Tax haven cools a bit on hot cash: Luxembourg has amended its laws on money-laundering, but only marginally

LUXEMBOURG has amended its laws on money-laundering - but only for funds that have been tainted with drug-related activities. Anyone else's hot money remains protected by a blanket of secrecy, whatever crimes they may have committed. Last week's action followed intense pressure from the Group of Seven industrial nations' Financial Action Task Force.

Luxembourg has a reputation among millions of tax-dodging shopkeepers, landlords and dentists in Europe of being like a giant mattress, where, away from the taxman's prying eyes, they can salt away their wealth.

Money-launderers have been attracted by the Grand Duchy's banking secrecy laws and its 'come one, come all' policy. Earlier this year a treasurer of the Cali drug cartel in Colombia, Heriberto Castro-Maza, had the pleasure of hearing a Luxembourg court declare that assets of dollars 36m (pounds 22m) should be returned to his family, although it convicted him on drugs charges and jailed him for six years.

By train, car or plane, hordes of furtive tax-dodgers and money-launderers arrive every day, their briefcases bulging with foreign currency, and head for the country's 213 financial institutions. German, French and Belgian secret services are busy trying to identify their nationals, but to little avail.

'We occasionally hear reports that tourists are taking photographs of cars in bank car parks,' Lucien Thiel, the general manager of ABBL, the Luxembourg banking association, said yesterday. 'We don't know if they are French security services or what, but a bank parking-lot does not make a very pretty background for a photo, though I can imagine the tax authorities are trying to catch our customers.'

The law forbids financial-services employees in Luxembourg from co-operating with foreign tax authorities. And it is a crime for a bank employee to divulge information about a depositor. Unlike Switzerland, which has a reputation for being choosy about its customers, Luxembourg woos the small depositor.

The flow of depositors became a flood recently when German savers panicked at the prospect, under a new law, of paying a 30 per cent withholding tax on the interest in their bank accounts. A huge capital flow to the Grand Duchy ensued - some dollars 50bn to dollars 60bn - as German savers responded to a tourism advertising campaign mounted by Luxembourg banks. German banks opened some 19 branches in Luxembourg last year and recycled most of the money back to Germany through unit trust investments.

Germany complained to Luxembourg about the flight of capital, but, as Mr Thiel pointed out: 'They created the problem themselves by introducing the withholding tax. That's their problem, not ours.'