The cutting-edge architecture of a string of brand-new banks might seem incongruous in a village topped off with a medieval royal castle.
But Liechtenstein, with 34,600 residents in an area a little more than double the size of Manhattan, is no ordinary corner of Europe.
The nation sandwiched between Austria and Switzerland gained what fame it has as a banking and financial-services center, a place where ill-gotten assets could be stashed away safely and no one would ask questions.
Now the regulations have changed and it’s time the rest of the world took notice of the country’s efforts, says the ruling Prince Alois von und zu Liechtenstein.
“I think it was rightly a major problem that the outside world found with Liechtenstein,” said Alois, who has sweeping powers — including the right to dismiss governments, veto legislation and cast the deciding votes on the appointments of judges.
But now, Liechtenstein has strong regulations to effectively fight money laundering and terrorism funding, he said.
Europe’s fourth-smallest sovereign state became rich on its status as an offshore tax haven, with strict rules on banking secrecy. Almost a third of its gross domestic product (GDP) of $3.4 billion comes from financial services, including banking.
But come the end of the 20th century, the rest of the world was getting annoyed with its role in international crime and, potentially, terrorism financing.
In 2000, both the Group of Eight leading industrialized nations and the 26-nation Financial Action Task Force put Liechtenstein on their blacklists of nations deemed uncooperative in fighting money laundering. The principality scrambled to revise its laws, and a year later was relieved to be removed from the blacklists.
Almost simultaneously, the Paris-based Organization for Economic Cooperation and Development (OECD) included Liechtenstein on a separate blacklist of “uncooperative tax havens.”
“The main reason countries were angry was we had very bad implementation,” says Alois, appearing relaxed in one of his castle’s state rooms. “Our system of giving legal aid [to other countries] was very poor.”
Being on the blacklists spurred the Liechtenstein authorities into action. Since then, new laws have been passed to tighten regulations, more judges and lawyers have been brought in to supervise and regulate the financial institutions, and a financial intelligence unit has been set up to watch for wrongdoers. In 2001, the country was removed from the money-laundering list.
“After 2001, the complete legal framework changed,” says Michael Lauber, chief executive of the Liechtenstein Bankers’ Association.
Liechtenstein is still on the tax-haven blacklist, but is lobbying to have its name removed.
“This is based on old info,” Mr. Lauber says.
Grace Perez-Navarro, a tax-haven specialist with the OECD, said Liechtenstein remains on the list of uncooperative tax havens “because, unlike 33 other jurisdictions, it has not made a commitment to the OECD to improve transparency and to establish effective exchange of information for tax purposes with OECD countries.”
As in neighboring Switzerland, tax evasion is not a crime in Liechtenstein. The country does not provide legal assistance to other countries investigating reported tax evasion and also wants to maintain as much of its banking secrecy as possible.
But Liechtenstein is keen to maintain a balance, keeping the rules that make it attractive to investors while doing its best against money laundering and terrorism financing, Alois says.
If a client arouses suspicion — for example, by demanding a large cash withdrawal — then he must explain how the money was obtained, what he plans to do with it, and why it has to be in cash, to the satisfaction of the banker. If the client is unable, the bank will refuse to release the funds.
“When you try to hinder [banking] through too much regulation, then the money goes to the Far East,” Mr. Lauber says.
There is also competition from Monaco, Switzerland and the British island of Jersey.
But that desire to maintain balance means the changes have been largely cosmetic, says Octavio Marenzi, chief executive of research firm Celent.
“They get a lot of their GDP from banking, and a lot of that’s attracted by banking secrecy,” Mr. Marenzi said in a telephone interview from New York.
“They made some fairly small concessions,” Mr. Marenzi says, noting that being on a banking blacklist likely would attract more clients. “In effect, I think they’re walking a tightrope.”
Liechtenstein still needs banking secrecy to boost its banking-dependent economy, but it is also keen on maintaining good relations with its neighbors.
Alois says Liechtenstein had a “big problem” with its image, but insists that it is changing, with the country likely to join Europe’s “Schengen” zone, which allows passport-free travel across borders while also stepping up the exchange of information among national authorities.
Thus, Liechtenstein would follow its independent-minded neighbor, Switzerland — whose currency and customs control it already shares — into closer ties with the European Union.
“With that comes a certain amount of cooperation,” Alois says. “I think the storm has more or less settled.”