Back Matter

Appendix I. Status of Implementation of the 2002 Recommendations

article image
article image
article image

Appendix II. Report on Observance of Standards and Codes (ROSC)

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

Prepared by the Legal Department

Approved by Sean Hagan

A. Introduction

64. This Report on the Observance of Standards and Codes (ROSC) for the FATF 40 Recommendations for Anti-Money Laundering (AML) and 9 Special Recommendations for Combating the Financing of Terrorism (CFT) was prepared by staff of the IMF.9 The report provides a summary of the AML/CFT measures in place in Liechtenstein and of the level of compliance with the FATF Recommendations, and contains recommendations on how the system could be strengthened. The assessment was conducted using the 2004 Methodology and is based on the information available at the time it was completed on April 4, 2007. The Detailed Assessment Report on which this ROSC is based has been agreed with the Liechtenstein authorities and adopted at the MONEYVAL plenary, September 10–14, 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.

B. Key Findings

65. The financial sector in Liechtenstein provides primarily wealth-management services, including banking, trust, other fiduciary services, investment management, and life insurance products. There has been significant expansion in non-banking areas such as investment undertakings and insurance. Around 90 percent of financial services business is provided to nonresidents, many attracted by access to discrete and flexible legal structures, strict bank secrecy, and favorable tax arrangements, within a stable and well-regulated environment.

66. Due to the financial and corporate services provided, Liechtenstein’s financial sector creates a particular money laundering (ML) risk against which the authorities and private sector apply risk-based mitigating measures. Minimizing the risk of abuse of corporate vehicles and related products is an ongoing challenge, as is the identification of the beneficial owners of the underlying assets or legal persons or arrangements. The vulnerability is mainly in the layering phase of ML, with no particular vulnerability noted to terrorist financing (FT).

67. Liechtenstein was listed by the FATF as part of its initial review of noncooperative countries and territories (NCCTs) in 2000 but was delisted in 2001. The authorities have since made significant progress in moving towards compliance with the FATF Recommendations, as already noted in the IMF’s AML/CFT assessment of 2002 and as evidenced by the subsequent major legislative amendments and institutional restructuring.

68. Both ML and FT are criminalized broadly (though not fully) in line with the international standard. There is no criminal liability of corporate entities. The quality of its analysis and output indicates that the Financial Intelligence Unit (FIU) makes effective use of the information it receives. However, the effectiveness of the reporting system could be improved, including by discontinuing the requirement for automatic freezing of assets for five days following filing of suspicious activity reports (SARs).

69. Investigative powers available to the law enforcement authorities are comprehensive enough to enable them to conduct serious investigations in an effective way. However, the number of investigations and prosecutions resulting from the files forwarded by the FIU appears low. There have been consequent convictions for ML or a predicate offense, though not in Liechtenstein. The Liechtenstein prosecutors consider it more effective to refer cases to the jurisdictions where the main criminal activity is alleged to have taken place and then provide strong support to the resultant prosecution.

70. Financial institutions and relevant designated nonfinancial businesses and professions (DNFBPs) are supervised by the Financial Market Authority (FMA), which reports directly to Parliament. The AML/CFT law (Due Diligence Act–DDA) and the Due Diligence Ordinance (DDO) provide the main legal basis for the AML/CFT preventive measures. Some doubt remains as to whether the scope of AML/CFT coverage is sufficiently wide. The DDA and DDO provide a broad framework for customer due diligence (CDD), though fall short of the international standard on some substantive issues and a range of technical points. This reflects the fact that, similar to many other European Economic Area member states, Liechtenstein is in the process of implementing the Third EU ML Directive (2005/60/EC) by 2008, which provides an opportunity to address the identified deficiencies.

71. CDD requirements are based around preparing and maintaining a customer profile, including beneficial ownership, source of funds, and purpose of the relationship. Discussions with auditors, who are contracted by the FMA to conduct AML/CFT on-site supervision, indicate that levels of compliance have improved significantly, although not evenly across all institution categories. The law allows excessive discretion in identifying high-risk customers and beneficial owners, and there is no explicit requirement for enhanced due diligence.

72. National cooperation on AML/CFT is effective, and Liechtenstein’s ability and willingness to cooperate internationally has improved strongly. However, the legal basis for sharing of information with foreign supervisors needs to be broadened and strengthened.

C. Legal Systems and Related Institutional Measures

73. Liechtenstein’s crime rate is low. The major criminal activities identified as predicate offenses for ML are economic offenses, in particular fraud, criminal breach of trust, asset misappropriation, embezzlement and fraudulent bankruptcy, corruption, and bribery.

74. ML is criminalized broadly in line with the international standard, but environmental crimes, smuggling, forgery, market manipulation, and fiscal offenses (including serious fiscal fraud) are not predicate offenses for ML. Although a conviction for a predicate offense is not required, the level of proof needed to determine that proceeds are illicit remains unclear. Liechtenstein does not yet have any jurisprudence on autonomous ML. Self-laundering is partially criminalized. Apart from conspiracy to commit ML, all ancillary offenses are criminalized. Intent may be inferred from objective factual circumstances. Criminal liability does not extend to legal persons. While FT is criminalized, the definition of the offense and, in particular of “terrorist organization” should be brought in line fully with the international standard and the financing of individual terrorists should be criminalized. There have been no prosecutions or convictions for FT.

75. Liechtenstein does not have a specific disclosure or declaration system to detect the physical cross-border transportation of currency or bearer negotiable instruments. Agreement first needs to be reached with Switzerland, as the two countries operate in a customs union.

76. With regard to seizure and confiscation, besides the conviction-based criminal forfeiture, the Liechtenstein criminal procedure also provides for the possibility of an in rem (object) forfeiture which results in an effective regime. The system focuses particularly on asset recovery, which is widely used. Confiscation of all criminal proceeds, the product of the crime, the (intended) instrumentalities, and equivalent value is broadly covered. However, in autonomous ML offenses, criminal confiscation of the assets is not formally covered, and confiscation of (intended) instrumentalities is seriously restricted. The seizure regime is similar to the confiscation system. There are appropriate legal means for tracing criminal assets or proceeds, including access to confidential account information. However, there are no overall statistics available on seizures and confiscations.

77. The freezing of terrorist assets under UNSCR 1267 is adequately addressed. There is no domestic terrorist list, but action has been taken based on foreign lists. There is no specific procedure outside that for UNSCR 1267, although the general legal processes are available.

78. The Liechtenstein FIU is an administrative and functionally-independent unit which functions effectively and produces high-quality reports. It has legal powers to collect additional information from the disclosing entity, but the powers to obtain such information from other DDA reporting entities are open to legal question. It has been successful in raising awareness and has established a relationship of trust with the reporting entities.

79. Law enforcement in ML and FT cases rests with the Public Prosecutor and the national police and with the investigative judges who have the power to impose coercive measures. The legal framework is comprehensive enough to enable serious investigations and effective prosecutions. However, ML-related investigations and proceedings are mostly initiated by mutual legal assistance requests, as there is a general tendency to transfer the cases to the authorities of the jurisdiction where the predicate offense occurred. Although not without foundation, this practice does keep the judiciary from developing its own experience and jurisprudence in stand-alone ML prosecutions.

D. Preventive Measures—Financial Institutions

80. AML/CFT preventive measures are defined in the DDA, the requirements of which are expanded in secondary legislation in the DDO. The DDA was substantially updated in 2004 with the aim of transposing the revised FATF Recommendations and the Second EU ML Directive (2001/97/EC). The DDA provides for due diligence to be completed by legal and natural persons when conducting financial transactions on a professional basis. All financial institutions and, in practice, all FATF-defined transactions are covered.

81. Liechtenstein has adopted a risk-based approach based on creating and keeping updated a profile for each long-term customer. The profile includes notably beneficial ownership information, source of funds, and purpose of the relationship. Detection of suspicious activities is based on deviation from the profile on the basis of risk criteria. However, the legal provisions for the risk-based system may give excessive discretion and do not fully comply with a number of specific criteria of the FATF Recommendations.

82. Provisions regarding CDD are broadly in line with the international standard but need to be strengthened further in some areas. The DDA and the DDO grant some exemptions from identification that are inconsistent with the FATF standard. The requirements for identification of beneficial owners, as well as verification of identity, need to be broadened. Financial institutions may rely on domestic and foreign intermediaries to provide them with customer identification information and documents, but also, contrary to the FATF standard, to conduct ongoing monitoring of customers and transactions. Moreover, they can avail of legal protection from responsibility for deficiencies in CDD work of their intermediaries.

83. The DDA and DDO provide only broad instructions for determining high-risk customers, for complex, unusual large transactions or unusual patterns of transactions, or those from countries that do not or inadequately apply the FATF Recommendations, as well as for defining specific due diligence for politically-exposed persons (PEPs) or respondent banks. Records, which have to be maintained for at least 10 years, should be sufficient to permit reconstruction of individual transactions and provide evidence for prosecution. AML/CFT requirements for foreign branches and subsidiaries need to be strengthened.

84. The FMA, which is an independent authority, is an integrated supervisor in charge of prudential and AML/CFT supervision. All financial institutions are licensed by the FMA. The FMA has developed and implements effectively a broad range of AML/CFT preventive measures. Annual on-site due diligence examinations are carried out by external auditors under mandate of the FMA. A greater involvement of FMA staff in on-site inspection work, requiring additional resources, could improve overall effectiveness.

85. Financial institutions have defined internal instructions, implemented training programs for their staff, and designated managers responsible for compliance with the AML/CFT law and regulations. Auditors indicated that overall compliance has improved significantly, although not evenly across all categories of reporting institutions.

86. The scope of available criminal sanctions is broad and the FMA refers cases in practice to the Prosecutor. However, the proportionality and effectiveness of the sanction system are restricted by the current narrow scope of available administrative sanctions.

87. While the quality of SARs received by the FIU is high, the overall effectiveness of the reporting system could be improved. A number of factors, notably the automatic freezing for five days of funds related to a filed report, appear to be suppressing reporting to the FIU. The reporting obligation needs to be amended to cover attempted occasional transactions and all terrorist-financing cases. Protection for reporting in good faith should be broadened. The prohibition against tipping-off, currently restricted to 20 days, needs to be made unlimited in time, as also recommended in the 2002 assessment.

88. The requirements (and their implementation) for transmitting data with cross-border wire transfers need to be brought into line with the international standard. The authorities stated that measures will be applied following their adoption of EC Regulation 1781/2006.

E. Preventive Measures—Designated Non-Financial Businesses and Professions

89. Liechtenstein’s DNFBPs are subject to the obligations of the DDA and supervised by the FMA in generally the same manner as are financial institutions. In particular, the very active Trust and Company Service Providers (TCSP) sector has been brought into the AML/CFT regime. Activities covered under the DDA include both the formation of a legal entity that is not commercially active in the domiciliary state and acting as an organ of such an entity, and anyone performing such activities on a professional basis must conduct CDD, file SARs, and have appropriate internal controls. Due diligence inspections for DNFBPs are conducted by auditors designated by the FMA once every three years.

90. As the AML/CFT legal framework for TCSPs is the same as for financial institutions, most of the general strengths and weaknesses of the preventive measures as noted above also apply to them. The most critical TCSP-specific issue is the exemption from full CDD requirements for work on behalf of companies that are commercially active in the state in which they are domiciled, as the FATF standard does not provide for such an exemption. Given that TCSPs routinely set up companies in many foreign jurisdictions, the exemption could be very substantial and difficult to administer. In practice, the preventive measures are usually followed by the TCSPs despite the available exemption.

91. Lawyers, when not acting as TCSPs, are covered by the DDA in performing financial “gatekeeper” functions as designated by the FATF standard. They enjoy appropriate legal privilege against reporting when representing clients in court proceedings. Although auditors are similarly protected, they are not licensed to manage money or accounts for clients.

92. There are currently no casinos, but if licenses are granted in the future they will be required to identify clients at the door and report suspicious activities. Real estate agents must conduct CDD and report suspicions concerning foreign transactions, but not for the purchase of Liechtenstein properties, which need approval of a government agency. High-value goods dealers, including in precious metals and stones, are covered for cash transactions above CHF25,000, which are rare.

F. Legal Persons and Arrangements & Non-Profit Organizations

93. Liechtenstein’s laws governing legal persons and arrangements are highly liberal and offer many different forms of companies and legal arrangements, including establishments (Anstalten), foundations (Stiftungen) and common-law style trusts. Most legal provisions are not mandatory and may be changed through founding deed or statute, allowing for any legal entity/arrangement to be custom tailored to the parties’ needs. It is estimated that 90 percent of all companies registered in Liechtenstein are not commercially active.

94. Liechtenstein relies on its TCSPs to obtain, verify, and retain records of the beneficial ownership and control of legal persons. All legal entities and arrangements that are not commercially active have to have at least one Liechtenstein director/trustee and provide the Office of Land and Public Registration (GBOERA) with the name and address of the relevant TCSP. The GBOERA fulfils an important role in allowing the FIU and FMA to link an entity/arrangement with a specific TCSP and thus locate beneficial ownership information.

95. TCSPs must obtain from the contracting party a written statement identifying the beneficial owner. Although the law does not explicitly require TCSPs to verify such information, it appears that they usually do so. The obligation to obtain beneficial ownership information generally covers only persons who hold economic rights to a specific legal entity or arrangement but not curators, protectors, or designated third parties controlling a structure.

96. For commercially-active companies, no formal measures are in place to ensure that beneficial ownership information is obtained, verified and maintained, although it appears that such information is generally obtained in practice. Nominee directors, nominee shareholders, protectors/collators and letter of wishes are permitted under Liechtenstein law and frequently used in relation to trusts and foundations.

97. Liechtenstein should conduct a full review of its laws concerning Non-Profit Organizations (NPOs) and conduct fuller outreach on CFT issues to this sector.

G. National and International Cooperation

98. National cooperation between the authorities on AML/CFT matters was found to be effective, and Liechtenstein’s ability and willingness to cooperate internationally and share available information has improved strongly. However, the legal basis for sharing of information with foreign supervisors needs to be strengthened as it currently relies on Court decisions to overrule the legislative prohibitions. These Court decisions are related to the Banking Act and it is not clear whether they could extend also to all financial institutions and DNFBPs. Moreover, a right of appeal could result in delays in the provision of information.

99. The FIU is active in international cooperation and may exchange information and otherwise cooperate with any counterpart financial intelligence unit abroad. In so doing, the FIU can exercise all the powers vested in it under the domestic law.

100. The legal framework of the mutual legal assistance and extradition system is basically sound and the authorities cooperate to bring proceedings to a satisfactory result. The significant scope for appeal is a delaying factor that is used in some cases. The fiscal exception is also extensively interpreted: serious and organized fraud by way of fiscal means still profits from the amnesty Liechtenstein provides for fiscal offenses.10

Table 1.

Prioritized Key Recommendations to Improve the AML/CFT System

article image
article image
article image
article image
Compliant (C): the Recommendation is fully observed with respect to all essential criteria.Largely compliant (LC): there are only minor shortcomings, with a large majority of the essential criteria being fully met.Partially compliant (PC): the country has taken some substantive action and complies with some of the essential criteria.Non-compliant (NC): there are major shortcomings, with a large majority of the essential criteria not being met.Not applicable (NA): a requirement or part of a requirement does not apply, due to the structural, legal or institutional features of a country.

H. Authorities’ Response

The Liechtenstein authorities would like to thank the evaluators for their professional work and the huge amount of time they have invested in Liechtenstein’s assessment. Their findings and impressions are reflected in a very comprehensive and detailed report. The valuable discussions and feedback with respect to the Liechtenstein AML/CFT system will help Liechtenstein to further improve its AML/CFT system.

Liechtenstein was assessed for the first time by the IMF in 2002. The IMF observed a high level of compliance with international standards for anti-money laundering and combating the financing of terrorism, particularly the standards issued by the FATF. Since then, Liechtenstein has continued to make serious and significant efforts to strengthen the regime to prevent money laundering and terrorist financing. Various laws have been amended or even totally revised, like for example the Due Diligence Act (DDA). The DDA applies to every financial institution and DNFBP in Liechtenstein. The Financial Market Authority is the single regulator that is responsible to supervise every financial institution and DNFBP.

Both, money laundering and the financing of terrorism are criminalized and to a large extent in line with international standards. Liechtenstein has set up a very proactive reporting system in the last years, which has led to the detection of various high profile cases in the fight against money laundering and the financing of terrorism. In addition, this proactive approach has made it possible in the last years to set up close and mutually beneficial relationships with foreign authorities and international organizations in the AML/CFT sector.

Liechtenstein will continue to further strengthen its established and successful AML/CFT system based on the findings of this report. Some of the recent recommendations have already been implemented, i.e. mutual legal assistance in cases of VAT tax fraud as per July 27, 2007, or are in progress. The EU Directive 2005/60/EC (Third EU AML/CFT-Directive) and the Directive 2006/70/EC (laying down implementing measures for Directive 2005/60/EC) are planned to be implemented in 2008. Thus, many of the current recommendations will be met. In addition, the implementation of the EU Regulation No. 1781/2006 on information on the payer accompanying transfers of funds (with regard to wire-transfer) is going to lead to full compliance with SR VII. Furthermore, the implementation of a disclosure system in order to fulfill the required measures of SR IX concerning physical cross-border transportation of currency and bearer negotiable instruments is—due to the customs union in collaboration with Switzerland—already in progress.

Liechtenstein will pursue the chosen way of strengthening its AML/CFT system and strive thereby for a sustainable implementation of international standards.

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.

2

See the Staff Paper Offshore Financial Centers, The Role of the IMF for a description of a Module 2 (http://www.imf.org/external/np/mae/oshore/2000/eng/role.htm); and Public Information Notice No.03/138 for a summary of the Executive Board discussion (http://www.imf.org/external/np/sec/pn/2003/pn03138.htm).

3

The liquidation is a voluntary judicial process that is also subject to the FMA’s monitoring. No depositors/clients suffered losses in the course of the liquidation.

4

The largest Liechtenstein company, CapitalLaben, has recently agreed to merge with Swiss Life.

5

The earlier report (Volumes 1 and 2) are available on the IMF’s website at Assessment of the Supervision and Regulation of the Financial Sector Volume I—Review of Financial Sector Regulation and Supervision and Assessment of the Supervision and Regulation of the Financial Sector Volume II—Detailed Assessment of Observance of Standards and Codes.

6

In light of the few material concerns expressed in the 2002 IAIS Core Principles Assessment, the mission team did not undertake an update of the 2002 assessment during this visit.

7

The 2002 assessment noted that the supervisor had conducted a few limited-scope onsite inspections; however, the onsite inspections had lacked comprehensive coverage. The authorities indicated that, depending on available staff, the supervisor would perform systematic onsite inspections for 2003.

8

The four principles were (a) confidentiality—the requesting authority has to be subject to equivalent confidentiality requirements; (b) specialty—the information can only be used for the supervisory purpose indicated; (c) Long-arm—the information may not be forwarded to other authorities without consent; and (d) proportionality—no information may be provided if the foreign request is minor, made in error, or appears to be a ‘fishing expedition,’ etc.

9

The evaluation team consisted of: Terence Donovan, Paul Ashin, Gabriele Dunker, and Alain Vedrenne-Lacombe, IMF Legal Department, and Boudewijn Verhelst, consultant. Mr. Verhelst also acted as assessor for MONEYVAL to address the provisions of relevant EU Directives outside the Fund’s AML/CFT mandate.

10

A legislative amendment subsequent to the assessment partially remedied this situation.