Luxembourg hopes to turn rules to advantage

Mon May 18, 2009 8:25pm EDT
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By Lisa Jucca

LUXEMBOURG (Reuters) - Down in Clausen, a trendy area near Luxembourg City's landmark gorge, the professionals smoking cigars and sipping mid-week wine in a brewery-turned- sushi bar seem oblivious to the threat to their economy.

But in the high-rise steel and glass buildings that dot Europe's investment funds capital, the market turmoil and its consequences for the small land-locked Grand Duchy are a recurrent talking point.

Luxembourg, where the financial sector accounts for 45 percent of the economy, is facing two specific headaches: its tradition of bank secrecy is crumbling, and ripples of Bernard Madoff's fraud have cast a pall over its successful funds industry.

"We have to accept that our reputation has been a bit tarnished by Madoff, even if this is an (isolated) incident," said John Li, Chairman of the Supervisory Board of consultancy KPMG Luxembourg.

Luxembourg's no-quibble procedures for fund registration, stable political scene and well-educated workforce have helped it become Europe's top funds center -- followed by France. At the pinnacle of its growth, in 2007, its funds managed assets worth 2 trillion euros ($2.7 trillion).

That figure dropped by a quarter after the financial storm hit in 2008. Madoff's fraud made matters worse: investors lost $1.7 billion to Madoff in Luxembourg, mainly via the large mutual fund Luxalpha.

Combined with a global crackdown on secretive offshore centres led by countries such as the United States and Germany, the impact on the country's lean financial system may be heavier regulation: Luxembourgers and foreign investors fear that could threaten its ability to market its funds abroad.

"The big challenge for Luxembourg is to remain a safe but flexible financial center even after the crisis," said 29-year-old Laurent Muller, who along with his brother runs family-owned corporate tax advisory business Paddock.   Continued...

<p>The headquarters of the Bank of Luxembourg is seen in central Luxembourg, March 17, 2009. Picture taken March 17, 2009. REUTERS/Francois Lenoir</p>