A Mighty Fortress Is My Tax Haven
Prince Hans-Adam II of Liechtenstein rules by a single guiding principle. "We have to guarantee a sphere of privacy," he says, sitting in a 12th century stone castle fortified with ramparts and a moat designed to keep out hostile invaders. That guarantee has cultivated a secretive financial services industry and a flourishing tax haven for the world's superrich. It has also been a boon to his own family's LGT Bank, which with $29 billion in assets is by far the largest bank in Liechtenstein.
But trouble has come to the castle. A report leaked to the press from the German intelligence service last November singled out Liechtenstein as a money-laundering center for all the usual suspects, from the Italian mafia to Russian gangs to Latin American drug cartels. The report has discredited the country's judicial system and cast a shadow on its 13 banks, which manage some $70 billion in assets. Now the prince is being forced to tighten bank controls to avoid incurring international sanctions.
BLACKLIST? Pressure is building up fast on this tiny nation of 30,000 to clean up its act. By June 22, a task force from the Organization for Economic Cooperation & Development will decide whether to place Liechtenstein on a blacklist of countries with lax banking supervision and a poor record of cooperating with authorities in other countries. The OECD argues that tax havens such as Liechtenstein contribute to financial crises in emerging markets by providing a refuge for the ill-gotten gains of dictators and organized criminals. If the country is blacklisted, the European Union and the U.S. could impose crippling sanctions on companies that do business there.
The prince has lost no time focusing on the OECD's concerns. The principality's legislature is pushing to strengthen laws on banking supervision, money laundering, and cooperation with foreign police. The prince also wants a team of detectives and a full-time prosecutor to deal with white-collar crime. "We are going to have the strictest laws in the world," he promises.
But the scandal just seems to grow. In an effort to clear Liechtenstein's reputation, the prince recently called in Kurt Spitzer, chief prosecutor for the Innsbruck area of Austria, and vested him with full investigative powers. Spitzer kicked off a grueling investigation that led to the arrest on May 13 of Parliament member Gabriel Marxer on suspicion of money laundering and fraud. Seven of his associates, including the deputy prime minister's brother, were arrested on similar charges. Now Chief District Court Judge Benedikt Marxer, Gabriel's brother, is under investigation for allegedly delaying an earlier attempt to prosecute the defendants. The judge and the defendants have denied any wrongdoing.
"A MAGGOT." Fresh allegations surface in the local press almost daily. "There are indications of links with cocaine cartels, there are indications of links with the Russian mafia," Spitzer said at a press conference in April. In response, government officials point out that Spitzer has found no evidence to support German intelligence's claim of a vast conspiracy involving the entire Liechtenstein establishment.
No fundamental changes to the banking system are in store, though. That means the anonymous bank accounts, trusts, and foundations are here to stay. So are the 80,000 registered holding companies that enjoy a low 1% tax rate and have no more than a mailbox in the principality. But if only superficial changes are made, Liechtenstein could invite more scrutiny from the European Union, which is eager to crack down on tax dodgers. In that vein, German Finance Minister Hans Eichel has called Liechtenstein "a maggot."
The prince has little use for such hyperbole. While admitting that he was surprised by the cases uncovered by Spitzer, he dismisses them as "just exceptions." He remains convinced that Liechtenstein's financial sector is generally above-board and that it offers a healthy alternative to his neighbors' tax regimes. Indeed, most of the anonymous trusts and foundations registered in Liechtenstein are probably owned by legitimate companies and individuals seeking tax relief. Liechtenstein's top tax bracket of 18% easily lures in wealthy Germans and French who pay rates of 50% and above.
It's a lucrative industry, and the prince needs to do all he can to protect it. But if suspicions of harboring dirty money prove true, Hans-Adam II will need more than a moat and wall to protect his principality's integrity.