## Liechtenstein as a Financial Center

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### Introduction: The Financial Center Strategy
- Liechtenstein pursues an international financial center strategy aimed to secure growth and development through well-paying jobs, a robust economy, and a strong tax base.
- The sector primarily focuses on asset management for international institutional investors and private clients and leverages dual access to the EU and the Swiss financial markets and low taxes.
- The authorities adhere to and enforce international standards, transparency, and a predictable legal system.
- Key institutional and legal milestones:
  - FMA was established in 2005 to ensure financial market stability, protect clients, prevent abuse, and comply with international standards. FMA publishes an annual stability report.
  - Liechtenstein implemented FATCA and Automatic Exchange of Information in Tax Matters as an early adopter.
  - A new law enacted in 2008 led to a substantial reshaping of the fiduciary sector, and the Professional Trustee Act is under review to strengthen fit & proper requirements, provide FMA with more intervention power, and enhance data availability.

### Structure of the International Financial Center
- Size and composition:
  - The broadest measure of the financial sector (including on-balance and off-balance sheet and activities in foreign subsidiaries) was CHF 773 billion in 2023, 100x GDP.
  - The narrowest measure (domestic banks) was CHF 81.5 billion or 11x GDP.
  - A proxy for international clients’ holdings (combined AuM by banks or asset management companies, and investment funds) is CHF 539 billion and makes up 75 percent of the total financial sector.
- Asset management and fund characteristics:
  - AuM activities are largely off-balance sheet; investment funds are typically unleveraged.
  - Since 2007, AuM has more than doubled, with most growth occurring abroad as banks expanded in Europe, the Middle East, and Asia.
- Inward FDI and SPEs:
  - Unlike some financial centers, Liechtenstein is not a host for shell corporations: inward FDI into resident SPEs as a percentage of GDP is low and most inward FDI is in companies with physical production presence in Liechtenstein.
  - Note: data on inward FDI and SPEs are uncertain because Liechtenstein does not report these data directly; they are mirror data or estimates based on Orbis and other sources.

### Risks
- Compliance and reputational risks:
  - Key risks include AML/CFT, cross-border activities, and wealth management. Complex structures can obfuscate ownership or asset origins, complicating supervision and increasing reputational risk.
  - Nonadherence to international standards can jeopardize international banking relationships and Liechtenstein’s stature as a financial center.
- Operational and legal risks:
  - Liechtenstein relies on Swiss financial market infrastructure (FMI) while Switzerland is not in EU/EEA. Access to Swiss FMI is subject to legal uncertainty where Swiss regimes are not considered equivalent to the EU regime.
  - A moratorium until 2030 exists on the EU’s equivalence decisions on key components of the Swiss FMI, which reduces the immediacy of some risks.
  - The use of alternative EU providers could be costly and, in a worst case, undermine Liechtenstein’s access to the Swiss franc currency area.
- Balance-sheet and systemic risk considerations:
  - AuM are off-balance sheet and investment funds are typically unleveraged, mitigating balance-sheet systemic risks.
  - On-balance-sheet activities related to AuM mainly consist of collateralized Lombard loans (around 20 percent of total assets) and simple deposits from AuM clients.
  - Fund maturity profiles do not point to liquidity mismatches; therefore the fund sector is not likely to be a source of systemic risk.
- Cost and profitability pressures:
  - The AuM business model is operationally and compliance intensive, increasing labor and compliance costs.
  - Employees (on an FTE basis) in banks in Liechtenstein (foreign subsidiaries not included) increased from 2.300 in 2016 to 3.300 in 2023.
  - Cost-to-income ratio was 78.3 percent at second quarter 2024.
  - In the first half of 2024, 56 percent of revenue came from net commissions mostly generated from the AuM business, which is sensitive to global financial conditions and geopolitical fragmentation.

### Conclusion and Policy Implications
- Summary findings:
  - Liechtenstein has shifted from secrecy to a transparency- and compliance-oriented IFC strategy in response to scandals and international pressure, particularly after the Global Financial Crisis.
  - The regulatory approach has been overhauled with strong focus on adherence to international standards and regulations, including AML/CFT.
  - A significant part of financial operations are off-balance sheet or unleveraged and thus present no direct financial risks.
  - Liechtenstein is not a major host for shell corporations relative to many other financial centers.
- Ongoing priorities and recommendations implied by the analysis:
  - Maintain robust financial sector oversight and continued compliance with international regulations, including AML/CFT requirements.
  - Strengthen supervisory powers and data availability (e.g., via the Professional Trustee Act review) to better monitor interlinkages with the financial sector.
  - Manage legal and operational exposure related to reliance on Swiss FMI and monitor developments around EU equivalence decisions through at least the 2030 moratorium horizon.
  - Address cost and profitability pressures in the AuM model while safeguarding high-touch compliance and service standards.

*Prepared by Thomas Elkjaer; IMF Selected Issues Paper SIP/2025/046, completed March 5, 2025.*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025046.pdf_