Princely business

Liechtenstein has abandoned its illegal income. Now, trustees are damaging the country's reputation.

Communication lines are short. In the Principality of Liechtenstein (here Vaduz), everyone knows everyone, even in the secretive financial sector – and not always to the benefit of the clients.

Last Friday, Ralf H.* fought in Courtroom 3 of the Princely Regional Court in Vaduz for approximately 3.5 million euros, which he wants back. He had lent this money to his own company. Because his trustees severed all of H.'s ties to his companies, he was denied access to their accounting records and completely lost access to his assets, he alleges. He is not the only one complaining that Liechtenstein trustees are destroying assets through mismanagement or enriching themselves excessively through their administration.

Recently, the case of a "grande dame" and testator who died in 2015 made headlines. Her heirs complained about a lack of information and the squandering of assets by the Liechtenstein foundation administering the estate. A criminal complaint filed in Vaduz was rejected due to "lack of initial suspicion," and a civil lawsuit would take years with an uncertain outcome.

Advantage as disadvantage

The principality handled the tax dispute with the US and the EU much more skillfully than Switzerland, quickly and significantly polishing its image. Within just a few years, Liechtenstein transformed from a haven for tax evaders to a model of tax compliance. However, the situation is different with the main source of income for fiduciaries in the country: legal structures such as foundations and trusts. The number of foundations shrank from over 50,000 in 2008 to just under 16,000 at the end of 2016: a bloodletting due to the outflow of undeclared funds.

Their advantage is also their disadvantage: The identity of the founder can disappear behind the managing foundation boards. In the worst case, however, so can their control over the foundation's assets. Austrian lawyer David Christian Bauer criticized in the local newspaper Vaterland that "the foundation's instruments are increasingly less aligned with the interests of the founder and the beneficiaries."

A total of 378 trustees and trust companies share the big business of managing an estimated CHF 20 billion in foundation assets. From the establishment of such a structure to its administration and supervision as a foundation board, hefty fees and commissions are incurred. As Bauer also criticizes, sub-foundations are also being established into which assets are outsourced, the use of which neither the founder nor the beneficiaries have any knowledge of. Now that hardly any undeclared money is being managed in the state, many clients of financial intermediaries and trustees are deeply annoyed.

According to royal jurisprudence, foundation boards and trustees have only very limited obligations to provide information to investors or beneficiaries. Furthermore, they must be proven to have committed a "serious breach of duty" that goes beyond discretionary decisions in order to be removed or held liable. But how can that work without information?

Professor Martin Schauer, who advised the Liechtenstein government on reforming foundation law, also criticized in Vaterland the "legal uncertainty" for beneficiaries and mandate agreements as a "welcome means of liability relief." Founders are increasingly, and often in vain, fighting legal battles against their own foundation boards or trustees. Angelika Moosleithner-Batliner's name is frequently mentioned in this context.

For decades, Herbert Batliner dominated the Liechtenstein trust business. His career ended rather ignominiously because he failed to recognize the signs of the times: A case brought by the German public prosecutor's office for involvement in tax evasion amounting to €250 million was dropped in 2007 in return for a payment of €2 million. And the Liechtenstein Constitutional Court, which Batliner himself once chaired, classified donations from a foundation to Batliner as "immoral transactions" in a 2009 ruling.

The family tradition is continued by his daughter, Angelika Moosleithner-Batliner. She is co-owner of the Batliner company, now renamed First Advisory. In 2009, First Advisory also acquired LGT Treuhand; the Princely Bank LGT withdrew from the embattled trust business at that time. Today, First Advisory is the leading financial service provider in the region, with over 240 employees and offices in Geneva, Zurich, Hong Kong, Panama, and Singapore.

On a grand scale

Moosleithner-Batliner is the defendant in the current lawsuit against scrap dealer Ralf H. She is, among other things, a member of the board of directors of H.'s companies. Ralf H., who has a previous conviction for tax offenses and lived a lavish life in a villa on Lake Lucerne in Switzerland for several years, accuses First Advisory and the board member of his companies, Moosleithner-Batliner, of failing to maintain proper accounting, thus causing his tax problems.

First Advisory's spokesperson counters that these "allegations by Mr. H. are completely factually refuted." "Part of his defense strategy in recent years since 2008 has been to improperly blame innocent third parties, including Liechtenstein trustees and lawyers, for his situation by making a variety of accusations in order to deny his sole responsibility for the VAT fraud." The verdict in the current trial is still pending. The situation is quite different in another case.

In November 2017, the case of trustee Harry G.* shook the entire profession in Liechtenstein. The "Princely Counselor of Justice" served as President of the Administrative Court for many years and even served as President of the Constitutional Court until 2004. The head of the Examination Commission for Trustees and Lawyers was convicted by the Vaduz Criminal Court of "commercially serious fraud and money laundering" and the embezzlement of CHF 13 million.

Since G. only appealed the six-year sentence, the verdict is final. Since this scandal, it's clear that the roof is on fire in the El Dorado of Liechtenstein trustees who make a fortune as foundation board members. And the next trial in this case is still pending, with a total amount of over 50 million Swiss francs at stake.

With 16,000 foundations still in existence, each of which must have at least three board members, the approximately 100 trustees account for 480 foundation mandates per person. Even without resorting to criminal means, each foundation is billed at a minimum of CHF 4,000 for establishment and CHF 5,000 for annual operation. Plus consulting fees based on time spent, at a rate of up to CHF 500 per hour. This amounts to an annual income of CHF 800,000 per board member.

It is generally recommended to establish a foundation only with a minimum investment of CHF 1.5 million. Since foundation boards have very limited disclosure obligations to the founder, and even more so to the beneficiaries, a gray area also exists regarding the fees or kickbacks the foundation boards receive from managing the assets. There are frequent cases in which beneficiaries demand information about the management of the assets after the founder's death – and are referred to the ordinary legal process.

In the region, with its 38,000 inhabitants, all distances are short, and everyone knows everyone. Angelika Moosleithner is the President of the Liechtenstein Institute of Trustees and Fiduciaries, and the board includes His Serene Highness Prince Michael of Liechtenstein and Johannes Gasser. This lawyer was once a partner of Batliner senior, continues to run the business as Gasser's partner, and is Moosleithner-Batliner's legal representative of choice.

It certainly doesn't hurt that Gasser sits on the Judicial Selection Committee; he therefore has a say in which judges handle his cases. The fact that lawyers and trustees are allowed to work part-time as supreme judges in the Principality is also not detrimental to the cause of financial intermediaries. When asked, Gasser's press spokesman countered: "The courts themselves decide independently and sovereignly on the allocation of cases within the courts. No one has any influence over this, not even the Judicial Selection Committee or Dr. Gasser."

Meanwhile, resistance is forming against the representatives of the fiduciary profession, who would like to retain their fat privileges. In October of last year, Liechtenstein fiduciary Roger Frick addressed his "esteemed colleagues" in the Chamber of Trustees and Fiduciaries and reported on increasing complaints from abroad that "there are more and more financial intermediaries in Liechtenstein who are blocking mandates, not allowing tax adjustments, and simultaneously increasing their fees." He argued that this could also be seen as "blackmail." The client's firm commitment to their fiduciary "amounts to a self-service store," which is damaging the financial center.

As a remedy, Frick proposes that at least the transfer of a mandate from one trustee to another should be made significantly easier and free of charge for the client. Moosleithner-Batliner and Gasser responded swiftly with a letter of their own, asking their colleagues to "refrain" from supporting Frick's request. They stated that any recommendations from the Board of the Chamber of Trustees and Fiduciaries should not be preempted.

50 billion from Switzerland

In the tax dispute, the Principality of Liechtenstein has gracefully extricated itself from the predicament and polished its image. Greedy trustees and foundation boards are now causing increasing reputational damage. While previously, warnings about undeclared funds prevented foundation investors from taking action against their own foundation boards and trustees when they became too greedy, today it is simply legal hurdles. In cases of doubt, they make it almost impossible for the founder or beneficiaries to obtain information and hold foundation bodies liable.

Of the total CHF 235 billion in assets under management in Liechtenstein, approximately CHF 50 billion originate from Switzerland. Some will be withdrawn before the automatic exchange of information comes into force this fall. However, if the assets are parked in a foundation, this may not be easy.