Front Matter

Front Matter Page

© 2008 International Monetary Fund

June 2008

IMF Country Report No. 08/195

Liechtenstein: Assessment of Financial Sector Supervision and Regulation

This Assessment of Financial Sector Supervision and Regulation for Liechtenstein was prepared by a staff team of the International Monetary Fund. It is based on the information available at the time it was completed on April 4, 2007. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of Liechtenstein or the Executive Board of the IMF.

The policy of publication of staff reports and other documents by the IMF allows for the deletion of market-sensitive information.

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International Monetary Fund

Washington, D.C.

International Monetary Fund

Liechtenstein

Assessment of Financial Sector Supervision and Regulation

Prepared by Monetary and Capital Markets Department

Approved by Jaime Caruana

March 21, 2008

This report is based primarily on work undertaken during a visit to Liechtenstein in the period March 21 to April 4, 2007. The assessment team comprised Messrs. Michael Moore (head; MCM), Terence Donovan (team leader, LEG), Paul Ashin, Alain Vedrenne-Lacombe, and Ms. Gabriele Dunker (all LEG), and Mr. Michael Deasy (banking supervision expert), Ms. Tanis MacLaren (securities regulation expert), and Mr. Boudewijn Verhelst (AML/CFT expert). The key findings are as follows:

  • The assessment team observed substantial progress in implementing the recommendations from the 2002 assessment following the creation of the independent Financial Markets Authority (FMA) (see Appendix I). A high level of compliance in the focused review of the Basel and IOSCO standards was noted, though some weakness was observed for insurance supervision. Onsite inspections of insurance companies were not conducted as planned and the preparation of industry guidance is delayed, both as a result of resource limitations.

  • The authorities and industry continue to make progress to strengthen the anti-money laundering regime. This assessment of compliance with the revised Financial Action Task Force standard, however, identifies a number of further necessary steps to achieve better compliance. The AML/CFT legislation provides a broad framework for customer due diligence (CDD), though it falls short of the international standard on some substantive issues and a range of technical points that should be addressed as Liechtenstein implements the Third ML Directive (2005/60/EC). (See Table 1 of Appendix II for key recommendations.)

  • Strategic planning will need to take account of ongoing and increasing resource requirements. The assessment team observed a generally effective capacity to conduct the current level of direct supervision (with the exception of insurance) and to carry out the indirect regulatory and AML/CFT due diligence audit activities. However, the authorities will need to undertake a review of resource requirements in light of future demands on the FMA more generally. Current resources may need to be supplemented to (i) undertake direct onsite inspections in other areas (e.g., AML/CFT due diligence); and (ii) as a result of new demands from the implementation of EU directives, particularly MiFID, Solvency II, and the Third Money Laundering Directive.

Appendix II provides the Report on the Observance of Standards and Codes (ROSC) for the FATF standard for Anti-Money Laundering and Combating the Financing of Terrorism.

Michael Moore is the main author of this AFSSR with contributions from the rest of the assessment team.

The AFSSR is a summary report on implementation of the indicated financial sector regulatory standards. It has been developed to help jurisdictions identify and remedy weaknesses in financial sector supervision and regulation. The reviews do not directly assess risks, such as those associated with asset quality, markets, or fraud, which could affect the soundness of financial systems or individual institutions.

Contents

  • Acronyms

  • Preface

  • Executive Summary

  • Priority Policy Recommendations

  • I. Introduction

  • II. Financial System Overview

    • A. Political and Economic Background

    • B. Financial Sector and Regulatory Arrangements

    • C. Prudential Regulation and Supervision

    • D. Results of the 2002 Assessment

  • III. Main Findings and Recommendations

    • A. Sectoral and AML/CFT Assessments

    • B. Cross-Sectoral Regulatory and Supervisory Issues

  • Tables

    • 1. Financial System Structure

  • Appendixes

    • I. Status of Implementation of the 2002 Recommendations

    • II. Report on Observance of Standards and Codes (ROSC)—FATF Recommendations

Acronyms

AML

Anti-money laundering

BCP

Basel Core Principles for Effective Banking Supervision

CESR

Committee of European Securities Regulators

CFT

Combating the financing of terrorism

CDD

Customer Due Diligence

CRD

Capital Requirement Directive (implementation of Basel II)

DDA

Due Diligence Act

DDO

Due Diligence Ordinance

DNFBP

Designated nonfinancial businesses and professions

EC

European Communities

EEA

European Economic Area

EU

European Union

FATF

Financial Action Task Force

FIU

Financial intelligence unit

FMA

Financial Markets Authority

FSA

Financial Services Authority

FT

Financing of terrorism

GBOERA

Office of Land and Public Registration

IAIS

International Association of Insurance Supervisors

IOSCO

International Organization of Securities Commissions

LEG

IMF Legal Department

MCM

IMF Monetary and Capital Markets Department

MiFID

Markets in Financial Instruments Directive

ML

Money laundering

MLA

Mutual Legal Assistance

MONEYVAL

Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures

MOU

Memorandum of Understanding

MVT

Money or Value Transfer Services

NCCT

Non Cooperative Countries and Territories

NPO

Non Profit Organization

OFC

Offshore Financial Center

PEP

Politically Exposed Person

ROSC

Report on Observance of Standards and Codes

SAR

Suspicious activity report

TCSP

Trust and Company Service Provider

UCITS

Undertakings for collective investments in transferable securities (investment funds, mutual funds)

UNSCR

United Nations Security Council Resolution

Preface

This report presents the conclusions of the IMF assessment of observance of financial sector supervisory and regulatory standards in the context of the Module 2 offshore financial center (OFC) assessment, which visited Liechtenstein during March 21 to April 4, 2007. The mission reviewed developments in the supervisory and regulatory framework since the last Module 2 OFC assessment mission in 2002.

The mission team held extensive discussions with staff of the Financial Markets Authority (FMA), other representatives of government, and with members of industry and industry associations. Staff of the FMA and the other authorities were very generous in making themselves available for discussions, which were helpful, frank, and forthcoming. The assistance from industry representatives was also very helpful.

The assessment was based on a review of the relevant legislation, questionnaires prepared by the authorities, and publicly available information that was considered in advance of and during the mission. The relevant laws, ordinances, and most other documentation were made available to the mission team in English.

The mission team comprised Messrs. Michael Moore (head; MCM), Terence Donovan (team leader, LEG), Paul Ashin, Alain Vedrenne-Lacombe, and Ms. Gabriele Dunker (all LEG), and Messrs. Michael Deasy (banking supervision expert) and Boudewijn Verhelst (AML/CFT expert), and Ms. Tanis MacLaren (securities regulation expert).

The mission team would like to express its appreciation for the excellent cooperation of all parties consulted and the kind hospitality of the Liechtenstein authorities.

Executive Summary

The financial sector in Liechtenstein provides primarily wealth-management services, including banking, trust, other fiduciary services, investment management, and life insurance. The industry is expanding, including in the nonbanking areas, particularly investment undertakings and insurance. The success of the financial services industry reflects in part the not insignificant role of quality supervision and regulation.

The establishment of the Financial Market Authority (FMA) as the unified, independent regulator in January 2005 was a huge step for the financial services industry. This assessment has observed the substantial progress achieved in establishing a modern supervisory and regulatory regime. The FMA’s ability to share information with domestic and foreign regulatory authorities works well in practice, and the capacity and willingness to cooperate has been demonstrated in the interactions by the FMA and other authorities with their foreign counterparts.

The FMA and other authorities have been very successful in implementing most of the recommendations provided in the earlier 2002 IMF assessment. The mission team found a high standard of compliance in its focused review of the Basel Core Principles and IOSCO Principles.1 The IAIS Insurance Core Principles were not assessed; however, there appears to be a capacity constraint at the FMA for insurance supervision in light of the significant growth in the insurance sector. In this regard, and for all areas subject to FMA supervision, the authorities will need to consider the demands on the FMA to ensure that it is able to sustain quality supervision. This assessment recommends that there be an increased capacity by the FMA to conduct onsite inspections of regulated firms. The development of this increased capacity, along with the demands to implement the EU requirements will mean that resources will need to be kept under review to ensure sufficiency, and augmented as necessary.

The authorities and the industry continue to make significant efforts to strengthen the anti-money laundering regime, though there is still work ahead. There have been substantial improvements since 2002, particularly in ensuring that there is a high awareness by the financial services industry to prevent misuse of the financial system. The IMF’s earlier assessment recognized the progress that had been made as measured against the earlier Financial Action Task Force (FATF) anti-money laundering standard. This assessment of compliance, which is against the now more rigorous FATF standard, identifies a number of further necessary steps to achieve a higher level of compliance (see item 5 of the Priority Policy Recommendations).

Priority Policy Recommendations

1. Financial Markets Authority

  • Follow through with the strategic plan to consider future resource requirements for on-site supervision and the future demands from implementation of EU Directives.

  • A formal process should be agreed to ensure that a suitable alternative Board member can act in the event of an extended absence by any Board member.

2. Banking (Basel Core Principles)

  • Review resources to ensure that they remain sufficient in light of the developing nature of banking supervision and increasing EU requirements, particularly the Capital Requirement Directive (CRD) and Markets in Financial Instruments Directive (MiFID).

  • Amend guidance to external auditors to include specific requirements for the Capital Requirement Directive (i.e., Basel II).

3. Securities (IOSCO Principles)

  • Priority should be given to the development of appropriate guidance for auditors in performing the regulatory audits of asset managers.

  • Principles for Market Intermediaries:

    • Provide the names of authorized personnel on the website listing of authorized firms.

    • Introduce an affirmative obligation on the part of an asset manager to give prompt notice to the FMA, if it becomes undercapitalized.

    • Implement fully all parts of the Asset Management Act; in particular, the Code of Conduct should be finalized.

    • Ensure that compliance with the MiFID investor protection requirements is reviewed during the regulatory audit performed on both asset managers and banks.

  • Pursue membership in the Committee of European Securities Regulators (CESR) in line with EEA status. This would be as a measure to strengthen international cooperation arrangements for cross-border securities activities.

4. Insurance (IAIS Core Principles)

  • Undertake inspections of insurers in line with expectations for direct supervision.

  • Review capacity for the insurance supervision function with a view to ensuring that resources are sufficient to conduct onsite inspections and implement EU directives.

  • Review reporting requirements, with a view to increasing the frequency of prudential reporting requirements to permit interim offsite analysis of the condition of firms.

  • Expand the coverage of regulatory audits to include the assessment of risk-management systems.

5. AML/CFT

  • In line with the UN Conventions (the Palermo, Financing of Terrorism, and Vienna), fully criminalize money laundering and financing of terrorism.

  • Strengthen legislative requirements for customer and beneficial ownership information, including obligations to (i) understand the ownership and control structure of legal persons; (ii) determine the natural person(s) that exercise ultimate control; (iii) perform enhanced due diligence on a broader range of potentially high-risk clients; and (iv) monitor and maintain customer information for cross-border and domestic wire transfers.

  • Enhance the due-diligence audit system through greater FMA participation in onsite inspections.

  • Take steps to improve the efficiency of the appeals process in relation to mutual legal assistance and extradition requests.

  • To improve the effectiveness of the SAR reporting, remove the time limit on the prohibition against financial intermediaries informing clients about reports to the FIU (‘tipping off’); discontinue the automatic freezing of assets on the filing of an SAR and extend the SAR requirement to include attempted transactions.

  • Ensure that terrorist-related assets can be frozen also outside the context of those identified through the UNSCR 1267 process.

1

Under current policies, partial assessments of financial sector standards (e.g., BCP and IOSCO) do not result in issuance of a formal Report of Observance of Standards and Codes.

Liechtenstein: Assessment of Financial Sector Supervision and Regulation
Author: International Monetary Fund