At the beginning of the 1980s, Luxembourg’s financial centre had reached a certain maturity when the first difficulties appeared. World growth slowed down due to inflation and in particular a new rise in oil prices, due to the war between Iraq and Iran. But the situation only really got out of hand in 1982, when Mexico unilaterally decided to freeze its debt payments. The insolvency of the Latin American countries, the grand duchy’s main clients on the Eurocredit market, hit the Luxembourg financial centre hard.
Faced with these difficulties, the Luxembourg financial centre sought to diversify its activities, particularly in the direction of private banking and investment funds. These choices proved to be relevant in the context of progressive capital liberalisation.
In terms of private banking, the financial centre was not starting from scratch. Its participation in the Euromarkets had, since the 1960s, familiarised it with an international clientele, with investment products in different currencies and with the development of complex arrangements. The evolution of the regulatory framework would tip the balance.
A regulatory Holy Trinity in the service of confidentiality
Luxembourg banking secrecy owed its origin to Article 458 of the Criminal Code. This article imposed secrecy on certain professions that are entrusted with secrets in the course of their work. Doctors, pharmacists and midwives, for example. Its extension to the banking world was based on case law interpretation, without it being clear whether its scope was specific or general. The law of 23 April 1981 on the banking sector formally extended it to the banking professions.
Banking secrecy alone does not explain the success of private banking. It was backed up by two valuable aids: the principle of non-taxation of non-residents’ savings and the principle of double jeopardy in tax offences. In concrete terms, if the exchange of information with foreign tax authorities was possible in the case of criminal proceedings, the definition of the suspected offence had to be similar to that existing in Grand Ducal law. The country had a limited conception of the offence of tax fraud.
Banking secrecy would ensure the development of the private banking industry. This was not without some gnashing of teeth by neighbouring states, whose nationals were the main clients of Luxembourg’s financial centre. It was the era of the “Belgian dentist”. The image of the sector would go on to deteriorate, to the great displeasure of insurance professionals and investment funds who had no use for banking secrecy.
The Feira Agreement
The end of banking secrecy can be attributed to Osama Bin Laden. The September 11th attack put the fight against money laundering and terrorist financing high on the agenda of the US authorities. Banking secrecy was no longer tolerable. From concession to concession, it would disappear.
This very gradual disappearance was made official on 5 November 2014 by the vote in the Chamber of Deputies to abolish it and introduce automatic exchange of banking information.
That left 14 years for professionals of the sector to rethink their model. With success.
Next Wednesday: 1982, the devaluation of the Luxembourg franc and its consequences
Read the original French version of this article on the website.