Luxemburg abandons banking secret

The government in Luxemburg has announced that it will begin conducting data exchanges with the other countries in the European Union (UE) concerning the accounts owned in its banks by European citizens, thus changing its policy on banking secrecy. Prime-minister Jean-Claude Juncker made the announcement on Wednesday night, during a speech on the state of the nation, the Wall Street Journal reports.

The decision represents a first step through which Luxemburg is distancing itself from the tradition of banking secrecy, which has helped it become one of the most important world financial centers.

According to the European Central Bank, (ECB), the assets of the banks in Luxemburg are 22 times bigger than the country's GDP.

The impact of the decision is still uncertain, because the new desecretization policy concerns interest payments for funds owned by EU individuals, not for the money held by investment funds or companies incorporated in Luxemburg. Also, the operations of foreign companies conducted through the financial center of Luxemburg will not be affected.

The Banking Association of Luxemburg estimates that over half of the customers that have deposits in the country come from the European Union.

Germany, France, Great Britain, Italy and Spain have agreed on Tuesday to develop a system for exchanging information which would make it easier to identify the persons or companies that are avoiding the payment of taxes by moving the money abroad. The five governments have announced the European Union that they hope the system will become a template for a similar initiative in the EU, then on a global level.

"We can, without suffering any major damages, introduce a system which would allow the automated exchange of information, starting with January 1st, 2015", Jean-Claude Juncker, said. "If this is a change in our position, it is not happening due to the European pressure, but because the Americans leave us no choice. The Americans only do financial business with those countries that agree with the automated information exchange".

Also on Wednesday, French president Francois Hollande made a harsh attack on fiscal paradises, promising that "he would eradicate them, in Europe and all over the world". The French government was recently shaken by a tax evasion scandal which led to the resignation of the Budget minister Jérôme Cahuzac, who was indicted for tax fraud, after transferring funds to bank accounts in Switzerland.

Luxemburg is cooperating with the United States on the implementation of the law for fiscal compliance of foreign accounts, which was passed in 2010 in Washington, as a measure for preventing tax evasion by American citizens. The law requires foreign banks to identify American depositors and to send to the US government information about the transactions they make and the balance of the accounts. Several European countries, including Germany and Great Britain, have already entered bilateral agreements with the US for exchanging such information.

Once Luxemburg will implement the announced measures, the automatic exchange of information about EU citizens that have accounts in the country will become possible, in order to fight tax evasion. The decision will not apply to foreign companies headquartered in Luxemburg, and the tax on corporate earnings will not be increased, said Jean-Claude Juncker.

Most countries will offer "on demand" information about depositors, but that involves that the authorities in the countries making the request to suspect illegal activities, which makes the effectiveness of the procedure in finding irregularities to be limited. The European Commission has announced that "it warmly salutes" the decision announced by Luxemburg and has advised Austria to follow its example. Austria is the only EU member state that refuses to abandon the banking secrecy, but the government in Vienna has announced on Tuesday its intention to conduct negotiations in that regard.