Protection against money laundering
One of the central tasks of Group Legal & Compliance is to fulfil legal and supervisory anti-money laundering requirements. The fight against money laundering and terrorist financing has been a top priority of Liechtenstein for years, which has a zero-tolerance policy towards such matters. As a member of the EEA, Liechtenstein has completely implemented the EU’s third anti-money laundering directive (2005 / 60 / EC) as well as the Commission directive (2006 / 70 / EC) concerning both the definition of the term “politically exposed person” and the determination of the technical criteria for simplified due diligence obligations.
Furthermore, Liechtenstein has taken the measures required to implement Regulation (EC) No. 1781 / 2006 on information on the payer accompanying transfers of funds. In particular, the corresponding implementation regulations are included in the law on professional due diligence to combat money laundering, organized crime and terrorist financing (“Gesetz über berufliche Sorgfaltspflichten zur Bekämpfung von Geldwäscherei, organisierter Kriminalität und Terrorismusfinanzierung” / SPG) of 11 December 2008. In February 2013, a revised version of this law with a corresponding directive came into force.
Early in 2012, the Financial Action Task Force (FATF) reformulated some of its recommendations on combating money laundering and terrorist financing (40 recommendations plus 9 special recommendations). This means: serious tax offences are now considered predicate offences to money laundering. Furthermore, the FATF has established the risk-based approach as the most efficient instrument for combating financial crime. The EU is also obliged to adapt the regulatory framework following the update to the FATF recommendations. On 18 June 2014, the Council of the European Union published its General Approach to the EU’s fourth Anti-Money Laundering Directive (AMLD). It is intended to strengthen the provisions of the EU’s third Anti-Money Laundering Directive and due diligence obligations. Its implementation is planned for 2016.
After the financial crisis in 2008 the most important industrialized nations and emerging economies agreed on reforms to increase the stability of the financial system. At the end of 2010, the leading economic powers (G20), including the U.S.A., committed themselves to applying the comprehensive reform package of the Basel Committee on Banking Supervision (Basel III) as of 2013. The regulations, which are expected to be progressively introduced by 2019, commit banks to larger capital buffers. The reforms aim to improve the regulation, supervision and the risk management of banks and, as a result, to increase the resilience of both individual banks and the banking system as a whole.
In mid-January 2014, the Central Bank Governors and Heads of Supervision who comprise the governing body of the Basel Committee on Banking Supervision adopted a worldwide unified definition of the maximum leverage ratio. Banks must hold capital of at least 3 percent of their total on-balance sheet assets and off-balance sheet commitments from 2018 onwards.
Minimum standards for the liquidity coverage ratio (LCR) for banks and for the net stable funding ratio (NSFR) were agreed upon for the first time as part of Basel III. The objective is to ensure that banks retain sufficient high-quality liquid assets and are able to finance themselves in an appropriate manner over the long term in order to survive stress situations.
The comprehensive reform package of the Basel Committee on Banking Supervision (Basel III) has been in force in the EU since 1 January 2014. The package consists of the Capital Requirements Regulation (CRR) and the implementation of the new Capital Requirements Directive (CRD IV). CRR introduces the first EU-wide supervisory regulations for all banks in the member states. It aims to ensure that international standards for bank capital are complied with in all EU member states. CRD IV gives EU countries more flexibility, such as the right to oblige domestic banks to retain more capital than required in order to protect them, for example, from the negative consequences of real estate bubbles.
By making changes to the Banking Law and the Banking Ordinance, the EEA member state Liechtenstein adopted the EU’s Capital Requirements Directive CRD IV (Directive EU 2013 / 36 / EU) and the Basel III standards, which are valid from 2019, into national law, effective as of 1 February 2015.
The legal situation in Liechtenstein conforms to the EU’s regulatory requirements, which aim to improve the integrity and transparency of the financial system as well as investor protection in the European financial market. The Liechtenstein financial centre implemented the “Markets in Financial Instruments Directive” (MiFID) on 1 November 2007. MiFID simplifies cross-border financial services and allows securities firms, banks and stock markets to also offer their services in other EU and EEA member states. Besides, they are required to conduct precise client and product analyses as well as disclose information on compensations and commissions.
The amendment (MiFID II) now provides for further regulation of financial markets and investment services. MiFID II modernizes the current MiFID, a cornerstone of the EU financial market regulation. It aims to provide uniform regulations for the securities and capital markets in Europe as well as to create more market transparency and to mitigate the effects of stock market turbulence for clients.
High-frequency trade will be made more transparent and subject to stricter supervisory controls, position limits on commodity trading will be stricter and investor protection will be improved. In future, throughout the EU, minutes must be taken of the information given to individual clients at bank branches and a more comprehensive recording made of telephone consultations. The minutes and recordings must document why a financial product was recommended and how it matches the client’s risk profile.
In mid-January 2014, the EU bodies reached a fundamental agreement on the legislative MiFID II package. The package will come into force in 2017.
Switzerland decided to conceptually reshape the guiding principles of its financial centre in order to transpose the large EU initiatives and, specifically, the EU directive on the Market Infrastructure Regulation (EMIR) and MiFID II into national law. This is to be done by transferring the core elements of EMIR through the Financial Market Infrastructure Act (FMIA) and the MiFID principles through a Federal Financial Services Act (FFSA), which still has to be drawn up too. Additionally, the licensing requirements and further organizational requirements for financial institutions in Switzerland will have to be revised across all sectors through the passage of a new Financial Institutions Act (FINIA). The FFSA is planned to enter into force on 1 January 2017.
UCITS and AIFM
Access to the EU market is central to the competitiveness of both the Liechtenstein financial and investment fund centre. Liechtenstein investment companies have been legally entitled to administer and sell funds across national borders for several years as a result of the adoption of EU law in the EEA Agreement.
On 23 July 2014, the Council of the European Union passed the Directive on Undertakings for Collective Investment in Transferable Securities (UCITS). It greatly increases investor protection after UCITS IV had eliminated existing market barriers in Europe and simplified the cross-border administration of investment funds. On 20 January 2015, the Liechtenstein Government adopted a consultation report on the adaptation of the law on Undertakings for Collective Investment in Transferable Securities (UCITSG).
Furthermore, the EU passport for managers of alternative investment funds (Alternative Investment Fund Managers, AIFM) should come into effect in the course of 2015. In October 2014, Liechtenstein, Iceland, Norway as well as the EU agreed upon a solution for the adoption of legislative acts governing the three supervisory authorities EBA (The European Banking Authority), ESMA (The European Securities and Markets Authority) and EIOPA (The European Insurance and Occupational Pensions Authority) in the EEA Agreement. Liechtenstein was one of the first jurisdictions that was able to offer its clients a functioning, efficient and AIFM compliant structure and, as a result, legal protection. A number of providers of alternative investment funds have since been issued with a corresponding permit by the Financial Market Authority (FMA).
Liechtenstein offers a legal basis that is focused on clients and investor protection: the Investment Undertakings Act (IUG, 2005), the Act on Certain Undertakings for Collective Investment in Transferable Securities (UCITSG, 2011), the forthcoming transposition of the EU Directive UCITS V and the law on Alternative Investment Fund Managers (AIFMG, 2013).
The Liechtenstein Government is now planning to draw up a new investment fund law for 2015 that most notably contains rules on the fund business model for qualified investors that was specially set up in Liechtenstein. This law is meant to provide a third legal pillar covering funds in addition to the UCITSG and the AIFMG. The goal is for this law to enter into force at the same time as the decision to transpose the AIFM Directive into the EEA Agreement becomes law, thereby putting the current Investment Undertakings Act (IUG) out of force.
The LLB Group has to confront numerous issues in view of the regulatory environment, which is undergoing far-reaching changes. The diversity of regulations and their increasing complexity require constant further development. As a result, the LLB Group optimized the definition of the compliance function in 2014. The independent organizational unit Group Legal & Compliance supports responsible and business-oriented actions.
According to the regulations governing the conduct of business of Liechtensteinische Landesbank AG of 1 January 2013, compliance is the observance of legal, regulatory and internal regulations as well as of common market standards and codes of conduct. A compliance risk involves the risk of violations against legal and regulatory regulations as well as against standards and codes of conduct. Group Legal & Compliance supports and advises the Group Executive Board regarding the assessment and monitoring of compliance risks. This organizational unit is involved in all the LLB Group’s regulatory measures and projects.