Legislation and supervisory authorities in Liechtenstein

Verwaltungs- und Privat-Bank Aktiengesellschaft (VP Bank Group), Vaduz, is constituted as a joint-stock company under Liechtenstein law. It is the parent company of VP Bank Group. The competent supervisory body in its country of domicile is therefore the Financial Market Authority Liechtenstein (FMA). Because the bearer shares of the parent company are listed on SIX Swiss Exchange, VP Bank Group is also subject to the rules laid down by SIX on the basis of the Swiss Federal Act on Stock Exchanges and Securities Trading and the related implementing ordinances. The business activities of VP Bank Group are supervised by the competent authorities of each country in which the Group is active through subsidiary companies or representative offices.

In Liechtenstein, the activities of VP Bank Group are subject primarily to the Act on Banks and Finance Companies (Banking Act, BankA) of 21 October 1992, as well as the Ordinance on Banks and Finance Companies (Banking Ordinance, FL-BankO) of 22 February 1994. In addition, the Bank is subject to the Ordinance on Capital Adequacy and Risk Diversification for Banks and Finance Companies (Capital Adequacy Ordinance, CAO) of 5 December 2006. The Banking Act also lays down the framework for the supervisory activities of the FMA. The latter – together with the external banking-law auditors, who must possess a licence from the FMA and are also under its supervision – constitutes the main pillar of the Liechtenstein system of supervision.

Under the Banking Act, banks and securities firms in Liechtenstein can offer a broad array of financial services. The Law on Professional Due Diligence to Combat Money Laundering, Organised Crime and Terrorist Financing (Due Diligence Act, DDA) of 11 December 2008 and its related ordinance (Due Diligence Ordinance, DDO) of 17 February 2009 – in conjunction with the money-laundering article of the Liechtenstein Penal Code – constitute the legal foundation for due diligence that must be observed by each liable individual and entity in Liechtenstein’s financial services sector. The former was revised especially with the implementation of the EC Directive of 26 October 2005 on the Prevention of the Use of the Financial System for the Purpose of Money Laundering and Terrorist Financing (3rd Money Laundering Directive), the Directive of 1 August 2006 (Politically Exposed Persons, PEP Directive) as well as the recommendations of the International Monetary Fund.

Within the scope of its business activities, and the financial services offered by it, VP Bank Group must, among other things, observe the following additional laws and related ordinances:

• Payment Services Act (PSA)
• Law on Certain Undertakings for Collective Investments in Transferable Securities (UCITSA)
• Law on Investment Undertakings for Other Assets or Real Estate (Investment Undertakings Act, IUA)
• Law on Alternative Investment Fund Managers (AIFMA)
• Law Governing Supplemental Supervision of Companies of a Financial Conglomerate (Financial Conglomerate Act, FCA)
• Law Governing the Disclosure of Information Relating to Issuers of Securities (Disclosure Act, DA)
• Securities Prospectus Act (SPA)
• Law Against Market Abuse in the Trading of Financial Instruments (Market Abuse Act, MAA)
• Law Governing Takeover Offers (Takeover Act, TOA)
• Persons and Companies Act (PCA)The following discusses a number of developments and legal foundations of relevance to financial market regulation which have been revised or put into effect during the past financial year or are likely to be of relevance in the future.

In September 2010, the European Parliament approved a new supervisory system that took effect on 1 January 2011. The previous committees, which only acted in an advisory capacity, were replaced by three new EU authorities:

• European Banking Authority (EBA)
• European Insurance and Occupational Pensions Authority (EIOPA)
• European Securities and Markets Authority (ESMA)

Ever since the establishment of these three new European supervisory bodies, the FMA participates in their meetings. Amongst the competencies of the aforementioned Authorities is the power to issue guidelines and recommendations that must be implemented within the EU in a binding manner.

These supervisory authorities have issued several guidelines. In its Notice 2012/02, the FMA declared a series of guidelines as being directly applicable in Liechtenstein. A legal basis for the obligation to implement and/or the direct applicability of the directives in the EEA and Liechtenstein was nevertheless always controversial, as the corresponding EU laws for the establishment of supervisory authorities and stipulation of their powers of authority until then did not extend to the basis of EEA laws. In this respect, the Liechtenstein legislature has clarified the situation with an amendment to the FMA Act: as from 1 January 2014, the FMA is in principle obligated to apply the guidelines of the aforementioned supervisory authorities insofar as no justified grounds exist to deviate from them. This clarification is of great importance to the Liechtenstein financial centre as the latter is particularly strongly linked to the EU and is increasingly dependent upon being considered as of equi­valent stature from a regulatory point of view. 

In September 2009, the heads of the G20 states agreed at the summit meeting held in Pittsburgh, USA, that at the latest by the end of 2012, all standardised OTC derivatives contracts are to be processed via a central counterparty and that all such contracts were to be recorded in a transaction register. This objective was confirmed at the Toronto meeting in June 2010 and the G20 also committed to implementing far-reaching measures aimed at increasing the transparency and supervision of OTC derivatives contracts.

The EU Commission paid heed to this matter by issuing an ordinance (EU No. 648/2012 of 4 July 2012) pertaining to OTC derivatives, central counterparties and a transaction registry (“European Market Infrastructure Regulation, EMIR”). The ordinance was published in the official gazette of commerce and took effect immediately in the EU region. It is foreseen that, as from 2014, standardised OTC derivatives contracts will no longer be concluded bilaterally but instead must be concluded via central counterparties and reported to a trans­action register. In addition, risk mitigation techniques are prescribed for those OTC derivatives not entered into with central counterparties. Both the central counterparty and the transaction register require a licence in the EEA region issued by the European Securities and Markets Authority (ESMA). Liechtenstein must adopt EEA-relevant EU ordin­ances once they have been adopted in the EEA Agreement. The implementation of EMIR at national level should follow in Liechtenstein during the course of 2014. 

The funding model of the Liechtenstein Financial Market Authority (FMA) previously in force was approved by the Parliament in December 2011 (effective as of 1 February 2012) but contested subsequently by numerous financial intermediaries in the general courts of law and over all judicial processes, so that the previous financing model of the FMA had to be replaced by 1 July 2013. To this end, the Law on the Supervision of Financial Markets was amended in two phases and a new totally revised model for the financing of the FMA was introduced. In a first phase, the weak points in the Financial Markets Supervisory Law were resolved and amendments adopted on 24 May 2013 (effective from 1 July 2013) and, in the second phase, the financing model of the FMA was completely revised. The amendment to the Law on the Supervision of Financial Markets pursuant to the Report and Petition no. 81/2103 (National Legal Gazette (“LGBl.”) 2013 no. 48) was adopted on 8 November 2013 and took effect on 1 January 2014 in accordance with LGBl. 2013 no. 48. 

Henceforth, the FMA will be funded, as first priority, from supervisory levies (consisting of a fixed basic levy and of an additional variable levy from all entities subjected to its supervision); as a second priority, from the proceeds of fees and finally, as a third priority, from an additional state contribution in the amount of CHF 5 million. The total aggregate supervisory levy per supervised bank shall not exceed CHF 250,000. 

As until now no mechanisms existed to control the correct and timely maintenance of the share register, penalties were defined in the concluding section of the PCA under § 66e “Sanctions”, which are to be applied in the case of violations of the provisions of par. 328 et seqq. PCA. These sanction mechanisms and related provisions correspond to those contained in § 66d of the concluding section of the PCA, which regulates violations of the provisions concerning the immobilising of bearer shares (par. 323 et seqq. PCA). The corresponding amendment to the law entered into force on 1 December 2013. 

As a result of far-reaching changes in the international framework conditions, the trust sector finds itself in a process of change which was taken as an occasion to completely revise the law on trustees. Until now, professional trustees were not subjected to prudential supervision but were primarily supervised by the FMA with respect to compliance with the Law on Professional Due Diligence to Combat Money Laundering, Organised Crime and Terrorist Financing. The former was also responsible for the granting of related licences, whilst the Princely High Court assumed disciplinary supervision. 

The complete revision of the Professional Trustees Act, which was dealt with in the Report and Petition no. 83/2013 and adopted in the November session of the Liechtenstein Parliament, seeks to enhance the international recognition of the professional status of trustees, to strengthen confidence in the branch, to consolidate the reputation of the entire financial marketplace, to promote international market access as well as to improve the competitiveness of the professional group referred to. In order to attain these goals, an effective and efficient supervision of the trustee sector must be ensured and client protection must be guaranteed. 

Accordingly, the enlarged supervision of the trustee sector by the FMA and the restructuring of disciplinary processes, as well as the ongoing compliance with the conditions for granting a licence constitute the core issues of the revision published in LGBl. 2013 no. 421. In addition, various reporting obligations were introduced and an extrajudicial arbitration board was created. 

The objective of the proposed legislation was the creation of a comprehensive system of supervision of persons pursuant to Art. 180a PCA. Whilst the persons defined in Art. 180 par. 1 PCA concerning the provisions of the Professional Trustees Act are monitored and controlled, until the present there was no explicit legal basis in place for the monitoring of persons as foreseen by Art. 180a par. 2 PCA (individuals employed by an individual or an entity licensed to carry on the business of trustee). This new law concerning the supervision of persons pursuant to Art. 180a PCA harmonises the rules for monitoring in that it subjects to supervision all persons not covered by the Professional Trustees Act as inspired by existing rules of supervision. The aim thereof is to ensure the professional competence and personal integrity of indi­viduals with corresponding power of authority together with the imposition of penalties in cases of violations of the law.

In March 2013, the FMA published Directive 2013/1 regarding the risk-based approach, which sets out a summary of the FMA’s practices and interpretations. The risk-based approach means that more rigorous due-diligence procedures are to be applied in the event of increased risk. This directive and the concept of a risk-based approach described therein, is designed to ensure that the measures taken in the area of combating money laundering and the financing of terrorism are in correlation with the risks observed. The directive makes reference to the subjects of risk criteria, contents of business profiles, requirements for monitoring business profiles and complex structures and transactions, as well as monitoring obligations for countries which do not apply the recommen­dations of the FATF at all or only to an insufficient degree. It should be mentioned that since 2013, appendix 2 of the Ordinance on Due Diligence (DDO) also includes those countries that showed strategic shortcomings in terms of combating money laundering and the financing of terrorism, and those from which ongoing and substantial risks emanate. 

In its Declaration of 12 March 2009, Liechtenstein committed to implementing the OECD standard on transparency and the exchange of information in tax matters. Since then, Liechtenstein has concluded an array of international tax treaties, including agreements on the avoidance of double taxation (DTA) as well as agreements on the exchange of information in tax matters (TIEA) conforming to the OECD model.

This includes for instance the Agreement on the Exchange of Information in Tax Matters with Canada dated 31 January 2013, with India dated 28 March 2013, with Mexico dated 20 April 2013 and in particular the DTA signed on 17 November 2011 with the Federal Republic of Germany, which implements the international standards on the exchange of information as well on assistance in the enforcement of legal judgments and, at the same time, takes account in a comprehensive manner of the close economic relations between both countries. This DTA entered into force on 19 December 2012. 

In addition, Liechtenstein seeks to revise the partial agreement between the Principality and the Swiss Confede­ration concerning various taxation questions and to agree upon a DTA based upon the OECD model. Initial negotiations on this matter between Liechtenstein and Switzerland began in the autumn of 2013. 

Furthermore, on 29 January 2013, Liechtenstein signed an agreement with Austria on cooperation in the field of taxation as well as a protocol on the modification of the existing agreement on the avoidance of double taxation (DTA). As a result of the revision of the DTA, OECD standards in particular in the field of the exchange of information are to be implemented. The purpose of the taxation agreement is to raise tax on the untaxed assets of individuals resident in Austria which have been booked, directly or indirectly, with a Liechtenstein bank, as well as ensuring the future taxation of income from capital on accounts / deposit accounts which are held with a Liechtenstein bank. The taxation agreement offers clients the choice between a lump-sum, anonymous tax deduction on all existing untaxed assets for the past and in future on income and gains from capital or, as an alternative, the disclosure of their banking relationships to the Tax Authorities with appropriate consent (voluntary notification) both for the past and future. The taxation agreement as well as the protocol on the modification of the DTA have been ratified in Liechtenstein and entered into force on 1 January 2014. 

On 14 November 2013, Liechtenstein issued a government statement on cooperation in tax matters and on the automatic exchange of information. In this statement, Liechtenstein committed itself to contributing actively to the development of international standards on the exchange of information, in addition to signing the Multilateral Convention of the Organ­isation of Economic Cooperation and Development (OECD) and of the Council of Europe on Mutual Administrative Assist­ance in Tax Matters. Liechtenstein declares itself prepared to negotiate bilateral agreements on the automatic exchange of tax information on the basis of the future OECD standard, whilst taking account the respective justified interests of all states possessing the basis for this transparent approach. In this respect, Liechtenstein particularly directs its attention to the G5 countries Germany, the UK, France, Italy and Spain. 

In this respect, the Government of the Principality of Liechtenstein pursues a comprehensive approach encompassing the models which ensure tax compliance both for the past and the future as well as agreements for the avoidance of double taxation and discrimination. The focus of attention is on the long-term and trusted relationship of trust with financial-­centre clients and their right to personal data protection as well as to appropriate procedures to determine their rights and obligations in tax matters. In this manner, Liechtenstein strengthens legal certainty for the clients of the financial centre and offers them a clear vision. At the same time, with a future-oriented strategy, Liechtenstein enhances its inter­national position as a sustainable financial centre and reliable and trustworthy partner.

In accordance with the government statement on 21 November 2013, Liechtenstein signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters in Jakarta which will provide the basis for the future automatic exchange of information. Over 60 countries, including Switzerland, Austria and Luxembourg have signed the agreement, and in some 30 countries it is already in force. Its modular system provides for multiple forms of cooperation in the field of taxation, including an exchange of information upon request and a spontaneous exchange of information under certain conditions. The automatic exchange of infor­mation is also listed in the Convention as a future option. 

With the Guideline dated 1 September 2013, Liechtenstein banks have committed themselves to uniform minimum standards for due-diligence which their clients have to meet regarding compliance with tax laws. These are to be followed prior to the commencement of a client relationship and acceptance of new assets using a risk-based approach, and further clarifications are required in the event that there is an increased risk of non-compliant tax behaviour. The Guideline lists by way of example various factors which either increase or diminish risk which banks are to take into account. Should the clarifications not lead to a plausible result, banks shall decline to enter into banking relationships and accept assets from these particular clients. 

The Guideline also contains restrictions in the case of cash transactions. As cash trans­actions have enormous potential in promoting tax avoidance, tax fraud or other tax offences, the provisions regarding cash payments have been tightened across the board. Thus, cash payments with a counter-value exceeding CHF 100,000, inter alia, are only allowed whenever it appears plausible that no tax offence has thereby been committed or carried on. In addition, banks are obligated to provide for special control mechanisms for such cash payments in their internal operating procedures/business rules.

On 18 July 2012, the OECD adopted a new standard per­taining to the exchange of information pursuant to Art. 26 of the OECD Model Tax Convention and published it in its commentary on the Model Convention. Under the new standard, enquiries made within the framework of a DTA would no longer be limited to individual cases but also include so-called group enquiries. The definition of a “group” in this regard is not based on pre-established terminological characteristics but instead on sample cases that the OECD has compiled and which could be an indication of non-compliant tax behaviour. In future, the new standard will be observed also by Liechtenstein within the scope of existing DTAs in accordance with the OECD standard and after adoption in the national law on administrative tax assistance.

On 18 September 2013, the Government of Liechtenstein resolved to adopt the consultative report concerning the amendment of the Tax Law. In the consultative report, the Government proposed the following measures to increase tax revenues. 

Concerning taxes on net worth and personal income:

• Adjustment of the tax rate in the lower and middle range as well as the introduction of an additional tax rate (8%)
• Adjustment of the tax rate applicable to dedications of assets
• Limitation on the use of tax loss carry-forwards to a maximum of 70% of taxable income in the case of self-employed individuals

Concerning taxes on corporate income:

• Uncoupling of target income and equity capital interest deduction
• No generation of tax loss carry-forwards as a result of equity capital interest deduction
• Limitation on use of tax loss carry-forwards to a maximum of 70% of taxable net income 
• Raising of the minimum tax payable on income and on capital pursuant to Art. 83 and Art. 84 of the old Tax Law to CHF 1,800

With its Report and Petition no. 139/2012 and 5/2013, the Government of Liechtenstein approved all proposed amendments, with the exception of the uncoupling of target income from the equity capital interest deduction as well as the increase in the minimum tax on corporate income. The latter are the object of a draft amendment issued for consultation purposes dated 4 December 2013.

In addition, in its Report and Petition no. 89/2013 dated 22 October 2013, the Government has proposed a second tax amnesty which is due to be available to Liechtenstein clients with undeclared assets during the period from 1 January 2014 to 31 December 2014. During the initial debate, reservations were expressed particularly about a further amnesty. With its Report and Petition no. 5/2014 of 28 January 2014 and with the aim of avoiding an accumulation of amnesties, the Government has proposed the introduction of a one-time non-punishable voluntary disclosure along the lines of the Swiss model. Whoever during this period reports, for the first time subsequent to 1 January 2011 and on his/her own initiative, a punishable offence committed by him/her pursuant to the provisions of the Tax Law, without being constrained to do so because of the imminent danger of being discovered, has only to pay the supplementary tax together with interest on arrears for the preceding five years. Neither fines nor surcharges as foreseen under Art. 142 of the Tax Law will be levied. During a transitional period until the end of 2014, individuals who are subject to taxes on net worth and personal income will benefit from a simplified procedure for the supplementary declaration. Upon application, the supplementary tax to be levied will be calculated by applying a lump-sum tax rate to all undeclared assets as 1 January 2013. This lump-sum tax rate is 2.5% plus the municipal tax rate. In the event that a taxpayer makes a further voluntary disclosure, a fine equal to one fifth of tax evaded will be imposed. These modifications were adopted by the Parliament of Liechtenstein on 13 March 2014. They take effect retroactively as of 1 January 2014. 

The legal and reputational risks inherent in crossborder financial services have increased noticeably in recent years. The supervisory authorities of various countries expect from banks that the latter respect and comply with foreign law in the execution of crossborder activities (cf. for instance the position paper of the Swiss Federal Financial-Market Super­visory Authority FINMA of 22 October 2010 regarding the risks in crossborder financial service business). 

Banks are to amend their business processes and service models for crossborder transactions in such a manner as to ensure a cultivation of the market in conformity with laws abroad. This requires a comprehensive analysis of legal and reputational risks which may result from crossborder business. Should risks be identified, the banks are to take appropriate measures to minimise them. Furthermore, banks are to issue appropriate internal rules with a view to the increased demands of the supervisory law, the observance of which is to be controlled strictly and any violations thereof sanctioned. In addition, employees entrusted with undertaking cross­border business are to be trained in depth regarding the foreign supervisory law in the markets which are targeted. 

VP Bank Group has implemented these regulatory directives regarding crossborder business in all locations in which its banks are situated. 

With the 2009 revision of the Due Diligence Act (DDA) in connection with the adoption of the 3rd EU Money Laundering Directive, the lion’s share of the International Monetary Fund (IMF) assessments from 2007 had already been implemented. The remaining recommendations form an integral part of the present revision, which includes the DDA, its related ordinance (Due Diligence Ordinance, DDO) and the Criminal Proceedings Ordinance (CPO).

The major points of this revision are:

• regulating the heightened due diligence obligations in connection with transactions and business relationships with persons in or from countries in which due diligence measures do not meet international standards, as well as especially complex transactions and structures;
• rounding out the list of sanctionable offences and decrim­inalising a number of due diligence violations by making them merely infractions, in order to ensure the completeness of the sanctioning system and its gradation according to the severity of the given breach;
• aligning the threshold values prescribed in DDA for fulfilling due diligence obligations in the handling of occasional transactions to the valid FATF standard by reducing the limit amounts from CHF 25,000 to CHF 15,000;
• specifying more precisely the Group-wide application of the legal due diligence standards and the prohibition of notification; and
• supplementing the definition “politically exposed person” as per Art. 2 Par. 1 lit. a DDO with the term “important party functionaries”, as well as referring, in Art. 23 par. 1 lit. g DDO, to the qualification of a previously politically exposed person within the context of Art. 2 Par. 1 lit. h DDO as a criterion for business relationships and trans­actions with heightened risks.

This revision, which is based on Report and Petition no. 77/2012, entered into force on 1 February 2013.

Moneyval, the Expert Commission of the Council of Europe for the evaluation of measures to combat money laundering and the financing of terrorism, visited Liechtenstein in 2013 as part of the 4th evaluation round and conducted an assessment of the financial centre, the legal foundations for the standards in the area of combating money laundering and the financing of terrorism and the implementation of these measures. Moneyval periodically assesses compliance with all relevant international standards in the area of combating money laundering and the financing of terrorism by member states and aims to ensure an effective system in the area of com­bating money laundering and the financing of terrorism in the member states.

As no report has yet been published, no country rating for Liechtenstein and/or related recommendations are yet available. The publication of the final report is to be expected around May 2014.

The European Commission proposed in October 2011 that the Markets in Financial Instruments Directive (MiFID, Directive 2004/39/EC of 21 April 2004) be revised to allow for more extensive regulation of the financial markets and securities-related services. The proposal underscored the need to improve the transparency and supervision of less regulated markets and address the problem of excessive price volatility in the commodity derivative markets. Such broader regula­tion has the purpose of making the financial markets more efficient, resilient and transparent, as well as reinforcing in­vestor protection. This fundamental reworking of the original Directive is referred to as MiFID II. 

Based on current knowledge, the following new features are planned:

• Broader scope of applicability: The new rules should also apply to the mere safekeeping and administration of financial instruments on behalf of clients. Moreover, issue certificates and organised trading systems should be included in the broader scope of applicability, and the previous exemptions from being subject to MiFID are to be drastically limited.
• The requirements for the admission of securities firms from third-party countries (e.g. Switzerland) within the EC/EEA will be partially harmonised: an EC passport will be introduced for securities firms from third-party countries which provide crossborder services within the scope of the MiFID. Insofar as the EC Commission recognises the regulations and supervision of a third-party state as being equivalent to that of the EU, financial institutions from this state, after registration with the European Securities and Market Supervision Authority (ESMA), may service professional investors on an EC-wide basis. The national registering currently in force can still be applied during a transitional period of three years from the date of the “equivalence” decision. As regards the crossborder solicitation of private clients, it would appear at present that the currently discussed requirement to establish a branch within the EC/EEA will be waived and the regulation regarding market access for third-party countries will continue to be handled at a national level. Insofar as an EC/EEA member state links crossborder activities of financial institutions with private clients to the establishment of a branch, harmonised EC rules for this are to be complied with.
• Reinforced investor protection: Stricter requirements will be placed on asset management, investment advisory services and the offering of complex financial products such as structured products. Investment advisors and asset managers are to avoid conflicts of interest. The former must disclose whether they provide their services independently or whether they have a contractual relationship with third parties and, where applicable, disclose whether and to what extent they receive payments or other financial benefits (retrocessions) from third parties. For independent investment advisors, MiFID II foresees a general ban on retro­cessions of all types. Furthermore, the provisions relating to the suitability and expedience of financial transactions for clients, as well as to the obligation to execute investment trades for the client on a best possible or most favourable basis, are to be broadened. In order to be deemed an independent investment advisor, the advisor must take into consideration a sufficiently broad array of financial instruments available in the market (diversified in terms of product type and issuer) when developing investment recommendations – in particular, the selection may not be limited to solely financial instruments from issuers or product providers with which the advisor has close ties.
• Independent investment advisors and asset managers must ensure that the compensation paid to their employees is structured in such a manner that no conflicts of interest can thereby arise in relation to the advice which is provided in the best interest of the client.
• Heightened transparency in the financial markets: The transparency rules already applicable to equity shares are to be extended to include other financial instruments, and the requirements for reporting financial transactions are to be increased. Apart from the national supervisory authorities, the EU financial market supervisors should also be empowered to forbid or limit trading in certain financial instruments.
• Lastly, the stipulation of far-reaching corporate governance rules is planned, and minimum requirements are to be placed on administrative sanctions.

The legislative process at EU level is not yet completed. At present, the points still being disputed are in particular the determination of the EU market access for third-party states (e.g. Switzerland) as well as the specific model concerning retrocessions. Presently, it can be assumed that MiFID II will be adopted in early 2014 and implemented in EEA member states by 2016. 

On 16 February 2012, the Financial Action Task Force (FATF) issued its revised recommendations for combating money laundering, the financing of terrorism and the proliferation of weapons of mass destruction. The revised recommendations provide for, amongst other changes, an extension of the list of predicate offences to also include severe tax offences. Going forward, this means that banks, insurers and other financial intermediaries will have to notify the national money-laundering reporting office – in Liechtenstein, the Financial Intelligence Unit (FIU) – if they become aware of any suspicious facts in this regard. Under certain circumstances, the latter will be obliged to forward the information to foreign reporting offices.

In response to the new FATF recommendations, the European Commission announced that the EU legal framework is to be updated without delay and the necessary changes are to be made. 

However, although the draft of the 4th EU Money Laundering Directive was published in February 2013, it has yet to be definitively adopted. In Liechtenstein, the government, FMA, Bankers Association and FIU are following the developments closely to determine whether and in which form any need for action exists on the part of the financial centre.

For the purpose of transposing Directive 2011/61/EU on the Regulation of Alternative Investment Fund Managers (AIFM Directive) into national law, the new Act on Alternative Investment Fund Managers (AIFMA), together with the related Implementing Ordinance (AIFMO) entered into force on 22 July 2013. For the time being, the previous law IUA will continue in force parallel thereto as Liechtenstein has not yet received the EU passport for alternative investment funds (AIF) (particularly as the transposition of the AIFM directive into EEA legislation has not yet taken place). 

With the new AIFMA, Liechtenstein is moving into uncharted territory. Until now (with the exception of “UCITS funds”), all other investment funds were subject to national and therefore independent regulation (in the Principality of Liechtenstein, in keeping with the IUA). With the AIFM Directive, the EU wishes to take account of recent developments and current circumstances in the financial markets. It is establishing a legal and supervisory framework for alternative investment funds (AIFs) which are not subject to the UCITS Directive and which take on considerable risks.

In return, AIFs should also enjoy the benefits of the EU passport under the terms of this Directive; in other words, alter­native investment funds may then be distributed throughout the EEA upon simple notification of the competent authorities.

The Liechtenstein AIFMA will bring an array of significant changes to the business with alternative investment funds and the future introduction of the EU passport, which should, on the one hand, increase competition while lowering costs and, on the other hand, contribute to ensuring the stability of the financial system. Thanks to the AIFM’s stricter disclosure and reporting obligations vis-à-vis investors and supervisors, as well as the organisational requirements the AIFMs must fulfil, even more effective and uniform investor protection should be ensured. The activities and responsibilities of custodian institutions will be comprehensively regulated, whereby in principle no longer just one bank need be the custodian. Whilst simultaneously ensuring a high degree of investor protection, this new constellation will enable Liechtenstein AIFMs and AIFs to be active or launched and marketed within the EEA and as well as beyond in a cross- border manner (EU passport). At the same time, the risks to the financial market should be mitigated through notification and reporting requirements as well as the close cooperation between the supervisory authorities in the crossborder distribution of these funds.

With this new law and with UCITSA, which has been in force since 1 August 2011, the Liechtenstein investment fund centre should become even more attractive to Organi­sations for Collective Investments in Securities (investment funds) as well as alternative investment funds (AIFs, e.g. private equity funds, hedge funds, real estate funds, etc.) and especially foreign fund initiators and their managers. This will ensure a sustainable growth of the financial centre in general an the investment fund business in particular. Hence, this proposed law represents a tremendous opportunity for promoting the Liechtenstein investment fund centre.

In the presence of the following circumstances, Liechtenstein banks, amongst other things, must send the following notifi­cations and/or applications to the staff office of the Financial Intelligence Unit (FIU) on the basis of the above-mentioned legal rules:

• In case of suspicion of money laundering, a predicate offence to money laundering, organised crime or the financing of terrorism (pursuant to Art. 17 Par. 1 of the Liechtenstein Due-Diligence Act (DDA);
• If they suspect that a trade in financial instruments could constitute market abuse (insider trade or market manipu­lation) (pursuant to Art. 6 Par. 1 of the Liechtenstein Market Abuse Act (MAA); and
• Whenever sanctioning ordinances issued pursuant to Art. 2 Par. 2 on the Liechtenstein Law on the Enforcement of International Sanctions (ISA) foresee a corresponding reporting or licensing requirement.

On 1 April 2013, the FIU put into effect instructions regarding such notifications and applications which explain or clarify the previous practices and thus are designed to serve as a guide for fulfilling the aforementioned legal notification and licensing obligations. In addition, and in conjunction with the banks, the FIU has revamped and simplified the form to be used by banks to make suspicious activity reports in compliance with the DDA and MAA. Both the instructions and the revised form are published on the home page of the FIU (www.liu.li under “Communications”).

With the Foreign Account Tax Compliance Act (FATCA), the USA adopted and issued a law whose objective is to obligate, by way of contract, foreign financial institutions (FFIs) to identify those clients of theirs who are liable to tax in the USA and disclose those clients’ assets and income to the US tax authorities (Internal Revenue Service, IRS).

These disclosure and reporting obligations resulting from FATCA are assured principally through bilateral agreements between the USA and the target state, which at the same time represent, together with related national implementing legis­lation, the legal basis for the aforementioned obligations. At present, two different models are employed worldwide which are designated as intergovernmental agreements (IGA). Both models differ in principle in that under IGA-1, the FFIs discharge their reporting obligations to the respective national tax authority which then passes on the data to the IRS, whereas under IGA-2, the reporting obligations are discharged directly to the IRS. Liechtenstein has opted for IGA-1, whereas Switzerland has taken the path of IGA-2. 

The USA is attempting in this way to introduce a seamless system for the global exchange of information on individuals who are liable to pay tax in the US (US persons), as well as attaining a high degree of tax transparency. To ensure this, the law provides for the introduction of a 30 per cent withholding tax on all US payment flows (dividends, interest, proceeds from sales of US securities, etc.). The levying of this tax is waived, however, insofar as the related financial institutions fulfil their obligations resulting from FATCA, the IGA and the respective national legislation. In order to attain the status of a so-called participating FFI/PFFI under the FATCA regime, the FFI must register with the IRS in order to receive a Global Intermediary Identification Number (GIIN). 

With this GIIN, which is published in a central IRS register, the PFFI identifies itself in future business transactions as participating in FATCA, thereby avoiding in particular the requirement to withhold 30% withholding tax on all US incoming payment flows. 

The GIIN is further required to meet the reporting obligations under the FATCA regime (FATCA reporting) and to complete and submit in an orderly manner the necessary US reporting forms (e.g. forms 8966/1042/1042-S). FATCA reporting is made annually and, based on present knowledge, will commence with the calendar year 2014 as reporting period, so that the first FATCA reporting will be made in 2015 for the 2014 reporting year. 

A PFFI must review and, in doing so, document all accounts that are held directly or indirectly by US persons. The economic beneficial owner of the account must also be included in this review in addition to the account holder.

Three client categories will result from this examination:

1. US accounts: these refer to those client relationships with US persons that have already been disclosed as such under the Qualified Intermediary (QI) rules or can be clearly classified as US persons (US citizenship, US residence) on the basis of data available to the PFFI, or who qualify as US persons on the basis of hardly refutable US indices (for all intents and purposes) (e.g. place of birth in the USA).
2. Non-US accounts: these are client relationships with persons who, on the basis of the review, are not designated as US persons and thus not liable to taxation in the USA. In addition, accounts (including those which would qualify as US accounts) with a balance of less than USD 50,000 (so-called small accounts) also qualify as non-US accounts.
3. Recalcitrant accounts: these refer to relationships with clients who are classified as US accounts on the basis of the available facts or indices but for which the account holder/contracting party has not submitted the required documents. For these client relationships, either a 30 per cent withholding tax is levied on practically all transactions with US assets or the PPI shall issue a related collective notification to the IRS on the basis of which a group inquiry can be made to the country of domicile of the FPPI by the US authorities. On the basis of this group inquiry, the related client data can thus be passed on the US authorities in accordance with the applicable IGA and corresponding national implementing legislation.

FATCA therefore has a considerably broader reach than the QI regime which is still in force. The latter mainly focuses on ensuring that US securities are correctly taxed. FATCA, on the other hand, demands from a participating FFI that it identifies its US clients and discloses their total assets and income to the IRS. Affected by this are not only individuals but also companies and other structures, for example foundations and establishments.

VP Bank Group plans to register as a PFFI. This way, it can above all maintain the status quo for its non-US client relationships and avoid being penalised with the 30% US withholding tax charged by other PFFIs. For VP Bank Group, it is important to note that, should it collaborate with uncooperative FFIs, it would face the risk of losing its own status as a PFFI. 

The implementing provisions of FATCA are still not available in a complete manner (although the so-called final regulations were published on 17 January 2013); however, several countries have already declared their desire to conclude bilateral agreements (IGA) which would imply a simplified implemen­tation of the FATCA provisions. 

As already mentioned, based upon current knowledge, the Government of the Principality of Liechtenstein intends to conclude an IGA with the USA following model 1. A specific date on which the IGA and the related implementing legis­lation to be drawn up will enter into effect is not yet known. Furthermore, numerous questions still need to be clarified in the meantime.