IMF Liechtenstein Anti-Money Laundering & Terrorist Financing

INTERNATIONAL MONETARY FUND LEGAL DEPARTMENT

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EXECUTIVE SUMMARY

Key Findings

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

2. By its nature, Liechtenstein’s financial sector business creates a particular money laundering risk in response to which the authorities and the financial sector firms have developed risk-based mitigating measures. Minimizing the risk of abuse of corporate vehicles and related financial services products presents an ongoing challenge, as does the identification of the natural persons who are the beneficial owners of the underlying assets or legal persons or arrangements. Therefore, Liechtenstein is vulnerable mainly in the layering phase of money laundering. No particular vulnerability to terrorist financing was identified.

3. Liechtenstein was listed by the FATF as part of its initial review of noncooperative
countries and territories in 2000 but was delisted in 2001. The authorities have made
significant progress since that time in moving towards compliance with the FATF
Recommendations, as noted in the AML/CFT assessment conducted by the IMF in 2002 as
part of the Offshore Financial Center (OFC) assessment program and as evidenced by the
subsequent major legislative amendments and institutional restructuring.

4. 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 suspicious activity reporting
system could be improved by addressing factors that may be currently suppressing the level
of reporting, including, for example, the requirement for automatic freezing of assets for five
days following filing.

5. The 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 resulting from the files forwarded by the FIU appears
low and there have been just two prosecutions for (autonomous) money laundering and no
convictions. Most of the cases in which Liechtenstein has been involved, including some
high-profile cases, have links to other jurisdictions and the Liechtenstein prosecutors
consider it more effective to refer the cases to those jurisdictions where the main criminal
activity is alleged to have taken place and then provide strong support to the resultant
prosecution. There have been consequent convictions for money laundering or a predicate
offense, though not in Liechtenstein.

6. The AML/CFT law (Due Diligence Act–DDA) was last amended in February 2006
and is elaborated by a 2005 Due Diligence Ordinance (DDO) to provide the main legal basis
for the AML/CFT preventive measures. Banks and other financial institutions and relevant
DNFBPs are supervised by the Financial Market Authority (FMA), which reports directly to Parliament. However, some doubt remains as to whether the scope of AML/CFT coverage is sufficiently wide to fully meet the FATF Recommendations. The DDA and DDO provide a
broad framework for customer due diligence (CDD), though their provisions fall short of the
international standard on some substantive issues and a range of technical points. This
reflects the fact that, as in many European Economic Area (EEA) member states,
Liechtenstein plans to implement the EU Third Money Laundering Directive by 2008, during
which process the authorities will have an opportunity to address the identified deficiencies.

7. In Liechtenstein, CDD is based mainly on the obligation to prepare and maintain a
customer profile, including beneficial ownership information, source of funds, and purpose
of the relationship. Discussions with auditors, who are contracted by the FMA to conduct
most of the AML/CFT on-site supervision, indicate that levels of compliance have improved
significantly, although not evenly across all categories of reporting institutions. In identifying
high-risk customers and beneficial owners, excessive discretion is provided in the law to
financial institutions and there is no explicit requirement for enhanced due diligence. Having
regard to the inherent risk in much of the financial service business in Liechtenstein, there is
a need for additional attention to the quality and depth of the identification of beneficial
owners and the conduct of ongoing due diligence.

Preventive Measures—Financial Institutions

17. AML/CFT preventive measures are defined in the Due Diligence Act, the
requirements of which are expanded in secondary legislation in the Due Diligence Ordinance
(DDO). The DDA was significantly revised in 2004 with the aim of transposing the revised
FATF Recommendations, as well as the EC Directive 2001/97/EC. The DDA provides for
due diligence to be completed by legal and natural persons (personal scope) when conducting
financial transactions on a professional basis (substantive scope). All financial institutions
fall under the personal scope of application and, in practice, all FATF-defined transactions
are covered under the substantive scope of application.

18. Liechtenstein has established an overall risk-based approach which requires financial
institutions to build, and keep updated a profile for each long-term customer. The profile,
which is to be completed on a risk-sensitive basis, consolidates CDD data and 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, by comparison with the FATF Recommendations, the legal provisions
may give excessive discretion to financial institutions when applying the risk-based system
and do not fully comply with a number of specific criteria of the standard. The DDA and the
DDO provide only broad instructions with regard to determining high-risk criteria for
customers, for all complex, unusual large transactions or unusual patterns of transaction, and
for transactions from countries that do not or inadequately apply the FATF
Recommendations, as well as to defining specific due diligence for PEPs or respondent
banks. Legal or regulatory requirements do not fully address the misuse of new technologies.
Identification, transaction and investigation records, which have to be maintained in
Liechtenstein for at least 10 years, should also be sufficient to permit reconstruction of
individual transactions and provide evidence for prosecution. Requirements for foreign
branches and subsidiaries related to AML/CFT need to be strengthened, particularly as
several of the Liechtenstein banks continue to expand their activities in other jurisdictions.

19. Provisions regarding CDD are broadly in line with the international standard, but,
whether conducted directly or through intermediaries, they need to be strengthened further in
some areas. The DDA and the DDO grant some exemptions to identification, and the
requirements for identification of beneficial owners, as well as verification of customers’ and
beneficial owners’ identity, need to be broadened. Financial institutions also may rely on
domestic and foreign intermediaries that introduce new business to provide them with
customer profile information and certified copies of identification documents, but also to
conduct ongoing monitoring of customers and transactions. Moreover, financial institutions
are legally protected (subject to certain conditions) from responsibility for deficiencies in
CDD conducted by their intermediaries.