Not only did the Luxembourg authorities pay no attention to these companies, and when the investors went to court, the authorities said ‘this is nothing to do with us.” Which, of course it was: it’s just that Luxembourg didn’t feel like paying up. A letter published in the FT a few months ago (also see here) described “no chance of a fair defence in Luxembourg.. . . not a single debate on the merits has been held before a Luxembourg court.”

Anyway, back to today’s FT story: same general story.

“Luxembourg’s financial regulator is under attack for refusing to help a group of bond fund investors who lost money in a fund that violated the grand duchy’s investment laws.”

Investors are now on a campaign to highlight what they call the “lax and selective” supervision of funds listed in Luxembourg.”

This involves Luxembourg’s “failure to offer compensation” and its “lax and oblivious supervision approach.”

Of course (of course!) this is all about harmful ‘competition’ between jurisdictions.

“Amin Rajan, chief executive of Create Research, the fund consultancy, believes regulatory lapses are on the rise in Luxembourg due to fierce rivalry with Dublin.

“There is a race among regulators to attract fund managers,” said Mr Rajan. “As a result of that, regulations on paper in Luxembourg are different than what is enforced. Both Luxembourg and Dublin have been competing with each other furiously. These regulatory lapses in Luxembourg are inevitable.”

And that’s exactly, exactly what I write about in Treasure Islands.

Competition between jurisdictions on financial regulation, as on tax, is always harmful: a race to the bottom.

2 comments so far

Links May 20 | OccuWorld 5th May, 2013 3.11 pm

[…] Luxembourg vs: Ireland: competing to be more rotten than each other Treasure Islands […]

Links May 21 | OccuWorld 5st May, 2013 6.15 pm

[…] Luxembourg versus Ireland: tax havens competing to be more rotten than each other Treasure Islands […]

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