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Liechtenstein banks on secrecy: the recent theft of data from a Liechtenstein bank may change the Savings Tax Directive between the EU and countries like Liechtenstein and Switzerland sooner than expected. The past few months have seen increasing political pressure on both states to combat banking secrecy.


In February 2008, the German Intelligence Service laid its hands on a CD with stolen data containing confidential information on foreign clients of the Liechtenstein bank LGT--Liechtenstein Global Trust. Hundreds of Germans, including the Deutsche Post chief executive Klaus Zumwinkel, were either arrested or reported to tax authorities for tax evasion.

German authorities allegedly paid the thief, Liechtenstein citizen Heinrich Kieber, 4 million [euro] and gave him a new identity. Liechtenstein made an official request to the German authorities for information and legal assistance in the case.

Standing on his balcony overlooking the Rhine valley, author Stefan Sprenger calls it the worst crisis Liechtenstein has ever confronted.

"If you could measure it on a Richter scale, this crisis surpasses [a] 10. There is nothing new in being attacked for our role as a tax haven by other states. It is however the first time that the system is being corrupted from within."

Sprenger notes it was a Liechtenstein citizen who stole the data and gave the information to German authorities. "Most people know Heinrich Kieber personally; he went to school with my brother. He had gotten himself into a social and financial mess."

The author adds that data-thief Heinrich Kieber may not be such a rarity.

He says there are employees of modest income in the Liechtenstein banking system that think they should profit from the excessive margins of banks and lawyers.

"They are starting to blackmail the financial institutions. A system based on this form of secrecy, where this amount of money is involved, bears the danger of corruption in its core. At the end of the day, there could be a Heinrich Kieber in all of us."

Banking on secrecy

According to the Liechtenstein Bankers Association, the principality's 15 banks have a total asset volume of SFr 200 billion under management, which would represent about 0.5 per cent of private assets in Swiss banks. Four of the Liechtenstein banks are Austrian and three of them Swiss; there is a fair amount of cross-border financial activity. All three countries have banking secrecy.

This particular bank, LGT, belongs to Liechtenstein Prince Hans Adam II.

"The prince," says opposition leader Paul Vogt of the Freie Liste, "is all too happy to switch roles between political leader and major bank owner, which my party considers a flawed attitude."

As it happened, Germany's action could strike at the heart of both the sovereignty of Liechtenstein and its economy.

Liechtenstein stands alone. Although the attack indirectly touches Switzerland too, and the theft is an infraction of international law, no other country came to Liechtenstein's defence.

With 160 square kilometres and 35,000 inhabitants, it hardly represents a political force to be reckoned with. In fact, its democratic values have been criticised by the Council of Europe, which has 47 member-countries. Although the prince officially shares power with the people, in reality he seems to have the final word, deciding whether to sign a bill into law, appoint and fire judges, even dismissing the government if he chooses.

In 2003, the Council said Liechtenstein had taken a step back in democratic values and considered monitoring the principality, however the country continues to be a full member.

The status quo is supported by a comfortable majority of its citizens. And as long as international political pressure remains limited and the population is happy, other items may be expected to continue to dominate the agenda.

Not a crime

Cutting deeper than these philosophical differences, however, is the European Union's dispute with Liechtenstein taxation laws.

Countries like Germany say Liechtenstein should not offer banking services that help their citizens avoid paying taxes at home.

In Liechtenstein, an individual's tax declarations are being taken on faith by the state, says Beatrice Noll-Schurti, director of the Treuhander Verein (Association of Financial Trustees). The failure to declare items on a tax form is treated as an administrative error rather than the crime it is considered to be in EU countries.

Liechtenstein's former justice minister, Heinz Frommelt, a lawyer, understands the frustration with Liechtenstein offering banking services to German clients who would be considered criminal tax evaders under German law.

By the same token, his country considers the Germans' illicit use of stolen data as equally criminal.

Liechtenstein's financial intermediaries do not ask customers for the source of their deposits. They do no consider themselves, as some have phrased it, 'the policemen of the EU'.

Nor does the principality offer judicial support to other states trying to obtain such information from their citizens. That is the core of Liechtenstein's and Switzerland's banking secrecy.

Germany claims it loses as much as 30 billion [euro] (SFr 48.3 billion) each year in tax fraud, a major chunk presumably flowing into Liechtenstein and Switzerland.


Stopping tax losses

The EU Savings Tax Directive, which came into force in 2005, was meant to stop the flow. A graduated withholding tax, up to 35 per cent is charged on the interest of saving accounts belonging to EU citizens in Liechtenstein and Switzerland. The withholding tax is transferred to the country of citizenship of the account holder. He or she can remain anonymous, and therefore banking secrecy can be preserved. Meanwhile, the EU countries are compensated for possible evasions of tax money.

Today, however, it appears the Saving Tax Directive has failed to deliver the desired results. As withholding tax is only levied on persons--not on trusts, assets or foundations--the tax is easily circumvented. Private foundations are the most popular form of asset management in Liechtenstein.

German and other European authorities have declared time and again that they cannot prevent tax evasion without full transparency concerning all financial transactions of their citizens. Against this backdrop, the occasional behavioural slip-up--like the use of stolen information from a neighbouring country--can work wonders.

It has certainly worked to speed up a political process. The Saving Tax Directive was meant to run until 2012. However, this May the EU finance ministers, prompted by Germany, asked the European Commission for an interim evaluation and the report is due by September.

For now, the CD naming some 1,400 people who previously enjoyed anonymity through one Liechtenstein bank circulates in numerous EU countries, rather like a time bomb under the principality's carefully enshrouded financial centre.
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Title Annotation:NEWS FEATURE
Author:Heddema, Renske
Publication:Swiss News
Date:Jul 1, 2008
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