Response to the report by the Süddeutsche Zeitung about KfW in connection with the Paradise Papers

In a report in connection with the Paradise Papers, the German newspaper Süddeutsche Zeitung critically examines the Microfinance Initiative for Asia (MIFA) Debt Fund that was initiated by KfW and other parties, as well as the establishment of the fund in so-called offshore locations. We take the following position on this:

KfW Group never conducts non-transparent financing operations as a matter of principle. In the course of initiating and processing every transaction, the borrower and other partners relevant for the transaction (for example, purchasers, suppliers) are checked with the aim of detecting possible indications of money laundering and other activities relevant to compliance. Every business relationship — and thus also relationships with offshore companies — is evaluated by KfW's Compliance department. Since 1 January 2010, KfW has implemented guidelines in consultation with the German Federal Government that it strictly follows for dealing with financing in countries where there is a lack of transparency.

What is the "Microfinance Initiative for Asia" (MIFA Debt Fund) and how did it develop?

The MIFA Debt Fund is a fund that concentrates exclusively on refinancing sustainably operating microfinance institutions in Asia that provide loans to micro-, small-, and medium-sized businesses as well as private households with low income. The MIFA Debt Fund has developed positively so far and was able to fulfil expectations. In particular, it succeeded in gaining several private investors for the initiative, thus mobilising private capital for financing development objectives.

As of 30 June 2017, the fund had granted loans to 42 MFIs in a total of 14 countries. Since the fund was established, the supported MFIs have granted a total of over 10 million microloans in an average amount of USD 1,000 to microbusinesses and households. The amounts make a valuable contribution to improving the living conditions of the target group.

Why was the MIFA Debt Fund established as a fund in a so-called offshore location?

The MIFA Fund is based in Luxembourg. Generally speaking, the good finance infrastructure supports the choice of location in Luxembourg (previously Mauritius), in particular due to their expertise in handling funds, for example, with regard to supervisory authorities, auditors and financial service providers. With a highly developed legal framework and expertise, Luxembourg has taken a leading role, especially with regard to the special form of so-called structured funds (funds with various risk categories for investors), which are particularly suitable for mobilising private capital. Furthermore, a high degree of legal security and large number of investment protection agreements, even with smaller developing countries, are important.

Why was MIFA Investment Holding Ltd., which was originally located in Mauritius, dissolved, and the location of the initiative focused in Luxembourg?

The MIFA Fund now only consists of one unit, a SICAV SIF investment fund according to Luxembourg law. MIFA Investment Holding Ltd. was already dissolved in 2015. Its shares were transferred to the MIFA Fund according to Luxembourg law as it was no longer necessary to be located in Mauritius (a requirement for Official Development Assistance eligibility) and the fund structure could be organised more efficiently.

How much of a role do tax issues play in this?

Tax reasons are not a decisive factor in the location selection process in any way. Because, for funds granting loans, the equity holder or investor, not the company, is taxed according to the rules in their location. This means that fund investors are subject to standard taxation in their home country.

What role does eligibility for the German Official Development Assistance allocation play during selection of offshore locations for funds like the MIFA Debt Fund?

Until 2012, direct financing could only be charged as Official Development Assistance in so-called Official Development Assistance recipient countries according to the OECD-DAC requirements. This created incentives for disbursing public funds for partners in developing countries via development funds, for example in Mauritius, an Official Development Assistance recipient country. Since the Official Development Assistance guidelines for structured funds were amended, certain investments in funds in third countries can also be directly charged as Official Development Assistance as long as the funds go to Official Development Assistance recipient countries. The German contributions to the MIFA Debt Fund from budget funds fulfil the criteria for direct charging. As before, the investments financed using KfW's own funds are not recorded as Official Development Assistance.

Why was the Microfinance Initiative for Asia (MIFA Debt Fund) not located in Germany?

The MIFA Debt Fund targets fundraising from private investor contributions, in particular; it was possible to implement this successfully. Fundraising from private investors is especially promising if the capital is used in a legal (Luxembourg SICAV SIF) and economic (structuring, risk diversification) structure trusted by private capital market investors.

Implementing the initiative via a fund (as opposed to direct lending by KfW) provides efficiency advantages and improved risk diversification because direct implementation of many small loans by the Federal Ministry for Economic Cooperation and Development (BMZ) and/or KfW would generate significantly higher costs, and it would also be impossible to provide a lever for investments with private capital.