## Detailed Assessment of Compliance of the Basel Core Principles (cr03290) ## Source details **Canonical URL:** [Detailed Assessment of Compliance of the Basel Core Principles (cr03290)](https://www.imf.org/-/media/files/publications/ofca/english/cr03290.pdf) ## Other formats - [Markdown version](/-/media/files/publications/ofca/english/cr03290.pdf.md) - [Structured JSON version](/-/media/files/publications/ofca/english/cr03290.pdf.json) --- ### Institutional and market structure overview - Liechtenstein has a GDP of CHF 4 billion; industry accounts for 42 percent and financial services for 28 percent of GDP. - Employed population: 30 thousand; residents: 34 thousand (including 34 percent foreigners). - Banking sector composition: - Seventeen banks and two finance companies operate in Liechtenstein. - At end-2001, banking assets were CHF 34 billion; assets under management were CHF 106 billion (only four banks published the amount of assets under management). - Market concentration: the three major banks account for 90 percent of total banking assets. - All banks report capital adequacy ratios above 15 percent (and 16 above 20 percent at end-2001). - Minimum capital for banks: CHF 20 million (noting elsewhere the assessment recorded a minimum CHF 10 million but since 2000 FSA requests CHF 20 million for new banks). - Total banking sector staff: 1,760 people. - Ownership: ten banks are subsidiaries of foreign banks (five from Austria, three from Switzerland, one from Germany, and one from France); four banks are owned by local interests. - Business focus: private banking and wealth management; credit activities largely mortgage and Lombard loans. - 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. - Currency and lender of last resort: - Swiss franc is the official currency; Swiss central bank acts as lender of last resort. - Institutional development: - Planning underway to establish an integrated financial services supervisory authority: creation planned for early 2005, legislative changes to be completed in mid 2004. - Liechtenstein Bankers Association employs four full-time staff and manages a deposit and investment protection scheme: coverage up to Euro 20 thousand per customer and a maximum of CHF 300 million. ### Legal and supervisory framework; institutional responsibilities - Legal basis: - Banking supervision governed by the banking act of 1992 as amended and the banking ordinance of 1994 as amended. - Banking and accounting legislation based on relevant EU Directives due to EEA membership since 1995. - Division of responsibilities: - Government: granting, withdrawing, and revocation of licenses. - Financial Services Authority (FSA): ongoing supervision; operates an “indirect supervisory system” where onsite inspections are carried out by external auditors licensed by the FSA. - Banking act provides for establishment of a banking commission to advise government and counsel FSA. - A Due Diligence Unit (DDU) handles anti-money laundering issues across financial and related services sectors. - External auditors play a key role in onsite examinations under the indirect supervisory model. ### Assessment methodology and scope - Assessment conducted as part of an offshore financial center assessment in the Principality of Liechtenstein using a five-part qualitative compliance scale: compliant, largely compliant, materially noncompliant, noncompliant, and not applicable. - Legal basis for assessment: Law on Banks and Finance Companies (banking act) of October 21, 1992, as amended, and Ordinance implementing the banking act of February 22, 1994, as amended. - Working sessions with representatives from the FSA, bankers association, auditors association, commercial banks, and banks’ external auditors; external auditor reports reviewed. - Access to consolidated prudential data limited due to lack of resources within the FSA offsite monitoring unit. ### Main findings and overall compliance - Overall CP assessment: - Of the thirty principles (CP1 comprised of six sub-principles), Liechtenstein is compliant or largely compliant with 25 principles and materially non-compliant with 5 principles. - Key legal clarifications needed: - Scope of banking secrecy not defined within Article 36 of the banking act. - Supreme Administrative Court decision of May 7, 2003 reduced legal uncertainty regarding sharing of client account information for supervisory purposes, but sharing in practice remains a concern. - Fixed-term appointment and disclosure of grounds for removal required to ensure independence of the FSA head. - Critical problem: - Serious lack of resources within the Banking Supervision Department (BSD)/FSA, notably staffing shortages undermining supervisory capacity. ### Supervisory framework (CP 1) — findings and numeric details - Legal framework generally adequate given EEA transposition. - Concerns: - Article 36 does not define “banking secrecy.” - Need clearer provisions to secure FSA head independence (fixed-term appointment and disclosure of grounds for removal). - Severe staff shortages: BSD staffed by two persons plus a consultant (head of BSD/FSA assumed position on October 1, 2001); BSD staffing described as seriously understaffed. - Actions and capabilities: - BSD may set prudential standards administratively and collect information in the form and frequency it deems necessary. - BSD has wide powers including qualitative judgment, unfettered access to bank files, and powers to take remedial action; administrative sanctions should be spelled out in detail. ### Licensing and structure (CP 2–5) - Licensing criteria consistent with international practices; fit-and-proper tests applied to directors, senior managers, and heads of internal audit. - Governance requirements strong: dual management structure required (board of non-executive directors of at least three persons; management board at least two persons; internal audit function). - Minimum capital: - Minimum capital recorded as CHF 10 million in law; since 2000 FSA requests CHF 20 million minimum for new banks. - Finance companies minimum capital: CHF 2 million. ### Prudential regulations and requirements (CP 6–13) - Capital adequacy (CP 6): - Definitions and ratios consistent with Basel Accord; general minimum requirement: 8 percent of own funds, and 4 percent of tier one for market risks. - Ratios applied solo (quarterly reporting) and consolidated (semi-annual reporting). - At end-December 2001: out of 17 banks, 16 institutions had a ratio above 20 percent and 1 between 15 percent and 20 percent. - Credit policies and provisioning (CP 7–8): - FSA has not issued detailed regulations for credit risk, loan classification, or provisioning; reliance on external auditors. - Assessment: CP 7 — Largely compliant; CP 8 — Largely compliant. - BO (Annex 3) requires unpaid interest be cancelled after 90 days. - Large exposures and connected lending (CP 9–10): - Large exposures defined as exposures above 10 percent of capital (BO, Article 19); limits: 25 percent for a single exposure and 800 percent for all large exposures; ten largest exposures reported yearly. - BA (Article 8) requires limits to an individual client. - Related-borrower definitions align with international rules; data-transfer restrictions affect global consolidation for internationally active banks. ### Corporate governance and AML (CP 14, 15, 21) - Internal control and audit (CP 14): - Internal audit mandatory (BA, Article 22); internal auditors report directly to the board; external auditors licensed and must verify sound conduct of banking business. - Assessment: CP 14 — Compliant. - Anti-money laundering (CP 15): - Comprehensive Due Diligence Act (DDA) and Executive Ordinance (DDEO) require customer identification, beneficial ownership, due diligence officers, compliance officers, ongoing monitoring, SARs, record keeping, audits of due diligence; DDU has exclusive supervisory authority for DDA compliance. - Assessment: CP 15 — Compliant. - Accounting standards (CP 21): banks follow EU banking and accounting Directives and Swiss guidelines; annual external audit required; assessment: Compliant. ### Methods of ongoing supervision (CP 16–20 and 22) — resource impacts - Onsite/offsite supervision (CP 16, 18): - BSD employs both onsite and offsite systems but in practice relies on external auditors to conduct inspections; inspections at least once a year with external auditor reporting to BSD. - Offsite supervision via periodic returns: monthly liquidity, quarterly capital adequacy and large exposures, half-yearly and annual accounts. - Assessment: CP 16 — Materially non-compliant; CP 18 — Materially non-compliant. - Consequences of resource constraints: - Inability to conduct timely offsite monitoring. - Limited capacity to analyze external audit reports promptly and thoroughly. - Limited understanding of banks’ activities, risks, and financial situations. - Bank management contact (CP 17): - BSD meets banks on an ad-hoc basis; assessment: Materially non-compliant due to insufficient staff to gain thorough understanding. - Validation of supervisory information (CP 19): - External auditors verify supervisory information; BSD approves appointment of external auditors and meets them; assessment: Compliant. - Remedial measures (CP 22): - Article 35 allows BSD to issue “orders” and take remedial actions; government fines up to 50,000 Swiss francs for specified offences. - Assessment: Compliant; comment that “orders” should be detailed in public documents. ### Consolidated and host/foreign supervision (CP 20, 23–25) - Consolidated supervision: - BSD required to supervise on a consolidated basis (Article 41a) in line with EU Directive 2000/12/EC; assessment: CP 20 — Compliant. - Host country supervision and MOUs: - FSA has not established MOUs with foreign regulators. - Legislation should specifically address Liechtenstein banks proposing to establish abroad; assessment: CP 24 — Largely compliant. - Supervision over foreign banks’ establishments: - Subsidiaries of foreign banks subject to similar prudential requirements; Article 36a allows home supervisor to verify information; assessment: CP 25 — Compliant. ### Cross-cutting findings and numeric thresholds - Repeated emphasis on inadequate BSD staffing and expertise: - Current BSD staff complement at time of assessment: two permanent staff (one head and one administrative assistant) plus a consultant banking expert. - Following mission, government approved establishment of two professional positions for auditors/financial analysts; one of two vacancies filled in June 2003. - Specific numeric thresholds and penalties preserved: - Reporting requirement for one month term liability positions exceeding 10 percent of the one month term total liabilities (BO, Article 15). - Government fines up to 50,000 Swiss francs for specified offences related to banking administration. ### Recommended Action Plan — cross-cutting priorities - Priority actions: - Recruit two qualified BSD staff (recently the government assured recruitment of two banking staff members by governmental decision of December 3, 2002; one vacancy filled in June 2003). - Define scope of banking secrecy within Article 36 of the banking act to streamline exchange of information with foreign regulators; consider signing MOUs with major home supervisors. - Clarify supervisory standards and enforcement powers: publish guidelines for operational risk and credit risk assessment; detail remedial actions beyond undefined “orders.” - Selected entries from recommended plan: - Independence and resources (CP 1–2): Recruit experienced staff and/or train new staff. - Information sharing (CP 1–6): Delimit banking secrecy with regard to supervisory concerns. - Other risks (CP 13): Determine applicable norms. - Onsite and offsite supervision (CP 16): Add resources for comprehensive analysis of audit reports and bank reporting. - Bank management contact (CP 17): Add resources to understand banks’ operations. ### Authorities’ response and planned measures - FSA transitional position; government decision of December 3, 2002 assured recruitment of two additional banking staff members; one vacancy filled in June 2003. - Organization streamlined; short- and long-term training program introduced in 2003. - FSA aims to see 28 (93 percent) of the 30 Principles in the range of compliant/largely compliant (starting from 25 of 30, 83 percent). - Supreme Administrative Court decision of May 7, 2003 reconfirmed that Article 36 banking act permits sharing of client account information with foreign counterparts for supervisory purposes under confidentiality safeguards; government to evaluate whether to amend Article 36. ### AML/CFT legal, supervisory, and institutional framework — key findings and statistics - Assessment methodology: FATF 40+8 Methodology (October 11, 2002). - Financial sector size and counts: - 17 banks with over 200 thousand customer relationships. - Approximately 355 trustees and trust companies providing services for approximately 31 thousand incorporated entities. - 51 thousand foundations. - 1,500 trusts with family purposes. - 101 lawyers (many acting as trustees). - 12 insurance companies engaged in direct life insurance. - 16 mutual fund management companies managing 81 investment funds. - Commercial registry: estimated 85,000 total entities enrolled. - AML/CFT legal instruments and institutions: - Law on Professional Due Diligence in Financial Transactions (DDA) and Executive Order (DDEO) set KYC, UBO, monitoring, SAR, record-keeping, audit, audits by DDU. - FIU established February 2001, codified May 8, 2002; independent, reports to prime minister; member of Egmont Group. - DDU created October 2001 to administer compliance across financial intermediaries. - MLA Law (effective November 6, 2000) streamlined mutual legal assistance. - SARs and FIU statistics: - 2001: 158 SARs received — 81 from banks, 64 from fiduciaries, 13 from lawyers; 121 of 158 forwarded to public prosecutor. - 2002 full year: 202 SARs — 96 from banks, 95 from fiduciaries, 6 from lawyers, 2 from insurance companies, 1 from investment companies, 2 from Liechtenstein Post. - FIU staffing: six full-time staff (one administrative support); operational budget for 2002 (in addition to salaries): CHF 220,000. - Confiscation and freezing: - By August 2000 public prosecutor estimates above SwF 500 million frozen or confiscated in aggregate. - Example of recovery: assets ≈ $28 million recovered and turned over to the United States (less a small percentage retained by Liechtenstein). - Criminalization and penalties: - ML criminalized in Article 165 StGB; amendments on December 19, 2000 allow prosecution of self-laundering; mental element dolus eventualis. - Penalties: - Article 165 StGB: imprisonment between six months and five years, or fines up to 360 daily rates. - Article 278a StGB (FT): imprisonment from one to ten years. - Article 15 DDA: imprisonment of six months or fines up to 360 per diem units for willful violations. - Criminal liability for ML and FT presently extends to natural persons but not legal entities; Article 18 DDA extends Article 15 DDA criminal provisions to legal entities for certain DDA offences. ### AML/CFT implementation findings and recommendations (selected) - KYC and beneficial ownership: - Article 4 DDA requires customer identification; Article 5 DDA requires establishment of ultimate beneficial owner (UBO defined as natural person). - Transitional and audit findings: - Banks required to obtain/update beneficial ownership for existing relationships by December 31, 2001. - April–May 2002 audit of 17 banks: 3.8 percent of 2,196 relationships had missing (0.93 percent) or insufficient (2.57 percent) beneficial ownership information. - DDU trustee audits (Oct–Nov 2001): 6 percent formal/other deficiencies; 2002 trustee audit deficiencies ~8 percent (mostly minor); ~0.59 percent of audited relationships had UBO unknown. - Cash transaction threshold: CHF 25,000 triggers CDD/UBO requirements. - SAR blocking and tipping-off: - Article 9 DDA allows FIU/public prosecutor up to ten days to take necessary measures (automatic ten-day blocking upon SAR receipt); assessment recommended abolishing automatic ten-day blocking and empowering FIU with discretionary initial blocking (suggested 48 hours) with extensions to ten days, and impose permanent prohibition against tipping off with administrative sanctions. - External auditors and dualistic supervision: - DDU relies on external auditors for routine audits; banks/finance companies/investment undertakings/insurance companies audited annually; trustees/lawyers at least once every three years. - DDU ordered 80 due diligence audits in 2001 and about 330 in 2002. - Recommendation: DDU evaluate external auditors’ performance and coordinate supervisory and due diligence audits (ideally by same auditor). - FIU effectiveness and operations: - FIU operational since March 1, 2001; effective analysis and dissemination of financial intelligence; SAR flow and forwarding to prosecutors robust. - Recommendation: formalize coordination procedures among FIU, DDU, FSA, and law enforcement; disseminate SAR form and instructions (e.g., via FIU website). - International cooperation: - MLA Law improved timeliness and effectiveness; urgent MLA typically expedited; high volume of incoming and outgoing requests with low rejection rates. - Recommendation: pursue additional multilateral/bilateral agreements; clarify fiscal-exclusion interpretations. ### IOSCO and IAIS assessments — supervisory scope and market implications - IOSCO assessment: - Securities activity limited; scope includes universal banks, investment undertakings (81 funds with CHF 5.2 billion AUM), and trustees as asset managers. - Market counts: - 17 banks licensed and carrying out securities activities. - 81 licensed investment undertakings with CHF 5.2 billion assets under management. - 355 licenses granted across entities (many operate with more than one license). - Key IOSCO findings: - FSA mandate not consolidated in single statute; limited independence—cannot unilaterally approve/refuse/withdraw licenses (except trustees) or levy fines; fees remitted to general revenue and total less than operational costs. - Trustees acting as asset managers are largely unsupervised; Trustees Association acts as mandatory SRO but is unsupervised by FSA. - Recommendations: consolidate FSA role in single law; grant FSA licensing, rulemaking, sanctioning powers; increase staffing; supervise trustees performing asset management; enter MOUs with key foreign supervisors (notably Swiss authorities). - IOSCO implementation counts (selected): - Implemented: 7; Broadly Implemented: 10; Partly Implemented: 7; Not applicable: 6. - IAIS assessment (insurance): - Insurance market: at end-2002 there were 12 life insurers, 4 nonlife, 5 reinsurance companies; local market premium income about 197 million euros at end-2001; life and reinsurance market activity amounted to 319 million euros in 2001. - Assets: CHF 1.1 billion in direct insurance; CHF 0.78 billion for reinsurance business. - Unit-linked policies: ~65 percent of total technical reserves of life insurance companies. - IAIS key findings: - ISA staffed by six trained staff (four university graduates); ISA costs exceed charges levied on companies; additional resources needed. - Reporting and onsite inspection capacity limited; aggregate solvency data not available. - Recommended actions: increase ISA staff; require new reporting templates beginning 2003; perform systematic onsite inspections when staff available; develop guidelines for unit-linked products and asset-liability management. - IAIS summary observance counts: - Observed: 10; Broadly observed: 4; Materially non-observed: 1 (CP 13 — onsite inspections capacity); Not applicable: 2. ### Consolidated recommended plan of actions (high level) - Strengthen FSA legal basis and independence: - Consolidate FSA role and authority in a single law. - Grant FSA licensing, rulemaking, and sanctioning powers (including levy fines and withdraw licenses). - Set transparent criteria for selection and dismissal of FSA head; consider board of directors with fixed terms. - Build capacity and resources: - Urgently increase staffing resources—priority recruitment and training; recruit experienced staff for banking and investment supervision. - Consider technical cooperation with other jurisdictions (short-term secondments or placements). - Improve transparency and information sharing: - Adopt policies to operationalize sharing of client account information with foreign supervisors; pursue MOUs especially with Swiss authorities; designate a contact person for foreign supervisor requests. - Launch an FSA website with laws, ordinances, proposed policies, processes, and a detailed annual report. - Strengthen AML/CFT and trustee oversight: - Abolish automatic ten-day SAR blocking; empower FIU with discretionary blocking and strengthen tipping-off prohibitions. - Enhance trustee supervision: separate licensing for asset managers, require periodic audits, and apply conduct rules. - DDU to refine audit quality assurance and face-to-face debriefing of auditors within 90 days of audits. - Insurance and CIS reforms: - Develop more detailed NAV and valuation rules for illiquid securities; conflicts-of-interest rules for funds; duties of custodians to report material non-compliance. - For insurance, require reporting templates on asset types, stress-testing and clearer rules for unit-linked assets and surrender-value liquidity risks. *Source: IMF assessment of observance of the Basel Core Principles, IOSCO Objectives and Principles, IAIS Core Principles, and AML/CFT frameworks for the Principality of Liechtenstein (cr03290).* ### 1.1 Detailed Assessment of Compliance of the Basel Core Principles....................................10 ### 1.1 Detailed Assessment of Compliance of the Basel Core Principles ### Institutional and macroprudential setting; market structure overview - Liechtenstein has a GDP of CHF 4 billion, of which 42 percent comes from industry and 28 percent from financial services. - The employed population is 30 thousand, and there are 34 thousand residents (including 34 percent foreigners). - Seventeen banks and two finance companies operate in Liechtenstein. - At end-2001, banking assets were CHF 34 billion, and assets under management were CHF 106 billion. - Only four banks published the amount of assets under management. - The market is highly concentrated: the three major banks account for 90 percent of total banking assets. - All banks report high capital adequacy ratio above 15 percent (and 16 above 20 percent at end-2001). - Minimum capital for banks is CHF 20 million. - Total staff working in the banking sector is 1,760 people. - Ten banks are subsidiaries of foreign banks (five from Austria, three from Switzerland, one from Germany, and one from France); four banks are owned by local interests. - The major business is private banking and wealth management; credit activities are largely mortgage and Lombard loans. - 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. - Liechtenstein has been a member of the European Economic Area (EEA) since 1995 and is obliged to transpose European Union (EU) legislation into national legislation; banking and accounting legislation is based on relevant EU Directives. - The Swiss franc is the official currency, and the Swiss central bank acts as lender of last resort. - Planning is underway to establish an integrated financial services supervisory authority: - Creation of the new agency is planned for early 2005, with legislative changes to be completed in mid 2004. - The Liechtenstein Bankers Association employs four full-time staff and manages a deposit and investment protection scheme: - Coverage up to Euro 20 thousand per customer and a maximum of CHF 300 million. ### Legal and supervisory framework; institutional responsibilities - Banking supervision is governed by the banking act of 1992 as amended, and the banking ordinance of 1994 as amended. - Government and the Financial Services Authority (FSA) share responsibility for banking supervision: - Government: granting, withdrawing, and revocation of licenses. - FSA: ongoing supervision; operates an “indirect supervisory system” where onsite inspections are carried out by external auditors licensed by the FSA. - The banking act provides for establishment of a banking commission to advise the government on supervisory matters and to counsel the FSA’s independent work. - A Due Diligence Unit (DDU) handles anti-money laundering issues across financial and related services sectors. - External auditors play a key role in onsite examinations under the indirect supervisory model. ### Assessment methodology and scope - The assessment was conducted as part of an offshore financial center assessment in the Principality of Liechtenstein. - The assessment of compliance is qualitative using a five-part system: compliant, largely compliant, materially noncompliant, noncompliant, and not applicable. - To be "compliant," all “essential” criteria generally must be met without significant deficiencies. - "Largely compliant" indicates only minor shortcomings. - "Materially non-compliant" indicates shortcomings sufficient to raise doubts about achieving the principle’s objective but with substantive progress made. - "Non-compliant" indicates no substantive progress or insufficient information to determine progress. - "Not applicable" is for principles deemed irrelevant by the assessors. - The assessment was conducted on the basis of the Law on Banks and Finance Companies (banking act) of October 21, 1992, as amended, and the Ordinance implementing the banking act of February 22, 1994, as amended. - Working sessions were held with representatives from the FSA, the bankers association, the auditors association, commercial banks, and banks’ external auditors; external auditor reports were reviewed. - Access to consolidated prudential data was limited due to lack of resources within the offsite monitoring unit of the FSA. ### Main findings and overall compliance - The assessment concluded that of the thirty principles (CP1 comprised of six sub-principles), Liechtenstein is compliant or largely compliant with 25 principles and materially non-compliant with the five other principles. - Key legal clarifications needed: - Scope of banking secrecy is not defined within Article 36 of the banking act. - A recent court ruling reduced legal uncertainty regarding banks’ ability to provide information to the FSA upon request of a foreign supervisory authority; however, sharing of client information in practice remains a concern. - Fixed-term appointment and disclosure of grounds for removal are required to ensure independence of the FSA head. - The most critical problem identified is the serious lack of resources within the Banking Supervision Department, notably in staff. ### Supervisory framework (CP 1) - Banking act and banking ordinance provide an adequate framework for banking supervision given EEA transposition efforts. - Concerns: - Undefined scope of banking secrecy (Article 36). - Need for clearer provisions to secure FSA head independence (fixed term appointment and disclosure of grounds for removal). - Severe staff shortages undermining supervisory capacity. ### Licensing and structure (CP 2–5) - Banking activity and licensing criteria for banks and financial companies are consistent with international practices. - Fit-and-proper tests are applied to directors, senior managers, and heads of internal audits. - Governance requirements are strong and consistent with international norms. ### Prudential regulations and requirements (CP 6–13) - Banks operate within a prudential regulatory framework aligned with EU and Basel standards and largely modeled after Switzerland. - The FSA has not defined specific guidelines for operational risk or for credit risk assessment and relies extensively on external auditors for onsite examinations. - Absence of specific FSA guidelines risks inconsistent application of policies across the industry. ### Corporate governance and AML (CP 14, 15, 21) - Banking act and banking ordinance require a dual management structure (board of non-executive directors and management board). - Internal audit and external auditor functions are defined and subject to supervisory scrutiny via fit-and-proper tests and licensing for audit firms. - Comprehensive Due Diligence Act (DDA) supports AML policies and procedures. ### Methods of ongoing supervision (CP 16–20 and 22) - The supervisory authority’s ability to carry out its functions is materially undermined by lack of staff and expertise. - Current FSA resources limited to the head of the FSA (who assumed position on October 1, 2001), a consultant largely involved in EU transposition, and administrative staff. - Consequences of resource constraints: - Inability to conduct timely offsite monitoring of banks. - Limited capacity to analyze external audit reports promptly and thoroughly. - Limited understanding of banks’ activities, risks, and financial situations. - Enforcement powers should be more detailed and specific; the use of “orders” by the FSA requires enhancement. *Source: IMF assessment of observance of the Basel Core Principles for Effective Banking Supervision in the Principality of Liechtenstein.* ### 19. Consolidated supervision can be carried out whether Liechtenstein is the home or the ### 19. Consolidated supervision can be carried out whether Liechtenstein is the home or the host country ### Consolidated supervision and MOUs - Consolidated supervision can be carried out whether Liechtenstein is the home or the host country. - The Financial Services Authority (FSA) has not established MOUs with any foreign regulators. - Specific provisions should be included in the legislation for Liechtenstein banks proposing to establish abroad. ### Principle 1 — Objectives, Autonomy, Powers, and Resources - Overall assessment fragments: - Principle 1(1) — Assessment: Largely compliant. - Principle 1(2) — Assessment: Materially non-compliant. - Principle 1(3) — Assessment: Compliant. - Principle 1(4) — Assessment: Compliant. - Principle 1(5) — Assessment: Compliant. - Principle 1(6) — Assessment: Largely compliant. - Description and findings: - Both the government and the FSA are responsible for banking supervision: the government grants, withdraws, and revokes licenses; the FSA is responsible for ongoing supervision. - The legislative base is comprehensive and based on implementation of EU banking legislation required of Liechtenstein as a member of the EEA. - The present system has worked, but a single regulatory body responsible for all aspects of supervision (including licensing) would provide a more cohesive approach; constitutional difficulties are being considered. - The banking supervision department (BSD) is a department within the FSA and is staffed by two persons and a banking consultant. The head of the BSD, Mr. Melliger, is also head of the FSA and has been with the FSA for just one month. The second person is an administrative assistant. - The head of the FSA/BSD was appointed by open competition, has no minimum term, and can only be dismissed on grounds applicable to all civil servants. There are no provisions for public disclosure of the reasons for dismissal should this occur. - BSD staffing is seriously understaffed, creating knowledge deficits and difficulties in understanding banks’ operations and reviewing reports. - BSD is recruiting an analyst; it is felt that a second analyst is also required. Competitive salaries are essential to attract the right people. - Following the mission, the government approved the establishment of two professional positions for auditors/financial analysts. - BSD may set prudential standards administratively and collect information from banks in the form and frequency it deems necessary. - BSD has wide powers: qualitative judgment, unfettered access to banks’ files, and powers to take prompt remedial action. Administrative sanctions should be spelled out in detail (see CP 22). - Under the law on Official Liability, 1966, public employees are not held liable as long as they are not acting with willful negligence; there are no statutory provisions protecting supervisory staff from the costs of defending their actions. The 1966 Act appears adequate but clarity on coverage for defense costs is desirable. - Article 36 of the banking act permits sharing information with foreign supervisors provided “the public order, other essential interests of the country, and the banking secrecy are not violated thereby.” The provision does not apply where international treaties dictate otherwise. - The term “banking secrecy” is not defined in Article 36; practical difficulties have arisen (example: EU member state query on possible market manipulation). The Supreme Administrative Court decision of May 7, 2003 confirmed that sharing client account information is permissible for supervisory purposes only if appropriate confidentiality safeguards are in place. The FSA intends to begin sharing information on this basis and is reviewing possible amendment to Article 36. - Information received from overseas regulators is subject to Liechtenstein secrecy provisions and can only be used for prudential supervision. ### Principle 2 — Permissible Activities - Assessment: Compliant. - Findings: - BA (Article 3, Para. 3) lists banking activities including acceptance of deposits, granting of loans, safe custody business, off-balance sheet banking transactions, and participation in securities and banking services. - Banks are defined as entities allowed to conduct banking activities (BA, Article 3, Para. 1) on a professional basis; only banks can take deposits. - BO (Article 1) further encompasses portfolio management, payment services, investment management, services including issuing securities. - BA (Article 16, Para. 1) stipulates that only licensed banks may use the word “bank” in designations of business or advertising; BA (Article 16, Para. 4) empowers the FSA to ensure companies’ names are not misleading. - Government may dissolve any non-licensed company conducting banking activities (BA, Article 28, Para. 4). - The Swiss Post Office operating in Liechtenstein conducts some banking activities; a 1999 law placed these activities under FSA supervision, but conventions between Switzerland and Liechtenstein and management arrangements must be analyzed before appropriate supervision can be conducted. ### Principle 3 — Licensing Criteria - Assessment: Compliant. - Findings: - Conditions and procedures for licensing are specified in Articles 17 to 30 of the BA and Articles 28 to 35 of the BO; FSA internal guidelines list detailed information and forms required. - BA (Article 15, Para. 3) indicates economic needs of the market may not be taken into consideration; the market is open to competition. - Licensing authority is the government (BA, Article 15, Para. 1); applications filed with the FSA which must ensure within 12 months that conditions are met. FSA proposals are submitted to the Banking Commission for consultation before transmission to government. - Licensing criteria include adequate ownership, statutes, internal organization, resources, and business plan. Specific governance requirements: board of non-executive directors of at least three persons, management board of at least two persons, internal auditors; head office must be in Liechtenstein; one board member of each board must be resident and able to represent the bank. - Fit-and-proper tests apply to board members, management board, and head of internal audit (BA, Article 19). FSA has access to domestic official records and may contact foreign counterparts. - Minimum capital is CHF 10 million; since 2000 the FSA requests all new banks to bring CHF 20 million minimum capital. Finance companies must have capital of CHF 2 million. - Applicants must have an external auditor chosen from a list of audit firms licensed by the FSA. Any change in license prerequisites must be notified to or approved by the supervisory authority. - Foreign banking groups opening a subsidiary must have home supervisors conduct consolidated supervision and not object to establishment (BA, Article 15). Similar conditions apply for representative offices. - Decisions on licenses must be notified within six months after complete application; grounds for refusal specified; decisions can be appealed to the administrative court. No applications have been denied in recent years. - Licenses can be withdrawn if legal prerequisites or contractual obligations are no longer met (BA, Article 28, Para. 1). ### Principle 4 — Ownership - Assessment: Compliant. - Findings: - “Qualified interest” defined as 10 percent minimum of capital (BA, Article 3a, Para. h); such shareholders must ensure solid and prudent management (BA, Article 24, Para. 3). - Bearer shares are allowed but disclosure of beneficial owners is required per the DDA (Article 4 and Article 5). - FSA can prohibit transactions or suspend voting rights. - BO (Article 27a) requires prior information to the FSA from any person intending to directly or indirectly hold or sell a qualified interest, or increase participation to obtain 20, 33, or 50 percent of voting rights or control. - If acquisition would endanger sound and prudent management, FSA can prohibit acquisition within three months (BO, Article 27a, Para. 3) or impose suspension of voting rights (BO, Article 27a, Para. 8). - BA (Article 26a, Para. 1) and BO (Article 27a, Para. 4 and 6) require banks to inform FSA of any change of a qualified interest and to report personal information on these shareholders at least once a year. ### Principle 5 — Investment Criteria - Assessment: Compliant. - Findings: - Laws do not formally give FSA power to review and approve banks’ acquisitions and investments, but banks must submit descriptions of business and organization to supervisory authorities (BO, Article 31). - At licensing, BA (Article 21) requires statutes to define banking and non-banking business circles; statutes and amendments must be approved by the FSA (BA, Article 35, Para. 3b) and changes reported before public announcement (BA, Article 26, Para. 2). - Banks’ investments in non-banks or entities not conducting banking-related business are limited to 15 percent of the capital of each entity (BO, Article 20a, Para. 1); total of these holdings cannot exceed 60 percent of a bank’s capital (BO, Article 20a, Para. 3). Limits do not apply to banks that cover such investments with capital (BO, Article 20a, Para. 5). Information must be regularly reported to the FSA and is reviewed through onsite examinations. ### Principle 6 — Capital Adequacy - Assessment: Compliant. - Findings and statistics: - BA requires banks’ own funds to be in appropriate proportion to risks (Article 4). - Definitions of own funds, risk-weighted assets, and off-balance sheet exposures in BO (Articles 4 to 7) are consistent with the Basel Accord. - General minimum requirement: 8 percent of the own funds, and 4 percent of the tier one for market risks (BO, Article 4, Para. 2). - Ratio applied on both a solo (quarterly reporting) and a consolidated basis (semi-annual reporting). FSA can issue final decisions and orders if norms are not met; ultimately supervisory authority may report to government to withdraw license (BA, Article 28). - Out of the 17 banks operating in Liechtenstein, 16 institutions had a ratio above 20 percent and 1 between 15 percent and 20 percent at the end of December 2001. ### Principle 7 — Credit Policies - Assessment: Largely compliant. - Findings: - FSA has not issued detailed or specific regulations concerning credit risks; banks required to define sound credit policies and procedures. - External auditors perform onsite assessment of credit practices and opine on true and fair value of loans. - Banks’ exposure to credit risk is limited in Liechtenstein: most institutions have small portfolios of Lombard credit; only the three major banks provide mortgage loans. - FSA has not defined standards for loan portfolio review, asset and off-balance sheet exposure classification, or provisioning; reliance is exclusively on external auditors referencing “international best practices.” - Three “letters of urgency,” based on annual external audit reports, have been sent to banks for various weaknesses in loan procedures in recent months. ### Principle 8 — Loan Evaluation and Loan-Loss Provisioning - Assessment: Largely compliant. - Findings: - FSA has not published detailed regulations concerning loan classification or loan provisioning except that unpaid interest should be cancelled after 90 days (BO, Annex 3). - Banks define their own asset classification and provisioning rules; external auditors assess portfolio quality onsite. ### Principle 9 — Large Exposure Limits - Assessment: Compliant. - Findings: - BA (Article 8) requires banks to limit exposure to an individual client. - Large exposures defined as exposures above 10 percent of the capital (BO, Article 19); reported quarterly. - Limits: 25 percent for a single exposure and 800 percent for all large exposures; the ten largest exposures reported yearly. - Definition of related borrowers aligns with international rules; BA gives broader supervisory definition; Persons and Companies Act sets rules for financial consolidation. - Bankers Association developed software for collection and reporting of these risks used by most banks. - Regulations restricting transfer of personal data limit some internationally active banks’ ability to automatically consolidate global exposures to a single client. ### Principle 10 — Connected Lending - (Description begins in source but is truncated in the supplied content.) - Findings (from available text): - Banks are required to follow the “generally acknowledged principles of the banking business” when granting loans to related persons. - Related persons are defined as members of corporate bodies (board of directors, management board, audit), external audit firm, qualified shareholders, and persons or entities related to them (BA, Article 9 and BO, ...). *International Monetary Fund (detailed assessment from cr03290)* ### Annex 3, Para. 81). Bank’s statutes must include provisions on transactions by corporate ### Annex 3, Para. 81). Bank’s statutes must include provisions on transactions by corporate bodies and personnel (BO, Article 31, Para. 2c) ### Principle 11. Country Risk — Description, Assessment, Comments - Description: - Pursuant to Article 21a of the BO, the FSA has defined specific guidelines regarding country risk (BO, Annex 4–1). - Banks are requested to identify, measure, limit, and monitor their country exposure, as well as booking the provisions that they deemed to be necessary. - Specific reporting has to be established on an annual basis by the largest banks (BO, Annex 3, Table J). - Assessment: Compliant - Comments: (no comments provided) ### Principle 12. Market Risks — Description, Assessment, Comments - Description: - Market-risk measurement is defined in the BO (Article 6 and Annex 1, 4, 4-2). - The three major banks only hold substantial market exposures and use the standard approach to calculate their global exposure. - Other banks have to meet the norms which are applicable to their activities, essentially limits on foreign exchange positions. - Assessment: Compliant - Comments: (no comments provided) ### Principle 13. Other Risks — Description, Assessment, Comments - Description: - The BO stipulates that banks must determine principles, organization and procedures of risk management, including market, counterpart, settlement, liquidity, image, operational and legal risks (Article 21a). - The BO has detailed guidelines for interest risk assessment and monitoring, that include requirements for VaR and stress testing exposures (Annex 4). - Banks in Liechtenstein hold large liquid assets which are invested on the Swiss money market; the BA requests banks to maintain sufficient liquidity (Article 5), and the BO defines a monthly cash liquidity ratio and a quarterly total liquidity ratio (Articles 8 to 16). - Banks must report on one month term liability positions vis-à-vis a single counterpart that exceed 10 percent of the one month term total liabilities (Article 15). - Specific provisions have been defined regarding outsourcing of “essential” services (BO, Article 27e); essential services relate to the assessment and monitoring of risks, especially, with regards to EDP, administration, and accounting (BO, Annex 6). - Assessment: Materially non-compliant - Comments: - In private banking, operational, legal, and reputation risks are major issues. - Considering the lack of international published standards in that regard, the FSA should publish some guidelines to make sure that minimum requirements are met by all banks, and to ensure consistency within the industry. ### Principle 14. Internal Control and Audit — Description, Assessment, Comments - Description: - The BA (Article 22 and 23) sets minimum requirements regarding the number, functions, and qualifications of directors and management board members; the organizational structure must be submitted to the FSA and any change reported. - Banks are required to set up an internal audit function (BA, Article 22); the BO defines rights and duties of the internal audit (Article 34). - The head of internal audit is subject on a permanent basis to the fit-and-proper requirements; with FSA approval, internal audit can be outsourced. - Internal auditors must report directly to the board of directors (BA, Article 22); they coordinate with external auditors and make reports available to them (BA, Article 11). - Bank accounts must be audited every year by an independent audit chosen on a list of firms licensed by the government (BA, Article 11); criteria for licensing are based on independence, professional organization and management, and on financial soundness of the firm (BA, Article 37). - Audit firms must verify compliance with the law and the statutes and that banking business is conducted on a sound basis; auditors must have access to all documents they deem necessary (BA, Article 11). - Appropriate measures must be enforced when legal provisions are not met (BA, Article 39), and the FSA must be informed of the outcome; any serious infringement must be immediately reported to the supervisory authorities (Article 39). - The scope of audit reviews is defined through the regulatory outline of audit reports (BO, Annex 5). - Assessment: Compliant - Comments: (no comments provided) ### Principle 15. Money Laundering — Description, Assessment, Comments - Description: - Under the Law on Professional Due Diligence in Financial Transactions (the DDA), as amended in 2001, banks are required to have policies, procedures, and internal controls to prevent use of the bank for money laundering, predicate crimes to money laundering, and organized crime. - The Due Diligence Unit (DDU) has exclusive supervisory authority for ensuring compliance with due diligence and suspicious activity reporting; the FSA has no role in this area although the DDU apprises the banking supervisor of issues of common interest. - The DDU has wide powers to exchange information with domestic and foreign competent authorities, although sharing of information with foreign supervisory authorities may still be subject to banking secrecy. The financial intelligence unit (FIU) has authority to share transaction-specific information with counterpart FIUs when indications of money laundering, predicate offenses or organized crime appear. - The DDA requires banks to implement procedures for identification of customers, establishing beneficial ownership information, and repetition of these verifications if doubts arise. - The DDA and the Executive Ordinance for Due Diligence (DDEO) contain specific requirements for minimum customer-profile information. - Banks must appoint a due diligence officer (responsible for implementation of internal control policies) and a compliance officer (responsible for compliance with due diligence measures and for receiving and coordinating suspicious activity reporting). - Banks are required to monitor relationships and accounts on an ongoing basis and to monitor transactions for unusual or suspicious activity; DDU guidelines provide indicia of money laundering and require implementation of monitoring procedures, preferably through use of IT systems, clarification of doubtful activities, and mandatory reporting when doubts remain. - Banks and employees are shielded from liability when reporting suspicious activities in good faith. Penal and administrative sanctions apply for failure to comply with due diligence requirements. - Compliance with due diligence is monitored on a yearly basis through external audits, conducted separately from the annual supervisory audits; external auditors must ensure due diligence duties are undertaken and documentation preserved. - The detailed assessment for anti-money laundering and combating the financing of terrorism provides further discussion on requirements and supervisory measures for AML applicable to banks. - Assessment: Compliant - Comments: - The government is proceeding with its plan to consolidate the current functions of the FSA, the ISA, and the DDU into a single integrated financial supervisory authority, which will bring the AML function for banks back together with the banking supervision function. ### Principle 16. Onsite and Offsite Supervision — Description, Assessment, Comments - Description: - The Banking Supervision Department (BSD) employs both onsite and offsite systems of supervision. - While BSD has power to carry out onsite inspections, in practice such inspections are carried out by external auditors on its behalf and are in addition to the statutory audit carried out by external auditors. - Inspections are carried out at least once a year, and the external auditor is required to report to the BSD after each inspection. The banking ordinance sets out issues to be included in the report. - Offsite supervision is achieved through reports banks must submit monthly, quarterly, half-yearly, or annually, including liquidity reports (monthly), capital adequacy and large exposure reports (quarterly), and half-yearly and annual accounts. - External auditors carry out random checks on the accuracy of these reports; BSD reviews and analyzes these reports. - Assessment: Materially non-compliant. - Comments: - Serious questions arise as to the ability of the BSD with its current staff levels and lack of expertise to carry out meaningful analysis of inspection reports and periodic reports. - As recommended in BCP 1, additional staff are required in the Banking Supervision Department. ### Principle 17. Bank Management Contact — Description, Assessment, Comments - Description: - BSD is open to meetings with banks and currently meets them on an ad-hoc basis; it gains awareness of banks’ activities from external auditor reports and banks’ own reports. - Banks appear to notify BSD of substantive changes or material adverse developments, including breaches of legal and prudential requirements. - Assessment: Materially non-compliant - Comments: - A thorough understanding of banks’ operations can only be achieved by appointment of additional qualified staff. - Current BSD staff complement is two—Mr. Melliger (who has overall responsibility for the FSA and has been with the authority for just one month) and an administrative assistant; the department is also supported by a consultant banking expert. - Mr. Melliger proposes to meet each of the 17 banks in the coming period; at this point, the department’s knowledge of the banks is incomplete. - The banking community is small and relatively homogeneous (private banking) and onsite supervision is carried out by external auditors, but effective supervision requires detailed knowledge of the banks and their operations. - Highlights need for a more structured and better resourced banking supervision department. ### Principle 18. Offsite Supervision — Description, Assessment, Comments - Description: - The banking act and ordinance provide for timely receipt by the BSD of prudential and statistical information on a solo and consolidated basis, including data on- and off-balance assets and liabilities, profit and loss, capital adequacy, profitability, large exposures, etc. - Accounting technique for solo and consolidated accounts is governed by EU banking and accounting law. - All banks are required to report as at the same reporting date to allow comparisons across banks. - Assessment: Materially non-compliant - Comments: - The law and range of returns are adequate, but the department currently lacks resources to carry out meaningful analysis. - Underscores need for a properly resourced banking supervision department. ### Principle 19. Validation of Supervisory Information — Description, Assessment, Comments - Description: - External auditors are used to verify supervisory information; in addition to statutory audit, external auditors must by law carry out a ‘banking’ audit with terms set by the BSD. - Banking audits are carried out annually and cover a broad range of banking activity; a report on each audit is presented to the BSD. - BSD may request external auditors to carry out further audits as deemed fit. - Banks are subject to annual AML audits instigated by the DDU; these auditors must be different from banking auditors. - External auditors must inform BSD immediately on becoming aware of any serious issues. - BSD must approve in advance the appointment of the external auditor; in practice auditors are major international accountancy firms. - BSD has power to meet with external auditors and has done so. - Each bank is required to employ an internal auditor; for small banks this function may be outsourced to external accountants. - Assessment: Compliant. - Comments: (no comments provided) ### Principle 20. Consolidated Supervision — Description, Assessment, Comments - Description: - BSD is required to supervise banks on a consolidated basis under Article 41a of the banking act based on EU Directive 2000/12/EC. - All banks must prepare solo and consolidated accounts and calculate relevant ratios (e.g., capital adequacy, large exposures) on a consolidated basis. - External auditors review consolidated accounts in banking audits. - Banks are allowed to establish operations in foreign jurisdictions only where rules allow free flow of information to facilitate effective consolidated supervision. - Assessment: Compliant - Comments: - BSD would benefit from properly qualified staff to assess consolidated accounts and consolidated returns submitted (see CP18). ### Principle 21. Accounting Standards — Description, Assessment, Comments - Description: - In accordance with EU banking and accounting Directives transposed into Liechtenstein law, all banks must maintain adequate records drawn up in accordance with consistent accounting standards. - Banks must meet accounting guidelines set by the Swiss regulatory authority and the Swiss Bankers’ Association. - Banks are subject to an annual external audit required to opine whether accounts give a true and fair view. - Banks are required to publish annual and semi-annual accounts. - The Banking Association and the Department of Statistics publish aggregate data on the Liechtenstein banking industry yearly. - Assessment: Compliant - Comments: (no comments provided) ### Principle 22. Remedial Measures — Description, Assessment, Comments - Description: - Article 35 allows the BSD to take all necessary measures to remedy violations; Article 35.4 states “If the Financial Services Authority learns about any infringements of the law or about other grievances, it shall issue the orders required to achieve the regular situation and to eliminate the grievances.” - The term “the orders” is derived from the Public Administration Act allowing administrative bodies to issue sanctions; under that act, the FSA may take actions such as removal of any officer of a bank, suspension of business by a bank, recommending to the government that it withdraw a license, etc. - The Court of Justice can impose imprisonment and fines on banks and bank staff for various offences, including violating obligations connected with a license, furnishing false information to the FSA, failure to keep proper books and records, etc. - The government can impose fines up to 50,000 Swiss francs for offences including failure to produce annual accounts or communicate with the FSA. - Assessment: Compliant - Comments: - The remedial powers appear adequate; however, the actions the FSA can take under “the orders” should be detailed in some public documents. ### Principle 23. Globally Consolidated Supervision — Description, Assessment, Comments - Description: - All operations of Liechtenstein banks, at home or in other jurisdictions, are included for consolidated supervision. - Banks proposing to establish operations abroad must obtain BSD permission and submit a business plan; they must satisfy BSD that rules of those jurisdictions would not impede effective consolidated supervision. - External auditors must consider consolidated position and satisfy themselves as to appropriateness of group organization and enforcement of group management principles. - Assessment: Compliant - Comments: (no comments provided) ### Principle 24. Host Country Supervision — Description, Assessment, Comments - Description: - Liechtenstein banks are permitted to establish overseas operations; FSA will only permit establishment in countries where it is satisfied with the local supervisory regime and can prevent establishment in countries with secrecy laws or regulations prohibiting flows of information necessary for supervision. - Liechtenstein has not established MOUs with any foreign regulator. - In the past, the FSA has contacted host supervisors of overseas operations. - Assessment: Largely compliant. - Comments: - BSD relies on general supervisory powers to oversee banks proposing to establish abroad and interprets Article 30o (dealing with foreign banks proposing branches in Liechtenstein) as applying to Liechtenstein banks proposing to establish abroad. - It would be desirable to have specific legislation dealing with Liechtenstein banks proposing to establish abroad. - Liechtenstein should consider introducing legislation dealing specifically with that issue. ### Principle 25. Supervision Over Foreign Banks’ Establishments — Description, Assessment, Comments - Description: - All subsidiaries (there are no branches) of foreign banks are subject to similar prudential, inspection, and regulatory reporting requirements as domestic banks. - All home country supervisors (Switzerland, Austria, and France) practice consolidated global supervision. - Article 36a of the banking act provides that the home country supervisor may verify information required about a subsidiary domiciled in Liechtenstein, by onsite visit or by requesting the FSA to do it; to date, no foreign regulator has requested verification. - Article 36a stipulates such information is used exclusively for consolidated supervision and requesting authorities are bound by official or professional secrecy. - Provisions of Article 36a relating to sharing information for consolidated supervision do not make reference to banking secrecy unlike Article 36, which conditions furnishing official information to foreign supervisors on public order, other essential interests of the country, and banking secrecy. - Assessment: Compliant - Comments: (no comments provided) ### Cross-cutting Findings and Resource Constraints - External auditors perform substantive onsite inspection functions and validation of supervisory information; banking audits and AML audits must be conducted by different auditors. - Repeated findings stress inadequate staffing and expertise within the Banking Supervision Department: - Current BSD staff complement is two (Mr. Melliger and an administrative assistant) plus a consultant banking expert. - The department’s ability to analyze inspection reports and prudential returns is constrained and described as requiring additional qualified staff. - Specific numeric thresholds and penalties preserved: - Reporting requirement for one month term liability positions exceeding 10 percent of the one month term total liabilities (Article 15). - Government fines up to 50,000 Swiss francs for specified offences. *Source: IMF assessment of Liechtenstein banking supervision (Annex 3 excerpts and related principles).* ### 1. Objectives, Autonomy, Powers, and Resources ### 1. Objectives, Autonomy, Powers, and Resources ### Recommended Action Plan — cross-cutting issues and priorities - Three major issues that cut across several Core Principles must be corrected: - Priority should be given to recruiting two qualified staff. Constrains in financial resources may not allow the FSA to appoint people with expertise, which would be the most efficient way, both for quality and rapidity. The BSD has recently been in the process of recruiting two additional members of staff; one of these two vacancies was already filled in June 2003. Training with foreign supervisory authorities and the external auditors is essential. - Meanwhile, in order to streamline the exchange of information process with foreign regulators, the scope of banking secrecy within Article 36 of the banking act must be clearly defined, and it would be useful that MOUs be signed with major home supervisors. - Lastly, full compliance would be achieved if more clarification were brought into the supervisory standards and enforcement powers: in several areas, notably operational and credit risks, some of the external auditors commonly refer to Swiss rules or practices, although such norms have not been formally approved by the FSA; and remedial actions, in the form of undefined “orders,” should also be formulated into specific and gradual measures. - Table 1.3 — Recommended Action Plan to Improve Compliance of the Basel Core Principles (selected entries) - Independence and resources (CP 1–2): Recruit experienced staff and/or train new staff - Information sharing (CP 1–6): Delimit banking secrecy with regard to supervisory concerns - Other risks (CP 13): Determine applicable norms - Onsite and offsite 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 - Offsite supervision (CP 18): Add resources for effective and comprehensive understanding and analysis of audit and bank reports ### Authorities’ response — FSA human resources, organization, and actions - Introductory position: - The authorities of the Principality of Liechtenstein expressed gratitude to the assessors and indicated the assessment encouraged ambitions to improve regulation and supervision. - FSA human resources and organization: - The FSA was in a transitional situation at the time of the assessment. - Recruitment of two additional banking staff members has been assured to the FSA by governmental decision of December 3, 2002. - The FSA has recently been in the process of recruiting two highly qualified auditors/financial analysts according to the job-descriptions assigned by the government. One of these two vacancies was filled in June 2003. - The organization of the Financial Services Authority has been streamlined, and the responsibility of each staff member has been defined. - The FSA is introducing a short- and long-term (permanent) training and education program in 2003. ### Basel Core Principles — statistical summary and aims - Out of 30 (100 percent) Principles, 25 (83 percent) are within the range of compliant/largely compliant. - The FSA’s aim is to see 28 (93 percent) of the Principles in the range of compliant/largely compliant. - Initial measures have been taken in the field of human resources to reach this goal. ### Information sharing, legal clarification, and transparency - Court ruling and information sharing: - In its decision of May 7, 2003, the supreme administrative court reconfirmed the government decision that banking secrecy provisions referred to in Article 36 banking act do not limit the FSA’s ability to share client account information with foreign counterparts. - The supreme administrative court confirmed the legal view 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 request of the foreign authority. - Within the foreign authority, access to the information provided has only to be granted to persons who are subject to official secrecy provisions; information must be kept strictly confidential and may only be used in accordance with the agreed supervisory purpose. - Any further disclosure of the information whether to other national authorities or to other foreign authorities is not allowed. If, according to foreign legislation, the information provided by the FSA has to be forwarded to other authorities, the regular mutual assistance procedure must be complied with. - Information is shared by the FSA according to this decision of last resort; nevertheless the government will evaluate whether it is advisable to amend Article 36 of the banking act accordingly. - Transparency measures: - The FSA issues a complete annual report available to the public upon request. - An annual code of administrative practice is issued and available to the public. ### IOSCO assessment — scope, market structure, and regulatory framework - Scope and methodology: - An assessment of observance of the IOSCO Objectives and Principles of Securities Regulation was conducted as part of an offshore financial center assessment in the Principality of Liechtenstein. - The assessment relied on the Fund/Bank Guidance Note for Assessing Implementation of IOSCO’s Objectives and Principles of Securities Regulation. - The limited nature of permitted securities activity in Liechtenstein was an important factor in assessing the IOSCO Principles. - Market structure and participants: - Securities related activity is carried out by universal banks licensed under the Law on Banking, investment undertakings licensed under the Law on Investment Undertakings, and trustees acting as asset managers licensed under the Law on Trustees. - Banks are focused on private banking and asset management primarily for high net worth clients, the majority of whom are located outside of Liechtenstein (the largest number are in Switzerland, followed by other European jurisdictions). - Two large banks also offer brokerage services—including the sale of mutual funds and securities—to small retail investors. Only banks can open customer accounts in this manner. - Asset management by trustees requires customer assets to be in custody at a third-party bank (located in Liechtenstein or elsewhere). - Investment undertakings operate collective investment schemes organized as trusts or as 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. - Market size and counts: - There are 17 banks licensed and operating in Liechtenstein, all of which carry out securities activities. - There are 81 licensed investment undertakings with a total of CHF 5.2 billion assets under management. - There are 355 licenses granted, but many entities operate with more than one license. - The number of trustees carrying on business as asset managers is unknown, although it is thought to be almost 35). - There are few public issuers; the Law on Prospectuses came into effect in 1997, and during the past two years only six prospectus filings have been made—all from the same issuer (a Liechtenstein bank) and mostly for the purpose of making amendments to the original offering prospectus. ### Regulatory responsibilities, institutional features, and resourcing constraints - Regulatory responsibilities: - Responsibility for oversight of banks and investment undertakings rests with the FSA, which is responsible for screening licensing applications, reviewing and approving prospectuses and disclosure documents, and carrying out supervision. - Licenses are granted by the government (Cabinet); withdrawal of licenses and imposition of fines are also carried out by the government. - The public prosecutor is responsible for enforcement activity. The Court of Justice can also issue fines or terms of imprisonment. - The Due Diligence Unit (DDU) is responsible for enforcement of compliance with anti money-laundering regulations for banks, investment undertakings and trustees. - In the case of trustees, the FSA grants licenses but has only a limited on-going supervision responsibility. FSA decisions can be appealed to the government. - Legal framework and EU integration: - Relevant laws include the Law on Banking, the Law on Investment Undertakings, the Law on Trustees, and the Law on Prospectuses, as well as subordinate legislation under each law. - The FSA also issues administrative guidelines. - As a member of the EEA, Liechtenstein is obliged to implement the EU Directives and has implemented the Investment Services Directive, the UCITS directive, and the prospectus directive. - Dualistic supervisory model and staffing: - The Liechtenstein system is a “dualistic” system of oversight relying to a large extent on the use of independent third party auditors to supervise regulated entities; these auditors carry out the regular annual audit of a company and report to the FSA on compliance with relevant regulation. - The FSA has a very small staff: - Two permanent staff engaged in banking supervision (one of whom is the head of the authority) - One consultant for banking supervision - Two permanent and one temporary staff for oversight of collective investment schemes - One staff member responsible for licensing of trustees, including those that act as asset managers - Two staff members in the legal department responsible for legal support and implementation of EU Directives - The FSA does not have sufficient resources to make credible use of the inspection system and must be in a position to communicate specific instructions to auditors and to properly analyze inspection results. ### IOSCO principle-by-principle summary of key findings and recommendations - Regulator (Principles 1–5): - The FSA’s mandate should be set out more clearly in the law—current provisions are sometimes vague, and there is no clear constitution of the agency itself. - The FSA should operate more independently and should be granted authority to license and withdraw licenses (authority it has only with respect to trustees, lawyers, and auditors), levy penalties and other sanctions against regulated entities without approval from government. - The FSA should have the ability to make legally binding rules. - Additional transparencies should be introduced by setting up a website to assist public understanding and create a more accountable regulatory process. - Self-regulatory organizations (Principles 6–7): - Industry associations complement the stretched resources of the FSA; the FSA must be vigilant to benefit from association work without being dominated by it. - The Trustees Association acts as a self-regulatory body since membership and compliance with its code of conduct is mandatory; this association is unsupervised and the FSA should have a formal role in the association’s formulation of rules for asset management activities. - Inspections, investigations, and enforcement (Principles 8–10): - The FSA has full inspection and investigations authority other than over trustees. - Under the dualistic system, regular inspections of most regulated entities are carried out by third party auditors; these audits could be extended to trustees acting as asset managers. - The FSA must have sufficient resources to communicate instructions to auditors and to analyze inspection results. - Information sharing and cooperation (Principles 11–13): - The FSA can share information with domestic counterparts and does so in practice, particularly with the DDU. - The Law on Banking grants the FSA the ability to share information with foreign regulators on banks and investment undertakings under certain conditions; there has been debate regarding the scope of this ability—the FSA’s interpretation of the law was recently upheld by a court decision. - The FSA is not a party to any information-sharing agreements with foreign counterparts; it should consider such arrangements with important jurisdictions, particularly with the Swiss authorities, and appoint a designated person for handling all information requests to provide consistency and efficiency. *Source: International Monetary Fund assessment of the Principality of Liechtenstein (Basel Core Principles and IOSCO Objectives and Principles evaluations).* ### 48. Issuers (Principles 14–16)—The issuance of securities is subject to the Law on ### Issuers (Principles 14–16) ### Regulatory framework and disclosure - Issuance of securities is subject to the Law on Prospectuses which implements the EU Prospectus Directive. - 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—however, an issuer must be listed on an exchange which would have such rules in place. - There are very few issuers in Liechtenstein, and the six prospectuses that have been reviewed and approved during the past two years all have been from the same issuer (mostly in the form of amendments). ### Accounting and audit standards - 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) ### Legislative and supervisory framework - A legislative framework governing collective investment funds (known as investment undertakings) is largely in place in Liechtenstein, which has implemented the EU UCITs directive. - Investment undertakings are subject to detailed licensing requirements, are audited annually by third-party auditors with reports made to the FSA, and must publish disclosure documents in accordance with detailed rules. ### Identified weaknesses and required rule development - There is a need for conflicts-of-interest rules for collective investment schemes—these rules should, among other things, address related party transactions, borrowing and lending with affiliates, trading using a related party brokerage, employee conduct, and disclosure of conflicts of interest to clients. - The FSA should not rely entirely on the Funds Association for development of these rules. - Net-asset-valuation rules should be developed in more detail with a clearer definition of transferable security that imports an element of liquidity and detailed requirements for the valuation of illiquid securities. ### Market intermediaries (Principles 21–24) ### Current structure and supervisory gaps - Market intermediaries in Liechtenstein are banks which offer brokerage and asset management services and trustees who may act as asset managers. - Regulation of banks is discussed in detail under the Basel Core Principles assessment. - Trustees acting as asset managers are largely unsupervised; although, they are subject to a licensing process and are inspected by the DDU. - The extent of the asset management business carried on by trustees is unknown, and because they operate under a general license, there is no transparency to the public. ### Recommendations for intermediaries - The authorities should consider licensing these entities separately from other trustees and must implement periodic audits in order to monitor compliance with existing requirements. - The need for more detailed rules (some of which should apply to trustees also) should be addressed in a global fashion with rules governing: - account documentation, - representations made to clients, - disclosure to clients (both risk and conflicts of interest), - rules regarding related party transactions, and - employee conduct. - The new EU Directives on UCITS and market abuse will also necessitate work in this area. ### Supervisory capacity, institutional issues, and recommendations ### Staffing and capacity constraints - The weaknesses that pervade the Principles assessment are mostly related to the low level of staffing and resources at the regulator—particularly for the supervision of banks. - Immediate attention should be given to increased staffing in order to use the existing inspection system effectively and improve the FSA’s ability to actively develop policy. - Staff time is currently devoted to licensing and implementation of EU Directives, leaving little time for supervision. - Staff currently employed in supervision are highly qualified and diligent but are lacking in regulatory experience. - Because the opportunities for training within Liechtenstein are limited, the authorities could consider working with outside authorities to provide additional training—either by employing experienced staff from other regulators on a short-term basis in Liechtenstein or by placing FSA staff with other regulators for short training periods. ### Legal clarity, independence, and transparency - The FSA should have its role in supervision set out more clearly in law, ideally in a single document. - The planned restructuring of the regulator should address many of the issues related to independence, including lack of licensing authority, ability to levy fines or make legally enforceable rules represent some weakness in the system. - Creation of a website and a more detailed annual report would improve transparency. ### Trustees as asset managers - Trustees that act as asset managers are effectively investment advisors operating outside of securities regulatory rules (but they can only act through licensed banks, which are, however, subject to securities regulations). - These asset managers should be licensed separately, subject to rules governing sales and business conduct and supervised through inspections. *Source: IMF assessment of Liechtenstein financial sector.* ### 54. While the authorities have worked very hard over the past few years to implement EU ### cr03290 - 54. While the authorities have worked very hard over the past few years to implement EU Directives and bring Liechtenstein law up to contemporary standards, some gaps remain, including an absence of rules addressing conflicts of interest for mutual funds and asset managers. ### Regulator: mandate, independence, powers, and resources - Assessment grades: - Partly implemented: Principle 2 (operational independence and accountability), Principle 3 (adequate powers, resources, capacity) - Broadly implemented: Principle 1 (clear responsibilities), Principle 4 (clear and consistent regulatory processes), Principle 5 (professional standards) - Key findings: - The Financial Services Authority (FSA) is part of the state administration and does not have particular status as an independent agency; authority is delegated under each particular law (Law on Investment Undertakings; Law on Banking). - The FSA’s authority is clear in practice but sometimes difficult to locate in the law. - The FSA does not have a single operating statute establishing its role and authority broadly in one law. - The FSA cannot unilaterally approve/refuse/withdraw licenses (except trustees) or levy fines; it makes recommendations to Cabinet. - The FSA’s budget is part of the government general budget; fees collected are remitted to general revenue and total less than operational costs. - Staff numbers are small relative to responsibilities; staff are generally inexperienced though qualified and dedicated. - The FSA does not have a website and does not make licensing or supervision information widely available to the public. - Civil service protections: head and staff are civil servants subject to Law on Civil Servants; protected from liability for discharge of duties in good faith by the Law on Official Liability. - Recommendations (from Table 2.3): - Increased staffing resources are urgently needed. - Training of staff should be a priority; consider working with other jurisdictions. - The FSA mandate should be clearer in law; consider consolidating role and authority in a single law. - Grant the FSA authority to grant, refuse, and withdraw licenses for banks, investment undertakings, and asset managers; grant power to make legally binding rules and to levy fines. - Set criteria for selection and dismissal of the FSA head in a transparent, legally binding manner. - Introduce greater transparency through a website. - Consider establishment of a board of directors appointed for a term under clear criteria. ### Trustees, self-regulation, and supervision - Assessment grades: - Implemented: Principle 6 (use of SROs — Trustees Association acts as SRO) - Partly implemented: Principle 7 (SRO oversight) - Partly implemented / Broadly implemented across other principles where trustees/asset managers are implicated - Key findings: - Regulation of trustees is split between the FSA (licenses trustees), the Trustee’s Association (enforces code of conduct), and the government (public prosecutor or FSA could appeal to Court of Appeals for withdrawal of license). - There is no ongoing FSA supervision of trustees other than due diligence AML audits; FSA has no inspection authority over trustees acting as asset managers. - Trustees Association membership is mandatory under the Law on Trustees; non-compliance with its Code of Conduct can be basis for license removal by a court. - The Trustees Association’s Code of Conduct is not subject to FSA review or approval. - Recommendations: - Supervise trustees who carry out asset management activities with separate and distinguishable licensing, inspection rights, and a periodic inspection program. - If the Trustees Association continues to play a regulatory role for trustee/asset managers, the Association should be supervised by the FSA and its rules reviewed and approved by the FSA. ### Enforcement, inspection, and compliance - Assessment grades: - Implemented: Principle 9 (comprehensive enforcement powers — public prosecutor) - Partly implemented: Principle 8 (inspection, investigation, surveillance powers), Principle 10 (effective use of enforcement powers and compliance programs) - Key findings: - Enforcement is carried out by the public prosecutor’s office; the public prosecutor has full power to demand documents and oral testimony and to bring criminal actions (including insider trading under Penal Code Article 122A). - The FSA has access and inspection rights under the Law on Banking and the Law on Investment Undertakings for banks and investment undertakings, can request reports and inspect, and can bring civil actions against third parties acting without a license via court application (Article 35, Law on Banking). - The FSA relies on third-party auditors (concessioned by FSA) to assess regulated entities; auditors file annual reports with the FSA and must notify of non-compliance. - The dualistic system (third-party auditors + FSA review) is acceptable but hampered by insufficient FSA resources to oversee and evaluate audits. - Recommendations: - Grant the FSA authority to inspect and supervise trustees acting as asset managers. - Consider granting the FSA the ability to withdraw licenses and levy fines to allow faster and more independent action, particularly for minor breaches. - Recruit and retain experienced staff to supervise the audit process and make greater use of the FSA’s ability to give audit instructions for specific institutions. ### Cooperation and information sharing with domestic and foreign counterparts - Assessment grades: - Broadly implemented: Principles 11–13 (authority and mechanisms for sharing public and nonpublic information) - Key findings: - Act on the Organization of State Administration obliges domestic agencies to share relevant information; FSA and DDU share information in practice and with FIU. - Article 36 of the Law on Banking allows sharing of bank or investment undertaking information with foreign supervisors for regulatory purposes provided confidentiality is protected; scope of bank secrecy under Article 36 was clarified by the supreme administrative court decision of May 7, 2003 (client account information permissible for supervisory purposes under prescribed conditions). - The FSA has not entered into memoranda of understanding with foreign supervisors; domestic information sharing is informal but effective given size of FSA. - The FSA has no legislative authority to share nonpublic information on trustees with foreign counterparts and lacks inspection rights over trustees. - Recommendations: - Adopt new policies and procedures to implement authority to share client account information. - Enter into information-sharing arrangements with key counterparts, specifically the Swiss authorities. - Consider designating a contact person to handle all foreign supervisor requests. ### Collective investment schemes (CIS) and market conduct for funds - Assessment grades: - Implemented: Principle 18 (legal form, segregation of client assets), Principle 19 (disclosure for CIS), Principle 17 and 20 Broadly implemented - Key findings: - Licensing: Law on Investment Undertakings and Ordinance require licenses; minimum capital requirements: CHF 1 million for management company of a trust-form undertaking, CHF 50,000 for a limited liability company form. - Three categories of license: UCIT eligible fund; broad second category exempt from risk limitations (not UCIT eligible); third category for real estate funds. - FSA reviews prospectuses and makes recommendations to Cabinet; in practice FSA endorses approvals and Cabinet has always approved. - Custodians must be Liechtenstein banks; custodians have obligation to supervise compliance with NAV calculation and investment policies under Article 19 Law on Investment Undertakings. - Conduct: general legal provision that investment undertaking must put interests of client first; FSA has not created detailed rules on conflicts of interest, related party transactions, borrowing/lending with related parties, use of affiliate brokers, or employee transactions. Funds Association with FSA is developing a code of conduct (to be approved by FSA). - Valuation and redemption: UCIT eligible funds redeemable at minimum daily; other funds minimum every 6 weeks; real estate funds once a year. UCITs required to be valued daily; all listed securities mark-to-market on any day units are for sale/redeemable or at least every 14 days. NAV must be published each day units are available for sale or redemption (daily for UCITs) or minimum twice monthly. No specific rules for valuation of illiquid securities. - Recommendations: - Develop more detailed net-asset-valuation rules and rules on valuation of illiquid securities. - Develop conflicts-of-interest rules for investment undertakings. - Consider more detailed rules for duties of custodians, including a specific positive obligation to report material non-compliance with NAV or investment regulations to the FSA. - Increase resources and experience for review of audits and prospectuses (training and recruitment). ### Market intermediaries, entry standards, and conduct - Assessment grades: - Partly implemented: Principles 21 (minimum entry standards), 23 (internal organization and operational conduct) - Broadly implemented: Principle 22 (initial and ongoing capital and prudential requirements) - Implemented: Principle 24 (procedure for dealing with failure of market intermediary) - Key findings: - Two kinds of intermediaries: banks (subject to Basel-related entry and prudential standards) and trustees (may act as asset managers but regulated as trustees). - Trustees licensed by FSA must pass written examination and three-year apprenticeship; membership in Trustees Federation is mandatory and code of conduct applies, but no ongoing supervision or annual audits (except AML due diligence audits). - Trustee/asset managers may hold client funds in separate trust accounts; co-mingling/pooling generally considered banking and not permitted. - Trustee/asset managers are not subject to capital or prudential requirements (except liability insurance); banks are subject to capital and prudential requirements. - There is no specific monitoring program or contingency plan for failure of asset managers beyond court-administered winding down under Law on Trustees. - Recommendations: - License asset managers separately rather than as trustees; at minimum make asset management activities of trustees transparent in license terms. - Vest licensing, supervision, and rule-making authority for asset managers in the FSA; give FSA power to withdraw licenses. - Require asset managers to be subject to an annual FSA audit. - Develop business conduct rules for all market intermediaries covering account documentation, client information requirements (know-your-client), conflicts of interest disclosure, risk disclosure, and employee conduct (employee trading). ### Secondary markets, market abuse, and surveillance - Key findings: - There is no secondary market, exchanges, clearing, or settlement systems operating in Liechtenstein; Principles 25–27, 29, and 30 are Not applicable. - Insider trading is a criminal offence under Article 122A of the Penal Code; investigations and prosecutions are the responsibility of the public prosecutor. - The FSA cooperates with DDU and the Financial Intelligence Unit on insider activities; ability to cooperate with foreign regulators is limited by bank secrecy provisions discussed under Principles 11–13. - Assessment counts (Table 2.2 Summary Implementation of the IOSCO Objectives and Principles of Securities Regulation): - Implemented: 7 (P 6, 9, 14, 16, 18, 19, 24) - Broadly Implemented: 10 (P 1, 4, 5, 11, 12, 13, 17, 20, 22, 28) - Partly Implemented: 7 (P 2, 3, 7, 8, 10, 21, 23) - Not applicable: 6 (P 15, 25, 26, 27, 29, 30) ### Consolidated recommended plan of actions (high level) - Strengthen FSA legal basis and independence: - Consolidate the FSA role and authority in a single law. - Grant FSA licensing, rulemaking, and sanctioning powers (including levy fines and withdraw licenses). - Set clear, transparent criteria for appointment and dismissal of the FSA head; consider a board of directors with fixed terms. - Build capacity and resources: - Urgently increase staffing resources. - Prioritize training and consider cooperation with other jurisdictions for technical assistance. - Recruit experienced staff for banking supervision and investment undertakings supervision; enhance audit review capability. - Improve transparency and information sharing: - Launch an FSA website with laws, ordinances, proposed policies, processes, and a detailed annual report covering licenses, investigations, and compliance activities. - Adopt policies and procedures to operationalize sharing of client account information with foreign supervisors; pursue MOUs (specifically with Swiss authorities). - Strengthen oversight of trustees and asset managers: - Introduce separate licensing and supervision for asset managers (whether organized as trustees or otherwise). - Require annual FSA audits for asset managers and more detailed conduct and internal control rules. - Develop conflicts-of-interest rules for funds and require custodians to report material non-compliance. - Enhance CIS and NAV rules: - Develop more detailed net-asset-valuation rules, including valuation of illiquid securities. - Clarify duties and reporting obligations of custodians. *Table 2.1 Detailed Assessment of Observance of the IOSCO Objectives and Principles of Securities Regulation.* ### 55. The Authority appreciates the helpful suggestions made within the context of the ### cr03290 - 55. The Authority appreciates the helpful suggestions made within the context of the ### Authority response and planned regulatory changes - The Authority aims to be responsive to the recommendations emerging from the assessment of Observance of the IOSCO Objectives and Principles. - The Authority will consider restructuring financial supervision in the Principality of Liechtenstein to comply with those suggestions. - The recommendation for a separate license for asset managers (instead of the present general license as a trustee) "will be considered strongly." ### FSA human resources, organization, and mandate - FSA was in a transitional situation at the time of the assessment. - Governmental decision of December 3, 2002 assured recruitment of two additional banking staff members for the FSA. - The FSA initiated recruitment of two highly qualified auditors/financial analysts according to government-assigned job descriptions; one of these two vacancies was filled in June 2003. - The organization of the Financial Services Authority has been streamlined; responsibilities of each staff member have been defined according to an organization chart and job descriptions. - A short- and long-term (permanent) training and education program has been installed to develop staff toward top professional qualification. - FSA’s mandate is set out in legal provisions including "Art 35 BA, Art 53 IUG, Ordinances delegating responsibilities regarding Trustees and Lawyers to the FSA, Art 9 Law on Prospectuses, etc.", which are said to guarantee a transparent and fully accountable regulatory process. ### Information sharing and confidentiality rulings - Supreme administrative court decision of May 7, 2003 reconfirmed the government’s decision that banking secrecy provisions in Article 36 banking act do not limit the FSA’s ability to share client account information with foreign counterparts. - The court confirmed that: - Information can be shared with foreign regulators where the information is used only within the scope of supervisory duties described in the request of the foreign authority. - Within the foreign authority, access to provided information must be granted only to persons subject to official secrecy provisions. - Information must be kept strictly confidential and used only in accordance with the agreed supervisory purpose. - Any further disclosure (to other national or foreign authorities) is not allowed; if foreign legislation requires forwarding the information to other authorities, the regular mutual assistance procedure must be complied with. - Information is shared by the FSA according to the court decision as a decision of last resort. - The government will evaluate whether it is advisable to amend Article 36 of the banking act. ### Transparency measures and UCITS III implementation - The FSA issues a complete annual report available to the public upon request. - An annual code of administrative practice is issued and available to the public. - Within implementation of UCITS III (directives "2001/107/EC an 2001/108/EC") the FSA will apply for additional staff for the division of investment undertakings. - As a result of this new legislation, investment undertakings will be required to disclose: - suitability of funds for investors, - initial and ongoing capital, - proper risk-management, - specific rules preventing conflict of interests. - A Code of Conduct will be developed and approved by the authority. ### IAIS Core Principles assessment: scope, methodology, and documents reviewed - An assessment of observance of the IAIS Core Principles was conducted as part of an offshore financial center assessment in the Principality of Liechtenstein. - The assessment was based on discussions with staff of the Insurance Supervisory Authority (ISA), representatives of the Insurance Association of Liechtenstein, and insurance firms. - Specific documents reviewed included several laws and executive orders (notably the Insurance Supervision Law of December 5, 1995), the Executive Order of December 17, 1996, the Executive Order of April 8, 1997, the Liechtenstein—Switzerland agreement on direct insurance of December 19, 1996, the Insurance Contract Act of 2001, onsite inspection and auditor notes (July 17, 2002; May 21, 2002), and EC directives on insurance including "life insurance third directive 92/96 of November 10, 1992, non life insurance third directive 92/49 of June 8, 1992, and insurance accounting directive N°91/674 of December 19, 1991." - The assessment additionally considered: - ISA circular letter on the use of assets in unit linked policies (November 30, 2000), - a specific onsite inspection report, - financial and structure information on insurance companies, - the draft financial report file to be sent by the companies to the supervisor starting 2003. - The assessment used the IAIS Core Principles methodology report adopted by the IAIS in October 2000. - The assessment incorporated cross-checking of supervisory authority sources, neighboring supervisory authorities’ inputs, opinions of supervised companies, and review of legislation, rules, policies, guidelines, and other documentation. ### Institutional setting, market structure, and key statistics - Liechtenstein insurance companies did not exist until 1995; previously services were provided by branches of Swiss companies. - In 1995, Liechtenstein joined the EEA and implemented third generation EU directives enabling firms to market insurance throughout the EEA under freedom of services. - A 1996 agreement enables Liechtenstein companies to market insurance products in Switzerland. - With licensing starting in 1996, at end-2002 there were: - 12 life insurance companies, - 4 nonlife companies, - 5 reinsurance companies. - Local market premium income: about 197 million euros at end-2001. - Life and reinsurance market activity incorporated in Liechtenstein amounted to as much as 319 million euros in 2001. - Assets held by Liechtenstein companies: - CHF 1.1 billion in direct insurance (nearly all matching life-technical reserves), - CHF 0.78 billion for the reinsurance business (basically assets matching captives technical reserves). - Unit linked policies amount to approximately 65 percent of total technical reserves of life insurance companies and represent a large part of new business. - The market composition implications: - Asset risk in unit linked products is borne by the policyholder, reducing company fragility in prolonged asset-value depressions, though surrender-value rules may increase vulnerability. - Captive insurance risk is substantially borne by captive parent companies; overall risk in the Liechtenstein market is described as very limited. - Aggregate solvency data are not available; no annual report from the Insurance Supervisory Authority or the Insurance Association existed at the time, which limits comprehensive market assessment. ### Recent and planned supervisory improvements - Several legislative changes and supervisory process improvements were to be implemented in 2003/2004: - Some changes adopted by parliament to come into force in 2003 (exchange of information with other supervisory authorities). - New financial statement files to be sent to the supervisory authority were to be implemented shortly. - These changes are expected to allow better monitoring of insurance-market risks, asset-liability management, and exchange of information. - Planning is underway to establish an integrated financial services supervisory authority to bring together oversight of banking, securities, and insurance: - Creation of the new agency is planned for early 2005, - Legislative changes to be completed in mid 2004. - The new integrated agency is expected to create tighter links between the insurance supervisory authority and banking and funds management counterparts. ### Conditions for effective supervision and resources - The legislative framework for insurance supervision was created over the last five to eight years and follows EU requirements consistent with EEA membership; it is influenced by EU directives and the Swiss legal system. - A distinctive feature is that legislation permits the presence of Trusts. - Since 1995, insurance has been supervised by the Insurance Supervisory Authority, a department of the office of national economy. - The ISA relies on the activity of six trained people to achieve its tasks. - The Due Diligence Unit oversees anti-money laundering requirements in the insurance sector. - ISA intends to carry out more frequent onsite inspections once the licensing process of Liechtenstein incorporated companies has been finished. *Source: Offshore financial center assessment—Assessment of Observance of the IOSCO Objectives and Principles and the IAIS Core Principles; responses and institutional statements by the Financial Services Authority and the Insurance Supervisory Authority.* ### 81. Additionally, and due to the evolution of the EU as well as the enforcement of new ### Detailed Assessment of Compliance of the Insurance Core Principles (Liechtenstein) ### Principle 1 — Organization of an Insurance Supervisor - Legal basis: Article 60 of the insurance supervision law of December 6, 1995 defines the supervisory authority as the Liechtenstein government. - Operational structure: Bulk of supervisory activity carried out through the ISA, a department within the office of national economy. - Resourcing: - An Executive Order of April, 8, 1997 provides the ISA with resources in line with Article 46 of the insurance supervision law of December, 6, 1995. - The ISA’s actual costs exceed the charges levied on companies; ISA receives additional funding from the global budget of the state. - ISA staff addressing insurance supervision: a team of six trained staff, out of which four are university graduates. - Staff also cover social security issues (pension funds, health and sickness insurance, accident insurance), reducing available supervision capacity for insurance. - Assessment: Broadly observed. - Comment: An increase in the number of people devoted to insurance supervision is needed. More resources are needed for effective insurance supervision, particularly as onsite inspection capacities are developed. See assessment of CP13 for capacity to conduct onsite inspections. ### Principle 2 — Licensing - Legal framework: Articles 12–21 and 23; Articles 24–27 (Liechtenstein companies in other EEA countries); Articles 28–30 (EEA companies in Liechtenstein); Articles 31–34 (non-EEA companies). - Switzerland-Liechtenstein arrangement: Specific agreement sets principle of home-country control, enabling Swiss companies to work in Liechtenstein as EEA companies and vice versa. - Executive Order: Articles 48–62 of the Executive Order of 1996 provide additional information. - Reinsurance: Reinsurance companies licensed under same rules as direct insurers; Article 5 exempts insurers with head office outside Liechtenstein carrying out only reinsurance transactions from licensing. - ISA requirements for local companies: - At least one director must be resident of Liechtenstein (Article 23). - Adequate experience in insurance required for management (Article 7 of the 1996 Executive Order). - Head office must be in Liechtenstein and cannot be moved (business plan requirement). - Outsourcing: ISA permits transfer/outsourcing of some back-office activities, including to parent company; transfer/outsourcing arrangements require contractual agreement and ISA approval. - Assessment: Observed. - Comment: Most licensing rules stem from EU directives and treaties and are in line with the principle. Articles 2 and 6 enable ISA to exempt some companies from supervision (these articles were never applied). Brokers and intermediaries are not supervised under insurance law and fall under general trade law; Article 22 prohibits them working with companies not licensed in Liechtenstein. ### Principle 3 — Changes in Control - Notification/approval: Articles 36 and 43 of the Insurance Supervision Law require the supervisory authority to be informed of any change in the business plan, including changes in control; additional references in Articles 58–61 of the Executive Order of 1996. - Business plan disclosures: Companies must provide list of board members and outsourcing contracts as required by Article 13 of the Insurance Supervision Law. - Board residency and fitness: Insurance Supervision Law requires at least one director to be a Liechtenstein resident (Article 23‑1) and management to meet insurance experience requirements (Article 7 of 1996 Executive Order). - Supervisory tools: ISA relies on market size and close links among participants to check changes in control. - Assessment: Observed. - Comment: Most Liechtenstein companies are wholly owned subsidiaries of major foreign companies; changes in control have been seldom in recent years. ### Principle 4 — Corporate Governance - Regulatory coverage: No specific insurance-law regulation on corporate governance; general corporate law defines corporate governance principles in broad terms. - Professional secrecy: Article 44 of the Insurance Supervision Law requires professional secrecy on some occasions, which might hinder prudential supervision and corporate governance when authorities discover abnormal behavior. - Assessment: Not applicable. - Comment: Situation aligns with many written-law countries lacking specific mandatory corporate governance rules. ### Principle 5 — Internal Controls - Supervisory rights: Article 57 of the Executive Order of 1996 and the onsite inspection report manual of 2002 entitle ISA to review internal controls and require strengthening where necessary. - Guidance: No specific government or Insurance Association guidelines; checking relies substantially on attitudes and controls of parent companies. - External assurance: Supervision relies on external auditors or actuaries selected by ISA from an approved list per Article 69c of the Executive Order of 1996. - Market structure: Most companies are small subsidiaries of big groups; internal controls often mirror parent company controls. - Assessment: Observed. - Comment: Reliance on external auditors/actuaries and parent-company controls; absence of specific domestic guidance. ### Principle 6 — Assets - Legal references: Articles 31, 33–37, 40, 41, 43–47 of the Executive Order of 1996; appendices 2–4 of the Executive Order; EU regulations apply. - Notable rules and issues: - Articles 35 and 44 of the Executive Order allow ISA to permit use of other assets than those listed as conforming in the EU directive. - No asset-liability management requirements currently. - List of assets for unit-linked life policies is very wide and may include illiquid assets such as unlisted securities. - Article 71 of the Insurance Contract Law of 2001 requires surrender value to be paid within four weeks following demand, creating potential liquidity risk for companies with concentrated unit-linked business. - Currency matching requirements align with EU requirements. - Assessment: Broadly observed. - Comment: Additional information from companies on maturity, quality, and yield of assets is needed. The ISA will soon require these changes beginning 2003. ### Principle 7 — Liabilities - Legal basis: Articles 29 and 30 of the Executive Order of 1996 set principles for insurance liabilities; Appendix 3 and Article 38 address credit and health insurance. - Life insurance specifics: - Appendix 4, Article 13: interest rates for guaranteed interest-rate business chosen according to a circular by ISA referencing figures used by EU supervisory authorities. - An actuary must supervise technical reserves for life insurers (Executive Order of 1996, Article 9). - Tax treatment: All technically justifiable reserves are tax-deductible, attracting some reinsurers. - Reinsurance credit: Credit given to reinsurers according to their rating without specific technical protections (letters of credit, asset pledges). - Assessment: Observed. - Comment: No additional comments provided. ### Principle 8 — Capital Adequacy and Solvency - Legal references: Articles 12–28 of the Executive Order of 1996 detail solvency regulations. - Alignment: Regulations align with EC directives 73/239 and 79/267 on direct non-life and life insurance. - Reinsurers: Liechtenstein authorities do not require any solvency margin for reinsurers; favorable for captives. This may change once new EU regulation on reinsurers’ solvency is implemented. - Assessment: Observed. - Comment: No global market data available to assess actual solvency levels across companies. ### Principle 9 — Derivatives and “Off-Balance Sheet” Items - Regulation: No specific derivatives regulation. Companies are not allowed to use derivatives to cover liabilities toward policyholders, though Articles 33 and 44 could enable ISA to allow such use (these Articles have never been used). - Fund investments: Life insurers may use a very large list of funds including hedge funds and other alternative or derivative funds for unit-linked policies. - Liquidity risk: Four-week surrender-payment requirement (Insurance Contract Law) may be insufficient to liquidate unlisted assets used for unit-linked policies, potentially causing liquidity problems. - Assessment: Broadly observed. - Comment: Further guidance for use of derivatives is needed. ### Principle 10 — Reinsurance - Disclosure: Technical reserves are disclosed net of reinsurance per Appendix 4 of the Executive Order of 1996, preventing external observers from directly viewing reinsurance programs. - Supervisory reliance: ISA relies on reinsurer ratings and global reinsurance programs of parent companies to assess appropriateness of reinsurance; no specific credit regulations beyond rating information. - Notification: Companies must inform supervisory authority when changing reinsurer per Articles 36 and 43 of the Insurance Supervision Law. - Reinsurer obligations: Reinsurers do not have to abide by the insurance contract law according to Article 62 of the insurance contract law. - Market materiality: Reinsurance not a material concern given current market size and lower-risk profile; no specific regulations in place. - Assessment: Observed. - Comment: No additional comments provided. ### Principle 11 — Market Conduct - Legal framework: No specific market-conduct rules enforced; some principles covered by general corporate or consumer protection law and policyholder information requirements in regulatory framework. - New legislation: A new insurance-protection act has been passed but is not yet implemented. - Institutional arrangements: Office of national economy broadly responsible for consumer protection; no consumer association or ombudsman exists for insurance. - Industry self-regulation: The Insurance Association is not active in monitoring member conduct. - Complaints handling: Few complaints registered to date; no formal procedures established by firms; ISA deals with complaints that are brought to its attention. - Assessment: Not applicable. - Comment: Methods and processes for handling market conduct and consumer complaints are undeveloped; as market expands and cross-border activity grows, ISA will need to strengthen market-conduct monitoring. ### Principle 12 — Financial Reporting - Scope: Financial reporting requirements listed in Articles 39–42 of the Insurance Supervision Law and Article 64 and Appendix 4 of the Executive Order (text ends mid-sentence in source). - Reporting and supervisory processes: Supervisory authority requires financial and statistical reports, actuarial reports, audits, and standards for technical provisions (principle description). (Further details in source beyond provided excerpt.) - Assessment and comments: (Further details not provided in the supplied content.) *Source: IMF Office of the Chief Economist (detailed assessment of Insurance Core Principles for Liechtenstein).* ### 1996. The general provisions of company law also apply. ### 1996. The general provisions of company law also apply. ### Reporting and financial-risk assessment (IAIS Principle 12) - Findings - The Insurance Supervisory Authority (ISA) receives the annual report of insurance companies, a special report by the auditor, and for life business a certification report by the responsible actuary. - Few files are sent to the ISA that clearly distinguish what is sent to shareholders versus the supervisor. - The ISA has not implemented reporting requirements for financial-risk assessment and solvency measurement; information received is insufficient to determine timely financial positions of companies. - Consequently, the ISA relies on: (i) auditors selected for their insurance expertise (required to have at least three mandates in the field of insurance); and (ii) the responsible actuary’s life insurance assessment. - Developments - The ISA prepared a new set of reporting templates that firms are required to send beginning in 2003 to enhance information regarding assets-liability management and solvency analysis. - New systems will need to be developed to receive and analyze the reported information. - Assessment - Broadly observed. ### Onsite inspection (IAIS Principle 13) - Findings - Onsite inspections are authorized by Article 42 of the Insurance Supervisory Law; the ISA issued a recent policy report on onsite inspection. - The ISA has conducted a few limited-scope onsite inspections focused on specific concerns; inspections have lacked comprehensive coverage. - The ISA is also responsible for Social Security supervision, limiting resources available for insurance onsite inspection. - Assessment - Materially non-observed. - Comments / Recommended action - Additional staff is needed for the ISA to conduct regular onsite inspections and monitor financial positions of insurance firms (see Recommended Action: CP 1 and CPs 12–14). - The ISA intends, for the year 2003, to perform onsite inspections systematically depending on available staff. ### Sanctions (IAIS Principle 14) - Findings - Criminal violations are handled by the Public Prosecutor under Article 64 of the Insurance Supervisory Law, detailing sanctions against individuals exercising control over insurance companies. - Prudential measures available to the ISA include refusal of authorization (Articles 19, 33), revocation of authorization (Articles 51, 55), and transfer of portfolio. - Reinsurance companies face the same supervisory powers; brokers and intermediaries may be sanctioned only under general trade law provisions. - Assessment - Observed. ### Cross-border business operations (IAIS Principle 15) - Findings - Liechtenstein insurance companies derive the bulk of premium income in foreign countries; cross-border operations are a major issue. - Legal provisions: - Articles 24–27: Liechtenstein companies wishing to operate in other EEA countries. - Articles 31–34: non-EEA companies wishing to operate in Liechtenstein. - Agreement between Switzerland and Liechtenstein. - ISA applies the Sienna Protocol for relations with other EU supervisors; Article 61 of the Insurance Supervision Law enables information sharing with foreign authorities. - A new text has been implemented to strengthen supervision for companies working outside of the EEA. - Assessment - Observed. - Comments / Recommended action - ISA needs to establish strong relationships with foreign supervisors overseeing firms with Liechtenstein activities; consideration should be given to bilateral meetings to ensure comprehensive supervisory arrangements. ### Coordination and cooperation (IAIS Principle 16) - Findings - Liechtenstein participates in IAIS, EFTA; has observer status in the EU; and a mixed commission with Switzerland. - Article 61 of the Insurance Supervision Law permits information exchanges with foreign supervisors. - Domestic legal obligations require the ISA to share relevant information and grant assistance (Article 15 Act on the Organization of State Administration, LLG 1973 Nr. 41; Article 25 Administrative Proceedings Law, LLG 1922 Nr. 24). - Specific obligations to cooperate exist in other laws (Article 20 Due Diligence Act, LLG 1996 Nr. 116; Article 53 Code of Penal Procedure, LLG 1988 Nr. 62; 61 Para 1 VersAG). - Money laundering is addressed by the DDU, which informs the ISA of specific investigations. - Assessment - Observed. ### Confidentiality (IAIS Principle 17) - Findings - ISA staff are bound by general civil service law; breach of confidentiality is a criminal offence (Article 310 of the Penal Code). - Article 44-2 of the Insurance Supervision Law converts professional secrecy into official secrecy, protecting secrecy toward persons outside the ISA. - Communication of official information to foreign authorities is regulated by Article 61. - Secrecy provisions may occasionally conflict with prudential-risk operations (e.g., guaranteed interest rates above legal provisions; illiquid SPV assets used to match policies). - Assessment - Observed. - Comments - Restrictions from professional secrecy requirements may affect disclosure of certain prudential risk information (examples: guaranteed interest rates in excess of legal provisions; illiquid SPV matching assets). ### Summary observance (Table 3.2) - Principles Grouped by Assessment Grade - Observed: 10 — CP 2, 3, 5, 7, 8, 10, 14, 15, 16, 17 - Broadly observed: 4 — CP 1, 6, 9, 12 - Materially non-observed: 1 — CP 13 - Not applicable: 2 — CP 4, 11 ### Recommended actions and authorities’ response (selected highlights) - Recommended actions (paragraphs 82–93) - New legislation to apply starting 2003 includes: - More comprehensive supervision of cross-border activities of Liechtenstein companies out of the EEA: new Article 27a of the insurance supervision law (see Principle 15). - Tighter links with supervisory authorities outside insurance: new Article 61 of the insurance supervisory law (see Principle 16). - Implementation of new legislation will require: - More specific financial reporting to supervisory authorities (see Principle 12). - Greater capacity for onsite inspection (see Principle 13). - Specific recommendations: - Increase ISA staff to supervise insurance companies and carry out regular onsite inspection (CP 1; CPs 12–14). - Access global insurance market information and reporting of foreign insurance firms for peer comparison (paragraph 86). - Require new reporting templates on types of assets beginning in 2003; consider more comprehensive asset-liability management processes (e.g., stress tests) for life insurance (paragraph 87). - Clarify legal framework for unit-linked products and capital-redemption operations; consider specific regulation for assets held for unit-linked policies (paragraphs 88–89). - Develop a more sophisticated customer-claims system (ombudsman or similar) for market conduct improvements (paragraph 91). - Strengthen cooperation and supervision of intermediaries, leveraging the newly adopted EU Directive on Insurance Intermediation (paragraphs 92–93). - Authorities’ response (paragraphs 94–97) - The government of Liechtenstein acknowledges resource shortages and plans to recruit two highly qualified persons (auditor, lawyer). - ISA has prepared new reporting templates required beginning in 2003; new systems will be developed to receive and analyze reporting; ISA shall develop new rules on assets authorized for unit-linked products. - ISA intends to perform systematic onsite inspections in 2003, subject to available staff. - Transposition of the new EU Directive on Insurance Intermediation will make intermediary supervision more effective and increase cooperation with foreign authorities. *Source: IMF mission assessment (1996).* ### 98. The mission reviewed the relevant AML/CFT laws and regulations and supervisory ### Assessment of Liechtenstein AML/CFT legal, supervisory, and institutional framework ### Scope and methodology of the assessment - The assessment team reviewed AML/CFT laws, regulations, and supervisory systems for prudentially regulated financial institutions including banking, insurance, and securities firms, and conducted a review of ML-preventive measures for trustees and trust companies providing trust and company services and conducting financial transactions; such trustees and trust companies are macro-relevant to the economy and pose a risk for money laundering. - The assessment was conducted using the methodology for Assessing Compliance with Anti-Money Laundering and Combating the Financing of Terrorism Standards (AML/CFT Methodology), endorsed by the Financial Action Task Force (FATF) in October 2002 and by the IMF and World Bank Executive Boards in November 2002. - The assessment team reviewed primary and secondary legislation including: the Law on Professional Due Diligence in Financial Transactions (including the Law of November 16, 2001, Concerning the Amendment of the Due Diligence Law) (collectively, the DDA); the Executive Order Concerning the Law on Professional Due Diligence (the DDEO); the Decree of October 15, 2001 Concerning the Due Diligence Unit; the Law Concerning the Financial Intelligence Unit (the FIU Act); the Executive Order of February 22, 2001 concerning the establishment of the FIU; the Law on International Mutual Assistance in Criminal Matters (MLA Law); relevant provisions of the Ordinance on Persons and Companies; the Criminal Code (StGB); and the Code of Criminal Procedures. - The assessment team reviewed Guideline 2002/1 Monitoring of business relationships, Directive 2001/2 on the Performance of Inspections in Accordance with the DDA and Instructions for the Conduct of Audits in Accordance with the Due Diligence Law in 2002 issued by the Due Diligence Unit (DDU). - The assessment team met with representatives from the DDU, the FIU, the Financial Services Authority (FSA), public prosecutor’s office, the office of legal assistance in the ministry of justice, the legal advisor to the government, commercial registrar, the national police authority, a judge of the Princely Court, the trustee’s association, the lawyer’s association, the auditor’s association, and two Liechtenstein banks; and attended meetings with the prime minister and outside advisers on restructuring of the supervisory system for financial services. ### General situation and vulnerability to ML/FT - Liechtenstein is described as a well-established offshore financial center highly dependent on a multiplicity of financial services, particularly banking and an international business company (IBC) business involving formation of legal entities, including foundations (Stiftung) and trusts. - Historically, IBCs, foundations, and trusts were of concern for money laundering because of effective disguising of beneficial ownership information; banking secrecy added to vulnerability and misuse of financial institutions. - The assessment indicates an estimated 85,000 total entities enrolled on the commercial registry, contributing to large capital flows through the jurisdiction. - The assessment notes that recent legal changes have increased transparency regarding beneficial ownership of IBCs and loosened banking secrecy in criminal investigations and international cooperation, reducing attractiveness for money laundering; nonetheless, the high rate of IBC business and tax policies mean ML/FT risk cannot be disregarded. ### Size and composition of the financial sector (reported figures) - 17 banks with over 200 thousand customer relationships - approximately 355 trustees and trust companies providing trust and company services for approximately 31 thousand incorporated entities - 51 thousand foundations - 1,500 trusts with family purposes - 101 lawyers, many of whom are also trustees - 12 insurance companies engaged in direct life insurance - 16 mutual fund management companies managing 81 investment funds ### Legislative and institutional developments and effectiveness - The DDA (first passed in 1996, substantially enhanced in 2001) sets minimum due diligence requirements including customer identification (know-your-customer), internal control procedures, training, designation of compliance and due diligence officers, ongoing monitoring, suspicious activity reporting to the FIU, record keeping, audit requirements for due diligence, and penal and administrative sanctions; the DDA overrides banking and official secrecy for AML/CFT intelligence disclosures to the DDU, FIU, and foreign competent authorities. - The FIU was created in February 2001 and is responsible for collection, analysis, and dissemination of financial intelligence and information exchange with foreign FIUs. - The DDU was created in October 2001 to administer compliance with the DDA and DDEO across a broad set of financial intermediaries and on a blanket basis for persons who accept or keep in custody client assets. - The MLA Law (enacted in 2000) reduced procedural steps for mutual legal assistance, virtually eliminated the backlog of older requests, broadened scope of assistance, allowed broader participation of foreign investigators/prosecutors/judges, and specifies that once a criminal investigation starts banking and profession secrecy of trustees no longer applies. - Criminal provisions on money laundering were amended to liberalize the intent requirement and permit prosecution for self-laundering, facilitating investigations and prosecutions. - The offense of participation in criminal organizations addresses financing of terrorist organizations to a limited extent; pending proposals aim to create a separate offense for financing of terrorism. ### Operational cooperation and implementation - The national police unit EWOK is responsible for investigations of white collar crime including money laundering, predicate offenses, and organized crime. - The public prosecutor is primarily responsible for development and prosecution of ML offenses, criminal violations of the DDA, and execution of confiscation orders through domestic criminal and civil processes and mutual legal assistance requests. - Princely courts conduct criminal processes, confiscation matters, and execution of mutual legal assistance requests; the main conduit for mutual legal assistance is the legal assistance unit of the ministry of justice. - Authorities deliberately housed the DDU, FIU, and the public prosecutor (along with the FSA) in the same building to ensure continuous and close cooperation. - The assessment reports that analysis of suspicious activity reports, transmittal to investigative authorities, preparation of prosecutions, and provision of mutual legal assistance or information sharing with foreign authorities have progressed considerably; however, domestic collaboration methods remain somewhat informal in the absence of clearly established procedures permitted under law. - The authorities are focusing on ongoing monitoring of implementation to achieve a culture of compliance; the true test remains execution of criminal laws, FIU operations, and international cooperation, which appear to be progressing. ### Identified weaknesses and recommended legal/institutional reforms - Remaining vulnerabilities call for measures beyond existing standards, including: - Full criminalization and international cooperation through application of the Strasbourg Convention and the Second EU Directive on Money Laundering. - Consideration of evolving trends in continental law concerning legal liability of entities and inclusion of fiscal related matters, particularly those relating clearly to fiscal fraud matters. - Consideration of FIU authority to have direct access to financial information from financial institutions rather than relying on indirect access from the DDU. - Specific legal measures to monitor and consider: - The criminal provision for ML limits prosecution such that both prosecution for the predicate offense and money laundering is not permitted simultaneously; while meeting the FATF 40 Recommendations, the Strasbourg Convention contemplates allowing prosecution of both offenses—authorities should consider whether the limitation is an impediment to pursuing criminal actions. - The inability to prosecute legal entities under the ML and existing FT provisions should be considered for potential gaps. - Potential gaps in legal certainty of the existing legal framework should be addressed promptly through legal and institutional reform if they arise and inhibit effective prosecutions, FIU operations, or international cooperation. - The assessment anticipates that a proposed criminal provision for an autonomous FT offense will enhance the structure and fill current gaps related to combating the financing of terrorism. ### Counter-terrorism financing coordination and obligations - The government established a coordination task force headed by the FIU including DDU, national police, public prosecutor, judicial service, personal staff of the government (directly reporting to the prime minister), foreign ministry, and the press office to implement the FATF 8 Special Recommendations on terrorist financing, as decided by the government on January 8, 2002. - The Coordination Task Force is responsible for disseminating lists of suspected terrorists, terrorist organizations, and financiers from the United States and the European Union for enhanced scrutiny; United Nations lists are issued directly by Executive Order and require immediate blocking and reporting; other lists (e.g., from the United States) are disseminated by the DDU with administrative blocking applied. - The Coordination Task Force has responsibility for completing and updating reports to the UN Counter Terrorism Committee, including United Nations Security Council Resolution (UNSCR) 1373, which was last updated in January 2003. *Assessment team findings and recommendations from the IMF mission assessment of Liechtenstein AML/CFT framework* ### 119. As an overall approach, the regulations and guidelines defining the scope of the ### As an overall approach, the regulations and guidelines defining the scope of the preventive measures for financial institutions ### Key findings - The regulations and guidelines defining the scope of the preventive measures for financial institutions address minimum requirements across all relevant financial sectors. - The due diligence obligations in the DDA and DDEO are broadly drawn. - Many of the DDA and DDEO preventive measures satisfy sector-specific criteria, particularly those set forth by the Basel Committee for Banking Supervision in the Basel Core Principles (BCP) and the Customer Due Diligence Paper (CDD Paper). - The general approach aims to provide clear, objective, and achievable preventive measures to bring financial sectors up to the level of the FATF standards. ### Implications and identified needs - As implementation of the DDA and DDEO progresses, sector-specific issues are likely to arise. - These sector-specific issues will require more tailored requirements to ensure compliance with evolving sector-specific standards. ### Recommendations (implicit in analysis) - Maintain the broadly drawn, minimum-requirements approach to ensure coverage across all relevant financial sectors. - Monitor implementation to identify sector-specific issues as they emerge. - Develop more tailored, sector-specific requirements where necessary to align with the Basel Core Principles (BCP), the Customer Due Diligence Paper (CDD Paper), and evolving sector-specific standards under FATF. *Source: International Monetary Fund (IMF).* ### 120. At the moment, only the additional sector specific requirements for banks contained ### 120. Detailed assessment — Liechtenstein AML/CFT framework ### Integration of sector-specific requirements and supervision - Only the additional sector specific requirements for banks contained in the BCP and in the CDD Paper have been integrated into the framework for preventive measures; authorities recognize the need to develop guidance for insurance, investment undertakings and trustees. - The supervisory framework of the DDU is designed to monitor compliance with core preventive measures and sector specific requirements, using mandatory guidelines for external auditors such as Instructions (February 2002) and Guideline 2002/1. - Liechtenstein largely relies on a dualistic/indirect supervision system: routine DDU audits are conducted by external auditors; the DDU conducts a limited number of audits yearly while DDU staff auditing experience is progressing. - Ongoing attention required to ensure the dualistic system functions adequately given the structure of the Liechtenstein financial marketplace. ### Methodology and scope of the detailed assessment - The detailed assessment was conducted using the October 11, 2002 version of Methodology for assessing compliance with the AML/CFT international standard (FATF 40+8 Recommendations). ### I — Criminalization of Money Laundering (ML) and Financing of Terrorism (FT) Findings - Liechtenstein is a signatory to: - the Palermo Convention since 2000; - the Convention on Laundering, Search, Seizure, and Confiscation (Strasbourg Convention) since 2000; - the International Convention for the Suppression of the Financing of Terrorism (Financing of Terrorism Convention) since 2001 (not yet ratified). - ML is criminalized in Article 165 StGB (modeled on Austrian Penal Code); predicate offenses are all crimes punishable by 3 years in prison, specified misdemeanors relating to official corruption and misconduct, and misdemeanors of the Narcotics Act (including sale or procurement of narcotics, financing narcotic trafficking, or procurement of financing of narcotics). - FT is addressed by Article 278a StGB; FT is a predicate offense for ML prosecution. - Article 165 StGB was amended on December 19, 2000 to allow prosecution of self-laundering; the mental element standard is now dolus eventualis (willful disregard). - Penalties: - Article 165 StGB: imprisonment between six months and five years, or fines up to 360 daily rates; - Article 278a StGB: imprisonment from one to ten years; - Article 15 DDA: imprisonment of six months or fines up to 360 per diem units for willful violations of the DDA; - Article 20 StGB: mandates payment equal to unlawful enrichment. - Criminal liability for ML and FT offenses presently extends to natural persons but not legal entities (gap relative to Strasbourg Convention); mitigations: - Article 18 DDA extends Article 15 DDA criminal provisions to legal entities (joint and several liability for fines, penalties, costs); - in rem confiscation process allows confiscation from legal entities notwithstanding conviction of the entity. Recommendations - Enact a separate autonomous FT offense (proposal to add Article 278d StGB) criminalizing gathering or keeping assets for planned terrorist acts and broader material support; proposal expected to go to parliament in April 2003. - Consider extending Article 165 StGB to legal entities as required under the Strasbourg Convention. - Consider whether limitation of Article 165 StGB to natural persons impedes mutual legal assistance (dual criminality) or confiscation. Statistics / prosecutorial activity - By end-March 2003: nine indictments from Article 15f DDA investigations → four convictions, three acquittals, two pending. - The public prosecutor now has four judges assigned for investigations and international cooperation matters. Implications for FATF compliance - Largely compliant with FATF Recommendations 1, 4, and 5 (including Palermo Convention), though legal entities are not subject to ML liability. - FT provisions not fully addressed; existing organized crime provisions largely meet FATF SR II but full compliance with SR I requires the autonomous FT offense. ### II — Confiscation, freezing and provisional measures Findings - Broad confiscation and provisional measures available, including civil in rem process (Art 353ff StPO). - Confiscation on conviction: Article 20 StGB (forfeit amount equal to unlawful enrichment); Article 20b StGB allows confiscation of assets subject to power of disposal of a criminal organization and assets from punishable acts in other jurisdictions (non-fiscal). - Freezing prior to conviction: Article 97a StPO; Article 9 DDA allows FIU and public prosecutor up to ten days to take necessary measures on suspicious activity reports (blocking assets), extendable if required. - Civil forfeiture orders/freeze may be issued by investigative magistrate at public prosecutor request; civil in rem allows confiscation absent criminal conviction. - FIU, public prosecutor, and ministry of justice maintain statistics; since August 2000 public prosecutor estimates above SwF 500 million frozen or confiscated in aggregate. - Asset sharing: Article 253a StPO authorizes sharing agreements; example: assets ≈ $28 million recovered and turned over to the United States, less a small percentage remaining to Liechtenstein. - Five accounts related to terrorist financing frozen (based on mutual legal assistance from Switzerland); two disclosures sent to FIU based on government executive order on Taleban lists. - Article 20c StGB excludes confiscation when assets are subject to legal claims of persons not involved or forfeiture remedy is disproportionate. Analysis of effectiveness - Comprehensive legal framework for confiscation, freezing, and seizing; civil in rem process complements criminal confiscation and facilitates confiscation from legal entities. - Provisional measures and confiscation framework largely compliant with FATF Recommendations 7 and 38 and FATF SR III (blocking requirements implemented). Recommendations - Continue full use of civil in rem confiscation as complement to criminal confiscation (particularly for legal entities). - Analyze whether corporate criminal liability limits affect confiscation exercise and whether in rem procedure suffices. - Clarify and make discretionary FIU blocking powers explicit in the DDU. - Centralize and develop targeted statistics on frozen funds and confiscation amounts. Implications for FATF compliance - Measures for freezing, seizure, and confiscation are legally adequate and put to effective use, resulting in compliance with FATF Recommendations 7 and 38 and SR III. ### III — Financial Intelligence Unit (FIU) operations and information handling Findings - FIU established by Executive Ordinance on February 22, 2001 (Article 22 DDA); codified by Law Concerning the Financial Intelligence Unit on May 8, 2002 (FIU Law). - FIU is independent, reports directly to the prime minister, has no law-enforcement functions, and is not subordinated to FSA, other supervisors, or DDU. - FIU roles: collect and analyze information for detecting ML, predicate offenses, and organized crime; obtain information from public and nonpublic sources, national police, and foreign FIUs. - FIU membership in Egmont Group since June 2001; access to Egmont Secure Website; member of Egmont Training and Outreach Working Groups. - FIU is Secretariat for Coordination Task Force for Counter Terrorism (established October 2001). - Legal powers: - Article 8 FIU Act authorizes obtaining, recording, processing required information; - Article 5 Para.1 FIU Act authorizes ordering measures in accordance with Article 9 DDA, including forwarding SARs to public prosecutor when FIU analysis confirms suspicion; - Article 7 FIU Act authorizes sharing information with foreign FIUs subject to conditions (reciprocity, use exclusively to combat ML/predicate crimes/organized crime, not adversely affect public order/fiscal interests, etc.); - Article 9 DDA immunizes reporters from liability for SARs (Art 9 Para. 3), and FIU may block assets under Article 9 DDA (ten-day period). - Access to information: real-time access to vehicle registration; attempts to ensure police database compatibility; access to commercial register, tax administration, registry of persons on request; INTERPOL info on request. - SAR statistics: - 2001: 158 SARs received — 81 from banks, 64 from fiduciaries, 13 from lawyers; 121 of 158 forwarded to public prosecutor. - 2002 year-to-date (through second quarter): 93 SARs filed — 51 from banks, 29 from fiduciaries, 1 from lawyers, 2 from Liechtenstein Post; 72 forwarded to public prosecutor. - 2002 full-year reported: 202 SARs — 96 from banks, 95 from fiduciaries, 6 from lawyers, 2 from insurance companies, 1 from investment companies, 2 from Liechtenstein Post. - FIU staffing and budget: - Six full-time staff (one administrative support); - Head is an experienced white-collar crime investigator; staff roles include strategic analysis, preliminary and operational analysis, IT management; - IT system: high-secured Oracle-based system with standardized analytical tool; - Operational budget for 2002 (in addition to salaries): CHF 220,000. - Reporting form and minimum SAR content: Article 23 DDEO prescribes minimum information; FIU created SAR notification form. Analysis of effectiveness - FIU, operational since March 1, 2001, is sufficiently resourced, staffed, and trained to collect, analyze, and disseminate financial intelligence for AML/CFT. - FIU has broad powers and effective collaboration with DDU, public prosecutor, national police, and FSA. - Some legal text (Article 7 FIU Act) could be read strictly and pose obstacles; in practice SAR-filed information overrides banking secrecy (Article 9 DDA). - Coordination relies heavily on particular individuals; formalized procedures for continuity and relationship with FSA/DDU recommended. Recommendations - Formalize systemic lines of communication and collaboration procedures between FIU, DDU, FSA, and law enforcement to sustain coordination as FIU grows. - Widely disseminate the SAR form and submission instructions (e.g., via FIU website). - Clarify DDA/DDEO/FIU statutory provisions on FIU discretionary blocking authority and on information-sharing scope under Article 7 FIU Act. - Continue independence of FIU while ensuring formalized coordination. Implications for FATF compliance - FIU legal framework and institutional structure support compliance with FATF Recommendations 14, 28, and 32 (effective detection, reporting, and exchange of financial intelligence). ### IV — Law enforcement, prosecution authorities, powers and duties Findings - National police white-collar unit EWOK investigates ML and FT; EWOK had seven investigators and planned recruitment of three additional investigators (total ten by July 2003). - Public prosecutor office expanded from two prosecutors on financial crimes to six qualified prosecutors (recruited from Austria). - Princely Court: four investigative magistrates assigned to handle domestic and international cases. - Investigative powers available: wire tapping (Article 103 StPO), surveillance, controlled delivery (used mainly in drug cases), searches (Article 92 StPO); sting operations (agent provocateur) are legally prohibited (Article 9 StPO) though courts have allowed analogous techniques in practice. - Mutual cooperation: Police treaty with Austria and Switzerland allows mixed investigating teams; trilateral treaty on Collaboration of Police and Customs Authorities Across the National Border effective July 2001. - Caseload and activity: - 2002: fifty cases investigated based on mutual legal assistance, 49 requests received from foreign police authorities; 37 FIU requests; 113 domestic cases initiated. - 2001: EWOK investigated 218 financial cases (45 requests from foreign police, 18 from FIU, 78 court orders, 25 prosecution orders, 52 own initiative); ~74 related to ML; 15 INTERPOL requests. - 2002 public prosecutor: received 93 matters from SARs (59 already known); 64 new investigations opened; in five cases requested foreign judicial authorities to take over prosecution; two investigations led to formal forfeiture in rem; one suspect indicted and sentenced to four years imprisonment (serving in Austria); 51 investigations pending. - Investigative tool enhancements proposed (broader access to bank records via Article 98a amendment in Criminal Procedure Code). Analysis of effectiveness - DDA, StGB, StPO, FIU Act, and MLA Law provide law enforcement and prosecution with an adequate range of investigative powers, broadly utilized except for fiscal offenses; resource increases have addressed prior capacity gaps. Recommendations - Sustain enhanced resources and training to maintain capacity. - Ensure proposed amendments to permit broader access to bank records are adopted to allow access to records not clearly tied by name or transaction to a suspect. - Ensure “fiscal” excuse does not inhibit investigative techniques where indicators of other offenses (fraud, bankruptcy) exist. Implication for FATF compliance - Provides generally adequate means to obtain evidence and materials for ML investigations and prosecutions; supports compliance with FATF Recommendation 37. ### V — International co-operation (mutual legal assistance, extradition, transfer of prosecution) Findings - New Law on International Mutual Legal Assistance in Criminal Matters (MLA Law) effective November 6, 2000; aims to provide rapid and effective MLA by reducing steps and appeals. - MLA Law assigns ministry of justice legal assistance unit as competent authority; courts and public prosecutor integrated into streamlined process; “one man, one case” practice assigns same judge and prosecutor to related matters. - MLA Law authorizes implementation of requested measures: search and seizure of banking documents, asset blocking, telephone tapping, witness interrogation, and participation of requesting state law enforcement in proceedings. - Turnaround times improved: non-coercive measures often obtainable in 14 days to 3 weeks; most requests resolved under six months; urgent MLA executed on expedited basis (via INTERPOL or foreign courts). - Statistics: - 2000: 301 requests received, 188 requests made; 13 received requests rejected (8 fiscal matters, others for lack of double criminality, etc.). - 2001: 385 requests received, 300 issued; 13 rejected. - 2002: 304 requests received, 472 sent; approx. 10 rejected. - 97 percent of requests to Liechtenstein originate from countries party to European Convention on MLA. - Extradition authorized under Articles 10–41 of MLA Law; extradition of nationals generally not permitted without consent; Article 60 MLA Law authorizes passive transfer of prosecution to Liechtenstein; Article 74 authorizes active transferal of prosecution abroad. - Enforcement of foreign forfeiture orders under Article 64–67 MLA Law and Strasbourg Convention (dual criminality, non-fiscal, no ongoing domestic proceeding); enforcement used in cases (forfeitures ranging CHF 64,000 to £200,000). Analysis of effectiveness - Substantial enhancement of MLA performance since MLA Law; backlogs largely cleared; streamlined processes and resources effective. - Possible substantive limitations remain due to fiscal offense exclusions and Liechtenstein’s “serious crimes” approach for predicate offenses; interpretation of fiscal matters (e.g., VAT carousel) may inhibit assistance. Recommendations - Continue monitoring MLA implementation quality and pursue additional bilateral/multilateral agreements to ensure coverage and expedite assistance. - Review and clarify interpretation of fiscal offense exclusion (e.g., VAT carousel cases). Implications for FATF compliance - Measures implemented affect compliance with FATF Recommendations 3, 32, 33, 34, 37, 38, 40, SR I, SR V; improvements since MLA Law bolster international cooperation capacity. ### Preventive measures for financial institutions — summary findings and implementation I — General framework - DDA and DDEO are principal instruments establishing legal/institutional obligations for financial intermediaries (Article 2 Para. 1 DDA covers banks, finance companies, lawyers, trustees, investment undertakings, insurance companies (direct life business), bureaux de change, and Liechtenstein Post). - DDA/DDEO mandate due diligence, ongoing monitoring, suspicious activity reporting, internal procedures, audit, and record keeping. - DDU has exclusive supervisory authority for preventive measures under DDA; FSA/ISA retain prudential licensing/enforcement roles but limited ongoing AML/CFT supervision; gateways for communication between DDU and FSA/ISA exist but not formalized. - External auditors perform routine on-site audits; banks, insurance firms, investment companies audited annually; trustees and lawyers at least once every three years. Analysis/Recommendations - DDU effectively established as independent supervisory body; sustain DDU role and coordination with FSA especially if proposed merger of FSA and DDU proceeds. - DDA and DDU achieved compliance with FATF Recommendation 2 (banking and professional secrecy not an unduly limiting factor). II — Customer identification (KYC) Findings - Article 4 DDA: identify customers with supporting evidence when entering business relationships. - Article 5 DDA: establish ultimate beneficial owner (UBO); UBO defined as natural person (ultimate beneficial owner can only be a natural person). - Non face-to-face relationships require certified copies of passports/ID (Article 17 DDEO). - Reliance on third parties permitted under Article 24 DDEO with transmission of collected information. - Numerical implementation details and audit findings: - Transitional requirement (Law of November 16, 2001): banks required to obtain/update beneficial ownership for existing relationships by December 31, 2001. - As of December 2001: banks reported 2.5 percent of relationships formerly relying on trustees had missing/incomplete beneficial ownership. - April–May 2002 audit of 17 banks: 3.8 percent of 2,196 relationships had missing (0.93 percent) or insufficient (2.57 percent) beneficial ownership info (mainly minor formal deficiencies). - DDU trustee audits (Oct–Nov 2001): 6 percent had formal/other deficiencies; 2002 trustee audit deficiencies ~8 percent (mostly minor); ~0.59 percent of audited relationships had UBO unknown. - Blocked historical accounts: 423 accounts blocked as of October 23, 2002 (or 420 accounts as of October 20, 2002 noted elsewhere) pending required customer identification. - Thresholds and exceptions: - Cash transaction threshold for CDD: CHF 25,000 triggers CDD/UBO requirements. - Exceptions: publicly listed companies and banks subject to EU Directive 91/308/EEC or equivalent. - Correspondent banking: DDA/DDEO do not explicitly prohibit relationships with shell banks; no specific provisions for special treatment of shell banks. Recommendations - DDU/FSA should issue guidance restricting correspondent activities with shell banks. - Complete trustee audits by year-end 2003 to verify full implementation. - Ensure KYC completion for blocked historical accounts. Implications for FATF compliance - Legal requirements sufficient for FATF Recommendations 10 and 11; full implementation across sectors pending verification. III — Ongoing monitoring of accounts and transactions Findings - Ongoing monitoring mandated by DDA, DDEO, Guideline 2002/1, and Instructions (February 2002); risk-based monitoring intensity recommended. - Customer profiles required (Article 6 Para. 2 DDEO) with minimum elements; 32 monitoring indicators in Guideline 2002/1 Annex. - Annex indicators include A17/A18 requiring enhanced scrutiny for wire transfers missing originator/beneficiary information; A20 flags transfers to/from drug-producing or FATF NCCT countries. - Banks have invested in IT systems for aggregation and monitoring; trustee and insurance sectors show less advanced IT/monitoring systems. - Insurance sector lacks specific guidance for second-hand endowment policies and single premium unit-linked products; reinsurance/retrocession review recommended. - Trustee sector: monitoring less developed; trustee cultural/behavioral change needed (noted misuse in Iraqi oil-for-food program instances). Analysis/Recommendations - Compliance officers and external auditors must ensure wire transfers consistently scrutinized for originator information. - Enhance training and IT systems for trustees and insurance sector; issue insurance-specific AML/CFT guidance addressing second-hand policies and single premium life products. - Continue to build judgment-based review culture, not merely formal documentation checks. Implications for FATF compliance - Sufficient to meet FATF Recommendations 14, 21, 28 and SR VIII in law; implementation stronger in banking sector than trustees/insurance. IV — Record keeping Findings - Article 10 DDA: retain customer identification, beneficial ownership, clarifications, suspicious activity records for ten years after relationship ends or execution of transaction. - Article 32 DDEO: auditors’ work papers retention. - Records must be maintained within Liechtenstein (Article 5 DDEO / Article 12 DDA). - External audits verify record keeping as part of substantive checks. Analysis/Recommendations - Record keeping and record recovery adequate for FATF Recommendation 12. - DDU may refine substantive checks to identify systemic weaknesses and improve reconstruction capability. V — Suspicious transactions reporting (SAR) Findings - Mandatory SARs: Article 9 Para. 2 DDA requires reporting where clarifications do not dispel suspicion of ML/predicate/organized crime; Article 9a permits pre-relationship reporting. - SAR immunity: Article 9 Para. 3 and Article 9a Para. 3 provide protection from liability (unless intentional or grossly negligent). - Tipping off / blocking: - Article 9 Para. 5 prohibits informing customer/third party that SAR filed or investigation underway until the reporting party receives notice from FIU or ten working days have elapsed (during which FIU may block assets); after ten days prohibition no longer applies unless specifically requested by FIU. - Concern that automatic ten-day blocking risks tipping off and may be unnecessary; recommendation to replace with FIU discretionary initial blocking (e.g., 48 hours) and extend prohibition on tipping off beyond blocking period. - Implementation: banks’ SAR awareness high; fiduciaries and insurance sector improving more slowly. - SAR submission form standardized by FIU (Article 23 Para. 3 DDEO). Analysis/Recommendations - Amend Article 9 Para. 3 to remove mandatory ten-day automatic blocking; empower FIU with discretionary initial blocking (suggested 48 hours) with extension by court ex parte order. - Extend tipping-off prohibition beyond mandatory blocking period; introduce specific administrative fines for tipping off violations. - Clarify narrow circumstances when parallel filing directly to public prosecutor is appropriate (avoid routine parallel filings). - Issue insurance-sector guidance on monitoring single premium life and second-hand endowment policies. Implications for FATF compliance - SAR system largely compliant with FATF Recommendations 15, 16, 17, 28; tipping off and blocking aspects require attention to achieve full compliance. VI — Internal controls, compliance and audit Findings - Article 12 DDA requires financial intermediaries to implement internal controls and mandates external audits; Article 13 DDA requires auditors report results to DDU. - Article 4 DDEO requires internal guidelines; Article 11 DDEO mandates staff education/training. - Article 8 DDEO: designate DDU contact; Article 9 DDEO: designate due diligence officer; Article 10 DDEO: designate internal control officer. - External audit scope: banks/finance companies/investment undertakings/insurance companies audited annually; trustees/lawyers at least once every three years; DDU conducted 11 onsite trustee audits in 2001; DDU ordered 80 due diligence audits in 2001 and about 330 in 2002. - Concerns: quality of external auditors’ “material controls” not fully satisfactory per DDU; need qualitative review of auditors’ work; some institutions subject to separate financial, supervisory, and DDA audits. Recommendations - DDU should evaluate external auditors’ performance, consider face-to-face debriefs within 90 days of audit report delivery, and differentiate audit instructions by institution type. - Provide guidance on employee screening (criminal background checks) for personnel with access to customer funds/assets. - Insurance sector: issue specific AML/CFT internal control guidance, strengthen underwriter-claims investigator collaboration, and review reinsurance payments. Implications for FATF compliance - Framework supports FATF Recommendations 19 and 20; implementation requires continued improvement in trustee/insurance sectors and auditor quality assurance. VII — Integrity standards and corporate vehicle oversight Findings - Fit-and-proper tests and impeccable management requirements enforced via licensing and audits; banking sector has robust ongoing fit-and-proper obligations (banking act Article 19). - Investment undertakings and trustees must provide criminal record extracts in licensing processes; trustees’ ongoing supervision limited; Association of Trustees has disciplinary role but FSA monitoring of trustees could be enhanced. - Commercial Register: approximately 31,000 incorporated entities registered (≈2,900 with commercial purpose), about 51,000 foundations and 1,500 family trusts deposited; deposited family foundations/trusts may choose registration or deposit; deposit information not publicly available. - Commercial Register reviews sufficiency of filings but substantive verification limited; failure to file may lead to fines or liquidation steps; registry not yet electronic. - Foundational/trust anonymity recognized as vulnerability; trustees' duty to obtain/maintain identification information emphasized; trustee sector weaknesses noted in analysis and enforcement. Recommendations - FSA should adopt a more active role in ongoing monitoring of fit-and-proper requirements for trustees and use due diligence audit results to assess trustee integrity. - Consider enhancing commercial register verification powers and transparency; accelerate electronic availability and information access mechanisms. Implication for FATF compliance - Areas impacting FATF Recommendation 29 (fit-and-proper and integrity of legal persons/arrangements) require enhanced trustee supervision and registry verification. VIII — Enforcement powers and sanctions Findings - Article 15 DDA: criminal sanctions (up to six months imprisonment or fines up to 360 per diem units) for willful violations of DDA obligations (CDD failures, UBO failures, tipping off, failure to block/retain assets, failure to file SARs, record keeping breaches). - Government may impose fines up to CHF 100,000 for refusal to provide information, false statements, concealing facts from DDU/FIU/auditor, or permitting withdrawals when business profile missing. - FSA powers under Article 35.4 banking act to issue remedial orders (including license withdrawal) and FSA has used powers to close unlicensed banking operations. - Potential overlap/duplication between DDU enforcement and FSA/ISA prudential enforcement; coordination currently effective via cooperation but requires clearer procedures. Recommendations - Coordinate DDU and FSA enforcement tools; develop guidelines for selecting appropriate enforcement remedies for given violations. IX — Cooperation between supervisors and other competent authorities Findings - DDU fully staffed as of October 2002 with five full-time members; DDU ordered 80 due diligence audits in 2001 and ~330 audits in 2002. - Article 20 DDA mandates cooperation among national authorities (courts, public prosecutor, DDU, national police, FIU); implementation relies on regular meetings and colocation (DDU, FSA, public prosecutor in same building). - Article 20a DDA authorizes sharing of information with foreign authorities for money laundering subject to public order/secrecy/fiscal interests/restrictions; concerns remain about the effect of banking secrecy wording in supervisory information-sharing laws (Article 36a banking act). - FSA legal opinion and government decision maintain that banking secrecy does not limit FSA ability to share client account information with foreign counterparts; Supreme Administrative Court reconfirmed this on May 7, 2003 (ruling noted). - FIU gateway substantially offsets sharing concerns by enabling FIU international exchange of transaction-specific information from SARs. Analysis/Recommendations - DDU appears to have broad authority to share ML/FT-relevant information domestically and internationally; clarify limits regarding transaction-specific supervisory information sharing with foreign supervisors. - Continue to formalize cooperative procedures among DDU, FIU, FSA, ISA, and law enforcement to ensure consistent and lawful information sharing. Implication for FATF compliance - DDU and FIU arrangements support cooperation requirements; outstanding issues on supervisory secrecy should be clarified to ensure full compliance with international supervisory information exchange expectations. *Source: Detailed assessment using the October 11, 2002 Methodology for assessing compliance with the FATF 40+8 Recommendations, as presented in the referenced examination of Liechtenstein’s AML/CFT legal and institutional framework.* ### conclusion that such information can be shared with foreign authorities. The question currently before the ### cr03290 - conclusion that such information can be shared with foreign authorities. The question currently before the ### Recommendations and comments on information sharing and secrecy - Clarification of the limits on banking and professional secrecy on information exchange by the DDU should be resolved. - Clarify the information-sharing authority of the DDU so the DDU is empowered to share account or transaction information related to ML or FT with foreign supervisory authorities. - Implications for compliance with FATF Recommendation 26 noted. ### Controls and monitoring of cash and cross-border transactions (FATF 22–23) - Section collects information on measures to control or monitor large cash transactions, and cross border movements of currency, monetary instruments, or wire transfers, including factors influencing use of cash (e.g., financial transaction taxes, use of credit or debit cards, limitations on size denomination of bank notes, confidence in the banking system). - Table 4.3 findings for Liechtenstein: - Customs and economic union with Switzerland (since 1924) places customs controls with Switzerland; open border makes cash controls, other than reporting of large suspicious transactions in Liechtenstein financial institutions, not feasible. - Bearer instruments: movement of bearer shares of companies and foundations is significant; DDA requirements for beneficial ownership disclosure appear to require lodging or deposit of bearer shares with trustees or others who must verify beneficial ownership before transactions can be executed. Auditors and financial intermediaries, specifically banks, almost routinely require lodging and immobilization of bearer shares. - Guideline 2002/1 Para. 4.1 requires filing of SARs for cash transactions that are suspicious or unusually large. - Foreign currency exchange transactions in banks and two bureaux de change for amounts in excess of CHF 25,000 are recorded and records are maintained and available to domestic competent authorities. ### Ratings of compliance with FATF Recommendations (selected entries) - 1 – Ratification and implementation of the Vienna Convention: Largely compliant - 2 – Secrecy laws consistent with the 40 Recommendations: Largely compliant - 3 – Multilateral cooperation and mutual legal assistance in combating ML: Largely Compliant - 4 – ML a criminal offense (Vienna Convention): Compliant - 5 – Knowing ML activity a criminal offense (Vienna Convention): Compliant - 7 – Legal and administrative conditions for provisional measures (Vienna Convention): Compliant - 10 – Prohibition of anonymous accounts and implementation of customer identification policies: Compliant - 12 – Comprehensive record keeping for five years of transactions, accounts, correspondence, and customer identification documents: Compliant - 15 – Reporting suspicions to the FIU when funds suspected to stem from criminal activity: Largely Compliant - 17 – Directors, officers, and employees should not warn customers when information is reported to the FIU: Largely compliant - 20 – AML rules and procedures applied to branches and subsidiaries located abroad: Largely compliant - 26 – Adequate AML programs in supervised banks, financial institutions, or intermediaries; authority to cooperate with judicial and law enforcement: Compliant - 32 – International exchange of information relating to suspicious transactions and to persons or corporations involved: Largely compliant - SR II – Criminalize the FT and terrorist organizations: Largely compliant - SR III – Freeze and confiscate terrorist assets: Largely compliant - SR VII – Strengthen customer identification measures for wire transfers: Largely compliant - SR VI – impose AML requirements on alternative remittance systems: Not applicable ### Summary of AML/CFT effectiveness (by theme) - Criminal Justice Measures and International Cooperation - Criminalization of ML is largely consistent with international standards; legal entities are not subject to punishment for ML, though DDA criminal provisions allow imposition of criminal penalties to legal entities, alleviating some limits. - Criminalization of FT via Article 278a StGB is sufficient for financing of terrorist acts and certain organizations, but a separate criminal provision directly addressing terrorist financing is needed for wide coverage of FATF Special Recommendations. - Confiscation of proceeds of crime or property used to finance terrorism is comprehensive, effective, and efficient; sustainability should be a priority. - The FIU is effective and should maintain its independence; independence has allowed a significant role in AML/CFT policy formation. - Enhancements to the Police EWOK unit strengthen investigative capacity; public prosecutor demonstrates high skill and professionalism and effectively directs responses to foreign jurisdictions’ requests for mutual legal assistance. - International cooperation has undergone significant transformation; previous barriers (excessive review layers, professional secrecy, differing standards of proof) have been largely removed. - Legal and Institutional Framework for All Financial Institutions - General framework adequate to ensure covered financial institutions adhere to preventive measures. - Customer identification requirements are substantive and comprehensive; implementation in banking advanced, with remaining implementation issues in insurance and trustee sectors. - Ongoing monitoring largely in line with international requirements; banks most advanced. - Record keeping largely adequate; DDA requirement that copies of all records be maintained within the jurisdiction substantially enhanced usefulness of records. - Suspicious transaction reporting framework largely adequate; concerns remain about current tipping-off provision which only prohibits tipping off during an automatic ten-day blocking upon filing of a SAR; the ten-day blocking may increase tipping off risk and is less efficient than discretionary blocking for a shorter period by the FIU. - Internal controls, compliance and audit: reliance on external auditors for due diligence audits appears adequate; DDU should prepare to assume greater direct-audit responsibility across sectors. - Integrity standards: greatest vulnerability in corporations, foundations, and trusts marketed and administered by trustee sector; law does not vest Company Registrar with strong powers to verify or investigate underlying information filed for foundations, companies, or trusts; DDA application to trustees and lawyers is the most effective tool and implementation should be strengthened. - Co-operation between supervisors and other competent authorities: limitations persist on direct exchange of account and transaction specific information between prudential supervisors; mitigated somewhat by FIU availability but involves additional steps that may hinder efficient exchange. ### Recommended Action Plan (selected actions from Table 3) - Criminal Justice Measures and International Cooperation - I: Complete criminalization of a separate offense for financing of terrorism; extend legal liability to legal entities. - III: Ensure continued independence of the FIU; provide clearer guidance on processes for domestic information sharing. - V: Pursue additional multilateral and bilateral agreements needed to ensure coverage; ensure requests with non-fiscal aspects are not rejected on fiscal grounds. - Legal and Institutional Framework for Financial Institutions - I: Ensure effective supervision by the DDU continues after proposed merger of the DDU with the FSA into a single regulator. - II–III: Implementation by trustees, trust companies, and insurances of customer identification and monitoring obligations may need additional attention. - V (Suspicious transactions reporting): Abolish provision on automatic ten-day blocking of assets and accounts when filing SARs and replace with authority of the FIU to order blocking upon receipt of a SAR; reduce blocking time to a shorter period with extensions to ten days. Amend law to impose a permanent prohibition against tipping off. Provide for a specific administrative sanction for violations of tipping-off prohibition. - VI (Internal controls, compliance and audit): Due diligence audits and supervisory audits should be conducted by the same auditor or audit firm and should be conducted together, insofar as possible. - VII (Integrity standards): Additional monitoring directly by the FSA regarding fit-and-proper requirements and impeccable management of trustees and trust companies is warranted. - IX (Co-operation between supervisors and other competent authorities): Clarify the information-sharing authority of the DDU so the DDU can share account or transaction information related to ML or FT with foreign supervisory authorities. - Insurance sector specific measures - Guidelines should require insurance entities to be alert to implications of financial flows and transaction patterns of existing policy holders and be extra vigilant to risks from buying and selling second hand endowment policies and single premium life. ### Authorities’ response and planned measures - Due Diligence Unit (DDU) — general observations: - Report states attractiveness of Liechtenstein for ML has diminished due to structural changes and “loosening of banking secrecy in criminal investigations and international cooperation”; however, banking secrecy never applied in domestic criminal investigations or mutual legal assistance proceedings—what changed is enforcement of the law. - Measures to prevent ML and FT: - Liechtenstein is a signatory to the Strasbourg Convention on money laundering; the convention has been in force in Liechtenstein since March 1, 2001, and is being applied by the courts. - Criminalization of ML and FT — government proposals and legislative drafting: - Government commissioned a draft to amend legal framework and fill possible gaps; recommended measures include: - definition of the new crime “Terrorist Association” (Article 278 b StGB); - definition of the new crime “Terrorist Financing” (Article 278 d StGB); - collective designation of terrorist crimes (Article 278 c StGB); - extension of the definition of gang to “Criminal Association” (Article 278 StGB). - Proposed amendments will be circulated for consultation and then discussed by parliament on basis of a draft law presented by the government. - Liechtenstein Penal Code modeled on Austrian Penal Code; the 2002 Draft Act on Amendment of the Penal Code in Austria will, to extent possible, be incorporated into Liechtenstein law to maintain conformity. - Additional substantive changes recommended: - take terrorist associations into account with regard to confiscation of proceeds and forfeiture (Article 20 and 20 b StGB); - extend domestic jurisdiction according to Article 64 StGB to terrorist associations and terrorist financing; - extend definition of money laundering by expanding list of predicate crimes and through new Article 278 d StGB. - In substantive criminal law Article 320 StGB (“Support of a Party in a Foreign Armed Conflict”), include the crime of “Arms Brokering”. - Objective of proposed legislative measures: improve legal framework for combating terrorism in accordance with Security Council resolution 1373 and implement United Nations Convention against Transnational Organized Crime; resulting amendments include Article 278 StGB (Criminal Association), Article 278 a StGB (Criminal Organization), Article 278 b StGB (Terrorist Association), Article 278 c StGB (Terrorist crimes), Article 278 d StGB (punishes intentional provision or collection of financial assets for committing terrorist acts). - Customer identification and ongoing monitoring: - DDU will give additional attention to implementation of due diligence by trustees, trust companies, and insurances; specific provisions for trustees, trust companies and insurances will be considered in planned revision of DDA and DDEO. - Internal controls, compliance, and audit: - FSA and DDU will conduct both supervisory audits and due diligence audits by the same auditor and, if possible, together in the near future. --- _Source: https://www.imf.org/-/media/files/publications/ofca/english/cr03290.pdf_