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Long-time Prime Minister Jean-Claude Juncker talks to the media after his meeting with Grand Duke Henri at the Grand Ducal Palace in Luxembourg July 11, 2013. The Luxembourg government bowed to pressure for an early election after the junior coalition partner blamed Juncker for failing to curb abuses of power by the secret service. (STRINGER/REUTERS)
Long-time Prime Minister Jean-Claude Juncker talks to the media after his meeting with Grand Duke Henri at the Grand Ducal Palace in Luxembourg July 11, 2013. The Luxembourg government bowed to pressure for an early election after the junior coalition partner blamed Juncker for failing to curb abuses of power by the secret service. (STRINGER/REUTERS)

Sleepy Luxembourg rocked by spy scandal Add to ...

Luxembourg is a tiny European country best known for low taxes, secret bank accounts and sleepy politics.

But, these days, the nation of 540,000 people is embroiled in a political drama right out of a spy novel, with allegations that the country’s intelligence service spied on politicians, illegally sold luxury cars and may have been involved in a bombing campaign. Adding to the intrigue are revelations that the former director of the agency used a special wristwatch to secretly record a conversation with Prime Minister Jean-Claude Juncker.

A parliamentary probe into the allegations has left the country reeling and raised questions about the leadership of Mr. Juncker, who has been in government for 30 years and prime minister for 18, longer than any other leader in Europe. His government lost a vote of non-confidence this week and he has submitted his resignation. Elections will be held in October.

Luxembourg isn’t used to this kind of scandal. The country prides itself on being one of the most stable and wealthiest nations in the world, where the average annual income is above $50,000 and the bulk of the population works in banks or for European institutions. Mr. Juncker’s Christian Social People’s Party has ruled Luxembourg for most of the past 60 years, and he has played a crucial role in European affairs.

He was among the main architects of the 1991 Maastricht Treaty, which created the European Union and later helped launch the euro. From 2005 to early this year, he also headed the Eurogroup, the euro zone’s managing council, which co-ordinated bailouts for Greece, Ireland and Portugal. Until now, he was also considered a possible candidate to be European Council president in 2014.

One of Mr. Juncker’s duties as prime minister was to keep an eye on Luxembourg’s intelligence service, le Service de Renseignement de l’État, or SREL, which was created in 1960. It wasn’t easy and Mr. Juncker allegedly tried to plant a friendly agent inside SREL, at one point to keep him posted on its activities. But the extent of the problems ran deep and has brought down his government.

The first signs of trouble at the SREL emerged last November when a Luxembourg radio station broke a story about how Marco Mille, the former SREL head, used a microphone concealed in his watch to secretly record a conversation with Mr. Juncker in 2007. The station also reported that the SREL had recorded a 2005 meeting between the Mr. Juncker and Grand Duke Jean, the father of the current ruler, Grand Duke Henri. The discussions were allegedly about an investigation into a bombing campaign in the 1980s and possible ties to Britain’s security service MI6. Recordings of the conversations have been ruined and the palace has denied the alleged contents.

The media reports led to the creation of a parliamentary inquiry into the SREL. Four months of testimony unveiled a host of disturbing revelations, all compiled in a 140-page report released this week.

According to the inquiry, the SREL ran wild under Mr. Mille, who headed the agency from 2003 until 2010 when he left for a job with the German company Siemens AG. It said agents not only spied on politicians but engaged in extensive unauthorized surveillance of thousands of other people, amassing 300,000 individual files.

Agents also bought government-issued BMW cars at a discount, sold them at a higher price and pocketed the difference, the inquiry found. They went on so-called trade missions to Iraq, Cuba and Libya looking to develop their own business opportunities. They also used agency money for unauthorized travel and to buy a home for a senior official. The head of operations, Frank Schneider, even set up his own security business, called “Sandstone,” while working at SREL and using its resources.

The report also cited deep mistrust between the SREL and the government. At one point, it said, Mr. Juncker pushed the intelligence agency to hire his chauffeur, who was also a former police officer. The agency balked, fearing the driver would be a mole for the Prime Minister – which proved to be true.

Some of the most serious allegations relate to a series of 20 bombings in Luxembourg in the 1980s. There have been suspicions for years that the bombs, which did not kill anyone, were the work of a secret group that allegedly orchestrated bombings in Luxembourg and other NATO countries in Europe to win support for more government spending on security. Two former police officers are on trial in Luxembourg on charges related to the bombs. The inquiry heard allegations that SREL was involved in the bombings and that it had spied on the prosecutor investigating the case. Mr. Mille told the inquiry that he was unaware of the surveillance but that it could have been done by others inside SREL without his knowledge.

Mr. Juncker played down the allegations, saying he did nothing wrong. “The intelligence service was not my top priority,” he told parliament this week. “Can you really expect from the [Prime Minister] that he knows around the clock what 60 SREL employees are doing? I don’t think so.”

Luxembourg by the numbers

540,000: Number of people in Luxembourg

$88,000 (U.S.): Per capita gross domestic product, highest in the world.

40: Percentage of the population who are foreigners (most working in banking or European institutions). That is one reason the GDP per capita is so high, because the foreigners contribute to Luxembourg’s GDP but are not included in population figures.

Grand Duke Henri: The 58-year old head of state. He is the son of Grand Duke Jean, who stepped down in 2000.

150: Number of banks in Luxembourg, holding an estimated $350-billion. The country has eased some of its bank secrecy provisions and it recently agreed to share tax information with other countries, after facing years of criticism as being a haven for tax avoidance in other countries. Luxembourg has some of the lowest tax rates in Europe, leading many multinational corporations to run transactions through the country.

1949: Luxembourg was among the 12 founding members of NATO in 1949 along with Canada. Luxembourg is also a member of the European Union and euro zone.

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