OpenLux exposes governments’ “severe shortcomings” on transparency data

Responding to OpenLux¹, the Tax Justice Network’s Director of Financial Secrecy and Governance, Markus Meinzer, said:

“What makes OpenLux so striking is that it‘s not a leak from a shady service provider, but a deep dive into public government data that had been made unwieldy to connect dots with. Luxembourg should perhaps be commended for providing better public access to its beneficial ownership² register than most other countries, but the fact remains that today’s revelations only came to light once journalists laboriously analysed the data and linked it up with other public records. This speaks volumes about the severe shortcomings of not just Luxembourg but the many governments, including across the EU, that have been reluctant both to publish and to employ beneficial ownership data despite its evident power in the fight against tax abuse, money laundering and financial crime.

“OpenLux makes two things clear. First, for beneficial ownership transparency to be useful at all, it must be made publicly available so that society can hold wrongdoers and government to account. Second, financial secrecy remains a central pillar of Luxembourg’s economy. Financial secrecy keeps tax abuse feasible, drug cartels bankable and human trafficking profitable. Luxembourg must put an end to its financial secrecy and it can start by closing loopholes in beneficial ownership registration, financial disclosure and tax ruling disclosures, and by closing down companies of investors that fail to comply with transparency requirements.

“Luxembourg currently ranks 6th on both the Financial Secrecy Index 2020³ and the Corporate Tax Haven Index 2019⁴, making it the world’s sixth greatest enabler both of financial secrecy and of corporate tax abuse. Last year, the State of Tax Justice 2020⁵ revealed that Luxembourg costs the world $28 billion in lost tax every year by enabling corporate tax abuse and private tax evasion. Next month, the 2021 edition of the Corporate Tax Haven Index will reveal hidden administrative practices the Luxembourg government is engaged in to bypass EU and OECD rules that were designed to clamp down on corporate tax abuse, possibly in infringement of EU law.”

Assessment of Luxembourg’s beneficial ownership register

Luxembourg’s policy for registration of beneficial ownership information has three critical loopholes and suffers from a complete failure to police and enforce compliance. The following provides a brief summary of the loopholes and their consequences:

1. Various types of Luxembourg legal entities (such as SA, SAS, SE, S.e.c.s and foreign companies) are not required to register their legal ownership information with the commercial registry.⁶ When this lack of legal ownership information for these companies is coupled with the exemption for companies with foreign investors to register their beneficial ownership information in certain cases (eg due to the “senior manager” clause⁷), certain companies can operate with absolute secrecy.
2. Investment funds also have room to evade registering their legal and beneficial owners, and hence operate in absolute secrecy. This is due to the 25 per cent threshold that Luxembourg, like many countries, exercises, which requires an investor to be registered as a beneficial owner only if they own more than 25 per cent of a fund’s shares. Since investors usually own less than this, they are often not required to register as beneficial owners. In addition to this exemption, Luxembourg does not always require a fund’s investors to be registered as legal owners, again creating a scenario where a legal entity can operate without disclosing any information about its ownership. This makes it virtually impossible to prevent abuse. All funds should be required to treat all investors as owners for registry purposes, and to publish all their legal and beneficial owners using no threshold (rather than 25 per cent).
3. Bearer shares, ie physical certificates that bestow ownership of stock to the person or entity that physically holds the certificate, continue to pose risks for abuse in the country. Luxembourg has still not required bearer shares to be immobilised via registration with the government and instead permits bearer shares to be held on behalf of a company by a custodian, such as an asset manager or lawyer, in Luxembourg.⁸ This setup creates risks for manipulation of the information about the owners of the bearer shares and any such manipulation is near impossible to detect and prove in court.

Beyond these legislative gaps, there is a high risk of Luxembourg not enforcing existing rules of ownership registration by dispensing with verification of submitted ownership data. In order to improve the quality and integrity of ownership data, the Tax Justice Network is pioneering pilot projects⁹ with a handful of countries’ tax administrations focused on interconnecting and verifying beneficial ownership data. Without improving verification and closing the above loopholes, Luxembourg’s extremely large fund industry make it the perfect linchpin for illicit financial flows between the EU and the rest of the world.

Lastly, it is important to draw attention to the way in which Luxembourg fosters financial secrecy by not publishing its laws and regulations online in an accessible format, making it very difficult for lawyers outside of Luxembourg to determine which versions of which laws are in force today. For example, the important General Tax Law of Luxembourg¹⁰ dates back to 1931 and has been subject to 25 rounds of amendments through separate laws, yet a consolidated version of the law and its legal texts is not available. This is a bonanza for Luxembourg law firms that can commercialise their monopolistic knowledge of legislation. Laws should not be a commodity – they should be accessible by all people within and outside of the country as a prerequisite for the rule of law, sound governance and democracy.

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Notes to editor

1. OpenLux is a join investigation into Luxembourg’s beneficial ownership register conducted by the French daily Le Monde, Süddeutsche Zeitung, the journalist network Organized Crime and Corruption Reporting Project (OCCRP), the Belgian newspaper Le Soir, the Luxembourg weekly Woxx and the American media group McClatchy, which publishes the Miami Herald, and others that also took part.
2. A beneficial owner is the real person, made of flesh and blood, who ultimately owns, controls or receives profits from a company or legal vehicle, even when the company legally belongs, on paper, to another person or entity, like an accountant or a shell company. Companies must typically register the identities of their legal owners (which can be real people or other companies), but not necessarily their beneficial owners. In most cases, a company’s legal owner and beneficial owner are the same person but when they’re not, beneficial owners can hide behind legal owners, making it practically impossible to tell who is truly running and profiting from a company. This allows beneficial owners to abuse their tax responsibilities, break monopoly laws, get around international sanctions, launder money and funnel anonymous money into political processes – all while staying anonymous and out of the reach of the law. For more information about beneficial ownership, see our summary here. For a in-depth account of countries’ progress on beneficial ownership, see our “The state of play of beneficial ownership registration in 2020”.
3. The Financial Secrecy Index ranks countries by their complicity in helping wealthy individuals hide their finances from the rule of law. The more financial secrecy a country enables, the higher the country ranks on the index. The following 10 jurisdictions ranked highest on the latest edition of the Financial Secrecy Index published in 2020: 1. Cayman Islands, 2. United States, 3. Switzerland, 4. Hong Kong, 5. Singapore, 6. Luxembourg, 7. Japan, 8. Netherlands, 9. British Virgin Islands, 10. United Arab Emirates. More information about the index is available here.
4. The Corporate Tax Haven Index ranks countries by their complicity in helping multinational corporations abuse corporate tax. The more corporate tax abuse a country enables, the higher the country ranks on the index. The following 10 jurisdictions ranked highest on the latest edition of the Corporate Tax Haven Index published in 2019: 1. British Virgin Islands (British territory), 2. Bermuda (British territory), 3. Cayman Islands (British territory), 4. Netherlands, 5. Switzerland, 6. Luxembourg, 7. Jersey (British dependency), 8. Singapore, 9. Bahamas, 10. Hong Kong. More information about the index is available here. The 2021 edition of the Corporate Tax Haven Index will be published in March 2021.
5. The State of Tax Justice is an annual report by the Tax Justice Network on the state of global tax abuse and governments’ efforts to tackle it. The study measures how much every country loses to both corporate tax abuse and private tax evasion. The 2020 edition of the State of Tax Justice revealed Luxembourg to cost other countries $28 billion in lost tax every year by enabling cross-border corporate tax abuse and private tax evasion. The study revealed that countries altogether lose over $427 billion to tax havens every year – the equivalent of one nurse’s salary lost every second to a tax haven.
6. See Financial Secrecy Index 2020 reference on Luxembourg’s on legal ownership here.
7. See pages 3 and 6 for details about the senior manager clause: Knobel, A., & Meinzer, M. (2016). Drilling down to the real owners – Part 1. “More than 25% of ownership” & “unidentified” Beneficial Ownership: Amendments Needed in FATF’s Recommendations and in EU’s AML Directive. https://www.taxjustice.net/wp-content/uploads/2013/04/TJN2016_BO-EUAMLD-FATF-Part1.pdf
8. See Financial Secrecy Index 2020 reference on Luxembourg’s bearer shares here.
9. More information about the pilot projects available here.
10. See the General Tax Law of Luxembourg here.