LUXEMBOURG SEEKS DIALOGUE ON DESIGNATION AS A TAX

S E C R E T LUXEMBOURG 000062

NOFORN
SIPDIS

TREASURY FOR JOHN L. HARRINGTON

E.O. 12958: DECL: 03/02/2019
TAGS: KFPC ECON EFIN EINV ETRD BEXP PGOV PREL LU
SUBJECT: LUXEMBOURG SEEKS DIALOGUE ON DESIGNATION AS A TAX
HAVEN, ASKS FOR CONSULTATIONS

Classified By: A/DCM Thomas Boughter for reasons 1.4 (b) and (d)


1. (U) This cable contains action request for Department.
Please see paragraph 10.


2. (S/NF) SUMMARY: Luxembourg Minister of Justice Luc
Frieden (protect) 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 Haven Abuse Act" in both
houses of Congress has magnified Luxembourg's anxiety.


3. (S/NF) SUMMARY CONT'D: The international pressure on
the GoL, from both the U.S. and European neighbors may be
spurring the GoL to act, and with our properly-conveyed
guidance, we may have an opportunity to ensure they move in
the right direction. Frieden has requested Post assistance
in identifying the proper interlocutors within the USG and
facilitating consultations during his April visit to
Washington. The political season is afoot in Luxembourg
(national elections are scheduled for June) and political
wrangling is in full swing. Frieden, however, is not
necessarily politicking on this issue; his primary motive is
to avoid any misinterpretation of the GoL's position.
Frieden wants to be clear that, on this issue, his is the
voice of the GoL, and that the Foreign Minister has been
effectively sidelined from the banking secrecy and greater
financial regulatory system discussion. END SUMMARY

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THE MINISTER'S APPROACH
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4. (S) Justice and Budget Minister Luc Frieden and
Ambassador privately discussed Luxembourg's frequent mention
as a tax haven. 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. In conversations with Ambassador, he has
mentioned both the list contained in the 2007 version of the
legislation - sponsored by then-Senator Obama - and the
forthcoming blacklist President Sarkozy intimated the G-20
would release in London in April. Frieden expressly asked
for USG guidance on opening up a dialogue on the issue. Post
sees this approach as an opportunity. If Luxembourg is
genuinely interested in exploring change, this opening is an
opportunity to influence GoL policy.

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FRIEDEN VS. ASSELBORN
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5. (C) Although Minister Frieden, in consultation with
Prime (and Finance) Minister Juncker, clearly has the lead on
this issue, Foreign Minister Asselborn ) as is his wont )
independently commented, as well. In an interview with Swiss
press, Asselborn said, &Luxembourg's banking secrecy
possibly needed to be redefined.8 This comment prompted an
opposition MP to pose a Parliamentary Question to the Foreign
Minister seeking clarification. Asselborn has one month to
respond.


6. (S/NF) In a private conversation with Ambassador,
Frieden said very clearly that he, and not Asselborn, has the
lead on this issue. Post has learned to accept that
Asselborn's musings often do not reflect the position of the
GoL, but Frieden stated very explicitly that he, and not
Asselborn, is presently the GoL's go-to guy on this issue.
(NOTE: Frieden is one of the GoL's most outspoken friends of
the United States. For this reason, his leadership on this
issue could be critical to a successful dialogue. END NOTE)
On 3 March, Frieden told the Ambassador that he will be
meeting with the Austrians and the Swiss to discuss bank
secrecy issues on 8 March and that Asselborn was not invited
to this meeting. Minister Frieden will accompany Prime
Minister Juncker to Washington for IMF meetings in April

2009. Frieden specifically asked Ambassador with whom in
Treasury could he consult on the issue and could Post help

arrange such a meeting. Frieden also suggested that the GoL
may team with Austria and Switzerland in an effort to present
a unified front to the USG.

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LISTS, LISTS, AND MORE LISTS
--------------


7. (S) Frieden expressed to the Ambassador a great deal of
anxiety over French President Sarkozy's 1 March comments that
Switzerland may find itself on a planned G-20 list of tax
havens. Post believes Frieden's palpable apprehension
reflects that of the Prime Minister, and his edginess was
further evidenced when he directly asked the Ambassador, "Are
the Americans making a G-20 list?" Post notes that both
houses of Congress introduced new legislation on 2 March,
mirroring 2007's "Stop Tax Haven Abuse Act" (S. 681).
Luxembourg, of course, figures prominently on the list
contained in this legislation, as does Switzerland and
Liechtenstein, with Austria notably absent. Post feels we
should answer Frieden's query to avoid the appearance of
disingenuousness if a G-20 blacklist mirrors or even closely
resembles the list contained in the new legislation.

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ROOM FOR MOVEMENT
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8. (C) A number of factors leads Post to believe there may
be an opening to move the GoL to act on the issue and even
reform their banking regulations. French President Sarkozy's
repeated criticism of Luxembourg's status as a tax haven and
calls for tighter regulatory procedures have Prime Minister
Juncker on the defensive. Upcoming elections (June) and
strong domestic lobbying to maintain the status quo certainly
will play a factor. Recent headway on breaking down some
bank secrecy barriers in Belgium, Switzerland, and
Liechtenstein certainly has been noticed here, adding to GoL
and financial sector anxiety. Finally, the Foreign
Minister's comment and subsequent Parliamentary Question may
indicate some political will to move on the subject.

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COMMENT AND ACTION REQUEST
--------------


9. (S) COMMENT: The Frieden-Asselborn political dynamic is
more than just a subtle undertone of this issue. Frieden is
a member of Juncker's CSV party and is currently the heir
apparent to the prime ministership. Asselborn, however, is a
Socialist and is currently the Deputy Prime Minister. The
two have jockeyed for years over the coveted "second most
popular politician in Luxembourg" title. Post notes,
however, that Frieden is not posturing. It is not necessary.
The CSV - with Juncker at the helm and Frieden at his side -
is comfortably entrenched at the head of the ruling coalition
and at the pinnacle of Luxembourg politics. Frieden's direct
overtures to the Ambassador confirm his ownership of the
issue and his blessing directly from the Prime Minister to
speak on behalf of the GoL. Thus, as Asselborn and the
Ministry of Foreign Affairs have been effectively sidelined
for the moment, so too has the Luxembourg Embassy in
Washington, possibly explaining their temporary silence on
the issue. END COMMENT


10. (S) ACTION REQUEST: Post's action request to the
Department is threefold. First, in the wake of Justice
Minister Frieden's ongoing discussions with the Ambassador,
Post sees an opportunity to &help Luxembourg help itself.8
Post seeks Department input on what guidance we can relay to
the GoL to steer its efforts to modify its existing banking
and information exchange regulations. Second, Post awaits
department advice on helping to facilitate consultations for
Minister Frieden in Washington in April (including, but not
limited to, Treasury). Finally, Post solicits Department
input on how to respond to Frieden's inquiry about the
blacklist that will possibly emerge from the G-20 summit in
London in early April, and the USG's role in crafting it.
WAGNER