"We will not give up bank secrecy," said Otmar Hasler, the prime minister of the Principality of Liechtenstein in a speech last week, "but we are willing to collaborate with other nations when it comes to the misuse of bank secrecy laws for tax evasion."
Prince Alois, hereditary ruler of Liechtenstein, confirmed on Friday that his tiny Alpine tax haven was seizing the initiative in response to foreign criticism of its financial sector’s strict bank secrecy laws. "The time has come for us to base our system of mutual legal assistance and administrative assistance in tax matters on a new foundation," the Prince said in his traditional national day speech to the nation.
Pressure from the Left
What nudged the historically conservative Liechtenstein into these latest proactive policies was a theft from the LGT Group, a bank owned by the Liechtenstein royal family. A known felon named Heinrich Kieber was paid more than US$7 million by the German secret police for stolen CD disc said to contain confidential lists of the bank's foreign clients. I have previously commented on this gross violation of Liechtenstein's bank secrecy and criminal laws.
At the time the LGT Bank theft became public in February, Prince Alois nailed it when he said: "German authorities paid a criminal to obtain stolen data. We reject this action." More to the point, Alois praised the several laws Liechtenstein has passed since 2000 to enhance transparency and combat money laundering. And he pledged, then and now, that the country won't surrender its policy of strict bank secrecy.
Billion Dollar Question
So for the world beyond the question arises -- do these latest actions by the government of Liechtenstein amount to a surrender or major compromise of what are possibly the strictest bank secrecy laws in the world?
I don’t think so, but before I answer that crucial question in detail, a review of recent history is in order -- especially because under a barrage of attacks from the world's political Left, since 2000 the Principality carefully has revised its laws to become more transparent and cooperative with other nations in cross-border criminal matters.
Liechtenstein was one of the first nations in the world to adopt specific offshore asset protection laws, as far back as the 1926. Its economy is diversified, and it is one of the most heavily industrialized countries in Europe, based on per capita population, but financial services provide some 30% of government revenues, so anything that tarnishes the country’s reputation causes problems.
Tax Blacklist
Blacklisted in 2000 by the left leaning, Paris-based Organization of Economic Cooperation and Development's (OECD) and its Financial Action Tax Force (FATF) as allegedly lax on money laundering, Liechtenstein subsequently toughened its banking laws and made major efforts to clean up any questionable financial practices. Because of these recognized improvements, in 2001 the country was removed from the OECD/FATF money laundering blacklist.
At the time, Liechtenstein adopted tough anti-money laundering laws that cover all crimes; created a Financial Intelligence Unit (FIU) to oversee the financial sector; imposed much stricter "know-your-customer" and suspicious activity reporting requirements; and to some minor degree, eased its historic, very strict financial secrecy now under attack once again.
The reforms also abolished the former right of trustees and lawyers not to disclose the identity of their clients to banks where funds were invested or deposited. Liechtenstein has ratified the European Anti-Laundering Convention and defines laundering as dealing with the proceeds of "any serious crime." It also signed a 2004 mutual legal assistance treaty (MLAT) with the United States.
Proud Tax Haven
Liechtenstein’s longstanding tax haven status was the source of a second major attack by the OECD, which in June 2000 placed the principality on its highly questionable 35-nation "harmful tax practices" blacklist where it still remains. By the unreasonable OECD definition, any nation that imposes no taxes on foreigners doing business there is engaged in "unfair tax competition." The true purpose of this pro-high tax list is as a brush for major G-7 welfare states with which to tar low tax nations that successfully compete with them for tax dollars.
In spite of all this outside pressure, Liechtenstein has refused to surrender its financial privacy laws to appease the OECD demands for tax information exchange or the U.S. demands for unfettered access to financial records. That, and an established history of excellent asset protection and private banking, is one of the major reasons this tiny Alpine redoubt has been one of my top choices for offshore financial activity and estate planning.
Foundations Accused
Liechtenstein was one of the first nations in the world to adopt specific offshore asset protection laws, as far back as the 1926. One of the leading legal entities has been the private family foundation (Stiftung) derive largely from the Swiss Civil Law and freely adapted to the circumstances of Liechtenstein. It has been the foundation that foreign tax collectors have attacked as being used for tax evasion, especially because all parties to the foundation are secret unless revealed by judicial action.
On June 30, 2008 Liechtenstein’s parliament approved amendments to the country’s law on foundations making them more open and imposing certain restrictions intended to curb their use for tax evasion, but not compromising traditional secrecy.
Fleeing Cash?
But cash is a fungible commodity and there are reports that individuals are transferring money from Liechtenstein to Panama, Singapore and other offshore centers with strict privacy laws. One official claimed the switch was prompted by the greater focus on tax evasion after the theft of client list from LGT bank.
The Financial Times reported (Aug. 15): "One beneficiary could be Panama. The Sovereign Society, a U.S. publisher specializing in offshore planning, says the country has 'iron-clad financial privacy laws' and describes it as 'an ideal 21st century offshore haven in a world where few remain'". Singapore and Hong Kong benefitted in 2005 from Europe based cash flows when the EU tax savings took effect, according to the Institute for Fiscal Studies, an independent think-tank.
Bank Secrecy Will Continue
Liechtenstein’s banking and financial secrecy statutes historically have been considered stronger than even those that apply in nearby Switzerland. Tax evasion is not a crime in the country and until now tax information rarely has been shared with foreign governments. Now this may change to a limited degree.
Bank secrecy is an established legal obligation under Liechtenstein law and may be lifted only by order of a local court. At present a court order is required to release or examine an account holder’s bank records.
Foreign governments or creditors seeking bank records face a time consuming and costly process. Liechtenstein is not obliged to honor a foreign court’s information request. Such requests may be approved if it can be shown that the alleged offense involves a clear violation of local Liechtenstein law. The cost and time required for such appeals is a deterrent to foreign based claims and lawsuits in many cases, or they act as strong inducements for settlement of claims.
Prime Minister Hasler recognizes that even the hint of liberal tax information co-operation could unsettle many members of the principality’s large financial services sector which has flourished over the years because of its secrecy laws. The government faces elections in February 2009 and bank secrecy remains a highly sensitive issue. "We are in a pre-election period. So such a proposal is extremely controversial. But I’m convinced it’s essential to implement this strategy for Liechtenstein’s future," said Hasler.
Firm ConclusionAfter conferring with trusted investment and legal experts with whom we work in Liechtenstein it is my judgment that a very limited cooperation on tax information with foreign governments in individual cases may now be allowed – but absolutely no fishing expeditions. But don’t expect the fondest dreams of the tax collecting Left to come true – Liechtenstein and its historic bank secrecy will stand firm.
* I am the author of a comprehensive work, The Liechtenstein Report, which explains the many legal advantages of banking and asset protection in Liechtenstein. Click here for more information.
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