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Inspect holding companies over human rights, study says
human rights

Inspect holding companies over human rights, study says

by Zuzanna REDA-JAKIMA 3 min. 28.04.2021 From our online archive
Luxembourg is a European hub for holding companies, hosting 50,000 so-called Soparfis
Luxembourg Foreign Minister Jean Asselborn
Luxembourg Foreign Minister Jean Asselborn
Photo credit: Anouk Antony

Luxembourg should make sure companies do not breach human rights in their operations around the world, a government-commissioned report said, as the country is taking steps to improve its laissez-faire attitude toward corporate infractions committed abroad.

The country is weighing whether to introduce a law requiring companies to consider human rights and ordered a study from the University of Luxembourg into the matter after national leaders declined to investigate a spyware firm in 2019 linked to the killing of a Saudi dissident.

Unlike other European countries, the Grand Duchy has no such law in place, and a recent parliamentary exchange pointed to the government’s preference to exclude the 50,000 financial holding companies that it is home to from the scope of any future human rights due diligence rules.

But importantly, the study said that companies should not be able to hide behind complex corporate networks and urged Luxembourg to include holding companies in the new rules even if their only business in the Grand Duchy is to administer the business they perform elsewhere in the world.

In particular, the law should be extended to holding companies, or Soparfis, which have flocked to Luxembourg because of its favourable tax regime, ease of accounting and the double-tax treaties it has with many countries.  

“Human rights abuses and environmental harms often take place within complex value chains or as a result of the conduct of overseas subsidiaries of the parent company," report author Başak Bağlayan said.

"This raises challenges for victims to seek reparations against the parent company or the group, due to the principle of limited liability and separation of legal personalities within corporate groups,” the report said. The new rules should force "the parent company (…) by controlling the subsidiary to ensure it does not engage in human rights violations, directly or indirectly.”

The foreign affairs ministry would not say whether it would follow the recommendations outlined in the report. “The determination as to which businesses will come into the scope of a future law is one of the issues that will be discussed in detail in the inter-ministerial committee,” Dejvid Adrovic from the Ministry’s press office said in an email.

But in March, Foreign Affairs Minister Jean Asselborn and Economy Minister Franz Fayot told parliament that holding companies are already subject to OECD guidelines and that “it would be inefficient for (holding) companies to be subject (to a human rights due diligence)” as by definition they are not in a position to control entities in the holding “and prevent non-compliance”.

That interpretation of the law led to Luxembourg refusing in 2019 to investigate Israeli spyware firm NSO – which has offices in the Kirchberg business district  - and has been linked to the killing of Saudi Arabian journalist Jamal Khashoggi at a consulate in Istanbul. The company said its software was used for intelligence operations, but human rights organisations have alleged it is used by regimes to spy on dissidents, activists and journalists. 

Asselborn and former economy minister Etienne Schneider said at the time that it was not up to Luxembourg to probe the company over Khashoggi’s death.

No clear timeline

Luxembourg should not wait with new rules for the EU to finish a joint approach it is working on, the report said, but there is no clear timeline for the legislation: “Any drafting of a law will require preliminary discussion and decision-making on central questions raised by the expert in her report,” Adrovic said.

The report quoted some concerns that the new law could hit Luxembourg's attractiveness as a business domicile, in particular in the financial sector, especially if neighbouring countries did not have similar legislation. 

The report noted that the financial sector was already heavily regulated and “that it would adapt relatively easily to an extra layer of regulation”. There was not enough evidence to determine “whether the adoption of mandatory due diligence legislation would encourage financial service providers to migrate to countries where such legislation was lacking”.

The new rules would also include measures for more thorough background checks of companies taking part in public calls for tender and due diligence procedures for state-owned companies. This includes the Banque et Caisse d'Épargne de l'État (Spuerkeess), the national mail and telecommunications provider POST Luxembourg, and rail service CFL.

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