Liechtenstein's financial swamp: The Prince wants to fix it

Liechtenstein trustees repeatedly cause scandals. Now a new law is supposed to drain this swamp. Or at least pretend to.

The highly esteemed Ministry of "Presidential Affairs and Finance" has declined to comment on the planned amendment to the Trustee Act. Even the Chamber of Trustees and Fiduciaries (THK) and the Liechtenstein Financial Market Authority (FMA) believe that there is a "need for action." "Transparency, combating abuse, and customer protection" must be incorporated into a "modern, internationally recognized legal system."

The prince will regret having to shut down the torture chamber in his fortress; that's obviously no longer possible in a modern legal system. But seriously: The state's only 150 or so licensed trustees are constantly making headlines. For example, with decanting.

In Liechtenstein, this doesn't just mean aerating the wine. It's the transfer of the financial contents of a foundation into another vessel. The actual owner or beneficiary owner is then left behind, so to speak, as the dregs, losing all access to their assets. This business model is also popular with the beneficiaries of such a structure. Once the founder has died, his heirs are surprised to learn that, unfortunately, there is not a single centime left in his foundation. Where have the assets gone? Well, unfortunately, attorney-client privilege prevents any information from being provided. But the free advice is to refrain from litigation.

Anyone who doesn't like that could still take legal action. However, in Liechtenstein, it is, to say the least, very, very difficult to even obtain recognition as a party, or even the right to sue. Just last year, the most famous trust firm received its first slap in the face from the Princely Supreme Court. A decantation it had performed was declared invalid.

The reason for this is that the money-making machine of illicit money hoarding has come to a standstill. Following the financial crisis ten years ago and as a result of the intensified prosecution of tax evaders, the number of foundations in the state shrank by two-thirds, from over 50,000 in 2008 to just under 16,000 at the end of 2016. The establishment, registration, and administration of such a foundation used to be a lucrative and easy-to-earn source of money. But now the shrunken market is fiercely competitive.

Trustees repeatedly resort to illegal means to maintain their accustomed lifestyle. Two years ago, the case of the "Princely Judicial Counselor" and head of the examination commission of the Liechtenstein Chamber of Trustees and Fiduciaries shook the Principality. Harry G.* was sentenced to several years in prison for "commercially serious fraud and money laundering." He had embezzled over 10 million Swiss francs. Socialite Mario Staggl is also no longer throwing lavish parties, but is in pre-trial detention. He is accused of embezzling 25 million Swiss francs.

The former president of the banking supervisory authority, the former deputy director of Bank Alpinum, repeatedly had to officially sing the refrain of "regrettable isolated cases," and an improvement in the oversight of the fiduciary profession was seen as possible, but not urgent. Now, however, action is being taken; the princely government writes in its consultation: "In recent years, there have been several incidents that have damaged the reputation of the fiduciary industry." This will no longer be tolerated: "Such abuses and negative developments must be addressed promptly and effectively."

They have to, but can they? A closer look at the draft bill amending the Trustee Act (TrHG) reveals that it's purely cosmetic. Trustees must now prepare an annual report, submit it to the Financial Market Authority (FMA), and have it certified by an auditor. This requires the introduction of an "internal control system" and "effective risk management." The Princely Government remains silent on what exactly this would entail. The planned requirement that proper accounting be maintained is also revealing.

The new, supposedly "effective client protection" is also more of a mirage than reality. Discretionary beneficiaries of Liechtenstein trusts or foundations will continue to have no party status in supervisory proceedings, no legally enforceable rights to information, and no party status in criminal proceedings against trustees. Less control is actually unimaginable. Nor is fewer rights.

To make matters worse, most victims of criminal trustees in Liechtenstein have come away financially empty-handed in recent years. When caught, the perpetrators went to prison but filed for bankruptcy. And if liability insurance exists at all, the statutory minimum coverage of one million Swiss francs is far from sufficient in most cases.

Only if the state intervenes or a fund is created can one speak of effective customer protection. As long as victims and their lawyers are not party to the criminal proceedings, this entire exercise will remain a paper tiger, "window dressing," as they say in banking. The facade is spruced up and painted over, but behind it the same quagmire exists as before. Foundations will continue to be emptied, and victims will continue to be coldly referred to the mostly hopeless legal process.

The Marxer law firm, which received this legal slap, was nicknamed the "secret Ministry of Justice," insiders say. Because it significantly influenced legislation in the region. With a population of just under 38,000, official channels are short, and the connections are tighter than ties. Thus, the trustee guild will continue to cause scandals, and private banks like "Alpinum" will continue to make headlines for managing accounts for shady characters. And the princely house will continue to speak of regrettable isolated cases and of the tireless fight for a clean financial center. It's a good thing the walls of the princely castle are medievally thick. That way, you won't hear the subsequent laughter.