Protection against money laundering
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, organised crime and terrorist financing (“Gesetz über berufliche Sorgfaltspflichten zur Bekämpfung von Geldwäscherei, organisierter Kriminalität und Terrorismusfinanzierung (SPG)”) of 11 December 2008. A revised version of this law with the accompanying ordinance came into force on 1 February 2013.
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 that 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. The European Parliament adopted the fourth EU Anti-Money Laundering Directive on 20 June 2015 and it came into force on 25 June 2015. The member states have two years to transpose the new rules of the directive into national legislation.
After the financial crisis in 2008 the most important industrialised 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 USA, 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, the 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 Group of Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee on Banking Supervision, agreed on a single definition worldwide 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 introduced 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 of Liechtenstein adopted the EU’s Capital Requirements Directive CRD IV (Directive 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 current 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 center 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 / EEA member states. Furthermore, they are required to conduct precise client and product analyses as well as disclose information on compensations and commissions.
The Amendment (MiFID II) and the accompanying Regulation (MiFIR) have since been adopted. They provide for further regulation of financial markets and investment services. Furthermore, MiFIR regulates trading transparency, an area that was not at the focus of MiFID I. MiFID II modernises the current MiFID, a cornerstone of 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. The package will come into force in the EU at the start of 2018.
Regulation of the Swiss financial center
Switzerland has embarked on the harmonisation of its regulations with EU standards to enable Swiss financial intermediaries to gain access to the EU market as third-country providers based on regulations that are recognised as equivalent. In a first step, the third and fourth versions of the Directive on Undertakings for Collective Investment in Transferable Securities (UCITS) relevant to retail funds were transposed into the Swiss Collective Investment Schemes Act (CISA). The core principles of the EU Alternative Investment Fund Managers Directive (AIFMD) were also transposed into the CISA.
Switzerland decided to conceptually reshape the guiding principles of its financial center in order to also transpose the next major EU initiatives, specifically the European Market Infrastructure Regulation (EMIR) on derivatives and MiFID II, into national law. On 4 November 2015, the Federal Council adopted the dispatch on the Financial Services Act (FinSA) and on the Financial Institutions Act (FinIA). The FinSA governs the prerequisites for providing financial services and offering financial instruments. The FinIA makes provision for an activity-based, differentiated supervisory regime for financial institutions requiring authorisation. The FinSA and the FinIA, which serve to provide modern investor protection, are unlikely to come into force before 2018.
The Financial Market Supervision Act (FINMASA), which came into force in 2009, and the Financial Market Infrastructure Act (FMIA) and the Financial Market Infrastructure Ordinance (FMIO), which have been in force since 1 January 2016, are all part of the new Swiss financial market architecture. Consequently, new rules that are consistent with the applicable international standards in this area will apply in Switzerland for financial market infrastructures, such as trading venues and central counterparties, as well as for derivatives trading.
UCITS and AIFM
Access to the EU market is central to the competitiveness of both the Liechtenstein financial and investment fund center. 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 V). 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 Act on Certain Undertakings for Collective Investment in Transferable Securities (UCITSG).
Furthermore, Liechtenstein fund providers should start to benefit from the EU passport for managers of alternative investment funds (Alternative Investment Fund Managers, AIFM) during the course of 2016. 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 security. 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). Parallel to the transposition of the AIFM Directive into the EEA Agreement, the fully revised Investment Undertakings Act (IUG) will also enter into force. This will be applicable to a clearly defined domestic investment fund category and replace the previous IUG.
The new investment fund law is meant to regulate most notably the fund business model for qualified investors that was specially set up in Liechtenstein. This constitutes a third legal pillar covering funds besides the UCITSG and the AIFMG.
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. Consequently, the LLB further optimised the compliance function in 2015: Group Compliance was split into two departments – Group Regulatory Compliance and Group Financial Crimes Compliance – for the purpose of specialisation in March 2015. One of the central tasks of the Group Financial Crimes Compliance Department is to fulfil legal and supervisory anti-money laundering requirements.
According to the regulations governing the conduct of business of Liechtensteinische Landesbank AG of 1 January 2016, 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 organisational unit is involved in all the LLB Group’s regulatory measures and projects. Group Legal & Compliance will come under the Division Group CFO as of 2016.