Principality Of Liechtenstein

The basic form of state of the Principality of Liechtenstein is laid down in the Constitution of the 5th October 1921. Art. 2 states: "The Principality of Liechtenstein is a constitutional hereditary monarchy upon a democratic and parliamentary basis; the power of the State is inherent in and issues from the Prince and the people and shall be exercised by both of them in accordance with the provisions of the present Constitution". The Prince has supreme State powers. He represents the State internationally. State treaties, however, also require the approval of the Diet (Parliament). On the proposal of the Diet the Prince appoints the members of the Government. He has the right to confer titles, to pardon or commute sentences. The laws require his sanction in order to acquire legal force.

The Diet is comprised of 25 members (the deputies) who are elected by the people for a term of four years according to the system of proportional representation. The Diet is concerned with legislation and participation in the conclusion of international treaties. It also exercises a controlling function with regard to the State's finances, the Government and the Administration.

The Government is comprised of five members (Head of Government, Deputy Head of Government and three Councillors), who are appointed for a term of four years. The Liechtenstein Courts sit in Vaduz.

The Principality of Liechtenstein was created in 1719, when the two territories, the Lordship of Schellenberg and the County of Vaduz, purchased by the Liechtenstein family from the Counts of Hohenems in 1699 and 1712, were joined together. By this act and thanks to the great esteem in which the German Emperor Charles VI. held the Princes of Liechtenstein, the latter took their seat and cast their vote in the Diet of the Princes of the German Empire (Holy Roman Empire). Sovereignty was attained in 1806 as the result of Liechtenstein's inclusion in the Confederation of the Rhine. The Liechtenstein army was disbanded in 1868.

Following the collapse of the Austro-Hungarian monarchy, with which Liechtenstein had had ties since 1852, Liechtenstein turned to Switzerland and in 1921 began entering into long-term agreements with the Swiss Confederation. The Customs Treaty (renegotiated 1994/95) was signed in 1923, when the Swiss franc was introduced as the official currency and certain special taxes relating, e.g. to the formation of companies and the issuance of and trading with securities were adopted. The Liechtenstein Company Law, dating back to 1926 and 1928, and uniquely implementing trust legislation in continental Europe, was slightly amended as at 1.1.2001 as the result of Liechtenstein's entry into the EEA. Diversified industrialisation began after the second world war. In 1950 Liechtenstein became a member of the International Court of Justice at the Hague, in 1978 a member of the Council of Europe, in 1990 a member of the UNO and in 1991 a member of the EFTA. In 1980 the already long existing currency union with neighbouring Switzerland was formalised. During the past years Liechtenstein has actively pursued its own foreign policy throughout Europe, intent upon strengthening its sovereignty (a key issue for the Ruling Prince).

Liechtenstein´s accession to the EEA membership has hitherto proved to be the right choice. Accession to the EEA was formally adopted in a referendum held in late 1992, and it was generally considered that Liechtenstein should not have direct ties with the EU. The Liechtenstein population voted early in 1995 regarding the amendments to the customs treaty with Switzerland (a main matter in dispute was the VAT, effective as from 1st January 1995 in both countries) and in favour of the EEA-treaty, which became effective as from 1st May 1995.

Since discarding its impoverished agrarian past, Liechtenstein's population makes efforts to preserve the progress made, which is attributable to the central location in Europe, the ties with Switzerland (Swiss franc economic area), the political stability, the level of taxation adapted to the financial needs, the banking secrecy, the skilled labour force and the ability to act quickly in an international business environment. It may be less well known that Liechtenstein has developed high-technology industries (fastening systems, high-vacuum equipment, thin coatings, foodstuffs, extrusion mouldings, dentures, boilers, etc.). Interesting statistics (basis 1998): Area 160 sq. km., population 32,000 of whom 35% are foreigners living in the country, gainfully employed 23,795 (including commuters crossing the frontier daily from Austria and Switzerland) of whom 60 % are foreigners. The agricultural sector employs just over 1%, the commercial and industrial sector 46% while the tertiary sector, embracing the banking, fiduciary and other services, employs 53% (compared with 67,2% for Switzerland, 61,4% for Austria and 59,1% for Germany). The state budget for 1999 hovers around CHF 690 million plus CHF 75 million direct tax revenue for the communes. Liechtenstein's industry exported goods for a value of more than 3.9 billion CHF in 1999. As at 31 December 1999 there existed 12 banks in Liechtenstein with a balance sheet total of 34.9 billion CHF. Clients assets under administration by these banks were more than 100 billion CHF at that time.

Liechtenstein as a member of the European Economic Area (EEA) but not of the European Union, is obliged to implement the EU Directives, including the field of banking, insurance, investment undertakings and other financial services. It has already implemented more than 97 per cent of the EU Directives. The law on (captive) insurance companies and investment funds was already adapted to EU-directives a few years ago. As at 1 January 2001 the changes to the Company Law with respect to the Company Limited by Shares (Joint Stock Company), the Private Company Limited by Shares and the Limited Partnership with a Share Capital closed the gap with the EU countries. The amendments affect the merger provisions, the purchase of own shares, the amortisation and redemption of the capital, certain more formal requirements relating to the constitution (official authentification) and publication; provisions relating to accounting, auditing, filing; members of the board of directors and legal representation are also affected. According to the amendments, the Company Limited by Shares will be formed with at least two shareholders (before only one was required), whereas the Private Company Limited by Shares requires now only one shareholder as opposed to two in the past.

The Establishment, the Trust Reg. and, of course, the Foundation, as well as the Trust (all well established Liechtenstein legal entities) are not affected by the EU-directives (more details in lit. F).

VAT which was implemented as from 1st January 1995, and has as from 1 January 2001 a standard rate of 7.6 % and reduced rates of 2.4 % and 3.6 % respectively for certain turnovers considered essential for the public. This tax has been modelled on the Swiss legislation, and future changes in rates in Switzerland will have to be enshrined also into Liechtenstein tax law.

Liechtenstein was named on the blacklists of the G7's Financial Stability Forum, the Financial Action Task Force (FATF), the Organisation for Economic Co-operation and Development (OECD).

The investigations led by the special Austrian Attorney General into the allegations raised by the German Secret Service "BND" have shown that most of the contents was unfounded and that the majority of the assets arriving in Liechtenstein went before through bank accounts of jurisdictions like United States, UK, Switzerland and Luxembourg.

The Liechtenstein Banking Commission reported in 1999 that out of 63 cases of suspected money laundering cases, 45 arose out of requests for legal assistance from authorities abroad, and not from reports generated by Liechtenstein banks and/or trustees. In some press this fact has led to negative response, however comparing other OECD countries, the financial volume they generate, the relative reportings generated and the outcome of such reportings is rather disillusive.

Nevertheless, Liechtenstein has conceded that there were deficiencies in the law and enforcement and immediate action was taken in the light of international criticism. It has amended the legislation to bring it in line with the most stringent "top standards" in order to combat money laundering and organised crime, and in December 2000 Liechtenstein became a signatory at the United Nations Convention against transnational organised crime.

The changes as from 1 January 2001 or earlier are:

1. new provisions in the Due Diligence Act on cooperation between the Liechtenstein Financial Supervisory Authority (FSA) and foreign financial authorities: enquiries pursued not exclusively through judicial channels are possible (information exchange between administrative anti-money laundering authorities in addition to the Legal Assistance Act);
2. general amendment of the Due Diligence Act in force since 1 January 1997;
3. Establishment of a Financial Intelligence Unit (FIU) in addition to the Financial Supervisory Authority;
4. Liechtenstein bankers are required to ascertain the identity of the beneficial owners for accounts established by a Liechtenstein licensed trustee, thus the licensed trustees and the Liechtenstein banks have to ascertain the identity, and not only the licensed trustee;
5. Reforms to the Legal Assistance Act to speed up the provision of legal assistance to investigators from other countries. The Act was completely revised;
6. Corruption of foreign officials is included as an offence and further amendments regarding money laundering in the Penal Code Act (already amended in 1996),
7. Immediate increase in human, financial and technical resources at the administrative and judicial authorities;
8. Amendments in the Court Proceeding Act;
9. Signatory at United Nations Convention against transnational organised crime.

The main target of changes coming into force on 1 January 2001 is to amend the laws in the understanding of international organisations and to pass the respective laws in order to have a basis for international administrative cooperation and much faster legal assistance with regard to money laundering issues. Liechtenstein has the money laundering law not restricted to drugs, terrorism etc. Basically any crime can be submitted to money laundering. Tax matters are not included in the money laundering issue. The past has shown that many tax issues are linked together with falsification of accounts which is however considered a money laundering issue.

Trustees have always been regulated and needed a licence for their profession, therefore there had to be no amendments. They have to pass a special exam, have to be members of the officially regulated Liechtenstein trustee association, are bound to restrictions with respect of advertisement and sound practice and have to cover the clients by an insurance against certain losses.

With the amended Due Diligence Act, not only the Liechtenstein trustees who always had to identify their clients and know what they are doing, but also the Liechtenstein banks have to identify the client in order to fullfil the "know your customers" (KYC) rules. With respect to foreign regulated professionals, it was the understanding that whenever the Liechtenstein trustee had a professional advisor as client (mandator) who himself was regulated by money laundering laws in his own country that the Liechtenstein trustee could then reduce his scrutinity on transactions (however since January 1997 the identification of the client was always effected by the Liechtenstein trustee). This has changed now and any professional advisor is basically treated in the same way as a direct individual client which means that the ultimate beneficiary and the nature, background and logic of any transaction will be scrutinized by the Liechtenstein trustee, the professional advisor (normally being a licensed trustee himself in his country) and the bank where the account may be run. The ordinance leaves some narrow room for cooperation between these professional advisors in order to avoid that both or all three (including the bank) have to do exactly the same. Furthermore, the Liechtenstein trustees will themselves be audited as to compliance by auditors acceptable to the Financial Supervisory Authority every year. The audit will encompass verification of the formal identification/establishment of the client and the ultimate beneficiary, the business profile established and the permanent supervision by the trustee if the transactions are identified by him and compared to the business profile established, the respective measures of the trustee and the adequate internal controls. The audits have been in place since 1997 but concentrated more on the formal fulfillment.

As before, institutions - such as banks, insurances - and trustees etc. have to clarify the nature of a transaction and see if there is some suspicion that a transaction could be connected with money laundering. If the suspicion cannot be eliminated after clarification, the transaction must be reported. Any financial intermediary such as a bank, insurance company or a trustee has to establish a client profile and square any transaction against this file (whether ordinary or non-ordinary; the latter potentially suspicious).

Is Liechtenstein out of "shooting" now?

OECD stresses that global financial stability goes along with internationally accepted standards for

• supervision;
• cooperation;
• information sharing and transparency.

The pressure by the EU-states to implement a European withholding tax at source on interests paid to individuals will affect Luxembourg, Austria, Switzerland and Liechtenstein as well as other low tax countries and even USA. As bank secrecy in Liechtenstein is not negotiable (the EEA-treaty with Liechtenstein was signed with the knowledge of both parties that Liechtenstein has established privacy rules for many years), only tax at source would appear to be on the table for discussion. The EU plans that the tax on interests will in the first instance be 15%, then move to 20%. The development and economic environment will show the further steps to be taken by Liechtenstein and any need to move in this regard. Switzerland has long ago had its 35% withholding tax on dividends and similar payments thus contributing to combat the negative effects of tax fraud (being a criminal offence) and tax evasion.

Liechtenstein's legal entities have been used for over 70 years for major private, independent asset management, for family maintenance purposes, for business and as holding instruments for underlying companies, in international tradings and the like, and can rely on established practice and law.