Liechtenstein trustees flee US sanctions

Business with rich Russians

In financial matters, the principality has an excellent or miserable reputation, depending on one's perspective.

The financial sector plays a key role in Liechtenstein's economy. Wealthy Russians also use the principality's services to park, hide, or optimize their taxes. The long arm of US sanctions authorities is causing panic in the industry.

Business dealings 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 US has also targeted the oligarchs' assets. One target is foundations in Liechtenstein: Some of these financial vehicles and the trustees entrusted with their management have been placed on a US sanctions list.

Fear of the long arm of the US authorities triggered a wave of exodus in the industry: Trustees deserted foundations that had ties to Russia – with or without sanctions. This effectively froze hundreds of foundations with assets totaling several billion Swiss francs, as two insiders explain.

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-efficient 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 their assets from third-party access.

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-efficient 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 their assets from third-party access.

Loss of livelihood - overnight

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, bank accounts and credit cards are blocked, cell phone connections no longer work, and clients turn away: "For those affected, this essentially means a loss of livelihood overnight," explains one lawyer.

The latest round of sanctions in August, in particular, sent shockwaves through the country straddling Austria and Switzerland. Trustees of hundreds of foundations resigned for fear that they too could be prosecuted. As a result, the foundation boards were no longer sufficiently staffed, forcing 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. Not all of them have ties to Russia.

Hoard of dubious funds

To contain the turmoil in the financial sector, which is so important for Liechtenstein, the government is considering options for the remaining foundations. According to an insider, one proposal involves offering legal certainty to lawyers willing to liquidate foundations so that they do not end up on the sanctions list themselves. Liechtenstein is in contact with OFAC in this regard, it is said.

Also on the table are proposals to transfer the orphaned foundations to a resolution bank or to place them directly under the control of the Liechtenstein Financial Market Authority (FMA). The government official remained tight-lipped: "Solution options are regularly reviewed."

The sanctions on trustees and foundations are a setback for Liechtenstein's efforts to shake off its reputation as a haven for dubious funds. Following 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 dealing with untaxed funds more quickly than its larger neighbor, Switzerland. Liechtenstein was also recently admitted to the International Monetary Fund (IMF). The move by the US sanctions authorities demonstrates that the Principality remains vulnerable to attack.

Death blow for a bank

For export-oriented Liechtenstein, access to dollar transactions is vital. This occurs through so-called correspondent banks, with which domestic banks such as the Princely House-controlled LGT, VP Bank, and LLB cooperate. If a bank is placed on a sanctions list, the correspondent banks risk withdrawing.

"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 for the incapacitated foundations. A second step is to tighten the reins on the sector. At the same time, the principality is pinning its hopes on Donald Trump: "Everyone is hoping that Trump will end the war and the issue will be off the table," the lawyer explains.