OpenLux: Europe has yet to address the roots of financial wrongdoing
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OpenLux: Europe has yet to address the roots of financial wrongdoing

Sunday, 21 February 2021
This is an opinion article by an external contributor. The views belong to the writer.
Despite a population of 600,000, Luxembourg is the host of a staggering $4 trillion in foreign direct investment—roughly the same as the United States, and approximately a tenth of the global total FDI.

In the seven years since LuxLeaks revealed that tiny Luxembourg was punching above its weight in terms of facilitating tax avoidance, the Grand Duchy has tried to convince the world that its days of backroom deals and banking secrecy were over.

Transparency campaigners were always sceptical of how deep Luxembourg’s policy changes ran, but a new investigation by a coalition of preeminent European newspapers suggests that the tiny country remains an international hotbed for dodgy financial activities.

The OpenLux exposé calls into question both Luxembourg’s own willingness to reform and the EU’s success in cracking down on financial malfeasance. Indeed, Luxembourg is only a cog in a much larger informal network of European governments, financial institutions and other go-betweens. Until policymakers develop a comprehensive plan to address these facilitators, they will continue to enable illegitimate financial dealings from Luxembourg to Larnaca.

Big money in the Grand Duchy

Despite having a population of 600,000, Luxembourg is the host of a staggering $4 trillion in foreign direct investment—roughly the same as the United States, more than China, and approximately a tenth of the global total FDI. Unsurprisingly, this flood of foreign investment can’t be chalked up to Luxembourg’s roaring industry. After the Grand Duchy’s steel production dropped off, the small country began taking measures including lowering its taxes to attract foreign firms and individuals in need of private wealth management. The plan worked—foreign investment came pouring in, boosting Luxembourgers’ GDP to the highest per capita in the world.

As the LuxLeaks and now OpenLux investigations have illustrated, however, this newfound prosperity came at a cost. The sweetheart tax deals and regulatory gaps which lured foreign investment to Luxembourgish shores also made the Grand Duchy a popular destination for dictators and oligarchs hiding their wealth, international companies avoiding taxes in the countries where they actually operate, and organized crime groups such as the Italian ’Ndrangheta.

Transcontinental network of facilitators

Though Luxembourg has taken much of the heat, the grand duchy is part of a broader informal alliance of European countries, including Switzerland, Liechtenstein and Cyprus, willing to turn a blind eye to suspicious financial activities. Unless Europe crafts a comprehensive plan to tackle this issue across the continent, policymakers will just keep playing whack-a-mole as miscreants simply shift their assets from one special tax regime or shell company to another. What’s more, simply cracking down on governments won’t be enough to seal loopholes—the major financial institutions & other middlemen which have been facilitating the dark side of the European financial industry also need to be taken to task.

Take the Swiss bank UBS, for example. In addition to the fact that newly-minted CEO Ralph Hamers is staring down the barrel of a Dutch criminal investigation on money laundering, the financial institution is likely to face continued questions over its apparent role in helping oligarch Farkhad Akhmedov evade the largest divorce settlement in British history. In 2016, Akhmedov was ordered by the London High Court to hand over £453 million to ex-wife Tatiana, but has instead apparently devised extraordinary schemes to hide his assets from his former partner. Among the more sensational elements of the case, apart from the fact that the estranged couple’s 27-year-old son Temur allegedly helped Farkhad conceal millions of pounds in assets, was testimony outlining how Farkhad apparently worked with UBS bankers to set up highly complex financial arrangements.

In particular, Akhmedov allegedly coordinated with a UBS banker to set up an asset management firm, Cotor, in Switzerland. According to court documents, Cotor became Akhmedov’s “piggy bank”—he stocked some $650 million in assets there, held at UBS—before transferring them to a network of Liechtenstein-based trusts shortly before the London court granted his former wife 41.5% of his fortune. Most troubling about the murky transfer of millions is not that, as one judge put it, Akhmedov engaged in “an elaborate […] campaign to evade and frustrate the enforcement of the [divorce award]”, but that major European financial institutions—from UBS to Liechtenstein’s LGT Bank—appear to have aided him in this endeavour.

An all-too-familiar pattern

Unfortunately, such assistance would be par for the course. In another high-profile case, a cache of documents dubbed the “Luanda Leaks” revealed how top-tier European financial advisors and consultants helped Angolan billionaire Isabel dos Santos build an international business empire built on Angolan public funds and insider deals. The scandal not only tarnished dos Santos’ reputation, but proved how enthusiastic some elements of the European financial industry were in helping an autocrat’s daughter amass and shield a fortune that made her the “richest woman in Africa”.

While Akhmedov appeared just to exploit Swiss and Liechtensteiner banks to carry out his asset-shifting, Isabel dos Santos took things a step further. As one senior former FBI agent with experience in such schemes explained, “one of the best ways to launder money is to buy the bank”—insight which dos Santos appeared to take to heart. The heiress established an expansive network of private banks to  funnel misappropriated Angolan funds into Europe, mainly through institutions in Portugal, Malta and Switzerland. Portuguese banks BIC and BPI were particularly essential to the scam, signing off on suspicious transfers and extending large loans.

A many-headed creature

An increasing intolerance for financial crime among both governments and the general public has brought an increasing number of such cases to light, but much like the legendary hydra, cutting off one head is no guarantee of victory. If European policymakers are serious about stamping out tax avoidance, asset concealment and other financial misdeeds, they need to devise a comprehensive and vigorous response.

In the wake of previous scandals, heavy pressure has been put on the national governments who have turned a blind eye to this behaviour, but repeated evidence highlights that this isn’t enough. In addition to governments, the financial institutions and other middlemen which facilitate it must also be addressed. Otherwise, stories like OpenLux will continue to come out, creating furore and outrage that then fades until the next such scandal.