Luxembourg watchdog sees no long-term Madoff damage

LUXEMBOURG (Reuters) - Luxembourg's fund industry will suffer no long-term damage from Wall Street swindler Bernard Madoff's fraud, and rules governing the sector need no overhaul in its wake, the country's regulator said.

"I don't think it has really damaged in any measurable way the fund industry here in Luxembourg ... You have to start from the fact that this was fraud and there will always be fraud," Jean Guill, director-general of the Commission de Surveillance du Secteur Financier CSSF.L, told Reuters on Friday.

Investors in Luxembourg lost $1.7 billion (1 billion pounds) to Madoff, mainly via the Luxalpha fund, for which UBS (UBSN.VX) acted as a custodian bank.

The U.S. financier has been found guilty of committing a $50 billion fraud and sentenced to 150 years in prison.

Luxembourg's fund industry, which hit a low last autumn as the financial crisis struck, has been recovering with renewed net inflows since the first quarter of 2009, Guill said.

"The outflow was never really important, but still people did not invest in funds during the second half of last year," he said in an interview.

Guill said the Luxembourg financial watchdog could not have detected Madoff's fraud and that it never had any reason to suspect such a crime.

The watchdog had been aware that Luxalpha and other funds' assets were managed by Madoff. It did not oppose the contracts the custodian banks signed with investors limiting their responsibility as custodian.

"People did not invest with Mr Madoff because they thought he was a thief, but precisely because he had a very good reputation. People thought that explained why he could give good results," Guill said.