Invisible Money 5
The Cloud Factory Revisited
Up The Ladder, Marius Kohl To Luc Frieden
With the equivalent of 67 trillion dollars floating in and around what is known as the off-shore "shadow banking system" – in tax havens and fiscal paradises from Delaware to Mauritius, the isle of Jersey to Hong Kong – we return, via Ed Perrin’s documentary, to Luxembourg to take a close look at how things work in one capital of guarded finance.1
Readers may recall that in 1998 the OECD – the thirty-four member, European-based Organization for Economic Development and Cooperation – agreed that "All members’ tax authorities must communicate about Advance Tax Agreements," which effectively meant that if Starbucks wanted to camouflage its UK earnings by moving the money somewhere else, that somewhere else (if a member of the OECD) would have to notify Her Majesty’s Revenue Collection, and the HRMC could object. OECD rules are, however, enacted "by consensus." Two member countries, Switzerland and Luxembourg, abstained, and thus, in the case of Starbucks, the money slipped away to Luxembourg, Starbucks cried poor, and Her Majesty sat in the dark, none the wiser until hearings in November of this year. Luxembourg and Switzerland can therefore argue that they abide by OECD regulations, which are, as far as they’re concerned, toothless.2
(Switzerland, grandaddy of the fiscal havens, is a bit more complex: unlike Luxembourg, there is movement inside the country to change its status as tax pariah numero uno.)3
Marius Kohl spends his days in a brick and glass pile in Luxembourg’s capital. It’s one of those mysterious post-modern sandwiches which perfectly merge form and function: it’s impossible to guess what goes on inside, which must be the point. 18, rue du Fort Wedell is where Kohl and his coworkers churn out tax schemes, for companies like Pearson and GlaxoSmithKline, that are the sole reason Luxembourg appears in the news.
Kohl is the head of Sociétés 6. The other five Sociétés divide their labors as follows:
Sociétés 1: ArcelorMittal, RTL Group, SES, Postes &Telecommunications Enterprises Luxembourg, Guardian group, Cactus, Match, Auchan and Monopol stores.
Sociétés 2: religious associations, the Friob group, and global corporations located in unlikely towns and hamlets from Bertrange to Winseler. It is precisely in places like that the 1,000s of sociétés anonymes listed in Perrin’s documents have established their world headquarters, at least on paper. The pharmaceutical giant GlaxoSmithKline, under Kohl’s purview in Sociétés 6, makes its home in the suburban hamlet of Mamer, just off the roadway to Belgium.
Sociétés 3: partnerships, limited partnerships, real estate companies, economic interest groups and European economic interest groups.
Sociétés 4: Commercial, industrial and craft groups covered by public law, associations and other communities; limited liability companies.
Sociétés 5: Farming cooperatives, resident commercial groups, insurance companies, the ASSEP savings and pension group, the CEPAL group.
Publicly available information all of the above, and no warrant to indict anyone. But one’s curiosity is piqued reading a list such as that in Sociétés 1: what exactly is the present relationship between ArcelorMittal – a steel and mining transnational operating in over 60 countries worldwide, with revenue of USD 93.97 billion as of March 21, 2012 – and Luxembourg? We know that its owner, Lakshmi Mittal, exploits his resident status to pay no taxes in the UK where he lives. So we are entitled to a few suspicions.4
Perrin went to no. 18, with camera and crew, on an official visit, hoping to find Marius Kohl and importune him with a few questions. Perrin had ample evidence that Kohl’s office was the most important of the bureaus, approving tax agreements for thousands of companies.
It was a weekday but, surprisingly, Marius Kohl wasn’t around. He had taken a day off, or so the pesky crew was told.
"In fact he was there. Later that afternoon, after we had left the building, I saw him quickly peer out his office window, but we didn’t have time to get a picture before he hurried back to his desk."
"Luxembourg is not a big country," Perrin continued. "There are only two men above Kohl, Pascale Toussing, Assistant Director, and Guy Heintz, Director of the International section at Contributions Directes; after that, one meets the Finance Minister, Luc Frieden. That’s the beauty of the place. Luxembourg is too small to ever produce an anomaly in its tax regime, and if you are seeking a safe haven for your money, it’s fast and easy."
But not so fast and easy for some. The team from Cash Investigations, accompanied by Richard Brooks of Private Eye, slipped in the door to see if they could find Kohl, only to confront the haughty regard of the Luxembourgeois, who looked at them like losers.
"I learned how condescending the Luxembourgeois could be towards the bloody French," Perrin told me. "We were the lazy sods, the 35-hour a week gang, a bunch of inefficient Latin peasants. In a way, it’s not so very different from the way the Flemish regard the Walloons in Belgium, who lost their dominance to the new rich on the block, those who wisely chose a new and more productive way. Luxembourg lost its industry and settled on finance. They feel proud of it, and they should."
From Luxembourg’s point of view, France’s loss is their gain. If the French had made other arrangements, companies like Arcelor and stars like Gerard Depardieu, who handed in his passport and fled to Belgium, would never have slipped across the border. Such is the attitude in all tax paradises towards troublesome outsiders: here they are, the peasants, with mud on their shoes, looking for dirt.
If the Cash Investigations group had no luck cornering Kohl, they fared better with Luc Frieden, who serves as public point man for Luxembourg’s ingenious interpretation of European law and thus consented to letting himself be interviewed later on screen. Frieden is the heir apparent in Luxembourg and he takes his role seriously. Perhaps he saw the interview as one more skirmish in the war of the tax havens, to lift a phrase from Nicholas Shaxson. Frieden did not, in any case, count on Elise Lucet, who conducted the interview.
"If the description you made is accurate, I find it unacceptable"
Luc Frieden is a member of the Christian Social People’s Party, and currently serves as Finance Minister. He, and not Vice-Premier and Foreign Minister Jean Asselborn, takes the lead in the tricky business of fending off attacks on Luxembourg’s status quo. He is on record as saying, "Our financial approach is totally European and applies all laws in the struggle against financial criminality." He is very careful in his choice of words.5
It’s very rare for a senior official in a tax haven to speak publicly and on the record. Readers of Shaxson’s invaluable Treasure Islands know the many tactics, from coöption to contempt to outright threats, that are employed to avoid doing exactly that. So it’s worthwhile to watch Frieden closely while he dances around the issues. It exposes the logic tax havens use to keep a respectable face on what they do.
For the sake of brevity, the interview is excerpted here.6
Cash Investigations: We’ve seen a lot of those docs. They cover Liechtenstein, the Caymen Islands and… Luxembourg. If we’re talking about tax havens, we find you, Luxembourg, in the middle of those schemes.
Luc Frieden: We abide by European law, which is not the case with all the countries you just mentioned. We should be compared to the UK and the Netherlands.
CI: So you reject the term tax haven?
LF: Absolutely. It’s an insult to my country because Luxembourg abides by every single OECD convention and we work in close cooperation with every single EU state. You cannot prove that Luxembourg does not adhere to EU law.
CI: But we’ve seen all the [tax haven] schemes and you are in league with those countries. You say it’s an insult to your country to be called a tax haven but you are always mentioned with those other countries. So, according to you, are Liechtenstein and the Caymens fiscal paradises?
LF: I’m not sufficiently versed in the tax laws of those countries or regions to be able to judge.
CI: If a large French company makes use of a subsidiary in Luxembourg, a non-active subsidiary, and succeeds in avoiding taxes in France, what happens?
LF: If it’s contrary to European law, and if the French mention it to us, I will take care to make sure it doesn’t happen.
CI: You won’t bring it up yourself?
LF: I would only be aware of it if the French tell me there’s a problem.
CI: When a French company has an office which it shares along with 31 other subsidiaries and where, quite blatantly, nothing goes on except for financial movement, for you as Finance Minister in Luxembourg, is this something you find shocking? I need to know your real position on this.
LF: Yes. If the description you made is accurate, I find it unacceptable.
CI: When the ATAs allow GlaxoSmithKline, for example, to avoid paying 40 million in taxes in their country, it’s a problem, isn’t it?
LF: Yes, I agree.
Impeccable manners indeed, and yet, by the end of the interview, the Finance Minister’s mask has slipped somewhat. If he isn’t exactly sweating his body language has changed, he’s leaning back to avoid Lucet’s punches, and, in a nice close-up, wringing his hands nervously. He has finessed the fight to a draw but not without making a few intriguing admissions.
To The Edge Of The Cliff For The View
If we step back briefly in time, to 2008-09, we can see what Frieden is nervous about. With the world’s economy hovering near the precipice, industrialized nations, the G20, the OECD were all seemingly caught by surprise. Et Alors!?! They had to do something to counter the crisis, and tax havens were certainly part of it. Instead of taking action, they decided to draw up lists.7
In 2008 Senator Barack Obama co-sponsored the Stop Tax Havens Abuse Act with Senator Carl Levin. It raised temperatures in the Duchy: Luxembourg figured prominently in its list of tax havens. In early March the bill, with Obama now President, was reintroduced, and on April 2, the G20 was to meet in London to discuss the crisis.
"Even before the new Stop Tax Haven Abuse Act was introduced in both houses of Congress on 2 March, Frieden was considerably worried about Luxembourg’s inclusion on any number of lists," according to the American ambassador, Ann Wagner.
Diplomatic cables between Luxembourg and Washington tell the tale. Released by Wikileaks as 09Luxembourg100, they present a vivid portrait of Luxembourg’s response to the crisis. They are excerpted here.8
On March 23, 2009, Frieden visited the offices of the U.S. Treasury in Washington D.C. to discuss "updating existing information exchange protocols." At the same time, his boss, Prime Minister Juncker, lashed out at OECD’s proposed "black list" of tax havens as "incomprehensible, while singling out certain U.S. states as tax havens." A stupendous piece of logic: the lists should not exist, but if they do, Luxembourg should not be on them, and if we must have them, Delaware goes first.
"A flurry of back door diplomacy and and visits by Treasury Minister Frieden to Paris, Berlin and Washington followed Luxembourg’s 13 March announcement that it would take the necessary steps to come into compliance with OECD standards on banking secrecy. Minister Frieden confided to Ambassador that Prime Minister Juncker tasked him to ‘do whatever it takes’ to stay off any lists."
"3. (C) Prime Minister Frieden visited with Treasury officials in Washington 23 March to discuss what his country could do to remain off any blacklist. While under pressure from Germany and France and pending G20 or OECD announcement of a blacklist, the GoL exhibitied enormous anxiety over its inclusion on a list within Senator Levin’s Stop Tax Haven Abuse Act… Frieden’s visit with Treasury officials proved positive. Luxembourg agreed to offer a one-issue protocol without asking for any concessions. Negotiations appear to be imminent on an amendment to the Double Taxation Avoidance Agreement (DTAA)…"
While Luc Frieden was nervously playing down the international fracas through diplomatic and bureaucratic channels, the country’s Prime Minister, Jean-Claude Juncker continued on a tear, loudly protesting the existence of any lists at all. "4. (C) Despite Frieden’s eagerness to conclude an agreement, his boss Prime Minister Juncker has been taking pot shots at the U.S. Juncker has repeatedly mentioned states such as Delaware, Wyoming and Nevada, as well as the U.S. Virgin Islands as worthy of placement on a blacklist… Juncker told the press on 3 April that Luxembourg’s inclusion on an OECD gray list was ‘incomprehensible,’ repeating his criticism of the entire ‘list’ concept."
Wagner appeared hopeful after a meeting with Frieden: "2. (S/NF) SUMMARY: Luxembourg Minister of Justice Luc Frieden… privately discussed with Ambassador the issue of USG’s perception of Luxembourg as a possible tax haven. Frieden’s discussions with the Ambassador indicate his and the GoL’s awareness that a dialogue must be initiated on the issue. Recent press coverage of U.S. tax fraud actions against Swiss bank UBS, combined with recent complaints about bank secrecy from powerful European Union neighbors have galvanized policymakers here. The introduction of a new ‘Stop Tax Havens Abuse Act’ in both houses has magnified Luxembourg’s anxiety."9
On July 9, 2009 Luxembourg was removed from the OECD’s ‘gray list’ of tax havens after it signed a double information-sharing agreement with Norway. Barely two months later, in September, French President Sarkozy, in one of his notorious fits of braggadoccio, announced that "Tax havens and bank secrecy are finished."
As of 2011 Luxembourg ranked no. 3 on the Tax Justice Network’s Financial Secrecy Index, behind Switzerland and the Cayman Islands. It continues, as Richard Brooks observes in the film, to play a double game, profiting by its participation in the EU while offering the same benefits as a tax haven in sunnier parts of the world.
Wagner and the government she represented were played by two sharp operators who know how to wait out a storm. In essence, Frieden, the chosen son, schmoozed his way capitol to capitol, parlaying and placating while Juncker stayed home and thundered to the cows on the hillsides, with the result that substantial changes in the outside world were averted and the local populace was once more induced to see Juncker and Frieden as their saviors. A roaring success.
Luc Frieden’s job is to make sure Sarkozy’s pronouncement never comes true for the country he one day hopes to lead.
For some reason I cannot get the scene in Quiet Days in Clichy out of my head, the one where the attentive cafe owner in Luxembourg has just handed Henry Miller and his friend Carl his business card, which says the bistro is "proudly Jew-free," is then roundly cursed and insulted by his two visitors and finally collapses onto a chair flabbergasted, a bewildered wreck. "All they were concerned about was to know which side of their bread was buttered. They couldn’t make bread but they could butter it." Miller has other choice things to say about Luxembourg but then I think of Perrin’s comment that Luxembourg lost its industry and settled on finance, and if that gets taken away, what then? No one has imagined a future for the country. Frieden, like all pols, has no idea what comes next but he is determined to see it doesn’t happen. They exist to function as a brake on reality. That’s their job. 10
Later this week or early next – if the world really hasn’t come to an end – we bid adieu to 2012 and Invisible Money – the latter for now at least – with a column that takes a close look at one of the most secretive politicians in Europe, a man who may have more control over European financial policy than any other.
1 67 trillion is the figure issued by the Financial Stability Board in their 2011 analysis. The FSB is a subgroup of the G20, one of many ‘powerful nation clubs’ (members include finance ministers and central bank governors from 20 major economies: 19 countries plus the European Union). So while the average pol might still claim ignorance, it is hard to see how their leaders can say they are, in George Bush’s immortal phrase, "out of the loop."
2 Among the OECD’s 34 members are the United States, Russia, the EU member states, including what we might call the Premier League of tax havens such as Ireland, the Netherlands, Luxembourg and Switzerland.
3 For a portrait of two Swiss campaigners against bank secrecy, read this article
in Der Spiegel.
The breakdown of Sociétés is here
5 "Notre place financière est totalement européenne et applique toutes les règles de lutte contre la criminalité financière," is a bit bold even for a ceaseless obsfucator like Frieden. June, 2006.
6 The full transcript of the interview is
7 Despite the optimistic pronouncements, we are in all likelihood still standing at the edge of those scenic bluffs. Those who doubt it are referred to a pungent paragraph in Eric Toussaint’s Banks Versus The People: "Balance sheets of private banks are still packed with bad assets ranging from the completely toxic – veritable time bombs – to non-liquid assets… including assets of which the value is completely over-estimated in the banks’ balance sheets." European leaders prefer to muddle through, have done nothing substantive about tax havens and when pinched, mutter the magic talisman, austerity. The Franco-Belgian bank Dexia has nearly tottered over three times in four years – October 2008, October 2011 and again in October of this year. The French and Belgian governments rescued them this time to the tune of 5.5 billion Euros. A mere bag of shells if one is in a generous mood but it begs the question, what’s so special about this bank? See Eric Toussaint, Six Years That Shook The Banking World.
8 Wikileaks published diplomatic cables between the American ambassador in Luxembourg, Ann Wagner, and Washington in the run-up to the April 2009 G20 conference in London and immediately after.
9 No one likes to spoil the mood these days so you really have to love "the perception of Luxembourg as a possible tax haven." Perhaps all the tea cups in the Embassy would have shattered simultaneously if Wagner had said, "Luc, you’re a thief." We’ll never make it through the apocalypse without a sense of humor.