## cr03289 ## Source details **Canonical URL:** [cr03289](https://www.imf.org/-/media/files/publications/ofca/english/cr03289.pdf) ## Other formats - [Markdown version](/-/media/files/publications/ofca/english/cr03289.pdf.md) - [Structured JSON version](/-/media/files/publications/ofca/english/cr03289.pdf.json) --- ### Mission and context - MAE-led mission visited Vaduz from October 28 to November 8, 2002, under Module 2 of the IMF’s Offshore Financial Centers initiative. - Assessment covered Liechtenstein’s implementation of: - Basel Core Principles (BCP) for effective banking supervision - IAIS core principles for insurance supervision - IOSCO Objectives and Principles of Securities Regulation - FATF 40+8 Recommendations for AML/CFT - AML/CFT assessment used the October 2002 final FATF-endorsed methodology. - Mission team composition included IMF staff (Michael Moore, Jennifer Elliott, Moni SenGupta), external experts (Michael Deasy, Guillaume Leroy, Ronald Ranochak, Alain Vedrenne-Lacombe), and assistant Bärbel Bernhardt. - Authorities and sector participants engaged: Due Diligence Unit (DDU), Financial Intelligence Unit (FIU), Financial Services Authority (FSA), Insurance Supervisory Authority (ISA), banks, accounting firms, lawyers, trustees, insurance representatives, law enforcement, and judiciary. ### Executive summary — main observations and institutional reform - Strengths - Strong dedication among FSA and ISA staff. - Supervision and regulation underpinned by a good foundation of modern laws and regulations derived from EEA membership. - High level of compliance with international AML/CFT standards; FATF removed Liechtenstein from its adverse list in June 2001 and ceased monitoring in June 2002. - Material weaknesses and resource constraints - FSA: inadequate resources for effective off-site supervision, analysis of auditors’ work, and regulatory reporting; inability to properly analyze financial reports and audit results and to communicate specific instructions to auditors and regulated institutions. - ISA: small staff faces heavy demands overseeing 12 life insurance firms, 4 non-life companies, and 5 reinsurance companies; growing cross-border activity and oversight of social security place heavy demands. - Institutional reform plan - Government study (January 2002) proposed integrated supervisory agency combining FSA, ISA, and DDU by 2004; creation planned for early 2005 with legislative changes to be completed in mid 2004. - Mission strongly supports timely creation of an integrated regulator and recommends implementing legislation ensure: - Clear statutory mandate - Operational independence, including sufficient funding and staffing flexibility - Authority to license and withdraw licenses, levy penalties and sanctions without government approval - Power to make legally binding rules ### Key national and financial system facts - Population: 34,000 - Area: 160 square km - Political institutions: constitutional monarchy; Diet of 25 seats elected for four years; H.S.H. Prince Hans-Adam II is Head of State. - International affiliations: customs and monetary union with Switzerland; member of EFTA, EEA, and the United Nations. - Economic structure and taxes - About 44.9 percent of the work force commutes daily from Austria or Switzerland. - Tax advantage for resident companies: 20 percent maximum. - Manufacturing: about 45 percent of GDP; services: 55 percent. - More than 40 percent of exports go to EU countries and an additional 12 percent to Switzerland. - Financial services sector employs about 2,000 people and accounts for some 30 percent of government revenues. ### Financial sector scope and statistics (selected exact figures) - Banking (end-2001 and related dates) - Number of banks: 17 - Balance sheet assets for the 17 banks: CHF 34 billion ($23 billion) - Off-balance sheet items (including derivative contracts): CHF 1.3 billion - Assets under management of banks reporting: CHF 106 billion - Year ended December 2001: nine banks made profits; six broke even or made marginal profits or losses; two recently established banks made significant losses. - Three largest banks account for almost 90 percent of bank market share. - Snapshot as of June 30, 2002 (selected items from Table 2) - Banks — Assets (million CHF): 33,156.7 - Banks — Loans (million CHF): 11,260.9 - Banks — Deposits (million CHF): 24,781.1 - Banks — Tier 1 Capital (million CHF): 4,463.2 - Banks — Net Income (million CHF): 174.5 - Banks — Return on assets (average) (annualized, in percent): 1.1 - Investment funds — Number (June 30, 2002): 81; Total assets (million CHF): 5,200.5 - Insurance (July 2002): Licensed insurance companies: 21 (12 life, 4 non-life, 5 reinsurance); Premium volume: CHF 500 million; Assets totaling: CHF 1.8 billion - Trustees (June 30, 2002): natural persons/legal entities: 79 / 276 - Memorandum items (approximate): Number of registered incorporated entities: 31,000; Number of foundations that are deposited: 51,000; Number of foundations with a commercial purpose: 2,900; Number of family purpose trusts: 1,500 - As of June 2002: - Licensed fund-management companies: 16 - Licensed investment companies: 5 - Authorized funds: 81 - Client funds under management in Liechtenstein: CHF 5.2 billion ### Regulatory architecture and supervisory resources - Legal and regulatory foundations - Banking, insurance, securities, and accounting legislation based on relevant EU Directives due to EEA membership. - Banking regulation: Law on Banks and Finance Companies 1992, as amended; Banking Ordinance 1994, as amended. - Key statutes include Persons and Companies Act 1926 (PGR Code); Law Concerning the Trust Enterprise 1928; Law on Professional Due Diligence in Financial Transactions (DDA) 1996, as amended; FIU-Law 2002; and others. - Supervisory structure and staffing (exact staff counts) - Financial Supervisory Authority (FSA): staff count: 11. - Insurance Supervisory Authority (ISA): staff: six professionals and one clerical staff including the director. - Due Diligence Unit (DDU): director, three lawyers, one clerical staff. - Financial Intelligence Unit (FIU): director, four professionals, administrative staff. - Supervisory arrangements - Dualistic system for banking and securities: FSA relies on external auditors for on-site supervision and carries out off-site supervision; auditors are paid by entities they audit. - ISA carries out more direct supervision but limited by small staff; relies on auditors and actuaries for specific reporting. ### Main findings from Basel Core Principles and IOSCO assessments - Basel Core Principles — selected findings - Legal and institutional framework consistent with EU requirements; however, inadequate staffing resources constitute a material deficiency. - At time of assessment, banking supervisory department staff complement: two persons and a part-time banking consultant (one head of FSA and one administrative assistant). - All banks had capital adequacy ratio above 15 percent; 16 were in excess of 20 percent at end-2001. - Assets: total banking assets CHF 34.3 billion; assets under management CHF 106 billion. - Recommend immediate recruitment of two banking analysts and additional resources for off-site analysis and understanding of banks’ operations. - IOSCO — selected findings - Securities activity limited; major activity is asset management for high net worth clients. - FSA screens licensing applications, reviews and approves prospectuses, supervises audits, and recommends measures to government; licenses and fines are formally granted/levied by the government (Cabinet) at FSA recommendation. - Trustees acting as asset managers operate under general trustee licenses and are largely unsupervised and inspected by the DDU; authorities should consider separate licensing for trustees acting as asset managers and enhanced supervision. ### Recommendations and Follow-Up Plan (selected highlights) - Financial Services Authority (FSA) - Clarify FSA mandate in law; constitution of the agency to be explicit. - Grant FSA authority to license and withdraw licenses, levy penalties and sanctions without government approval. - Empower FSA to make legally binding rules. - Improve transparency: more detailed annual report and a website. - Pursue medium-term establishment of an integrated financial regulator for efficiency gains. - Banking supervision - Recruit experienced staff and implement more training. - Formalize a complete set of rules addressing credit and operational risk. - Create a series of specific and gradual remedial measures. - Insurance supervision - Recruit experienced staff. - Adopt rules for assets for unit-linked policies and asset-liability management. - Implement augmented prudential reporting beginning in 2003; ISA prepared new reporting templates required in 2003. - Capital markets and asset managers - Recruit staff, expand training, consider foreign counterparts for training. - Create separate license for asset managers; grant FSA inspection power over asset managers; establish audit program for asset managers. - AML/CFT (selected) - Complete proposals to add a new provision for financing of terrorism that includes financing of planned terrorist acts and gathering or assembling of funds for a wide range of terrorist acts. - Make tipping-off prohibition permanent (not limited in time); replace automatic 10-day blocking with discretionary FIU authority to block from 48 hours up to 10 days when necessary; establish specific administrative sanctions for tipping-off violations. - Permit the same auditor to conduct the due-diligence audit and the supervisory audit (coordinated or concurrent), relying on statutory independence to ensure thoroughness. - Amend guidelines for monitoring of accounts to require special attention to single-premium life policies and buying and selling second-hand endowments. - Extend legal liability to legal entities (recommended change). - Ratify the UN Convention on the Suppression of the Financing of Terrorism (recommended). ### AML/CFT assessment — scope, findings, and recommended actions - Scope and institutional progress - Assessment covers FATF 40 Recommendations and 8 special recommendations; review based on information as of March 2003. - Major legislative achievements: enhancements to the DDA and enactment of the FIU Law; establishment of DDU (October 2001) and fully staffed, functioning FIU (in operation since March 2001). - FATF listed Liechtenstein as NCCT in June 2000; Liechtenstein implemented significant measures; FATF removed Liechtenstein from its list in June 2001 and ceased monitoring in June 2002. - Criminal justice, confiscation, and cooperation - ML criminal provisions liberalized intent requirement and permit prosecution for self-laundering. - Limitations: law does not permit prosecution for both the predicate offense and money laundering; ML criminal offense does not apply to legal entities (DDU criminal sanctions do apply to legal entities). - Confiscation and in rem forfeiture frameworks exist, including ability to execute on behalf of foreign countries via mutual legal assistance. - Recommendation to review the narrow interpretation of “fiscal offenses” to avoid limiting mutual legal assistance in serious and organized fiscal fraud. - FIU, law enforcement, and resources - FIU: fully staffed, can collect/analyze/disseminate financial intelligence and exchange information with foreign counterparts without violating secrecy; may require reporters to supplement SARs and can obtain information from filing institutions; would benefit from direct access to financial information from nonfiling institutions. - Law enforcement: national police special unit EWOK handles white-collar crime; public prosecutor responsible for ML offenses and DDA violations. - Preventive measures and sectoral implementation - DDA provides comprehensive requirements for CDD, internal controls, monitoring, SARs, record-keeping, audit, training, and designation of compliance officers; supplemented by DDEO. - Transitional provision required updating customer identification and beneficial ownership by end-2001: approximately 99 percent of accounts had updated information and the remainder has been blocked. - Banking sector shows strong implementation; insurance and trustees require additional supervisory attention and industry guidance. - FATF 40+8 selected recommended actions (drawn from Table 6) - Read fiscal offenses more narrowly to avoid rejecting MLA requests with nonfiscal aspects. - Extend criminal liability to legal entities. - Ensure limitations on prosecutions of legal entities do not hinder effective confiscation. - Increase supervisory attention to trustees and trust companies. - Enhance implementation by insurance sector and trustees; issue specific guidelines for insurance and trustees. - Abolish automatic 10-day blocking on SAR filing and replace with FIU discretionary blocking from 48 hours up to 10 days with available extensions. - Make tipping-off prohibition permanent and establish specific administrative sanctions for tipping-off violations. - Allow due-diligence and supervisory audits to be carried out by the same auditor or audit firm, coordinated or concurrent. - Ensure FIU has direct access to financial information needed to analyze SARs. ### Insurance supervision — IAIS findings and recommended action plan - Market structure and size - By end-2002: 12 life insurance companies, 4 nonlife companies, and 5 reinsurance companies incorporated in Liechtenstein. - Local market premium income: about 197 million euros at end-2001. - Liechtenstein life and reinsurance markets incorporated amounted to as much as 319 million euros in 2001. - Assets held by Liechtenstein companies: CHF 1.1 billion (direct insurance) and CHF 0.78 billion (reinsurance). - Supervisory capacity and recommendations - ISA staff: six trained people plus clerical support; on-site inspections infrequent and not comprehensive; ISA intends more frequent on-site inspections once licensing of Liechtenstein incorporated companies is finished. - Recommend increasing ISA staff to supervise insurance companies (CP 1). - Recommend adapting ALM supervision and clarifying legal framework for unit-linked products and capital redemption operations (CPs 6–9). - Develop consumer protection processes (ombudsman or internal company mechanisms) (CP 11). - Develop systems for receiving and analyzing ISA reports; implement new reporting templates beginning in 2003 to enhance ALM and solvency analysis. - Strengthen cooperation to supervise intermediaries and cross-border activities (CPs 15–17). ### Counter-Terrorism legislative package and DDA revisions - Counter-Terrorism Package - Government approved draft proposal to parliament to amend the Criminal Code, Code of Criminal Procedure, and the DDA (Counter-Terrorism Package). - Proposed new penal provisions: “Terrorist Offenses,” “Financing of Terrorism,” and “Terrorist Groups.” - Definitions: - “Terrorist Offenses”: severe sentences for specific commission of terrorist attacks. - “Financing of Terrorism”: punishes persons who gather or provide assets with intention to fund a crime classified as a terrorist offense. - “Terrorist Groups”: criminalizes organized associations of more than two persons established over a prolonged period aimed at joint commission of terrorist offenses. - Modifications include extension of domestic jurisdiction (Art. 64 StGB) to terrorist associations and financing; expansion of predicate crimes via new Art. 278 d StGB; inclusion of “Arms Brokering” in Art. 320 StGB. - Proposal circulated for consultation and discussed in parliament in June 2003. - Revision of Due Diligence Legislation (DDA / DDEO) - Due diligence legislation under revision with IMF recommendations to be considered; intended completion not later than end of 2004. - DDU to give additional attention to implementation of due diligence by trustees, trust companies, and insurances; specific provisions for those sectors to be considered in the revision. ### Authorities’ responses and subsequent developments (selected exact actions and dates) - Government decision of December 3, 2002 assured recruitment of two additional banking staff members for the FSA; one of these vacancies was filled in June 2003. - FSA organization streamlined and responsibilities defined; FSA introducing short- and long-term training and education program in 2003. - Supreme administrative court decision of May 7, 2003 confirmed that information can be shared with foreign regulators when used only within the scope of supervisory duties as described in the request; within foreign authority, access limited to persons subject to official secrecy; further disclosure requires mutual assistance procedures. - ISA prepared new reporting templates required beginning in 2003; ISA intends to perform systematic on-site inspections in 2003 depending on available staff. - Legislative process under way for integrated regulator: implementing legislation preparation underway with intent that a new law be in place in mid-2004 and integrated regulator in place by early 2005. *Source: IMF staff report CR03289.* ### Preface................................................................................................................. ### Preface ### Mission and context - The MAE-led mission visited Vaduz from October 28 to November 8, 2002, under Module 2 of the IMF’s Offshore Financial Centers initiative. - The assessment covered Liechtenstein’s implementation of four international standards: - Basel Core Principles (BCP) for effective banking supervision - IAIS core principles for insurance supervision - IOSCO Objectives and Principles of Securities Regulation - FATF 40+8 Recommendations for anti-money laundering and combating the financing of terrorism (AML/CFT) - The AML/CFT assessment used the October 2002 final FATF-endorsed methodology. ### Mission team and engagement - Mission composition: - IMF: Mr. Michael Moore (Monetary and Financial Systems Department), Ms. Jennifer Elliott (Monetary and Financial Systems Department), Ms. Moni SenGupta (Legal Department) - External experts: Mr. Michael Deasy (Central Bank of Ireland), Mr. Guillaume Leroy (private consultant, France), Mr. Ronald Ranochak (private consultant, United States), Mr. Alain Vedrenne-Lacombe (Bank of France) - Assistant: Ms. Bärbel Bernhardt (MAE) - The team held extensive discussions with regulatory agencies: Due Diligence Unit (DDU), Financial Intelligence Unit (FIU), Financial Services Authority (FSA), Insurance Supervisory Authority (ISA). - Meetings included representatives of several banks; accounting firms; lawyers; trustees; insurance industry representatives; and law enforcement and judiciary bodies. - Observed high levels of dedication and professionalism among agency staff. ### Key national facts - Population: 34,000 - Area: 160 square km - Political institutions: constitutional monarchy with a unicameral Diet of 25 seats elected for four years; H.S.H. Prince Hans-Adam II is Head of State. - International affiliations: customs and monetary union with Switzerland; member of EFTA, EEA, and the United Nations. - Legal tradition: incorporates aspects of Swiss and Austrian law; court system includes district court (Landgericht), court of appeals (Obergericht), supreme court (Oberste Gerichtshof), and a constitutional court. --- ### Executive Summary ### Scope and approach - The mission conducted detailed assessments under Module 2 of: - Basel Core Principles (BCP) - IAIS insurance core principles - IOSCO Objectives and Principles - FATF 40+8 Recommendations (AML/CFT) - Volume I contains the executive summary, financial system overview, and summary results of detailed assessments. Volume II contains the detailed assessments. ### Main observations - FSA-related assessments (BCP and IOSCO) found: - Strong dedication among FSA staff. - Supervision and regulation are underpinned by a good foundation of modern laws and regulations derived from EEA membership. - Material weakness: inadequate resources at the FSA for effective off-site supervision, analysis of auditors’ work, and regulatory reporting. - Consequence: FSA cannot properly analyze financial reports and audit results to communicate specific instructions to auditors and regulated institutions. - Remedy requires legislative action to add positions and funding for salaries, benefits, and office space. - ISA resource constraints: - ISA oversees 12 life insurance firms, 4 non-life companies, and 5 reinsurance companies. - Growing cross-border activity and ongoing oversight of social security (pension funds, health and sickness insurance, accident insurance) place heavy demands on small staff. - Mission supports ISA’s plans to augment capacity for on-site inspections and implement augmented prudential reporting beginning in 2003; additional professionals will be required. - AML/CFT: - High level of compliance with international AML/CFT standards, particularly FATF. - FATF had placed Liechtenstein on an adverse list as a “noncooperative” country in June 2000; authorities implemented significant strengthening measures. - FATF removed Liechtenstein from the list in June 2001 and ceased further monitoring in June 2002. - Institutional reform: - Government study (January 2002) proposed an integrated supervisory agency combining FSA, ISA, and DDU by 2004. - Creation of integrated agency is planned for early 2005, with legislative changes to be completed in mid 2004. - Mission strongly supports timely creation of an integrated regulator and recommends implementing legislation ensure: - Clear statutory mandate - Operational independence, including sufficient funding and staffing flexibility - Authority to license and withdraw licenses, levy penalties and sanctions without government approval - Power to make legally binding rules --- ### Table 1 — Recommendations and Follow-Up Plan (selected highlights) ### Financial Services Authority (FSA) - Observations: - General drawbacks to FSA structure and independence; mandate not clearly set out in law. - Recommendations: - Clarify FSA mandate in law; constitution of the agency to be explicit. - Grant FSA authority to license and withdraw licenses, levy penalties and sanctions without government approval. - Empower FSA to make legally binding rules. - Improve transparency: more detailed annual report and a website. - Pursue medium-term establishment of an integrated financial regulator for efficiency gains. ### Banking supervision - Observations: - Insufficient staff resources and experience for comprehensive analysis of audit reports and bank reporting; limited understanding of banks’ operations. - Auditors rely on Swiss or other practices due to legal gaps on credit and operational risk. - Remedial orders applied to banks are undefined. - Recommendations: - Recruit experienced staff and implement more training. - Formalize a complete set of rules addressing credit and operational risk. - Create a series of specific and gradual remedial measures. ### Insurance supervision - Observations: - Insufficient resources for adequate on-site reviews. - Inadequate guidance on assets for unit-linked policies and asset-liability management. - Recommendations: - Recruit experienced staff. - Adopt rules for assets for unit-linked policies and asset-liability management. ### Capital markets regulation - Observations: - Insufficient staff resources and experience for effective oversight of audits of investment funds. - Asset managers operating under general trustee licenses without proper supervision. - Recommendations: - Recruit staff, expand training, and consider foreign counterparts for training. - Create separate license for asset managers; grant FSA inspection power over asset managers; establish audit program for asset managers. ### Anti-money laundering (AML/CFT) - Observations: - Financing of terrorism not fully covered under existing legislation. - Prohibition against tipping off after SAR filing is limited to ten-day automatic blocking; automatic ten-day blocking is overly broad. - External due-diligence audits for banks are required to be separate from supervisory audits, potentially causing gaps. - No industry guidance for insurance sector to identify activities vulnerable to money laundering. - Recommendations: - Complete proposals to add a new provision for financing of terrorism that includes financing of planned terrorist acts and gathering or assembling of funds for a wide range of terrorist acts. - Make tipping-off prohibition permanent (not limited in time); replace automatic 10-day blocking with discretionary FIU authority to block from 48 hours up to 10 days when necessary; establish specific administrative sanctions for tipping-off violations. - Permit the same auditor to conduct the due-diligence audit and the supervisory audit (coordinated or concurrent), relying on statutory independence to ensure thoroughness. - Amend guidelines for monitoring of accounts to require special attention to single-premium life policies and buying and selling second-hand endowments. --- ### I. Introduction and Financial System Overview — Selected points ### Mission mandate and timing - The mission assessed Liechtenstein’s observance of financial sector supervisory standards and AML/CFT arrangements at the authorities’ request, as part of Module 2 of the IMF’s OFC initiative. ### National profile (reiterated) - Population: 34,000 - Area: 160 square km - Customs and monetary union with Switzerland - Memberships: EFTA, EEA, United Nations ### Government and legal system - Constitutional monarchy; H.S.H. Prince Hans-Adam II is Head of State. - Cabinet elected by the Diet and confirmed by the Prince; both Prince and Diet consent required to enact new legislation. - Diet: 25 seats, Members elected by universal suffrage using proportional representation for four-year terms. - Legal system: mix of Swiss and Austrian law influences; courts include Landgericht, Obergericht, Oberste Gerichtshof, and a constitutional court. *Source: MAE mission report on Liechtenstein’s financial sector (visit to Vaduz, October 28–November 8, 2002).* ### 5. Relationship with the European Union (EU)—The relationship between Liechtenstein ### 5. Relationship with the European Union (EU)—The relationship between Liechtenstein ### Relationship with the EU / EEA membership - Liechtenstein has been a member of the EEA since May 1995. - The EEA permits Liechtenstein to participate in the single market without full EU membership. ### Structure of the economy - Liechtenstein entered a customs and economic union with Switzerland in 1924. - The economy is highly industrialized and free-enterprise oriented. - About 44.9 percent of the work force commutes daily from Austria or Switzerland. - Tax advantage for resident companies: 20 percent maximum. - Manufacturing accounts for about 45 percent of GDP and services 55 percent. - More than 40 percent of exports go to EU countries and an additional 12 percent to Switzerland. - The financial services sector employs about 2,000 people and accounts for some 30 percent of government revenues. ### Financial services sector — scope and activity - Services include banking, trust, other fiduciary services, investment management, and insurance, with a majority provided to nonresidents. - Banking sector regulatory basis: Law on Banks and Finance Companies of 1992, as amended. - At end-2001: - Number of banks: 17 - Balance sheet assets for the 17 banks: CHF 34 billion ($23 billion) - Off-balance sheet items (including derivative contracts): CHF 1.3 billion - Assets under management of banks reporting: CHF 106 billion - Year ended December 2001: nine banks made profits; six broke even or made marginal profits or losses; two recently established banks made significant losses. - Three largest banks account for almost 90 percent of bank market share. - Two of the three largest banks are publicly quoted on the Swiss stock exchange; the third is privately held by the family of the Prince of Liechtenstein. - Ten of the remaining banks are subsidiaries of foreign banks (5 from Austria, 3 from Switzerland, 1 from Germany, and 1 from France); four are owned by local interests. - Four banks have operations in foreign countries (mainly elsewhere in Europe and in the Caribbean). - As of June 2002: - Licensed fund-management companies: 16 - Licensed investment companies: 5 - Authorized funds: 81 - Client funds under management in Liechtenstein: CHF 5.2 billion - Corporate law framework: - Principal statutes: Law on Persons and Companies 1926 (PGR Code) and Law Concerning the Trust Enterprise 1928. - Principal providers: 355 trustees and 87 attorneys licensed to operate in Liechtenstein. - Common legal entities: Company Limited by Shares, Limited Liability Company, The Establishment (Anstalt), The Foundation (Stiftung), and the Trust Enterprise. - Liechtenstein is the only civil law jurisdiction that has adopted largely Anglo-Saxon trust legislation. - Insurance sector as of July 2002: - Licensed insurance companies: 21 (12 life, 4 non-life, and 5 reinsurance companies) - Premium volume: CHF 500 million - Assets totaling: CHF 1.8 billion - Three Liechtenstein banks jointly hold a minor participation in one insurance company. - 34 Swiss and 1 EEA insurance providers operate with an agency in Liechtenstein. - More than 100 EEA and Swiss insurance providers notified intention to operate in Liechtenstein by way of freedom to provide services; these are supervised by their home-country authorities. - Foreign companies based in the EU or Switzerland are—regarding their activity in Liechtenstein—subject to supervision of general Liechtenstein law through the ISA even if they depend on home-country authority for financial supervision. ### Regulatory framework, oversight, and market integrity - The government is the primary authority for licensing banking, investment, and insurance activities. - As an EEA member, Liechtenstein is obliged to transpose relevant EU legislation into national legislation; banking, insurance, securities, and accounting legislation are based on relevant EU Directives. - Because of close monetary links with Switzerland, financial institutions—primarily banks—must meet accounting guidelines of the Swiss Federal Banking Commission. - Supervisory architecture: - Dualistic system for banking and securities: the FSA relies on external auditors for on-site supervision of financial intermediaries. - Insurance supervision is more directly carried out by the ISA, with reliance on auditors and actuaries for specific reporting. - Auditors are paid by the entities they audit. - Regulatory agencies share competencies and cooperate closely; professional associations promote best professional practices. - Bankers’ association manages the deposit and investment insurance scheme. - Supervisory agencies can issue administrative orders; criminal punishments pronounced by courts; administrative sanctions imposed by government; disciplinary penalties imposed by the President of the Court of Appeals (Obergericht). - Financial Supervisory Authority (FSA): - Originated in 1993 (formerly the Banking Supervisory Authority). - Expanded responsibilities in 1996 (investment companies) and 1999 (trustees, lawyers, accountants, auditing companies). - The FSA is an office responsible to the ministry of finance. - Within the FSA, staff count: 11. - Staffing roles described by function (director, consultants, lawyers, administrative personnel). - Insurance Supervisory Authority (ISA): - Staff: six professionals and one clerical staff including the director. - Conducts on-site inspections but activities are limited given small staff. - ISA is part of the Office of the National Economy under the ministry of economy. - Due Diligence / AML functions: - Due Diligence Unit (DDU) established as separate department responsible to the ministry of finance in October 2001; previously part of the FSA. - DDU staffing: director, three lawyers, one clerical staff. - Financial Intelligence Unit established in 2001; staffing: director, four professionals, administrative staff. - Audit and auditor requirements: - Legislation sets minimum audit requirements and qualifications. - Licensing criteria consider independence, professional organization and management, and financial soundness. - Audit firms must certify compliance with law and statutes and that licensing prerequisites are permanently met. - Auditors must have complete access to documents they deem necessary. - For regulated entities subject to external audit, appropriate measures must be enforced when legal provisions are not met and FSA and ISA must be informed of outcomes; serious infringements must be immediately reported to supervisory authorities. - For regulated firms, scope of audit reviews is defined through laws and ordinances; for companies more generally the FSA does not set specific terms of audit but has power to do so and can require auditors to answer specific questions or examine specific issues at any time. ### Developments in the financial sector (selected statistics from Table 2) - Banks: - Number (2000): 15; (2001): 17; (June 30, 2002): 17 - Assets (million CHF): 2000: 36,522.4; 2001: 34,340.6; June 30, 2002: 33,156.7 - Loans (million CHF): 2000: 12,036.4; 2001: 11,619.9; June 30, 2002: 11,260.9 - Deposits (million CHF): 2000: 28,440.7; 2001: 26,773.9; June 30, 2002: 24,781.1 - Tier 1 Capital (million CHF): 2000: 4,291.2; 2001: 4,646.4; June 30, 2002: 4,463.2 - Net Income (million CHF): 2000: 546.1; 2001: 440.0; June 30, 2002: 174.5 - Assets under management (million CHF) (three firms reporting): 2000: 113,669.6; 2001: 105,842.4; June 30, 2002: n.a. - Return on assets (average) (annualized, in percent): 2000: 1.5; 2001: 1.3; June 30, 2002: 1.1 - Investment funds: - Number: 2000: 44; 2001: 72; June 30, 2002: 81 - Total assets (million CHF): 2000: 3,038.4; 2001: 5,600.7; June 30, 2002: 5,200.5 - Insurance: - Number of life insurance firms: 2000: 7; 2001: 10; July 2002: 12 - Premium income (million CHF) (life): 2000: 302.5; 2001: 426.6; July 2002: n.a. - Number of non-life firms: 2000: 3; 2001: 4; July 2002: 4 - Premium income (million CHF) (non-life): 2000: 8; 2001: 19.3; July 2002: n.a. - Number of reinsurance firms: 2000: 4; 2001: 5; July 2002: 5 - Trustees: - Number (natural persons / legal entities): 2000: 67 / 256; 2001: 79 / 265; June 30, 2002: 79 / 276 - Memorandum items (approximate): - Number of registered incorporated entities: 31,000 - Number of foundations that are deposited: 51,000 - Number of foundations with a commercial purpose: 2,900 - Number of family purpose trusts: 1,500 ### Proposal to create an integrated financial supervisory authority - Proposal summary: - Current functions of the FSA, the ISA, and the DDU would be consolidated into a single integrated regulator. - Efforts proceeding according to a January 2002 project-team report; a formal steering group has been formed. - Implementing legislation preparation underway with intent that a new law be in place in mid-2004 and that the integrated regulator be in place by early 2005. - Mission team conclusions and recommendations: - A deepening of supervisory and regulatory functions is needed; the mission team strongly supports the medium-term effort to establish an integrated financial service regulator. - Immediate priority should be given to adding staff sooner for the present needs of the FSA and ISA; immediate staffing needs should not be delayed while awaiting creation of the integrated agency. - The drafters of implementing legislation should ensure the new agency has a clear mandate as the financial sector regulatory agency, operational independence (including sufficient funding resources), and flexibility to add staff. - Powers recommended for the integrated agency include authority to license and withdraw licenses, levy penalties and other sanctions against regulated entities without approval from government, and power to make legally binding rules. - Integration advantages: - More efficient administration through greater staffing allocation flexibility. - Better development of common information systems and administrative support mechanisms. - Capacity to carry out on-site inspections (the mission team recommends the integrated agency have such capacity, at least for limited-scope inspections). - Enhanced coordination and effectiveness between prudential and due diligence requirements. - Facilitated domestic information sharing and improved exchange of information between ISA, FSA, and DDU. - More efficient framework for consolidated supervision with foreign regulators. - On-site inspection capabilities recommended: - Case-by-case capacity to review adequacy and compliance with due diligence requirements, internal control policies, credit underwriting, operational risk, and market risk. - Preserve use of external auditors but supplement with integrated agency capacity for some on-site inspection tasks. ### Key legislation affecting the financial services sector (listed in source) - The Persons and Companies Act 1926, as amended; - Law Concerning the Trust Enterprise 1928, as amended; - Act Concerning Banks and Savings Funds 1960; - Act Relating to National and Local Taxation 1961, as amended; - Law on Banks and Finance Companies 1992 (Banking Act (BA)), as amended; - Act on Trustees 1992, as amended; - Act on Lawyers 1992, as amended; - Act on Auditors and Audit Companies 1992, as amended; - Banking Ordinance on the Banking Act 1994 (Banking Ordinance); - Law on the Supervision of Insurance Undertakings (Insurance Supervision Law) 1995; - Executive Order on the Law on Supervision of Insurance Undertakings 1996; - Law on Investment Undertakings, 1996, as amended; - Ordinance on the Law on Investment Undertakings 1996; - Law on Professional Due Diligence in Financial Transactions (Due Diligence Act, DDA) 1996, as amended; - Executive Order Concerning the Law on Professional Due Diligence (Due Diligence Executive Order, DDEO) 2000, as amended; - Law on the Amendment of the Criminal Code 2000; - Law on International Mutual Assistance in Criminal Matters (Legal Assistance Law); - Law on the Amendment of the Code of Criminal Procedure 2000; - Insurance Contract Act of 2001; - Law on the Financial Intelligence Unit (FIU-Law) 2002. ### Previous third-party reviews of regulatory arrangements - September 1999: Council of Europe’s PC-R-EV conducted an examination of Liechtenstein's anti-money laundering program and reported a number of weaknesses of varying severity. - Liechtenstein had initiated a self-review of its anti-money-laundering regime prior to the PC-R-EV examination and undertook efforts to address identified legislative and enforcement weaknesses. - June 2000: FATF identified Liechtenstein as a noncooperative country and territory (NCCT), prompting strengthened anti-money laundering measures. - June 2001: FATF reviewed progress and, while expressing some concerns regarding implementation, delisted Liechtenstein on the basis of commitments for further affirmative action by the prime minister. - June 2002: FATF decided to cease its monitoring, recognizing the improvements Liechtenstein had implemented. *Source: IMF staff report CR03289.* ### 29. In January 2001, the PC-R-EV follow-up to a self-assessment, noted substantial ### Observance of Financial System Standards and Codes: Summary Assessments (Liechtenstein) ### AML/CFT measures and institutional developments - January 2001 PC-R-EV follow-up noted substantial progress in adopting measures to prevent and combat money laundering, including: - Amendment of the Due Diligence Act and new Due Diligence Executive Order. - Creation of duties of due diligence/compliance department within the FSA and creation of the FIU. - Revision of the Law on International Mutual Assistance in Criminal Matters (Legal Assistance Law). - Increased staffing at the Princely Court and Public Prosecutor's office. - Creation of a special unit at the National Police Force to combat financial crime. - The mission completed an assessment of Liechtenstein’s compliance with the FATF Recommendations for Anti Money Laundering on the basis of the final version of the AML/CFT methodology document. - The mission reviewed: - The legal and institutional framework for AML/CFT, including criminal justice measures and international cooperation. - The effectiveness of implementation of preventative measures in the banking, insurance, securities and trust, and company service providers sectors. ### Offshore assessment context (FSF study) - May 2000 Financial Stability Forum (FSF) study (based on a 1999 survey of onshore supervisors in 27 countries) placed 42 jurisdictions among three groups. - Liechtenstein was placed in group three, viewed by the FSF as having weak supervision and not adhering to international standards. - Taking into account improvements implemented since the 1999 FSF survey, the assessment team considers it unlikely that the FSF result would be the same today. ### Assessment scope, methodology, and participants - The mission assessed observance relative to: - The Basel Core Principles for effective banking supervision. - The IAIS Core Principles for insurance supervision. - The IOSCO Objectives and Principles of Securities Regulation. - The Basel Core Principles assessment was carried out in accordance with the ‘Core Principles Methodology’ paper issued by the Basel Committee on Banking Supervision in October 1999. - The Basel assessment was carried out by Mr. Michael Deasy (Central Bank of Ireland) and Mr. Alain Vedrenne-Lacombe (Bank of France). - The IOSCO assessment relied on the Fund/Bank Guidance Note for Assessing Implementation of IOSCO Principles and was conducted by Ms. Jennifer Elliott. ### Banking sector structure and key statistics (end-2001 and related dates) - Market structure and participants: - Seventeen banks and two finance companies operate in Liechtenstein. - Finance companies are supervised by the FSA; one finance company is being wound up, the other engages in lending. - Ten banks are subsidiaries of foreign banks (5 from Austria, 4 from Switzerland and 1 from France); four banks are owned by local interests. - Four banks have operations abroad (mainly elsewhere in Europe and in the Caribbean). - Two of the three largest banks are publicly quoted on the Swiss stock exchange; the third is privately held by the family of the Prince of Liechtenstein. - Total staff working in the banking sector: 1,760 people. - Assets and business profile: - Total banking assets: CHF 34.3 billion. - Assets under management: CHF 106 billion. - Market concentration: the three major banks account for 90 percent of the total banking assets. - Credit portfolio is relatively small, comprising largely mortgages and Lombard loans; major business is private banking and wealth management. - Capitalization and profitability: - All banks have a capital adequacy ratio above 15 percent; 16 were in excess of 20 percent at end-2001. - Profitability in 2001: nine banks made profits, six more or less broke even, and two most recently established institutions recorded substantial losses. - Currency and lender of last resort: - Swiss Franc is the official currency; the Swiss National Bank acts as lender of last resort. - Investment funds: - There are currently 81 investment funds with client assets of CHF 5.2 billion (up from CHF 437 million in 1996). - Six prospectuses filed in the past two years following introduction of the Law on Prospectuses, all from the same issuer. ### Main findings from the Basel Core Principles assessment - Legal and institutional framework: - Banking sector regulated under the Law on Banks and Finance Companies of 1992, as amended, and the Ordinance on the Banking Act 1994, as amended. - Legislative framework based on implementation of EU banking legislation as required by EEA membership. - Government and the Financial Services Authority (FSA) share responsibility for banking supervision: government grants/withdraws licenses; FSA is responsible for ongoing supervision and employs a dualistic system relying on external auditors for on-site supervision and carrying out off-site supervision itself. - Resources and staffing (CP1): - Sound legislative framework exists; however, inadequate staffing resources reflect a material deficiency. - The current staff complement of the banking supervisory department at the time of assessment was two persons and a part-time banking consultant: one is head of the FSA and the second is an administrative assistant. - Lack of continuity due to recent staff turnover. - The inadequate resources undermine the FSA’s ability to carry out on-site and off-site supervision effectively. - Assessors recommend the immediate recruitment of two banking analysts. - Supervisory powers and information exchange: - The FSA has legal authority to share information with foreign supervisory agencies in line with EU requirements; this authority was affirmed in a ruling by Liechtenstein’s supreme administrative court on May 7, 2003. - The court decision clarifies authority for information exchange, but the process remains untested. - Licensing, governance, and prudential framework (CPs 2–15, 21, 22): - Banking activity and licensing criteria are consistent with international practices and include strong governance requirements and fit-and-proper tests for directors, senior managers, and heads of internal audit. - Banks must have a dual management structure with a board of non-executive directors and a management board; internal and external audit functions are well developed. - Banking Act and Banking Ordinance have comprehensive provisions on corporate governance. - Based on the comprehensive DDA, AML policies and procedures are in place. - Banks must maintain adequate records in accordance with EU banking and accounting Directives and meet accounting guidelines set by the Swiss regulatory authority; banks are subject to annual external audits and are required to publish annual accounts. - Ongoing supervision and enforcement (CPs 16–20, 22): - The FSA’s ability to carry out functions is undermined by lack of staff and expertise. - Resource limitations resulted in inability to conduct timely off-site monitoring or to analyze promptly and thoroughly external audit reports. - The Banking Supervision Department should aim for a better understanding of banks’ activities, risks, and financial situations. - Enforcement powers in the form of “orders” issued by the FSA need to be more detailed and specific. - Cross-border supervision (CPs 23–25): - Consolidated supervision can be carried out whether Liechtenstein is home or host country; however, the FSA has not established MOUs with any foreign regulators. - Specific provisions should be included in legislation for Liechtenstein banks proposing to establish abroad. ### Recommended Action Plan (selected recommendations from Table 3) - Independence and resources (CP 1-2): - Recruit experienced staff and/or train new staff. - Other risks (CP 13): - Determine applicable norms. - On-site and off-site supervision (CP 16): - Add resources for effective and comprehensive analysis of audit reports and bank reporting. - Bank management contact (CP 17): - Add resources for effective and comprehensive understanding of banks’ operations. - Off-site supervision (CP 18): - Add resources for effective and comprehensive understanding and analysis of audit and bank reports. ### Authorities’ response and subsequent developments - The authorities expressed appreciation of the recommendations and willingness to implement them. - Government decision of December 3, 2002 assured recruitment of two additional banking staff members for the FSA; one of these vacancies was filled in June 2003. - The organization of the FSA has been streamlined and responsibilities of each staff member defined. - The FSA is introducing a short- and long-term (permanent) training and education program in 2003. - Supreme administrative court decision of May 7, 2003 confirmed that information can be shared with foreign regulators when used only within the scope of supervisory duties as described in the request; access within the foreign authority must be limited to persons subject to official secrecy provisions; further disclosure is not allowed without mutual assistance procedures. - The FSA publishes an annual report and will strive to provide more detailed annual reports in the future; the report can be requested electronically under info@afdl.li. ### IOSCO assessment — securities market overview and findings - Securities activity is limited and focused on asset management for high net worth clients. - Major securities business: asset management carried out by universal banks (licensed under the Banking Act) and trustees acting as asset managers (licensed under the Law on Trustees). - Majority of clients are located outside Liechtenstein (largest number in Switzerland, followed by other European jurisdictions). - Brokerage services, including sale of mutual funds and securities, are available to small retail investors at two banks. - No secondary markets or underwritings in Liechtenstein; banks participate directly on secondary markets through their operations in Switzerland. - Investment undertakings: - May operate collective investment schemes organized as trusts or limited liability companies and may not directly distribute funds. - Many collective investment schemes are eligible under the UCITS directive for sale in other European jurisdictions. - Investment undertakings do not distribute funds directly to the public. - Regulatory responsibilities: - Regulation of securities activities is largely the responsibility of the FSA; some important aspects are carried out directly by the Cabinet. - FSA responsibilities include screening licensing applications, reviewing and approving prospectuses and disclosure documents, supervising the audit process, and taking supervisory measures. - Licenses are granted formally by the government (Cabinet) at the recommendation of the FSA; withdrawal of licenses and imposition of fines are also carried out by the government at the recommendation of the FSA. - The public prosecutor is responsible for enforcement activity. - The DDU is responsible for enforcement of compliance with anti-money laundering regulations for banks, investment undertakings, and trustees. - Preconditions for effective securities regulation (legal, accounting, tax framework) are in place in Liechtenstein. *Source: IMF mission assessment — Observance of Financial System Standards and Codes: Summary Assessments (Liechtenstein).* ### 62. Regulator (Principles 1–5): The FSA’s mandate should be set out more clearly in ### cr03289 - 62. Regulator (Principles 1–5): The FSA’s mandate should be set out more clearly in ### Regulator mandate and legal powers (Principles 1–5) - The FSA’s mandate in law is sometimes vague and there is no clear constitution of the agency itself. - The FSA should be granted authority to: - license and withdraw licenses, - levy penalties and other sanctions against regulated entities without approval from government, - make legally binding rules. - The FSA should introduce transparency measures, including a complete annual report available to the public and on a website, to improve public understanding and accountability. ### Staffing, resources, and supervisory capacity - Weaknesses in the securities regulatory system are mostly related to the low level of staffing and resources at the FSA—particularly for supervision of banks that engage in securities activities. - Current staff are professional and diligent but insufficient to make credible use of the inspection system or to: - communicate specific instructions to auditors, - properly analyze inspection results, - review prospectuses in the growing investment funds market. - Staff time is currently consumed by licensing issues and implementation of EU Directives, leaving little time for supervision. - Immediate attention should be given to increased staffing to use the inspection system effectively and to improve the FSA’s ability to develop policy actively. ### Self-regulatory organizations (Principles 6 and 7) - Industry associations complement the FSA’s limited resources but the FSA must retain sufficient resources and experience to benefit from associations without being dominated by them. - The Trustees Association acts as a self-regulatory body for trustees (membership and compliance with its code of conduct is mandatory). - The FSA should have a formal role in the Trustees Association’s formulation of rules for asset management activities. ### Inspections, investigations, and enforcement (Principles 8–10) - The FSA has full inspection and investigation authority other than over trustees but lacks resources to execute this authority effectively. - The public prosecutor has sufficient enforcement authority over regulated entities. - The FSA has licensing authority over trustees but not inspection authority (trustees are subject to a DDU audit). - Under the dualistic system, regular inspections are carried out by third-party auditors; these audits could be extended to trustees acting as asset managers. - The FSA must be in a position to instruct auditors and analyze inspection results credibly. ### Information sharing and cooperation (Principles 11–13) - Domestic information sharing is fully implemented. - For trustees, the FSA is limited by lack of inspection access and lack of responsibility for ongoing oversight. - The FSA is not a party to any information-sharing agreement with foreign counterparts. - A recent court case clarifies the FSA’s authority to share supervisory information with foreign supervisory agencies (subject to restrictions described by the authorities). ### Issuers (Principles 14–16) - Issuance of securities is rare in the Liechtenstein market; the EU Prospectus Directive has been implemented. - Under the Law on Disclosure on Major Participation in Companies, those with 10 percent or greater of voting shares are required to disclose transactions. - There are no other continuous disclosure requirements, corporate governance, or take-over bid rules unless an issuer is listed on an exchange. - Six prospectuses have been reviewed and approved during the past two years, all from the same issuer (mostly in the form of amendments). - Accounting standards are a mixture of EU and Swiss accounting standards and, for banks, IAS standards; auditors are held to EU standards. ### Collective investment schemes (Principles 17–20) - The legislative framework for collective investment funds (investment undertakings) largely exists; the EU UCITs directive has been implemented. - Investment undertakings: - are subject to detailed licensing requirements, - are audited annually by third-party auditors with reports made to the FSA, - must publish disclosure documents in accordance with detailed rules. - Identified needs: - conflict of interest rules addressing related party transactions, borrowing and lending with affiliates, related-party brokerage trading, employee conduct, and disclosure of conflicts to clients, - more detailed net asset valuation rules with a clearer definition of transferable security (incorporating liquidity) and requirements for valuing illiquid securities. ### Market intermediaries (Principles 21–24) - Market intermediaries are banks and trustees who may act as asset managers. - Trustees acting as asset managers are largely unsupervised, subject to a general license, and inspected by the DDU; the extent of their asset management business is unknown and lacks public transparency. - Authorities should consider: - licensing trustees who act as asset managers separately, - implementing periodic audits to monitor compliance, - developing global rules covering account documentation, representations to clients, disclosure to clients (risk and conflicts), related party transactions, and employee conduct. - The FSA should have authority to license, supervise, withdraw licenses from, and make rules regarding asset managers, and asset managers should be subject to an annual FSA audit. ### Recommended Action Plan (selected recommendations summarized) - Principles Concerning the Regulator (P 1–5) - Increased staffing resources are urgently needed; training should be a priority and consider cooperation with other jurisdictions. - Clarify the FSA mandate in law. - Grant the FSA authority to grant, refuse and withdraw licenses for banks, investment undertakings and asset managers. - Set transparent, legally binding criteria for selection and dismissal of the FSA head. - Introduce greater transparency through a website; grant the FSA authority to make legally binding rules. - Principles for the Enforcement of Securities Regulation (P 8–10) - FSA should have the ability to withdraw licenses and levy fines. - FSA should have authority to inspect and supervise trustees. - Principles for Cooperation in Regulation (P 11–13) - FSA should enter into information-sharing arrangements with key counterparts, specifically the Swiss. - Principles for Collective Investment Schemes (P 17–20) - FSA should develop more detailed net asset valuation rules. - FSA should develop conflicts of interest rules for investment undertakings. - FSA should consider more detailed rules for duties of custodians. - FSA requires more resources/more experience for review of audits and prospectuses. - Principles for Market Intermediaries (P 21–24) - Asset managers organized as trustees should be subject to a separate licensing procedure and made transparent to the public. - FSA should have authority to license, supervise, withdraw licenses from, and make rules regarding asset managers. - Asset managers should be subject to an annual FSA audit. - FSA should develop more detailed rules regarding sales and business conduct of market intermediaries. ### Authorities’ response - Authorities generally agreed with the report. - The FSA acknowledges the need for more resources and created two staff positions since the assessment (both in banking supervision); one vacancy was filled in June 2003. - The government acknowledges a lack of resources and is committed to grant essential staff resources to supervisory authorities. - Authorities expressed concern that emphasis on trustees acting as asset managers was undue given perceived low risk and DDU inspections; the FSA was concerned that additional trustee regulation responsibility would stretch resources. - The FSA did not agree that the Trustees Association is unsupervised. - With respect to transparent criteria for selection and dismissal of the FSA head, the planned integrated financial supervisory authority law will likely set out composition and structure, fulfilling the recommendation. - Supreme administrative court decision of May 7, 2002: - Confirms that information can be shared with foreign regulators while the information provided is only used within the scope of supervisory duties as described in the foreign request. - Within the foreign authority, access to information must be granted only to persons subject to official secrecy provisions. - Information must be kept strictly confidential and used only for the agreed supervisory purpose; further disclosure is not allowed unless regular mutual assistance procedures are complied with. - The FSA shares information according to this decision as a last resort. - Authorities noted proposed changes scheduled including revised collective investment scheme and market abuse legislation as a result of new EU directives. ### Summary of the IAIS Insurance Core Principles assessment (selected findings) - Assessment based on discussions with Insurance Supervisory Authority (ISA), Insurance Association, and insurance firms; documents reviewed include insurance legislation, inspection guidance, and EC directives. - Market and institutional facts: - Insurance companies in Liechtenstein began after 1995; by end-2002 there were 12 life insurance companies, 4 nonlife companies, and 5 reinsurance companies. - There are 34 branches of Swiss companies operating in Liechtenstein; more than 10 Swiss companies have notified the ISA of intent to take up business in Liechtenstein. - The local market (dominated by Swiss branches) had premium income of about 197 million euros at end-2001. - The life and reinsurance markets incorporated in Liechtenstein amounted to as much as 319 million euros in 2001. - Assets held by Liechtenstein companies amount to CHF 1.1 billion in direct insurance (nearly all matching life technical reserves) and CHF 0.78 billion for reinsurance business (matching captives technical reserves). - Supervision and capacity: - The ISA is a department of the Office of National Economy and relies on six trained people to achieve its tasks. - The Due Diligence Unit oversees anti-money laundering in the insurance sector. - On-site inspections have been infrequent and not comprehensive; ISA intends more frequent on-site inspections once licensing of Liechtenstein incorporated companies is finished. - There is little aggregate solvency data and no annual report from the ISA or the Insurance Association. - Main findings and recommendations: - The insurance industry is relatively young and risks appear relatively small given low-risk product profiles, but supervision requires improvement. - Staffing of the ISA is a main concern; additional staff are needed for on-site inspection and off-site monitoring, particularly with improved reporting requirements effective in 2003. - Regulatory framework should consider assets authorized for unit-linked policies and asset-liability management from an insurance perspective; specific regulation should be considered (Principles 6, 7, 9, and 12). - New legislation to apply from 2003 includes: - more comprehensive supervision of cross-border activities of Liechtenstein companies out of the EEA (new article 27a of the insurance supervision law), - tighter links with supervisory authorities outside the field of insurance (new article 61 of the insurance supervisory law). *Source: IMF assessment (cr03289).* ### 92. Additionally, a more sophisticated system to deal with customer claims out of the ### Insurance supervision, AML/CFT assessment, and recommended action plan (Liechtenstein) ### Insurance supervision and market conduct - A more sophisticated system to deal with customer claims out of the general consumer protection system, within the companies or through the adequate channel (ombudsman) might be useful to make a satisfactory market conduct system (see principle 11). - The soundness and effectiveness of supervision depend on satisfactory international cooperation, especially in reinsurance and life insurance where the bulk of the business is made in foreign countries. - Table of recommended actions in relation to IAIS Core Principles (summary): - Organization of an Insurance Supervisor (CP 1) - Increase the staff number to supervise insurance companies (CP 1). - Prudential Rules (CPs 6–10) - Adapt the ALM supervision (CP 6). - Clarify the legal framework for unit linked products and capital redemption operations (CP 6-9). - Market Conduct (CP 11) - A new insurance protection act has been passed but it is not yet implemented. Processes for consumer protection will need to be developed. - Monitoring, Inspection, and Sanctions (CPs 12–14) - Develop systems for receiving reports sent to the ISA (CP 12). - Increase in the number of staff devoted to the supervision of insurance companies (CP 1 and 13). - Cross-Border Operations, Supervisory Coordination and Cooperation, and Confidentiality (CPs 15–17) - More cooperation to supervise intermediaries (CP 15). Authorities’ response (insurance): - The government of Liechtenstein acknowledges a lack of resources and is fully committed to grant essential staff resources to the supervisory authorities. - The Insurance Supervisory Authority (ISA) prepared new reporting templates that companies are required to send to the ISA beginning in 2003; reporting will enhance information on asset liability management and solvency analysis, and new systems will be developed to receive and analyze the reported information. - The ISA shall develop new rules in the field of the assets authorized for unit-linked products. - The ISA intends for the year 2003 to perform systematically on-site inspections, depending on available staff. - With the transposition of the new EU Directive on Insurance Intermediation, supervision of insurance intermediaries will become effective and cooperation with foreign authorities to supervise intermediaries will become more intensive. ### Summary of AML/CFT assessment: scope, main findings, and institutional framework - The assessment covers the FATF 40 Recommendations and 8 special recommendations for combating the financing of terrorism, and provides recommendations to strengthen observance. - The assessors reviewed AML/CFT laws and regulations, and supervisory and regulatory systems for banking, insurance, securities, and trust and company service providers (comprised of 344 separately licensed trustees). The assessment is based on information available as of March 2003. - Main findings: - Overall, the AML/CFT legal, institutional, and supervisory framework provides a sound basis for prevention, detection, and prosecution of money laundering (ML) and financing of terrorism (FT). - Major legislative achievements: enactment and enhancement of the Law on Professional Due Diligence in Financial Transactions (DDA) and the Law Concerning the Financial Intelligence Unit (FIU Law). - Establishment of the Due Diligence Unit (DDU) and a fully staffed and functioning FIU in operation since March 2001. - Liechtenstein devoted substantial attention and resources following FATF listing as a noncooperative country and territory in June 2000; FATF removed Liechtenstein from its list in June 2001 and ceased further monitoring in June 2002. - Some implementation measures remain, particularly enhancing compliance among trustees and insurance concerning monitoring and reporting of suspicious activity. ### Criminal justice measures, confiscation, and international cooperation - Criminalization and prosecution: - Criminal provisions for ML are sufficient to prosecute offenses since legislative enhancements liberalized the intent requirement and permitted prosecution for self-laundering. - The DDA provides criminal penalties for certain willful failures to comply; public prosecutor has opened criminal investigations under DDA criminal provisions. - Limitations: Liechtenstein law does not permit prosecution for both the predicate offense and money laundering, nor does the ML criminal offense apply to legal entities. Criminal sanctions in the DDU do apply to legal entities, partially mitigating this gap. - Concern: limitation on offenses applicable to legal entities may limit penalties and inhibit confiscation and mutual legal assistance. - Financing of terrorism (FT) - FT is prosecuted under Art. 278a of the Penal Code (StGB), applying to financing of terrorist acts and criminal organizations, including known terrorist organizations. - Pending proposals exist to enhance the criminal code by creating a separate offense for financing of terrorism. - A Counter-Terrorism Coordination Task Force, headed by the FIU, includes DDU, national police, public prosecutor, legal assistance unit, judicial service, personal staff of the government, foreign ministry, and the press office. - Confiscation, freezing, and seizing - Liechtenstein has a comprehensive framework authorizing forfeiture upon conviction, siphoning off amounts equal to unjust enrichment, and civil in rem forfeiture even without criminal conviction. - Confiscation, freezing, and seizing may be executed on behalf of foreign countries through mutual legal assistance requests. - Forfeiture and confiscation proceedings take into account rights of bona fide third parties; in rem procedure allows confiscation of assets of legal entities despite lack of criminal penalties under ML provisions. - International cooperation - International cooperation enhanced since enactment of the Law on International Mutual Assistance in Criminal Matters (MLA Law) and addition of personnel to clear backlog of requests. - Main conduit for mutual legal assistance is the Legal Assistance Office of the Ministry of Justice. - The MLA Law has truncated procedures for delivery of MLA requests for search, seizure, subpoenas for bank documents, interrogation of witnesses, and extradition; extradition and transferal of prosecution are widely available. - Concern: strict interpretation of “fiscal offenses” appears to limit assistance, including in fiscal fraud such as VAT carousels and organized fiscal fraud schemes; recommendation to review exclusion of serious and organized fiscal fraud schemes from mutual legal assistance. ### FIU, law enforcement, and resources - FIU functions and authority - A fully staffed and operational FIU collects, analyzes, and disseminates financial intelligence and exchanges information with foreign counterpart FIUs without violating banking or professional secrecy. - The FIU may require reporting parties to supplement SARs and has broad powers to obtain relevant information; it works closely with DDU, public prosecutor, and Princely Courts. - The FIU may obtain directly financial information from a financial institution that has filed a SAR and has indirect access via the DDU to other financial institutions; the FIU would benefit from direct access to financial information in nonfiling financial institutions. - Law enforcement, prosecution, and judicial resources - National police special unit EWOK handles investigations of white-collar crime, including ML and organized crimes. - Public prosecutor is primarily responsible for ML offenses, DDA violations, and execution of confiscation orders via domestic criminal process and in rem proceedings. - Princely Courts conduct criminal processes, confiscation matters, and execution of mutual legal assistance requests. - Investigative, prosecutorial, and judicial resources have increased substantially; comprehensive statistics are maintained to assess effectiveness. ### Preventive measures for financial institutions and supervision - Due Diligence Act (DDA) framework - DDA provides comprehensive requirements for customer due diligence, internal controls, monitoring relationships, suspicious activity reporting, record keeping, audit, training, designation of compliance and due diligence officers. - DDA is supplemented by the Executive Order Concerning the Law on Professional Due Diligence (DDEO). - Transitional provision required updating customer identification and beneficial ownership information for existing customers by year-end 2001; approximately 99 percent of accounts had updated information and the remainder has been blocked. - Scope and coverage - DDA applies to banks, finance companies, lawyers, trustees, investment undertakings, insurance companies engaged in direct life insurance business, bureaux de change, the Liechtenstein Post, and other persons who accept or keep in custody client assets. - DDU role and capacity - DDU created in October 2001 to administer compliance with the DDA and DDEO; fully staffed and resourced. - DDU vests complete supervisory authority for preventive measures with respect to money laundering. - DDU provides detailed guidance on due diligence audits; guidelines should be enhanced for insurance entities to be alert to financial flows and transaction patterns, and risks from buying and selling second-hand endowment policies and single-premium life. - DDU monitors compliance through external auditors and direct on-site and off-site monitoring; in 2001 DDU conducted 11 on-site audits for trustees, and in 2002 participated in an extended examination. - Concern: DDU staffing may not support increased direct supervision in a crisis, though expertise continues to develop through on-site audits. - Sectoral implementation and vulnerabilities - Financial intermediaries are required to monitor relationships and accounts continuously and to file SARs with the FIU; banking secrecy does not impede filing; penal and administrative sanctions exist for failure to file SARs. - Banking sector has embraced customer due diligence and ongoing monitoring; insurance and trustees sectors may require specialized attention and further education on effective know-your-customer policies and ongoing monitoring rather than formalistic application of minimum requirements. - DDU reports less clear evidence of compliance in the insurance sector than in the banking sector based on 2002 DDA audits. - Overall, external audits to date have been adequate and the general level of compliance meets minimal standards, with notable weaknesses in available customer profiles. ### Summary assessment and recommended actions (FATF 40+8) - Overall assessment - The AML/CFT legal, institutional, and supervisory framework provides a sound basis and largely fulfills the requirements of the FATF 40+8 Recommendations. - Liechtenstein’s business climate and vulnerabilities require enhanced measures; efforts are progressing but specific improvements warrant closer attention. - Selected recommended actions (summary drawn from Table 6): - General framework (FATF 1–3) - Fiscal offenses should be read more narrowly to ensure that mutual legal assistance requests with nonfiscal aspects are not rejected on fiscal grounds. - Scope of criminal offense of money laundering (FATF 4–6) - Extend legal liability to legal entities. - Provisional measures and confiscation (FATF 7) - Ensure limitations on prosecutions of legal entities do not hinder effective confiscation in penal matters. - Role of financial system (FATF 8–9) - Implementation by trustees and trust companies requires additional supervisory attention. - Customer identification and record-keeping (FATF 10–13) - Implementation by the insurance sector, trustees and trust companies should be enhanced; specific guidelines for insurance and trustees are needed. - Increased diligence of financial institutions (FATF 14–19) - Abolish the provision on automatic 10-day blocking of assets and accounts when filing SARs and replace with authority of the FIU to order blocking upon receipt of a SAR, and reduce the amount of time for blocking to a shorter time period, with extensions to 10 days. - Amend the law to impose a permanent prohibition against tipping off. - Provide for a specific administrative sanction for violations of the tipping-off prohibition. - Due diligence audits and supervisory audits should be conducted by the same auditor or audit firm and should be conducted together, insofar as possible. - Implementation & role of regulatory authorities (FATF 26–29) - Additional monitoring directly by the FSA is warranted regarding fit-and-proper requirements and impeccable management of trustees and trust companies. - Administrative cooperation — exchange of general information (FATF 30–31) - Attention should be given to the potential limiting effect of Article 7 of the FIU Act on the exchange of financial intelligence with foreign counterparts. - Administrative cooperation — exchange of information relating to suspicious transactions (FATF 32) - The FIU should have direct access to financial information from intermediaries needed to analyze SARs and conduct its functions. - Other forms of cooperation — mutual assistance, confiscation, extradition (FATF 33–35) - Ensure additional multilateral and bilateral agreements needed to ensure coverage are pursued. - Other forms of cooperation — focus on money laundering issues (FATF 36–40) - Review the position on refusing assistance on fiscal fraud matters, such as VAT carousel. - Eight Special Recommendations on terrorist financing - I. Ratification and implementation of UN Instruments: Ratification of the UN Convention on the Suppression of the Financing of Terrorism should be completed. - II. Criminalizing the financing of terrorism and associated money laundering: Complete criminalization of a separate offense for financing of terrorism. *Source: IMF assessment and recommendations related to insurance supervision and AML/CFT in Liechtenstein.* ### 117. The government has approved a draft proposal to parliament to amend the Criminal ### Counter-Terrorism Package and Revision of Due Diligence Legislation ### Legislative amendments — Counter-Terrorism Package - The government approved a draft proposal to parliament to amend the Criminal Code, the Code of Criminal Procedure and the Due Diligence Act—the so-called Counter-Terrorism Package. - Proposed focus: establishment of “Terrorist Offenses,” “Financing of Terrorism,” and “Terrorist Groups” as new penal provisions. - In accordance with the normal legislative process, the proposed legislative amendments were circulated for consultation and discussed for the first time by the parliament in June 2003 on the basis of a draft law presented by the government. ### Definitions and scope of new criminal offenses - “Terrorist Offenses”: provides for the imposition of severe sentences for the specific commission of terrorist attacks. - “Financing of Terrorism”: punishes persons who gather or provide assets with the intention to fund a crime classified as a terrorist offense. - “Terrorist Groups”: criminalizes organized associations of more than two persons established over a prolonged period of time and aimed at the joint commission of terrorist offenses. - The proposed new penal provisions aim to close gaps in criminal legislation covering terrorism and the support of terrorism, and to fulfill the requirements of the UN convention on the financing of terrorism and the relevant UN Security Council resolution. ### Modifications and extensions to existing criminal law - Taking terrorist associations into account with regard to the confiscation of proceeds of crime and forfeiture (Art. 20 and 20 b StGB). - Extension of domestic jurisdiction according to Art. 64 StGB to terrorist associations and terrorist financing. - Extension of the definition of money laundering by expanding the list of predicate crimes and through the new Art. 278 d StGB. - Inclusion of the crime of “Arms Brokering” in Art. 320 StGB (“Support of a Party in a Foreign Armed Conflict”). ### Cross-jurisdictional and comparative context - The Liechtenstein Penal Code is modeled on the Austrian Penal Code. - The creation of criminal liability of legal entities is being discussed in Austria with respect to money laundering; Liechtenstein will observe those discussions and envisages reacting accordingly. ### Revision of Due Diligence Legislation (DDA / DDEO) - The due diligence legislation is currently under revision; the recommendations of the IMF team will be considered in this process, which is intended to be finished not later than by the end of 2004. - Particular attention will be given to recommendations regarding increased diligence for financial institutions (FATF 14-19) and administrative cooperation—exchange of information relating to suspicious transaction (FATF 32). - The DDU will give additional attention to the implementation of due diligence by trustees, trust companies, and insurances. - Specific provisions for trustees, trust companies, and insurances will be taken into consideration in the context of the planned revision of DDA and DDEO. --- _Source: https://www.imf.org/-/media/files/publications/ofca/english/cr03289.pdf_