Liechtenstein: in treacherous hands

They were the secret rulers of Liechtenstein and managed billions: the trustees. Now that the principality has weakened its banking secrecy, astonishing cases of fraud are coming to light.

Until he ended up in prison for a cosmetics company, trustee Harry Gstöhl was a highly respected man in Liechtenstein. Honored with the title of "Princely Counselor of Justice," he managed foundations and companies for wealthy clients through his law firm. At the same time, he served as President of the Administrative Court and later, for twelve years, as President of the Constitutional Court, comparable to the German Federal Constitutional Court. No one saw any conflict of interest in his various activities; Gstöhl was considered a symbol of integrity and reliability.

But then Gstöhl wanted to set up a cosmetics company in Italy with a Brazilian neurologist—who supposedly cured him of cancer. They were to conquer the market with a self-tanner for the skin that you just have to drink.

Gstöhl created a complex structure of companies and foundations around the company, designed to conceal the flow of money – just as trustees often do for their clients. The cosmetics company in Milan belonged to a company in Vienna, which in turn belonged to a holding company in Cyprus, which in turn belonged to a family foundation attributable to Gstöhl.

Doctor and millions gone

Initially, Gstöhl invested his private assets in the new company. As long as they lasted, that is. When they ran out, he began to embezzle his clients' money. As a trustee, he had full access to their accounts – and that's why Harry Gstöhl, now 70, is behind bars. Sentenced to six years in prison for aggravated fraud, breach of trust, and money laundering.

The verdict is not yet final. Although Gstöhl has admitted his guilt, he believes the sentence is too high. A second trial against him is currently underway. The first trial only concerned cases from 2010 onward and a total of 13 million Swiss francs. However, the public prosecutor estimates that the trustee embezzled up to 50 million Swiss francs.

The doctor with whom Gstöhl had an affair has disappeared. So have the millions. In Liechtenstein, people are already talking about the largest fraud case in the history of the principality. This is a disaster for the financial center. While it was long tolerated in the principality that trustees and their wealthy clients swindled foreign tax authorities, it was certainly not the clients themselves.

Wedged between Switzerland and Austria, less than 50 kilometers south of Lake Constance, lies Liechtenstein, the sixth-smallest country in the world. Bordered by the still-young Rhine River in the valley and the 2,599-meter-high Grauspitz mountain in the mountains. Liechtenstein has a population of just 36,000, but the tiny nature of the principality makes its financial center all the more important. Thanks primarily to its trustees.

Most of them are men in tailored suits who discreetly and quietly manage the foundations and companies of the world's wealthy, trying to preserve their clients' anonymity. For decades, they have cultivated their privileges, which, among other things, protected the trustees from prosecution.

When the money was no longer enough, he took his customers’

But since the principality abolished banking secrecy, the business of the 146 licensed fiduciaries and 250 trust companies has been faltering. Although the principality is now on the upswing again after years of crisis – bank client assets increased by 25 percent to CHF 294.3 billion last year – the fiduciaries are facing a crisis.

More and more clients want to terminate their contracts, dissolve foundations, or sue for damages. This is a new phenomenon in Liechtenstein. For decades, trustees could be almost certain that their clients would not take legal action against them in the event of misconduct. Doing so would have required them to disclose their own, often shady, business dealings to law enforcement authorities.

7 billion euros in additional payment

But then, ten years ago, Liechtenstein's status as a financial center began to falter. It was February 14, 2008, and in the upscale Cologne suburb of Marienburg, the spotlights were shining on a white villa. Klaus Zumwinkel , then head of Deutsche Post, was led away for questioning in front of running cameras. His skin was pale, his gaze lowered, flanked by his lawyer Hanns Feigen and public prosecutor Margrit Lichtinghagen. The image is burned into the collective memory. It has become a symbol of the greed of the rich and of tax evaders.

Zumwinkel had a multi-million-euro foundation account at the Liechtenstein bank LGT, from which he failed to pay taxes on the capital gains. The fraud was exposed because the Federal Republic had purchased secret bank data from over 700 Germans for €4.5 million. Germany's tax evaders panicked, reported themselves thousands of times, and paid more than €626 million to the tax authorities by the beginning of 2010 alone.

In addition, several hundred million euros in fines were imposed. This success set a precedent. In February 2010, North Rhine-Westphalia purchased data from Credit Suisse. Many more controversial deals were to follow. Since spring 2010, approximately 135,000 tax evaders who had failed to declare foreign investments have reported themselves. They have paid nearly 7 billion euros in back taxes to the tax authorities.

The then Federal Finance Minister, Peer Steinbrück, criticized Liechtenstein for "living largely from tax evasion." Diplomatically, there was a frosty period between the two states. Other European countries also pilloried the principality. After years of international pressure, the principality finally abandoned its most sacred asset: banking secrecy. In 2013, it announced that it would automatically exchange tax information with other countries in the future.

Courts as “service providers”

Liechtenstein trustees had previously lobbied against the impending change in the law for years. In one letter, for example, they presented 17 demands to the Liechtenstein government, demanding a voice and a seat in "all key national and international specialized institutions, working groups, and delegations," a liberal interpretation of the laws, and a say in the conclusion of tax information exchange agreements with other countries.

In addition, the trustees wanted to cushion the impending legal repercussions of their years of practice by demanding that the government guarantee them legal certainty. "Neither clients nor trustees will be criminalized," they demanded. Authorities, financial market regulators, and courts should view themselves as "service providers." In other words, they should place the trustee above the law. However, these demands have been of no avail.

Since the trustees' clients have been able to escape from illegality through voluntary disclosure or criminal prosecution, the number of lawsuits and charges against the firms has increased. In April of this year, for example, the handcuffs clicked again. This time, it was Mario Staggl. The head of New Haven Treuhand AG had been part of Liechtenstein's high society since the opening of his trendy bar, Esquire. Now the 53-year-old is in pre-trial detention. The man with gelled gray hair liked to pose as a financial expert to the media and philosophized about the future of the financial center. Now, the Princely Regional Court is investigating Staggl on suspicion of breach of trust, embezzlement, serious commercial fraud, and money laundering.

At the beginning of April, an employee of his trust company reported him. Documents obtained by Capital paint a picture of a man who shamelessly helped himself to his clients' accounts. This included a German trust, from which Staggl transferred 275,000 Swiss francs to his New Haven account. Supposedly as a "bridging loan" that he intended to repay within the next three months. This hasn't happened for two years, the documents state.

Tax evasion abroad was not considered a crime

In total, Staggl is alleged to have embezzled several million Swiss francs. Sometimes smaller amounts in the five-figure range, sometimes several million. After nearly emptying a trust account, but suddenly being asked to authorize a payment of $2 million from it, Staggl simply used another account to make the transfer. It is alleged that he justified some of the payments, which also ended up in Staggl's private account, internally as "special fees." His clients were unaware. If the allegations are confirmed, Staggl, too, could face several years in prison.

The fact that Staggl is even on trial is astonishing. Staggl had been wanted by the US authorities for nearly ten years for another case – but had barricaded himself from prosecution in Liechtenstein. Staggl was a central figure in the scandal surrounding the major bank UBS, which shattered Swiss banking secrecy. Together with former UBS wealth advisor and later whistleblower Bradley Birkenfeld, Staggl allegedly helped US real estate billionaire Igor Olenicoff evade $200 million in taxes through Liechtenstein companies.

The case sparked a tax dispute of gigantic proportions between Switzerland and the United States. In the end, UBS cooperated with the US authorities, handed over its client data, and paid $780 million to buy its way out. In August 2009, Birkenfeld, who confessed, was sentenced to three years and four months in prison. Staggl, however, remained in Liechtenstein and had nothing to fear there. Tax evasion abroad was not considered a crime in Liechtenstein. It wasn't until 2013 that the laws regarding "serious tax offenses" were tightened.

Even before Staggl was arrested in April, another Liechtenstein fiduciary warned of the conditions in his industry: Roger Frick wrote a fiery letter to his colleagues last October. The letter, which Capital has obtained, sounds like a declaration of bankruptcy for the profession. Frick reports complaints from Switzerland, London, Japan, Mexico, and Buenos Aires about "an increasing number of financial intermediaries from Liechtenstein" who, citing their discretionary powers, blocked mandates, refused to allow tax adjustments, and simultaneously increased their fees.

"I'm hearing from Zurich that they're now thinking twice about working with Liechtenstein financial intermediaries, as the whole thing is perceived as blackmail," Frick writes. He is now convinced that, in some cases, treating customers as a "self-service store" is a business model. "I consider such behavior harmful, reckless," and damaging to the financial center. Frick warns: "The customer is the priority, not the structure."

His goal: to make it easier for clients to change trustees. Until now, the bond between trustee and trustor has been like a marriage. It lasts a lifetime, through good times and bad. Divorce is not provided for. He attached a petition to his email calling for a change in the professional code of conduct.

The response came immediately, and it wasn't positive. Angelika Moosleithner-Batliner, President of the Chamber of Trustees and Fiduciaries, wrote to her colleagues: "We ask you to refrain from signing Mr. Frick's document."

The cases are classified under the heading "childless widows"

Moosleithner-Batliner is herself a well-known figure among Liechtenstein trustees. She is the daughter of Herbert Batliner. He is considered the inventor of family foundations – a way for wealthy families to discreetly pass their wealth on to the next generation. The 89-year-old lawyer proudly bears the title "Princely Councillor of Commerce, Senator hc" on his letterhead and is "Chamberlain of His Holiness."

He, like Harry Gstöhl, served as President of the State Court for several years. Batliner's clients included billionaire Friedrich Karl Flick and show jumper Paul Schockemöhle. Batliner went hiking with former Chancellor Helmut Kohl—a lead in the CDU party donations scandal led to him. All of this became known when Batliner's client files were leaked to the media and authorities in the late 1990s.

Even back then, Germany had its first tax scandal. The investigations into aiding and abetting tax evasion in more than 200 cases lasted seven years. They were dropped in the summer of 2007 in return for a payment of €2 million. Batliner was ill, medical certificates confirm this. "We would have had no chance of getting him before a German court," says one investigator at the time.

In his old age, however, Herbert Batliner was finally convicted. This time in Liechtenstein. And even then, the trustee was stumped by an accusation of fraud – not tax evasion abroad. In December 2009, the Supreme Court convicted Batliner in a civil case. It was deemed proven that Batliner had exploited the health of a demented widow for personal gain. The trustee was ordered to repay €1 million to the heirs.

"There are a whole series of such cases," says Konstanz-based attorney Jürgen Wagner, who has been representing clients harmed by trustees for years. He categorizes these cases as "childless widows." He says the scenario is often one in which a family foundation has been established, but the heirs, despite their claim to the assets, know nothing about the foundation – and the trustees, who are in possession of the documents, fail to notify them. Many clients have placed themselves at the mercy of their trustees, says another attorney at a renowned German law firm: "The trustees are often cold-blooded people who only care about the money."

Attorney David Christian Bauer, a specialist in foundation law at the DLA Piper law firm in Vienna, also demands that cases of abuse by trustees be "severely punished." Otherwise, Liechtenstein faces an avalanche of losses. "Once the withdrawal movement gains momentum," says Bauer, "it can no longer be stopped."

The trustees now seem to be making some progress. After Roger Frick's petition demanding that clients be able to change their trustee, the Chamber of Trustees caved. At the end of May, it established a three-member arbitration commission to "adjudicate" disputes between clients and trustees. In this way, the Chamber aims to "protect the reputation of the foundation's location." One insider simply calls it a lifeline to avoid being shackled by the financial market regulator.