Liechtenstein: International Law

Just before publication of the OECD and FATF reports, Liechtenstein had already moved towards making major revisions to the law covering the duty of care, changes to the penal code and the code of criminal procedure, and a complete reorganisation of procedures for giving international legal assistance.

The Financial Services Department was split into two, one part dealing with the capital markets and the other with financial services. Two working days after the FATF report appeared, the Liechtenstein parliament passed the requisite laws on a first reading. The laws came into force from the beginning of 2001.

In September, 2000, the Liechtenstein Bankers Association announced that their formal agreement to comply with, and enforce, the abolition of banking anonymity would take effect October 1st of that year. All intermediaries are now required to reveal the names of the depositors they represent. The "Know Your Customer" system of identifying the names of depositors had been in force for some time, but only then became obligatory.

Liechtenstein indicated that it was optimistic of being removed from the FATF list at the end of June 2001.

Earlier in the year the FATF had issued a second progress report on the jurisdictions it had cited in 2000 as having inadequate anti-money laundering armour. Liechtenstein, along wiith the Bahamas, the Cayman Islands, The Cook Islands, Israel, the Marshall Islands and Panama, was deemed to have made "significant progress" in the fight against money laundering and was requested by the FATF to submit its implementation plans now that all necessary legislation had been enacted.

In May, a delegation from the Financial Action Task Force (FATF) held "intensive, open and constructive" discussions with the Liechtenstein government.

The delegation was headed by Joseph Halligan and included Theodor Greenberg, Francesco Lo Voi, Jean Pesme and Ricardo Sansonetti. They were in Liechtenstein to try to gain a comprehensive picture of the measures introduced by the authorities in order to fight money laundering and organised crime.

In June 2001, Liechtenstein announced the establishment of an 'Institute for Compliance and Quality Management' (ICQM) which would concentrate on teaching local professionals how to identify suspicious customers and transactions. The idea was the brainchild of Prince Philipp, brother of Prince Hans-Adam II von und zu Liechtenstein, and chairman of LGT Group, the banking conglomerate owned by the royal family which which controls more than a third of Liechtenstein's managed assets.

In the event, in June, Liechtenstein Prime Minister, Otmar Hasler was able to express his relief that the jurisdiction had been removed from the FATF blacklist of uncooperative countries after exactly a year. Just one hour after the announcement of the decision in Paris, Mr Hasler was triumphantly addressing the media in Vaduz: 'The cancellation of Liechtenstein shows that the immense efforts, which the country took in the past years in fighting money laundering and organised crime, were recognised internationally,' he said.

Following the events of 11th September, Liechtenstein, like many other jurisdictions, took an active part in the international search for terrorist assets, but Robert Wallner, announced that no real leads had been found in the Principality.

Later in 2001, the Liechtenstein parliament voted on amendments to the principality's Duty of Care laws to ensure that bank accounts for which the beneficial owner and/or business profile was not known would be frozen in order to avoid accusations of lax anti-money laundering practices.

In the long running EU debate over information exchange regarding foreign savings interest reporting, several member countries, among them Austria and Luxembourg, had stressed that they would only accept the EU regulation if countries such as Switzerland, the United States, and Liechtenstein (all non-members) adopted similar information sharing procedures.

However, the Minister of Justice for Liechtenstein was keen to separate the issues of terrorist financing and legitimate banking secrecy. 'In Liechtenstein there is no banking secrecy in case of money laundering and terrorism and it has not existed in the past,' she explained.

In March 2002, the principality's Parliament unanimously approved a new law specifying the competencies and duties of the Financial Intelligence Unit, which had previously operated on the basis of a statutory instrument. The law clarified the procedures which the body was to use in order to procure and analyse information on potential and actual money laundering activity, and confirmed its position as an essential element of the amended regulatory system put in place in Liechtenstein's financial sector in the wake of OECD demands and the September 11 attacks.

The law allowed the FIU to cooperate and exchange information with authorities in Liechtenstein and abroad, and provides for it to solicit assistance from foreign FIUs and other regulatory bodies.

Although Liechtenstein had been released from bondage by the FATF, it still had the OECD to deal with, and when the OECD failed to remove Liechtenstein from its blacklist in March 2002 there was discussion within the country's financial services sector as to the extent of the multilateral body's powers.

There came help from an unexpected quarter, when the US Treasury Secretary at the time, Paul O'Neill told Liechtenstein's Head of Government, Otmar Hasler that America supported equal rights for small states within the OECD, and expressed his government's intention to stand up for Liechtenstein and other small sovereign states during future OECD talks.

As if to put the OECD firmly in its place, the United States and the Principality of Liechtenstien signed a mutual legal assistance treaty designed to combat money laundering and terrorist financing. Simple tax evasion did not fall under the remit of the agreement, as the result of a Liechtenstein law which states that the non-payment of taxes is an administrative matter into which foreign investigators may not probe. Speaking following the signing of the treaty, Otmar Hasler expressed pleasure at the way that the talks had gone. 'This is a big step in bilateral ties with the United States,' he told reporters.

From an international perspective, the big issue for Liechtenstein during 2003 and 2004 was the EU's Savings Tax Directive. For much of this time, Liechtenstein allied itself with Switzerland - with which it indeed has very close financial links. Specifically, Liechtenstein had wanted to apply a withholding tax rather than adopt information-sharing, and for the same reason as Switzerland, ie in defence of banking secrecy.

As negotiations with Switzerland dragged on - and on - and on - the EU began to worry about even the postponed deadline of 2005 for the commencement of the information-sharing regime. In February, 2004, Europe’s then Internal Market Commissioner, Frits Bolkestein told European finance ministers that there had been an unacceptable level of progress made in the EU’s negotiations with Andorra, Monaco, Luxembourg and Liechtenstein, intended to persuade them to accept the terms of the directive.

"It's a case of nobody wanting to make the first move," commented an EU official. The European jurisdictions, in addition to the overseas territories of the UK and the Netherlands, had to adopt rules facilitating exchange of banking information, or apply a transitional withholding tax by June 30 in order for the directive to be implemented by January 1 2005 (later put back to July 2005).

Nevertheless, despite the apparent impasse, Bolkestein was optimistic that the deadlock would be broken ahead of the deadline.

In June, Switzerland and the EU finally came to terms over the Savings Tax Directive and the parallel 'Bilaterals II' agreements, and Liechtenstein followed suit, accepting the need to introduce a withholding tax, initially at 15%, on the returns on EU citzens' savings from 1st July 2005.

In December, 2004, Liechtenstein signed its Savings Tax Directive agreement with the EU. Essentially the same as the agreement that had already been signed by Switzerland, the four key elements were as follows:

Withholding Tax: Paying agents are required to withhold tax on interest payments to EU individuals at the same rates as Belgium, Luxembourg and Austria under the Savings Directive - 15% during the first three years, 20% for the subsequent three years and 35% thereafter. Liechtenstein will share the revenue of the tax withheld, transferring 75 per cent of the revenue to the tax authorities of the individual's Member State of residence.

Voluntary disclosure of information: The retention tax is not applied if the EU resident taxpayer authorises the paying agent to disclose information on the interest payment to his home tax authorities.

Review clause stating that the Contracting Parties shall consult with each other at least every three years or at the request of either Contracting Party with a view to examining and if necessary improving the technical functioning of the Agreement, taking into account international developments.

Exchange of information upon request: For income covered by the draft Agreement, Liechtenstein will grant exchange of information on request for cases of fraud or comparable misbehaviour.

Laszlo Kovács, EU Commissioner for Taxation and Customs, commented: "I am delighted to welcome these agreements which show the willingness of each of our three European partners to work actively with us to tackle distortions in the capital market.”

He added: "While individuals' rights under the EC Treaty to place their capital wherever they choose must be protected, this cannot be allowed to lead to tax evasion and consequent erosion of Member States' tax revenues".

Turning back to regulatory matters, in November, 2004, Liechtenstein's Financial Services Authority announced that following Parliament's approval in June of the new Law (Organization Act) on Supervision of the Liechtenstein Financial Market, the new, independent, and integrated Financial Market Supervisory Authority created by the Act would commence operations on 1 January 2005.

The new single authority assumed the functions and responsibilities of the three existing regulatory bodies, namely the Financial Services Authority, the Due Diligence Unit, and the Insurance Division of the Office of Economic Affairs. The FMSA also took over the existing staff of the three authorities, the statement revealed.

All financial service providers supervised by these authorities were subject to the FMSA from 1 January 2005. Under the auspices of the new legislation, the Financial Market Supervisory Authority is responsible for safeguarding the stability of the Liechtenstein financial market, the protection of customers, the prevention of abuses, and the implementation of and compliance with recognized international standards.

In March, 2006, Prince Alois, ruler of the Principality, said that Liechtenstein was unlikely to dispense with its coveted banking secrecy laws any time soon because such a measure would probably not be approved if put to a referendum.

Prince Alois told Bloomberg News that banking secrecy is "very firmly anchored" in Liechtenstein and any proposed watering down of current laws to satisfy the OECD and the FATF would therefore be rejected when put to a referendum - a necessary measure under the Principality's constitution.

"I don't think a draft law or international accord proposing to scrap bank secrecy would be successful in the foreseeable future. The people would reject it in a referendum," Prince Alois stated at the time.

In March, 2007, the Liechtenstein government launched a project to examine the future of the jurisdiction's financial centre, which aims to make a long-term contribution to establishing conformity with international standards.

The government's announcement followed its first ever working meeting with the Egmont Group, the worldwide association of national Financial Intelligence Units (FIUs), at the beginning of March.

Liechtenstein said that it had made "great efforts" in combating money laundering and the financing of terrorism, strengthening national defensive measures, and expanding international cooperation. However, after tightening its due diligence legislation and the penal provisions for receiving criminal assets, expanding its courts, restructuring its economic crimes police unit, and modernizing mutual legal assistance, the government suggested that Liechtenstein is now in a "consolidation phase".

In June 2008, Liechtenstein announced that it would be implementing the 3rd EU Money Laundering Directive of the EU, by way of a revision of the Due Diligence Act.

"The Liechtenstein financial centre can only assert itself in the tightened international competition among business locations if the highest international standards are followed in the application of the law. The evaluation by the International Monetary Fund (IMF) gave Liechtenstein good marks with respect to implementation and application of the international standards for the prevention and suppression of money laundering," the government stated.

The Due Diligence Act originally entered into force in 2004 as part of implementation of the 2nd EU Money Laundering Directive, but the Government stated that it planned to expand due diligence obligations under the new revisions to include not just the core area of the financial sector, but also professions such as statutory auditors, accountants, and tax consultants.

Hitherto, the scope of the act had been limited to the acceptance and safekeeping of third-party assets and the formation of domiciliary companies. Under the revised law, it would be expanded to include relevant activities of natural and legal persons who, within their enterprises, are responsible for the formation of companies, exercise the function of general manager of a company, or make a domicile available.

With this expansion of due diligence, Liechtenstein says that it is confronting the danger that money laundering and terrorist financing may move to non-regulated areas.

The Government further revealed that it would be adopting international standards concerning the reporting requirement in the case of suspicion of money laundering and terrorist financing.

In July 2007, it emerged that the jurisdiction had once again failed to secure removal from the OECD's tax 'blacklist', leaving it in the company of Andorra, the Marshall Islands, and Monaco.

Liechtenstein also found itself in the spotlight with regard to tax matters in early 2008, when a huge tax evasion scandal, potentially involving hundreds of Germany's wealthiest citizens, and centring on the use of foundations registered in Liechtenstein, unfolded.

The scandal first broke after it emerged that the home of Klaus Zumwinkel, Chief Executive of Deutsche Post, one of Germany's largest companies, had been raided by police as part of a tax evasion investigation. He has been accused of hiding about EUR1 million from German tax collectors in Liechtenstein.

Zumwinkel was subsequently forced to resign by Deutsche Post, but the affair did not end there. It was reported that several more homes and offices in the Frankfurt area and in southern Germany have been raided, after the intelligence services received information from a former employee of a Liechtenstein bank about hundreds of wealthy German clients.

The informant, an ex-employee of LGT, Liechtenstein's largest bank, handed over a disc to the German intelligence service, the BND, containing confidential information on more than 1,000 clients. The BND was believed to have paid the informant a sum of between EUR4 and EUR5 million for the disk - a sum which the German government is regarding as a sound investment, considering the potential payoff if the tax evasion allegations are confirmed.

In February, Prince Alois was in somewhat defiant mood, and at the opening of the new Parliament Building in Vaduz on Thursday, he reiterated his message that the jurisdiction will continue to improve its financial sector regulation, but that this will not come at the expense of an erosion in individual privacy.

"The Liechtenstein financial centre has already undertaken considerable reform efforts in recent years, but more reforms will be necessary, not only to ensure the competitiveness of the financial centre for the future, but also to enhance it," the Hereditary Prince told Parliament.

"Other financial centres have caught up by creating new, attractive business environments, while the international pressure has risen on locations offering a high level of protection of privacy," he observed.

In the light of the discussion on tax evasion and tax investigations in Germany, Prince Alois argued that the need of citizens for protection of privacy must be taken into account. However, he stressed that this should not be understood narrowly in terms of strong bank secrecy in tax matters, but rather broadly in terms of a culture of privacy.

"Particularly at a time when other states are increasingly invading the privacy of their own citizens – and are even paying millions for stolen data – the need of citizens for a stronger protection of their privacy is great," the Prince remarked.

Commenting on the matter, the OECD suggested that the disclosures highlighted a much broader challenge in the current globalised economy: how to respond to countries and territories that "seek to profit from tax dodging by residents of other jurisdictions".

"This is a fundamental issue in our increasingly interdependent world," OECD Secretary-General Angel Gurría observed.

In September 2008, Prince Alois appeared to take a more conciliatory stance, revealing the Alpine jurisdiction's willingness to cooperate with other countries in tax matters, although he stated - unsurprisingly - that banking secrecy was to remain non-negotiable.

In a National Day speech which naturally focused heavily on the unwanted global attention which was heaped on Liechtenstein after it was accused of aiding and abetting citizens of Germany, the US and the UK, among other nations, of evading taxes, Prince Alois acknowledged that time had come for Liechtenstein to move more "forcefully" in the direction of cooperation.

Liechtenstein's system of mutual legal assistance and administrative assistance in tax matters should, as a result, be based on a new foundation, he said.

“We should offer all States comprehensive cooperation if they are willing to find sensible solutions with us for the client relationships we have built up, and if they are interested in fair and constructive cooperation for the future," Prince Alois remarked.

But, despite the ongoing campaign by onshore governments to crack open the veil of banking secrecy in jurisdictions such as Liechtenstein and Switzerland, Prince Alois affirmed that his government would continue to guarantee a high level of confidentiality to its banking clients.

“While many States are introducing the ‘transparent citizen’, we practice a culture of privacy that goes far beyond bank client secrecy in tax matters," he asserted.

This does not mean that Liechtenstein should remain isolated from the world, observed Prince Alois, as he emphasised recent efforts to integrate the jurisdiction internationally, for example with its signing of the Schengen Agreement, its negotiation of an Anti-Fraud Agreement with the EU, and talks with the US over the continuation of the Qualified Intermediary 'QI' status. However, he pointed out that this strategy has been “substantially disrupted by the tax affair staged via the media.”

In June, 2009, the Liechtenstein government adopted a report and proposal pertaining both to its Tax and Information Exchange Agreement (TIEA) with the US, signed on December 8, 2008, and to a law on mutual cooperation in tax matters with the US. An amendment to Article 102 of its constitution was also approved.

The key issue surrounding Liechtenstein’s TIEA with the US, which is based on the Organisation for Economic Cooperation and Development’s (OECD) standard, is the element of mutual support provided by an exchange of information, imperative for the application and enforcement of the respective domestic tax laws.

According to Liechtenstein’s government, providing for an exchange of information enables mutual cooperation to take place between tax authorities, allowing them to work together. Nevertheless, the government has also confirmed that this exchange of information will not be granted automatically, only upon specific request.

Liechtenstein’s TIEA with the US reflects its recent commitment to adhering to and implementing the OECD’s standards regarding transparency and information exchange in tax matters, expressed in its declaration on March 12.

However, in order to execute the TIEA, Liechtenstein must first adopt a new national law. As a result, the government presented to parliament a law on mutual cooperation in tax matters with the US. This law sets out the precise conditions and procedures required for granting mutual assistance, as stipulated in the TIEA. Designed to ensure that assistance is provided swiftly and efficiently, the law also provides for the necessary legal protection.

Both the TIEA and the law on mutual cooperation in tax matters are due to enter into force on January 1, 2010.

In November, 2009, the Organization for Economic Cooperation and Development (OECD) recognized Liechtenstein's implementation of the agreed international tax cooperation standard, and removed the jurisdiction from its “grey list”.

"The removal from the so-called 'grey list' is a milestone in the reorientation of the Liechtenstein location," announced Liechtenstein’s Prime Minister Klaus Tschütscher. He added: "I took office to restore the reputation of our country with the steadfastness demanded by the situation. This is the only way we can do justice in the long term to the full potential of our businesses and service providers."

Angel Gurría, Secretary-General of the OECD, welcomed the news: "Liechtenstein has demonstrated that it honors its commitments and is actively contributing to the international dialogue on tax cooperation."

With its implementation of the OECD standard, Liechtenstein has completed the first phase of its reorientation. "With the new framework conditions, we have established a basis that opens up new long-term development and growth opportunities for our location. These opportunities must now be actively pursued," Tschütscher emphasized.

In December, 2009, the government adopted a consultation report for the Law on Administrative Assistance in Tax Matters. The law creates the legal basis for implementation of agreements providing for information exchange in tax matters.

"With [this law], we have achieved another milestone in our consistent and rapid implementation of the international OECD standards," announced Prime Minister Klaus Tschütscher. "The law offers financial center clients, financial intermediaries, and our international treaty partners a clear legal framework for information exchange and accordingly for legal certainty."

Based on the OECD standards, the draft law provides for information exchange on the basis of detailed requests in individual cases within the framework of applicable agreements. For this purpose, the request must precisely identify the taxpayer affected by the information exchange and present the underlying fact pattern. The law thus rules out automatic information exchange or so-called "fishing expeditions."

Regarding the implementation of the TIEA concluded with the United States, the law establishes an efficient and rapid administrative assistance procedure, which offers the necessary legal protection for the affected persons as well as judicial review.

Given the unique nature of the agreement concluded with the United Kingdom on August 11, 2009, which provides for special arrangements until 2015, Liechtenstein has adopted a separate draft law.

The agreement with the UK provides for the creation of a Liechtenstein Disclosure Facility (LDF), administered by Her Majesty's Revenue and Customs (HMRC). As part of a taxpayer assistance and compliance program, Liechtenstein ensures that clients of the financial center taxable in the UK honor their tax obligations.

According to the government, the draft law stipulates the implementation rules for the compliance program. The UK TIEA Act and the rules for the compliance program contained therein do not provide for exchange of UK client data to HMRC beyond the OECD standard.

Information exchange upon request is governed solely by the general Administrative Assistance Act. The UK TIEA Act contains additional grounds for declining requests prior to April 1, 2015, which, for the purpose of protecting clients, provide for administrative assistance only in a few exceptional cases for the duration of the program.

Once the consultation period has elapsed on February 5, 2010, both laws will be presented to parliament for their first reading in April.

In April, 2010, it emerged that the Liechtenstein government had adopted eleven tax information exchange agreements conforming to the Organization for Economic Cooperation and Development’s (OECD) standard, along with the corresponding draft laws designed to support their implementation. The government has adopted bilateral agreements with countries including Germany, Great Britain, France, the Netherlands, and Ireland.

In a statement, Liechtenstein’s Prime Minister Klaus Tschütscher announced that the government’s latest decision has served to create, at national level, the necessary legal basis with which to implement the international OECD standards. Swift implementation of these agreements will create a sustainable environment for the country’s financial centre and provide legal certainty for both customers and agreement partners, he added.

According to the Liechtenstein government, the agreements are due to enter into force once the domestic ratification procedures in the respective partner countries are complete.

All agreements are based on the OECD Model Convention and provide for information exchange in suspected cases of tax evasion on the basis of a justified individual request. Upon entering into force, the agreements signed last year with the various partner countries will apply to tax years 2010 and beyond. The government points out, however, that the agreements exclude administrative assistance based on stolen client data pursuant to an "ordre public" clause.

In July, 2010, Liechtenstein’s government approved the consultation report pertaining to the amendment of the financial market regulatory law.

According to the government, the amendment to the law will enable Liechtenstein to adhere to internationally recognized standards in mutual assistance in the area of securities regulation. At the same time, the country’s Financial Market Authority (Finanzmarktaufsicht Liechtenstein – FMA) will be granted vital access to the international securities standards organizations.

Liechtenstein does not currently comply fully with the mutual assistance standards as laid out by the International Organization of Securities Commission (IOSCO) and by the Committee of European Securities Regulators (CESR). Liechtenstein’s mutual assistance procedure for providing information to clients about requesting assistance has been heavily criticized, as has the lack of opportunity for the FMA to provide mutual assistance in all CESR and IOSCO requested cases.

The government maintains that the amendment to the law will rectify these issues, ensuring that the principality complies fully with the CESR and IOSCO standards on mutual assistance, thereby enabling the FMA Liechtenstein to receive IOSCO member status and CESR observer status, while at the same time enabling the authority to become part of the new European financial supervisory structure.

According to Prime Minister Klaus Tschütscher, the proposed change to the law will ensure that Liechtenstein’s financial intermediaries in the area of securities will be able to take part in European and international financial markets in future, and will serve to maintain both the competitiveness and the reputation of Liechtenstein’s financial centre.

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