Luxembourg Banking Secrecy - Privacy tool or fraud facilitation?

University essay from Lunds universitet/Juridiska institutionen

Author: Philip Sahlin; [2009]

Keywords: Bankrätt; Law and Political Science;

Abstract: Luxembourg has been able to build up a very rich financial centre due to the use of a strong legal framework, social and political stability in the Grand Duchy and long-standing economic openness to the outside world. It is the second largest investment fund centre in the world after the United States and the premier private banking centre in the Euro zone. As understood, it has attracted many wealthy clients from all over the world. However, it is not only because Luxembourg banks offers a global wealth structuring service which encompasses all the client's assets, the main reason is that Luxembourg laws lay down very strict rules regarding customer privacy. Only in Luxembourg, there is almost 1 trillion euro under banking secrecy. The philosophy of this professional secrecy is found in the Constitutional Law of Luxembourg, which is very protective of personal freedom in its regulation of the relationship between the state and its individuals. Banking secrecy, which is a broaden form of professional secrecy, is a legal concept under which banking institutions have a duty to keep entrusted information protected. The protecting legislation of banking secrecy is laid down in article 41 of the Banking Act and in article 458 of the Criminal Code. Article 41 stipulates that professionals, working in the financial sector, are required to keep the trusted information secret or penalty will be carried out according to either the Civil Code and / or the Criminal Code. Banking secrecy, if used right, is a useful tool for banking institutions to attract clients who want to use the bank's services without getting too much insight in their private life. In some cases, however, too strict banking secrecy can be a problem as it is used as a tool for tax evaders. An attentive question, which has arisen during the financial crisis, is whether the disadvantages of the use Luxembourg banking secrecy are greater than the advantages. The OECD has formed some basic rules which countries should follow so that exchange of information between tax authorities on request can be manageable. Exchange of information is an important tool in fighting non-compliance with the tax laws. Professional secrecy, or duty of confidentiality, exists in different situations, for instance between doctor and patient (medical secrecy) or between banker and customer (banking secrecy). The differences between professional secrecy in different fields are specified in the legislation. For instance, solicitors are subject to an obligation of absolute professional secrecy and must not reveal any information pertaining to the client to a third party, whereas bankers, on the other hand, are subject to qualified professional secrecy. Qualified professional secrecy means that the information may be disclosed in some circumstances. The banking secrecy gives the banker both an obligation and a right to keep information secret. The obligation means that the banker cannot under any circumstance, except where the law gives it permission, disclose such information which has been confided to the banker. The laws concerning banking secrecy gives also, because of the obligations, a certain right for the banker to withhold information upon request from anybody, except from certain situations. The case against the businessman Weduwe, who was told to witness in the Belgian Court, is a good example to illustrate how strong the concept of banking secrecy is. The difficulties for national and international tax authorities are another good example of how difficult it is to receive information. However, there exist of course situations when disclosure of banking secrecy is available. Banking secretes may be disclosed in the following four situations, which were stipulated in the well-known Tournier case: compulsion of law, public interest, the bank's own interest or where the client himself gives consent. The equilibrium between these situations is settled by the law in the country and mirrors a certain type of society. The public interest in Luxembourg is partly to protect the private interest but also to secure the public interest, meaning fighting criminal activities. According to article 41 (2) of the Banking Act, the ''...obligation to maintain secrecy shall cease to exist where the disclosure of information is authorized or required by or pursuant to any legislative provision, even where the provision in question predates this law'' Disclosure of secret information can be made upon judicial authorization in criminal procedurals or if otherwise required by law. The exchange of information is however very restricted and, for example, instead of giving information about savings interests, Luxembourg applies withholding tax. Concerning information about other issues, access might be available through bilateral or multilateral agreements, but only upon a very detailed request. The problem with the use of the law enforcement is that different legislation defines crimes in different ways. Luxembourg has a higher tolerance than other countries when it comes to, for example, tax fraud.

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