New scandal casts shadow on Liechtenstein financial center

The public prosecutor's office is investigating a well-known trustee. If the suspicion of abuse is confirmed, this would be the third scandal in three years.

In March, the Liechtenstein Parliament passed a reform of the Trustee Act to prevent further cases of abuse. Critics consider the reform inadequate.

The Liechtenstein financial center is rocked by a new scandal: The public prosecutor's office is investigating a well-known trustee (name withheld from the editors). According to local media, the investigation involves suspicion of embezzlement of client funds. According to financial sources, his bank has noticed suspicious payments for which there is no explanation.

The bank subsequently contacted the authorities, which resulted in a criminal complaint. Investigators have already conducted a search of the trustee's premises to secure evidence. The exact amounts involved remain unclear.

Doubts as to whether the industry is sufficiently controlled

"There are no charges against my client; all allegations against my client are baseless, which the investigation will also reveal," his lawyer wrote. Liechtenstein's chief public prosecutor, Robert Wallner, declined to provide "any information on these ongoing proceedings." The presumption of innocence applies.

Should the investigations reveal criminal conduct, it would be disastrous for the financial center. This would be the third high-profile case of abuse in the trust sector within three years. Once again, the question arises as to whether the industry is adequately regulated. The sector is already under pressure, as the declining number of foundations demonstrates.

Perhaps the most prominent abuse case is that of the former President of the Liechtenstein Constitutional Court, who also worked as a trustee. The 70-year-old embezzled a total of CHF 40 million from his clients. Two years ago, he was sentenced to eight years in prison for breach of trust, aggravated fraud, and money laundering.

In another case, last July, trustee MS was sentenced to six and a half years in prison for breach of trust, commercial fraud, embezzlement, and money laundering. MS had paid for his Bentley, his children's school fees, and the costs of his real estate with the funds he was supposed to manage for his clients in two trusts.

In a brochure about the financial center, Liechtenstein, however, touts its "liberal and proven foundation and trust law": With Liechtenstein foundations and trusts, "assets can be secured and protected for generations, and potential dangers such as geopolitical or liability risks can be minimized." It's just unfortunate when those who are supposed to protect assets take advantage of this themselves.

Reform under criticism

To prevent such scandals, the Liechtenstein Parliament passed a tightening of the Trustee Act in March, which will take effect in July. The law extends the supervision of the Liechtenstein Financial Supervisory Authority (FMA) to include trustees. Furthermore, trustees must be audited by an independent auditor. They must also have an "internal control system" and "effective risk management."

An insider in the Liechtenstein trust industry, who did not want his name published in the newspaper, is critical: "This reform will not prevent cases like that of the former President of the Constitutional Court." For example, the convicted trustee's company was organized as a stock corporation, which was audited by auditors – who, however, never noticed the embezzlement.

Problematic trusts

The problem of abuse is not at the level of the trustees' companies, but at the level of the structures they manage, i.e., trusts and foundations. In a foundation, assets become legally independent; the founder can, for example, appoint a trustee to provide his or her heirs with regular payments from the foundation's assets. In a trust, the assets are transferred directly from the settlor to the trustee without legal independence. The trustee is then expected to manage the funds in the trustor's best interests even after the settlor's death.

Especially in trusts, however, beneficiaries have a weak position vis-à-vis the trustee, lawyers complain. "The rights to information are inadequate," says Alexander Amann, a self-employed attorney and partner at Schwärzler Rechtsanwälte. Discretionary beneficiaries have no legal right to learn from the trustee exactly what he or she is doing with the trust assets. Even in criminal proceedings against a trustee, it is unclear whether the trust's beneficiaries may appear as joint plaintiffs in the proceedings.

Further reform planned

Ivo Elkuch, Managing Director of the Liechtenstein Institute of Trustees and Fiduciaries, defends the reform of the Trustee Act. "An important goal of the reform is to raise the threshold to prevent misconduct. However, when someone exerts an extremely high level of criminal energy, it is always difficult to prevent fraud," he argues.

Regarding the expansion of information rights for trusts, there are, in addition to some supporters, many who are skeptical, says Elkuch. "Overly generous information rights can lead to a so-called spoiling effect. If someone knows they'll receive CHF 2 million later on, there's a risk that they'll put less effort into school and neglect their education."

For example, trustors may want the most restrictive information policy possible for future beneficiaries. An expansion of information rights could therefore lead to a reduction in the attractiveness of establishing trusts in Liechtenstein, Elkuch argues.

The debate about strengthening oversight continues. The Liechtenstein Office of Justice points out that the government's financial center strategy provides for "a review of trust law, or rather, the law governing trusteeships." This review is scheduled to begin at the end of this year. The rights of beneficiaries will also be analyzed.

It's high time, says one insider: "No other financial center has such a legal situation."