Foundations in Liechtenstein in turmoil due to US sanctions

Hundreds of foundations with assets worth billions of Swiss francs are virtually frozen. The government and authorities are trying to help without attracting the anger of the United States.

Liechtenstein: The USA has placed foundations from the principality on a sanctions list.Photo: REUTERS

Vaduz. Business deals with wealthy Russians are putting the Principality of Liechtenstein in a tight spot. In an effort to weaken Russia after its attack on Ukraine , the United States has also targeted the oligarchs' assets. One target is foundations in Liechtenstein. The United States has placed some of these financial vehicles and the trustees entrusted with their management on a sanctions list.

Fear of the long arm of the US authorities triggered a veritable wave of exodus: trustees of foundations that were not affected by sanctions but also had ties to Russia resigned in droves. This means that hundreds of foundations with assets totaling several billion Swiss francs are now virtually frozen, as two insiders explain.

The government and authorities are trying to help the sector out of its predicament without attracting the anger of the US. According to an insider, the industry will be reined in more tightly in a second step.

The financial sector plays a key role in Liechtenstein's economy. According to IMF estimates, the financial center is approximately 100 times the size of the country's economic output. Tax-saving foundations, in particular, repeatedly make headlines.

They can pool assets spread around the globe, such as company shares, real estate, cash, or securities. While the founder benefits from tax savings, they can support specific causes and protect the assets from third-party access.

Although the number of foundations in Liechtenstein has declined from around 80,000 to only about 20,000, this still means there is approximately one foundation for every two residents of the Principality.

475 foundations affected

Since April 2021, the U.S. Office of Foreign Assets Control (OFAC) has gradually added several foundations and their trustees to its sanctions list. These legal representatives manage the foundation in the interests of the founder. If a trustee is placed on the sanctions list, they lose clients, bank accounts and credit cards are blocked, and their mobile phone connections no longer work. "For those affected, this essentially means a loss of livelihood overnight," explains one lawyer.

The last round of sanctions in August, in particular, sent shockwaves through the country bordering Austria and Switzerland – trustees of hundreds of foundations resigned for fear that they too could be prosecuted. This left the foundation boards with insufficient members, prompting the authorities to initiate dissolution proceedings.

According to a government official, around 475 foundations currently fall into this category. For approximately 350 foundations, the deadlines for replacements have not yet expired, and for 85, the procedures have been suspended. Liquidation has been ordered for 40 foundations. However, not all of them have ties to Russia.

To contain the turmoil in Liechtenstein's crucial financial sector, the government is now examining options for the remaining foundations. According to an insider, one proposal involves offering legal certainty to lawyers willing to liquidate foundations, preventing them from ending up on the sanctions list themselves.

Liechtenstein was reportedly in contact with OFAC regarding this matter. Also on the table were proposals to transfer the orphaned foundations to a resolution bank or to place them directly under the jurisdiction of the Liechtenstein Financial Market Authority (FMA). The government official remained tight-lipped: "Solution options are regularly reviewed."

Hope for Trump

The Russian foundations are a setback for Liechtenstein's efforts to shake off its reputation as a haven for dubious funds. After the scandal surrounding former Deutsche Post CEO Klaus Zumwinkel at LGT, the small country, under the leadership of the Princely House, undertook a strategic shift and moved away from the business of untaxed funds more quickly than its larger neighbor Switzerland.

Liechtenstein was also recently admitted to the International Monetary Fund (IMF). However, the move by US sanctions authorities shows that the Principality remains vulnerable to attack.

For export-oriented Liechtenstein, access to dollar transactions is vital. This is done via so-called correspondent banks, with which domestic banks such as the Princely House-controlled LGT, VP Bankor the LLB work together.

US President Donald Trump: According to insiders, the new government of Liechtenstein is working with the US to find a solution for the incapacitated foundations.Photo: AP

If a bank is placed on a sanctions list, correspondent banks are threatened with withdrawal. "OFAC problems can spell doom for a bank pretty quickly," explains one banker. Fearing contagion, many of the dozen or so domestic institutions have severed ties with exposed trustees. Nevertheless, there are still Liechtenstein banks that maintain relationships with foundations with Russian ties, the government official said.

According to insiders, Liechtenstein's new government is working with the United States to find a solution to the incapacitated foundations. According to one of the people, the country is also trying to reduce the tariffs imposed by US President Donald Trump .

With regard to the foundations, the new US government could, in the best case scenario, even offer the principality a way out: "Everyone hopes that Trump will end the war and the issue will be off the table," explains the lawyer.