Billionaire Tax Haven Liechtenstein Loses on Bank ReformsDavid de Jong and Robert LaFranco
Liechtenstein, a principality once fabled for its banking secrecy laws, is losing its perch as one of the world’s top tax havens for the richest people on Earth.
The Alpine nation eliminated its banking secrecy laws four years ago under pressure from the U.S. and the European Union, sending clients to other jurisdictions and forcing one of Europe’s oldest banking hubs to recast its image.
“We’re not a tax haven, we’re a safe haven,” said Mario Gassner, chief executive officer of Liechtenstein’s Financial Market Authority, from his office on Landstrasse, the main street that cuts through the country’s capital city of Vaduz. “In the past, clients came to Liechtenstein to bring their money. Since 2008, our financial intermediaries have had to go to the clients.”
The European nation, which is one-20th the size of Rhode Island, remains a place favored by billionaires to stash the holding companies and investment entities that control their assets.
IKEA founder Ingvar Kamprad, the world’s fifth-richest person, according to the Bloomberg Billionaires Index, controls the company’s intellectual property rights through a Liechtenstein foundation. The 87-year-old has a net worth of $54.6 billion.
Margarita Louis-Dreyfus, chairman of Amsterdam-based food trader Louis Dreyfus Holding, the world’s largest cotton and rice dealer, owns 65 percent of the company through her family’s Liechtenstein-based holding company Akira. She has a $5.9 billion net worth.
Iris Fontbona, the matriarch of Chile’s richest family, controls their $15.7 billion copper fortune through holding companies overseen by several Liechtenstein-based foundations.
A small part of the $15.2 billion fortune controlled by Texas billionaire Elaine T. Marshall, 70, is based in Liechtenstein, where her late husband, E. Pierce Marshall, started a foundation for their grandchildren, according to his will. She controls almost 15 percent of Koch Industries Inc., the second-largest closely held company in the U.S.
A global shift in the movement of capital and the laws that govern it has followed the crackdown on financial secrecy. Assets under management at Western Europe’s private banks and offshore structures have declined by 2 percent since 2008, while Asia’s assets have grown about 15 percent to $8 trillion, according to a 2012 report by consultancy McKinsey & Co.
The Tax Justice Network, a U.K.-based organization that campaigns for transparency in the financial system, said wealthy individuals were hiding as much as $32 trillion offshore at the end of 2010. Since 2001, assets under management in Singapore, the heart of Asia’s private banking industry, have quintupled to S$1.4 trillion ($1.1 trillion), according to figures from the Monetary Authority of Singapore.
Singapore is now following Liechtenstein’s lead, and will make laundering of profits from tax evasion a crime under a law taking effect July 1.
“There are plenty of Europeans -- Germans for example -- who a number of years ago shifted money that was undeclared to Singapore and now have a major problem given the rules that are coming into effect this July,” Philip Marcovici, an independent Hong Kong-based tax lawyer and board member of Vaduz-based wealth adviser Kaiser Partner Group, said in a telephone interview.
Governments are hoping for a piece of what the European Commission estimates is 1 trillion euros ($1.3 trillion) of lost tax revenue as many nations struggle to narrow budget deficits. In April, the European Union moved closer to an agreement that would clamp down on tax evasion by sharing bank details across borders, as Luxembourg and Austria became the last countries in the 27-nation region to give up blocking the efforts.
Luxembourg Prime Minister Jean-Claude Juncker also said the country would end its bank secrecy policy in 2015.
Countries are also responding to the implementation of the U.S. anti-tax-evasion law, the Foreign Account Tax Compliance Act, or Fatca, which took effect Jan. 1. The legislation requires financial institutions based outside the U.S. to obtain and report information about income and interest payments accrued to the accounts of American clients.
More than a decade ago, Liechtenstein and 34 other countries were branded by the Organization for Economic Cooperation and Development as being uncooperative tax havens. Faced with a need for revenue following the 2008 global financial crisis, governments of the major economic powers were no longer comfortable with the kind of hands-off banking provided by the principality and began to demand transparency, said Katja Gey, director of Liechtenstein’s Office for Financial Affairs.
Yielding to the pressure in 2009, the country eliminated its banking secrecy laws. The 2008 financial crisis had further damaged Liechtenstein’s economy, cutting assets under management at the principality’s banks from 171 billion Swiss francs ($141 billion) in 2007 to 117 billion francs ($125 billion) in 2011, according to the Liechtenstein Bankers Association.
The nation’s trust business -- which amounts to 70 percent of revenue for Liechtenstein’s financial services industry --has shrunk by 30 to 35 percent since 2008, according to Clemens Laternser, managing director of the Liechtenstein Association of Professional Trustees.
Liechtenstein, whose 36,000 residents enjoy the world’s second-highest per-capita income, after Monaco’s, was unaccustomed to such a downturn.
“There were some years in which the financial industry in Liechtenstein didn’t really know where they were heading to,” Laternser said in a telephone interview from his office in Vaduz. “This insecurity made people leave.”
Tethered to the Swiss currency and boasting stable banking and judicial systems, Liechtenstein allows for the rapid creation of foundations and trusts that are controlled by boards and professional trustees and are owned by unidentified individuals or families.
Liechtenstein was further encouraged to change its stance on client secrecy after data was stolen from its largest bank, LGT Group, which is owned by the principality’s ruling family. The data was used by Germany to prosecute tax evaders in 2008. Former Deutsche Post AG Chief Executive Officer Klaus Zumwinkel was convicted of tax evasion and received a two-year suspended prison sentence and a penalty of 1 million euros ($1.25 million).
Liechtenstein agreed in March 2009 to meet international standards to avoid being branded again as an uncooperative tax haven by the OECD. In the same year, the country signed a five-year tax disclosure agreement with the U.K. that allows British citizens with unpaid taxes linked to investments or assets in Liechtenstein to settle their obligations under a special transitional arrangement that exempts them from prosecution in the U.K. for noncriminal acts. It now has 35 information sharing agreements with other nations.
Gey likened the country’s new openness to builders in the 1970s who had used asbestos and were castigated for spreading a health risk.
“You might lose some business in the short-term, but if you don’t adapt to the new rules, you will not be competitive anymore,” she said in an interview in her Vaduz office.
Liechtenstein’s foundations are now required to have on site all information related to the beneficial account owners, regardless of where the assets are held, according to Gey.
Not every tax haven is being as compliant as Liechtenstein. Neighboring Switzerland, the world’s largest offshore banking center, has so far resisted a tax evasion settlement or an agreement with the U.S. on Fatca.
The U.S. Justice Department has been investigating at least 11 Swiss financial firms suspected of helping Americans hide money from the U.S. Internal Revenue Service.
The U.S. began a crackdown on Swiss banking secrecy in 2008, when the IRS issued a summons for information from UBS AG, Switzerland’s largest bank. UBS had to pay a $780 million fine and hand over details on 4,700 accounts held by U.S. citizens in 2009 to settle proceedings that could have led to the loss of the bank’s operating license in the U.S.
Wegelin & Co., the oldest Swiss private bank, pleaded guilty in Manhattan federal court in January of conspiring to help hide more than $1.2 billion in assets from the IRS, while opening undeclared accounts for at least 70 U.S. taxpayers who were former UBS clients. The bank, which paid $74 million to resolve the investigation, closed its doors after 272 years.
“The Swiss made too much easy money from this business for too many years,” said Marcovici. “They’re like a dying man grasping for its last breath.”