In his essay for finews.first, Bruno Capone considers the question of whether the channeling of substantial funds into the hands of few «insiders» practiced in Liechtenstein is acceptable in a global context.
This article is published on finews.first, a forum for authors specialized in economic and financial topics.
Thanks to its almost untouchable banking secrecy, the Principality of Liechtenstein has for decades been one of the main destinations for assets that are supposed to be hidden from the tax and currency laws of their countries of origin. The economic and financial system of the Principality of Liechtenstein has long been able to depend on incredible sums of money in its banks' accounts. Specializing in asset management, the Liechtenstein system attracts an immensely wealthy clientele from all over the world.
However, the international financial world and national taxation systems have changed completely over the last decade. The international environment has evolved. As a result, the Principality of Liechtenstein has had to grudgingly adapt its legal system and implement international standards (for greater transparency purposes). For the most part, the exchange of financial and tax data and the FATCA and CRS procedures appear to have been adhered to.
«This is a perceptible market downturn for the asset management sector»
Nevertheless, on closer observation, one sees that the legal regulations were implemented in a «special» way. It is possible, for example, that a legal entity such as a Trust may or may not qualify itself as a «Financial Entity». This enables the legal entity itself to implement and manage the reporting system as it wishes. This also means that professional financial intermediaries can be bypassed.
It is clear that the exchange of financial and tax data has deprived the Principality of Liechtenstein of a «competitive advantage». The withdrawal or reduction of Trusts and Foundations from the Principality of Liechtenstein has caused an outflow of capital. The «Basler Zeitung» reported that there were over 50,000 Trusts in 2008, with only about 16,000 remaining at the end of 2016.1
«The Principality of Liechtenstein still holds considerable assets held in Trusts and Foundation structures»
This is a perceptible market downturn for the asset management sector – consisting of Trustees, Law Firms and the Banking System. It seems, however, that the resulting economic pressure has led one or another Trustee to touch the assets entrusted to him, as numerous cases in recent history have shown.
International Conventions on Private Law, Succession and Trusts were formally implemented by the Law of 19 September 1996 (IPRG). Articles 1 to 5 and 29 to 30 of the IPRG provide for the direct and «ex officio» application of the legislation of the Contracting State where the Trust or Foundation Founder is domiciled. Although this Law has been in force since 1996, it is in fact often (almost systematically) disregarded.
The Principality of Liechtenstein still holds considerable assets held in Trusts and Foundation structures. These structures were often set up by foreign Founders who, for (often illusory) reasons of succession planning, transfer large parts of their estate to Liechtenstein.
«The protective provisions of Trust Laws of other countries are simply ignored»
In the event of conflicts concerning the lawful establishment of Trusts and Foundations, the Courts of the Principality of Liechtenstein often fail to apply the «ex-officio» principle of the legal systems of other states, where the Founder is domiciled. The possible nullity of a Trust (due to a violation of the rules of the relevant competent State party to the 1985 Hague Trust Convention) is not examined.
The protective provisions of Trust Laws of other countries are simply ignored. The entire local Banking System, which continues to maintain current account or asset management relationships with (actually null and void) Trusts and Foundations, can thus continue to earn money with confidence.
«Experts from the Anglo-Saxon legal area only shake their heads here»
The same applies to Trustees who ignore or refuse to see the question of the possible nullity of a Trust. The nullity of a Trust (with value up in the millions) would only benefit the testamentary heirs, and often correspond to the actual last will and testament of the Founder. However, the local economy, consisting of a well-oiled machine of Trustees, Law Firms, Financial Advisors, and Banks, would then tremble for commissions and consultancy fees, so that in practice such considerations rarely occur.
What is particularly noteworthy (and this is almost cynical) is that in the case of criminal proceedings against a Trustee who manages a Trust or Private Foundation, the Beneficiaries of the embezzled foundation assets usually have no party status. They, therefore, lack elementary rights of inspection. Experts from the Anglo-Saxon legal area only shake their heads here.
These problems are intolerable not only from the point of view of International Private Law but also from a macroeconomic point of view. Legal vehicles, which have become autonomous, are illegally and unlawfully depriving the owners of their assets (sometimes amounting to billions). De facto the Trustees «confiscate» the assets via Trusts. As a result, from the prevented opportunities – to make a profit with the money parked in Liechtenstein and to bring it into the production cycle – not only do the legitimate owners suffer personal disadvantages, but also does the economy.
«Liechtenstein's Trust Laws only benefit local actors and not the interests of the Founders»
I wonder whether such practices, by means of which sometimes very large fortunes are diverted into the hands of a few «insiders», are still tolerable in a global economic context. It would be desirable for the Principality of Liechtenstein to finally take the priority application of the Laws of other States (in accordance with International Conventions) seriously. Liechtenstein's Trust Laws only benefit local actors and not the interests of the Founders.
Bruno Capone is the founding partner of Lextray, a law firm specializing in international trust law based in Luxembourg.