Liechtenstein
Assessment of Financial Sector Supervision and Regulation

The financial sector in Liechtenstein provides primarily wealth-management services, including banking, trust, other fiduciary services, investment management, and life insurance. The establishment of the Financial Market Authority (FMA) as the unified, independent regulator in January 2005 is a huge step for the financial services industry. The FMA and other authorities have been successful in implementing most of the recommendations provided in the earlier 2002 IMF assessment. The authorities and the industry continue to make significant efforts to strengthen the antimoney laundering regime, though there is still work ahead.

Abstract

The financial sector in Liechtenstein provides primarily wealth-management services, including banking, trust, other fiduciary services, investment management, and life insurance. The establishment of the Financial Market Authority (FMA) as the unified, independent regulator in January 2005 is a huge step for the financial services industry. The FMA and other authorities have been successful in implementing most of the recommendations provided in the earlier 2002 IMF assessment. The authorities and the industry continue to make significant efforts to strengthen the antimoney laundering regime, though there is still work ahead.

I. Introduction

1. This report presents the findings of an IMF mission that visited Vaduz from March 21 to April 4, 2007, in the context of a Module 2 offshore financial center (OFC) assessment. In 2003, the IMF Executive Board reviewed the status of the OFC initiative and agreed that there should be periodic assessments (every four to five years) to monitor progress in the development of supervisory systems.2 Under the initiative, all assessments are voluntary.

2. This assessment focused on developments in the supervisory and regulatory framework since the Module 2 OFC assessment mission in 2002 (final report issued in 2003). Key tasks of this mission were (i) a full reassessment of the standard for anti-money laundering (AML) and combating the financing of terrorism (CFT), based on the revised Financial Action Task Force (FATF) 40+9 Recommendations; and (ii) a focused review of the Basel Core Principles (BCP) and the International Organization of Securities Commissions (IOSCO) Principles.

3. The focused review of BCP and IOSCO principles considered only those principles that were rated less than largely compliant (for the BCP) or less than broadly implemented (for IOSCO principles) in the 2002 assessment mission. The BCP-focused review also considered issues related to compliance with the revised BCP standard. This mission did not review compliance with any of the Insurance Core Principles; however, the level of resources for insurance supervision was discussed, for which findings have been prepared.

4. The structure of the report is as follows. Section II provides an overview of the financial system, including a discussion of the political and economic background and financial sector and regulatory arrangements. Section III provides the main findings and recommendations according to each sector (banking, securities, and insurance) and for anti-money laundering and combating the financing of terrorism (AML/CFT). Appendix I provides the status of implementation of the 2002 recommendations, and Appendix II provides the ROSC for the assessment of compliance with the FATF Recommendations.

II. Financial System Overview

A. Political and Economic Background

5. The principality of Liechtenstein is a monarchy with also a democratic parliamentary system. The head of state is HSH Prince Hans-Adam II. Since August 2004, Hereditary Prince Alois has exercised the sovereign powers as the representative of Prince Hans-Adam II. Government consists of a five-member cabinet nominated by parliament and appointed by the reigning prince. The parliament is comprised of 25 elected members, who serve for four years. The consent of both the reigning prince and the cabinet is needed to enact new legislation. Liechtenstein has a resident population of about 35,000, and occupies a 160 square kilometer area between Austria and Switzerland. It has a customs union and monetary union with Switzerland.

6. Real GDP in 2004 was CHF 4.3 billion, up 3.5 percent from 2003. Financial services represent 30 percent of GDP. In 2005, about 30,000 people were employed in Liechtenstein, of which 14, 500 were inward commuters from Austria and Switzerland. Employment in the financial services industry is responsible for about 15 percent of all jobs.

B. Financial Sector and Regulatory Arrangements

7. The financial services sector offers a broad range of primarily wealth management services, including banking, trust, other fiduciary services, investment management, and insurance to a global market with a majority of the services provided to nonresidents. The FMA was established as an integrated financial supervisory authority in January 2005. It brings together the supervisory and regulatory functions that previously were under the Financial Services Authority (FSA), the Insurance Supervisory Authority (ISA), and the Due Diligence Unit (DDU).

8. The FMA is responsible for the prudential oversight of all financial service providers, including banks, investment undertakings, asset managers, trustees, and insurance firms. It has full authority under the Financial Markets Authority Act (FMA Act) to review and grant licensing applications, prospectuses, and disclosure documents, and for carrying out supervision of all licensed entities. The FMA also has the ability to impose fines and withdraw licenses. As part of the monetary union, the Swiss National Bank performs functions of a central bank and acts as the lender of last resort and fulfils some payment systems requirements.

9. The FMA is also responsible for ensuring compliance with due-diligence requirements for purposes of anti-money laundering. Several AML/CFT laws are in effect that set out the AML/CFT requirements, as applied to the financial sector. Key laws are the Due Diligence Act (DDA) and the law concerning the Financial Intelligence Unit (the FIU Act). The FMA has a statutory obligation to inform the public prosecutor, if it suspects a crime has been committed. The public prosecutor is responsible for enforcement activity where there is an allegation that a crime has been committed or where the penalty sought includes imprisonment.

10. The Liechtenstein Bankers Association manages the deposit and investment insurance scheme that protects deposits of private clients up to a maximum of EUR 20,000 or the equivalent in another currency. In the event of insolvency or bankruptcy of a bank, the scheme would pay compensation to the bank’s clients. The scheme is based on contributions of member banks up to a contractually agreed maximum amount assessed according to the level of deposits and investments of the member bank.

11. Liechtenstein has been a member of the European Economic Area (EEA) since 1995, which establishes the formal relationship between Liechtenstein and the European Union. As a condition of EEA membership, Liechtenstein must transpose all EEA-relevant laws of the EU in the financial services sector into domestic law. The EEA membership provides Liechtenstein’s financial intermediaries with the freedom of establishment and movement of services when offering cross-border financial services within the EEA. Countries within the EEA have the same rights within Liechtenstein.

12. Under the EEA requirement, Liechtenstein has recently implemented the UCITS III Directive and the Market Abuse Directive. It is in the process of finalizing requirements of the Markets in Financial Instruments Directive (MiFID), the Capital Requirement Directive (implementation of Basel II), the insurance Solvency II Directive, and the Third Money Laundering Directive.

13. Corporate bodies are formed under the Law on Persons and Companies 1926, as amended, known as the PGR Code. Trust enterprises are formed under the Law Concerning the Trust Enterprise 1928. A variety of legal entities may be formed. The most commonly used are Company Limited by Shares, Limited Liability Company, The Establishment (Anstalt), The Foundation (Stiftung), and the Trust Enterprise.

The banking sector

14. The banking sector is regulated under the Law on Banks and Finance Companies of 1992 (the Banking Act). The last amendment was in 2006, with a further revision underway to implement the new European Union Directives for Basel II and Markets in Financial Instruments. The main activity of all of the banks is asset management (private banking).

15. Liechtenstein has 15 active banks with 1 additional bank in liquidation; balance sheet assets were CHF 48 billion and client assets under management of CHF 173 billion at end-2006. Eight banks are controlled by Liechtenstein-domiciled investors, four are controlled by Swiss investors (including one bank in voluntary liquidation3), and four are controlled by Austrian investors. Three of the banks have operations in foreign countries, generally in the form of banks and/or investment companies.

16. The banking market is highly concentrated with the three largest banks (all controlled by Liechtenstein-domiciled investors) accounting for 90 percent of the total balance sheet assets, 86 percent of assets under management, 89 percent of operating profits, and 63 percent of employment in the banking sector. Two of the three largest banks are publicly quoted on the Swiss Stock Exchange.

Securities activities

17. Securities-related activity is primarily asset management for high-net-worth individuals. The major business is asset management—carried out by universal banks, licensed under the Banking Act, investment undertakings (collective investment schemes) licensed under the Investment Undertakings Act, and asset managers licensed under the Asset Management Act.

18. The majority of clients are located outside of Liechtenstein (the largest number are in European jurisdictions). While only one bank is a participant of the Swiss stock exchange, SWX, all banks also offer brokerage services—including the sale of investment funds and securities—to retail investors. All client assets of asset managers must be held at a depository bank and the asset manager may not have access to any of those assets.

19. The investment funds industry is growing quickly. As of December 31, 2006, there are 28 licensed fund management and investment companies and 208 investment funds with a total of CHF 26.6 billion assets under management. The equivalent figures for December 31, 2005 are 27 fund managers and investment companies and 166 funds with CHF 20.6 billion in assets. The licensing of asset managers under the Asset Management Act is still underway. There were 48 licensed asset managers in Liechtenstein, as of the end of 2006 (58 at end-March 2007), managing an estimated CHF 11.2 billion. There were an additional 33 applications pending as of end-March 2007.

Insurance sector

20. Insurance is regulated by the Law on the Supervision of Insurance Undertakings (Insurance Supervision Law) of 1995 and other laws. At end-2006, there were 35 insurance companies, of which 17 are life companies, 13 are nonlife, and 5 are reinsurance companies. Most of the Liechtenstein life companies are wholly owned subsidiaries of well known, internationally active insurance companies or banks. Only two insurance companies are locally-owned.4 The insurance captive companies are affiliated with well-known industrial and pharmaceutical companies. There were a further 26 branch offices of Swiss insurance companies and one French company (11 life, and 16 non-life), and 38 Swiss and 202 EEA insurance companies are licensed for cross-border service operations in Liechtenstein.

Table 1.

Liechtenstein: Financial System Structure

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Source: Financial Markets Authority

21. The insurance activity is growing, with the recent experience of about two to three new insurance companies entering the market per year (including captives). In 2006, the aggregate gross premiums for all insurance undertakings were CHF 6.8 billion, up from CHF 4.2 billion in 2005. Assets were CHF 16.8 billion at end 2006, up from CHF 10.7 billion in 2005.

22. Life insurance companies account for more than 90 percent of aggregate premium and insurance company assets. Ranked by premium income, most clients are from Germany, followed by Austria, Belgium, Italy, Sweden, and Switzerland. The main life insurance product is unit-linked life insurance, accounting for more than 85 percent of insurance company assets. The unit-linked life insurance product, though providing some insurance, is primarily an investment product, with the payout dependent on the performance of the investment.

C. Prudential Regulation and Supervision

23. The Financial Markets Authority (FMA) is the supervisory authority responsible for banking supervision, securities regulation, insurance supervision, and anti-money laundering due diligence for financial and nonfinancial businesses. The tasks and powers of the FMA are set out in the Financial Market Authority Act of 2005 (the FMA Act), with additional tasks and powers set out in other acts that apply to key financial sectors.

24. The FMA is an independent authority operating as an autonomous institution under the FMA Act. The FMA has its own legal personality under public law; it is independent of the government and is exclusively accountable to the parliament. The FMA has a five-member Board, whose members have a term of office of five years. The FMA Act sets out that the FMA Board shall appoint a general management team of at least three persons. All members of the general management shall hold full-time positions. The funding for the FMA is through a budget authorization provided each year by the Liechtenstein parliament, which includes split funding from the state and from fees charged to industry. In 2006, the budget was CHF 6.6 million, with 60 percent provided by the state and 40 percent from fees; in 2007, the budget was CHF 7.3 million, with 54 percent provided by the state and 46 percent provided by fees.

25. Supervision for financial services is mainly based on a dual system of reliance on the direct onsite inspections by external auditors and augmented by offsite indirect supervision by FMA staff. For the indirect supervision, the FMA relies on the review of the audit reports and periodic prudential reports. For insurance supervision, the FMA also relies on external actuaries for certain reporting requirements. The FMA additionally has a program of limited direct onsite inspections and can direct external auditors to work on its behalf.

26. The FMA sets out the detailed provisions on the content of the regulatory audit and actuarial reports through specific ordinances to the relevant financial sector laws. These reports are submitted simultaneously to the Board of Directors of the regulated institution, and the FMA pursuant to the provisions of the Law on Persons and Companies, and the FMA Act.

27. The auditors under the legislation must verify that (i) the business activities conform to the law, the articles of association, and the rules and regulations; (ii) the preconditions for granting the license are continuously met; and (iii) the form and content of the business report and the consolidated business report conform to the requirements of the law, articles of association, and rules and regulations.

D. Results of the 2002 Assessment

28. The 2002 assessment mission reviewed the level of compliance with four standards: Basel Core Principles, IOSCO Principles, IAIS Insurance Principles, and the FATF Recommendations on AML/CFT. Detailed assessments and ROSCs were prepared for the four standards, which the authorities agreed to publish.5

29. The 2002 assessment concluded that resources were not sufficient to conduct supervision and regulatory functions for banking, securities, and insurance activities. Resources were not sufficient to effectively use the work of the auditors, nor the regulatory reporting for off-site supervision and monitoring. The mission also sought clarification in several areas; notably, operational and credit risks, rules for external auditors, and remedial actions. For the BCP, there were five principles considered materially noncompliant and for the IOSCO principles, there were seven principles considered partly implemented.

30. The earlier mission observed a high level of compliance with the FATF standard that was in effect at the time (based on the 1996 version and 2002 methodology). The team observed a heightened commitment to AML/CFT efforts in large part due to the FATF’s adverse listing of Liechtenstein as a noncooperative country in the fight against money laundering in 2000. Following significant strengthening measures by the authorities and the industry, the FATF observed progress in addressing earlier identified deficiencies and, subsequently, removed Liechtenstein from its list of noncooperative countries or territories in June 2001 and ceased further monitoring in June 2002.

III. Main Findings and Recommendations

A. Sectoral and AML/CFT Assessments

31. There has been substantial progress in implementing the recommendations from the 2002 assessment in various areas of financial sector regulation (see Appendix 1). Key to this progress was the creation of the FMA as an independent agency formed under the FMA Act, with a full range of regulatory powers and resources that appear largely adequate to carry out its current level of activities. It is accountable directly to parliament and the annual report is published on the FMA’s website. The consultation process for formulation of new provisions is open and the FMA’s relationship with the industry is constructive.

32. Strategic planning should consider future resource requirements. With the exception of insurance supervision, the mission team observed an effective capacity to conduct the current level of direct supervision, and to ensure adequacy of the indirect regulatory and due diligence audit activities. The mission team takes note of the pending additions to staff to implement Basel II and other initiatives being taken for banking supervision. The mission team supports the efforts underway in the preparation of a longer range strategic plan that will consider future demands on the FMA.

33. The strategy should take due account of requirements for insurance supervision and future demands on the FMA more generally from the implementation of EU Directives. The FMA did not achieve the onsite inspections of insurance companies, as was projected in 2002, and the preparation of industry guidance is delayed, both as a result of resource limitations. Furthermore, current resources may need to be supplemented to (i) undertake direct onsite inspections in other areas (e.g., 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.

34. The following sub-sections provide other findings according to specific sectors and in regards to the review of anti-money laundering.

Banking (Basel Core Principles)

35. Compared to the situation in 2002, there has been a very significant improvement in resources, both in terms of numbers and expertise. Five professionals, one professional trainee, and an administrative assistant are currently employed in the Banking Supervision Division. Contracts have been signed for two more professionals, both of whom have specific Basel II experience. All of this, taken in conjunction with the role of external auditors in carrying out annual regulatory audits of the banks, appears sufficient to supervise the banking system properly. However, it is vital that these resources be reviewed to ensure sufficiency in the light of the developing nature of banking supervision, increased volume, compound instruments, and growing EU-requirements, particularly Basel II and MiFID.

36. Guidance on operational and legal risk was incorporated in the Banking Ordinance in 2004 and has been enhanced by the relevant provisions in the Capital Requirement Ordinance 2006 which implements Basel II in Liechtenstein. The FMA has put significant resources into the implementation of Basel II. Extensive consultation was also held with the industry. The main implementation legislation—the Capital Requirement Ordinance—was passed in December 2006 and became effective on January 1, 2007. A similar procedure was followed for the EU Markets in Financial Instruments Directive (MiFID), which will have significant implications for the investment activities of banks in Liechtenstein.

37. The focused review of the Basel Core Principles (BCPs) considered only those Principles that were rated at “materially noncompliant” or lower, during the 2002 Assessment. There were five such ratings—all rated as materially noncompliant. Four related to lack of resources within the regulator and the fifth to lack of guidance by the regulator on operational and legal risk. There have been very substantial improvements in all cases.

38. The assessment also reviewed preparedness for adoption of the revised BCP standard. While this review was necessarily limited by time, it appears that the FMA would do well generally in meeting the requirements for compliance, particularly in the context of compliance with the requirements of Basel II. The revised principles deal to a large extent with enhanced risk management processes and include specific principles to deal with liquidity and interest rate risk. Basel II is also very much concerned with increased risk management and has specific sections dealing with liquidity and interest rate risk. The ability to meet the revised principles is also influenced by the relatively uncomplicated nature of banking business in Liechtenstein, i.e., private banking and small and straight-forward lending practices.

Securities activities (IOSCO Principles)

39. The FMA has clear power to license, supervise, and take appropriate enforcement actions against banks, investment undertakings, and asset managers. In particular, it recently was given express authority over asset management activities via the Asset Management Act. It may make legally binding rules. Its resources and funding are stable and appear to be reasonable to support its current activities with respect to securities markets participants. Additional funding may be required if demands from EU directives and other initiatives increase. The staff are highly educated and continuous training is a priority. All staff have gained significant expertise since the last assessment and many of the added staff have direct experience in relevant industries.

40. The gaps in the regulator’s authority noted in the 2002 assessment have been filled. The FMA has full inspection and enforcement powers over banks, investment undertakings and asset managers, and these powers are used effectively for banks and investment undertakings. Under the dual system of supervision in place, regular inspections of all banks, investment undertakings, and asset managers are conducted by the appointed external auditor. Direct on-site reviews of banks and investment undertakings by the FMA have taken place. The full implementation of the Asset Management Act is at an early stage and so there is very little experience in that area. Given the expertise and processes in place for the other sectors, it is reasonable to expect a similar level of effectiveness here.

41. Asset managers are now licensed and supervised separately from trustees, as recommended. Asset management is a separate licensable activity and appropriate minimum entry standards, such as fit and proper assessments and minimum capital requirements, now apply both to banks and asset managers. Authorized firms are listed on the FMA’s website, which could be supplemented by including the names of the authorized personnel. There should be an affirmative obligation on the part of an asset manager to give prompt notice to the FMA if it becomes undercapitalized. Priority should be given to full implementation of the Asset Management Act.

42. Both banks and asset managers are subject to requirements designed to ensure investor protection and prudent risk management. The internal control and risk management guidance applicable to banks is extensive, while the requirements set out for asset managers are more general. This reasonably reflects the lesser risk of the latter business in the jurisdiction. MiFID will impose extensive investor protection requirements on both types of regulated firms when it is fully implemented in late 2007. The FMA should update the guidance provided to auditors to ensure compliance with MiFID standards is reviewed in detail during regulatory audits of intermediaries.

Insurance (Insurance Core Principles)

43. The insurance sector, primarily life insurance, is rapidly expanding as an important segment of financial services activities. At end-2006, assets for insurance undertakings were CHF 16.8 billion, which was an increase of 57 percent over the prior year, due largely to growth in unit-linked life insurance. To date, the FMA has focused its efforts on ensuring that the companies entering the Liechtenstein market are owned and controlled by strong internationally respected financial institutions.

44. The FMA has limited capacity to undertake onsite inspections in the insurance sector. In 2002, there was one material concern noted in the assessment that considered the lack of capacity of the supervisor to undertake onsite inspections.6 Since 2002, the authorities indicate that onsite inspection activity has remained limited, with only one comprehensive inspection conducted in 2006. The follow-through from that assessment was less than had been projected by the authorities in their response to the 2002 assessment.7

45. Staffing since the 2002 assessment has increased from seven to nine staff, and two additional trainees began in March 2007. The authorities will need to review existing staffing levels with a view to ensuring that resources should allow a systematic program of on-site inspections. In particular, there has not been sufficient comprehensive review from a prudential perspective of the high growth areas to determine whether risk-management systems are adequate. Consideration could be given to further augmenting the onsite inspections by expanding the coverage of checks carried out on behalf of the FMA by the external auditors. In particular, the regulatory audits could be expanded to coverage of risk-management systems.

Anti-Money Laundering and Combating the Financing of Terrorism (FATF Recommendations)

46. This assessment recognized the serious and significant efforts to improve the AML/CFT regime for which further strengthening is recommended, particularly to reflect fully the provisions of the revised FATF standard and Third EU Money Laundering Directive. The revisions to the Due Diligence Act (DDA) in 2005 and related measures address many aspects of the revised FATF Recommendations, though, in some cases, the measures lack necessary precision.

47. Money laundering and financing of terrorism are not fully criminalized according to the relevant UN Conventions (the Palermo, Financing of Terrorism, and Vienna Conventions). UN Resolution 1267 has been implemented; however, UN Resolution 1373 requires that a procedure be developed. Mutual legal assistance and extradition requests are processed in a constructive manner, but can still be subject to many levels of appeal. A disclosure or declaration system to detect the physical cross-border transportation of currency and bearer-negotiable instruments related to money laundering or terrorist financing should be put into place.

48. The FMA oversees the AML/CFT supervision conducted onsite by external auditors. In this regard, the mission team recommends that there be additional participation by the FMA in direct AML/CFT onsite inspections, which could impose a need for additional resources. Nevertheless, supervision through the FMA is robust and professional, if indirect.

49. Banks and other financial institutions base risk monitoring on customer profiles, facilitating identification of unusual financial activity. Some concerns remain regarding the identification of all beneficial owners, reliance on due diligence conducted by third parties, and discretion allowed in applying enhanced due diligence measures for higher-risk customers. The vast majority of designated nonfinancial businesses and professions (DNFBPs)—especially the core trust and company service providers—have been brought under the revised DDA and appear committed to compliance. They are required to perform CDD, monitor client relationships, and submit suspicious activity reports. Their reported customer due diligence and transaction monitoring practice appears satisfactory.

50. Liechtenstein’s framework for ascertaining the beneficial ownership of legal entities, trusts, and arrangements needs to be strengthened. It is not always clear that implementation extends to identifying the natural persons who are the ultimate beneficial owners. In addition, the verification of identification data is too limited.

51. The Financial Intelligence Unit is performing well. The quality of suspicious activity reports by financial institutions to the FIU appears to be high; however, the level of reporting appears low. Similarly, the reporting by DNFBPs appears low compared to the number of companies formed and transactions monitored.

B. Cross-Sectoral Regulatory and Supervisory Issues

Structure and independence of the Financial Market Authority

52. The respective responsibilities of the Board and general management are set out in the statute in line with good corporate governance practices. The Board is responsible for strategic and policy-level decisions for the FMA, for hiring and supervising general management, reviewing and approving the annual report, issuing binding rules and guidance, and entering into agreements with other supervisory authorities. The general management has operational responsibility.

53. Under the FMA Act, Board members and general management must have an impeccable reputation, a high level of expertise, and practical experience in the financial services industry or supervision. None may serve in the government, parliament, or a court. Board members are appointed by parliament for five-year terms which may be renewed. Board members and general management may only be removed for specified reasons including bankruptcy, criminal conviction, lasting inability to act, or a gross breach of duty.

54. There is a high quorum requirement that is effective in ensuring independence. The Board consists of five members, a majority of whom (the chairman, deputy chairman, and one other member) must be independent of the regulated industry; therefore, no more than two members may be associated with regulated firms. Only the chairman is a full-time executive appointee. A quorum for any meeting is four members and, on any tie vote, the chairman has a casting vote. In practice, industry-related members cannot alone determine decisions of the Board.

55. With such a small number of Board members, however, an extended absence of any Board member may impede the work of the FMA. The mission team recommends that a formal process be agreed for ensuring that a suitable alternative Board member can act in the event of an extended absence by any Board member. As an example, the CEO of the regulator could be assigned a formal ex officio status for participation in all Board meetings, and would assume voting powers in the event of an extended absence of a regular Board member.

Cooperation and information exchange

56. The FMA has the ability to share information with domestic and foreign regulatory authorities and does so in practice. The FMA may share any information with domestic counterparts. The specific laws on banking, investment undertakings, asset management, and insurance grant the FMA the ability to share information with foreign regulators (within or outside the EEA) on the respective regulated entities licensed by the FMA that the foreign authority needs to carry out its supervisory responsibilities. This information generally is subject to confidentiality provisions and may only be passed to third parties or otherwise disclosed with the express permission of the FMA.

57. The FMA’s ability to cooperate is enhanced by active participation in several relevant international organizations. The FMA representatives regularly attend the Committee of European Banking Supervisors (CEBS), Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS), and the Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEYVAL). However, the FMA has been unsuccessful in its efforts to join the Committee of European Securities Regulators (CESR). In light of the February 2007 introduction into force of the Market Abuse Act, membership in CESR should be pursued, particularly as Liechtenstein is an EEA member with significant cross-border financial services. The inability to participate in CESR weakens the quality of communication with European regulatory counterparts.

58. The process for sharing client-specific information has several steps, but apparently works comparatively efficiently in practice. The ability of the FMA to obtain client-related information from its regulated firms is unfettered. Its ability to share client-related information with competent foreign authorities is subject to a process, common across the legislation administered by the FMA, whereby the FMA must issue a formal order to the regulated firm stating what information is sought and that the FMA proposes to pass this information to the foreign regulator. Outside the context of a market-abuse case, this order may be appealed within 14 days to the FMA Complaints Commission, an independent tribunal established under the FMA Act. A decision of the Complaints Commission may then be appealed within 14 days to the Superior Administrative Court.

59. A 2003 decision of the Superior Administrative Court confirmed the regulator had the ability to share client specific information with foreign regulators. The court set down the four principles that had to be met for such disclosure.8 These principles would be binding on the Complaints Commission. Use of institution or client-related information for judicial or administrative enforcement proceedings, even if this entails public disclosure, is now specifically permitted under Article 36 of the Banking Act.

60. The advent of the Market Abuse Act (implemented by Liechtenstein as a result of the EU Market Abuse Directive) has introduced further refinements to the sharing of client information regarding market-abuse offenses. The Market Abuse Act still requires the FMA to issue an order to the regulated entity regarding the proposed information sharing, but only one appeal is available directly to the Superior Administrative Court, which can only be exercised within 14 days of the FMA order. Further, the statute requires the appeal to be conducted rapidly. The only statutory grounds for refusing requests are those permitted under the EU directive, and which appear in equivalent legislation of other EU countries. Liechtenstein took the EU directive one step further and extended this statutory right to competent authorities in non-EEA member states. The only additional conditions that must be fulfilled by these other authorities is that the information must only be used for market abuse matters and must be given equivalent confidentiality to that applied by the FMA, but may be disclosed as required for a public prosecution of a market-abuse offense. In that context, the information may be passed to a third-party regulator in the foreign jurisdiction without the specific prior permission of the FMA. All in all, the Liechtenstein regime for sharing information, including the right to appeal, is fully in line with the current IOSCO standards, in particular the IOSCO MMoU.

61. In order to enhance consistency and efficiency, the FMA is discussing entering into information-sharing arrangements with the Swiss and Austrian authorities and has designated personnel to handle all information requests. The FMA has the power to enter into information-sharing agreements with foreign counterparts, but is not yet a party to an agreement. Although a lack of formal agreement is not necessarily an impediment to sharing information; it can be helpful as each request would not have to be evaluated individually.

62. With the introduction of the MLA Act in 2000 the mutual legal assistance situation resulted in more expedient responses, which, in part, reflected heightened pressures following the 2000 listing of Liechtenstein as a noncooperative country. The MLA request can, however, still result in lengthy procedures, particularly due to the possibility to take the case to the Constitutional Court, even after it has passed all three lower courts of instance. All information can be shared, including confidential, and deposited on the basis of a court order. The refusal grounds are not excessive and universally accepted, except for the fiscal exception that is still too extensively interpreted, also in the money laundering context. However, an amendment has come into force on July 27, 2007 to exclude VAT fraud from the fiscal exemption. The statistical data show that MLA requests usually receive an effective and quite extensive response.

63. The commitment to international cooperation by the FIU is evident. Refusals to cooperate are justified by legal prohibitions, particularly the exclusive fiscal nature and purpose of the request. The FIU has broad power to query relevant information from nonpublic sources, even if, in the strict sense, the international standards do not expressly impose access to financial information at the request of a foreign FIU. The FIU takes a broad view on the issue and has already shown its willingness to cooperate also in this respect.