Liechtenstein: where the missing billions go

Liechtenstein is a throwback to the days when princes ruled. It is also the focus of a very modern industry: tax evasion. But all that may be about to change...

Long-distance trains don't stop in Liechtenstein's capital, Vaduz, because the place has no mainline railway station to speak of. When Crown Prince Alois, the principality's head of state, wants to travel by plane, he has to take a car to neighbouring Austria because there is no airport either.

This may seem odd for an Alpine country not only rated as one of the richest in the world but which likes to attribute at least part of its wealth to its role as global industrial player, albeit as manufacturer of a workman's tool considered virtually indispensable to modern construction: the Hilti drill. But prowess on the world's building sites plays only a minor role in the Liechtenstein success story. As European governments have been sharply reminded over the past 10 days, the principality, only twice the size of Manhattan island and sandwiched between Austria and Switzerland, owes its reputation and wealth to its role as one of the world's most secretive tax havens.

The atmosphere is almost palpable on the sleepy streets of Vaduz , which is on the banks of the river Rhine. Overlooked by its medieval mountain-top castle, glistening bank facades jostle for space with investment firms and dubious "letter-box" holding companies of which the country boasts an estimated 73,700. Liechtenstein does not need a mainline railway station because few of its paying clients make a habit of travelling by train.

Instead, Mercedes and BMW limousines, usually with German number plates, briefly grace the streets of Vaduz, usually shortly before lunchtime, before they disappear out of sight of tax police or possibly even intelligence agents into the underground garages of the banks.

Among the occupants of the cars are the tax evaders who have helped to put Liechtenstein on an OECD blacklist of only three countries in the world classed as "unco-operative tax havens". The others are Andorra and Monaco.

"Excessive bank secrecy rules and a failure to exchange information on foreign tax evaders are relics of a different time and have no role to play in relations between democratic societies," Angel Gurria, the OECD's secretary general, said last week.

Liechtenstein has remained an exception. Banks and "discreet" financial services are the core of its economy. They account for 14.3 per cent of the workforce and contribute to 30 per cent of a gross domestic product of €2.7bn (£2bn). The Liechtenstein royal family happens to own the country's largest bank and also wields more power than any other monarchy in Europe. The country has more registered companies than its 35,000 citizens and a maximum tax rate of 18 percent. The Liechtenstein system works as follows: the principality has 15 banks and more than 300 trustees, usually lawyers, who manage thousands of stiftungen, or "foundations".

The Liechtenstein banks' foreign customers favour stiftungen above most other investments because they are hardly obliged to pay any tax if they put money into them. The rules governing anonymity are also highly favourable. If a customer wants to remain anonymous, he or she, simply appoints one of the principality's trustees to run his investments on their behalf.

Being tax-free, the investment grows far more quickly than in a normal account and, as the account holder remains anonymous, the tax authorities, in his or her country of residence, remain unaware that sums are being filched away illegally from under their noses. Apart from a few hiccups involving secret Liechtenstein bank accounts held by the German Flick family of Nazi-era industrialists, and members of Germany's conservative Christian Democratic Party who were exposed during the early 1990s, the system of trustees and foundations has worked famously for the principality, its clients and royal family.

Crown Prince Alois, 39, even attempted a robust defence of his country's banking system late last week. "We just don't behave like a nanny and ask people continuously, 'Have you paid your taxes?' I think this can't be our role."

But with so much money involved and Liechtenstein surrounded by neighbours hostile to its secretive tax-haven policy, its system was a sitting duck for anyone able to get their hands on the names of the trustees' "anonymous" investors. If Liechtenstein's bankers are to be believed, the man responsible for the principality's present confidentiality crisis is a dangerous supergrass called Heinz Kieber, a 50-year-old Liechtenstein citizen who began working for the principality's main bank, the Liechtenstein Global Trust (LGT) in 1999.

Kieber was taken on in the bank as an external employee of an IT company but secured a post as a full-time LGT employee in April 2001. He held the job until November 2002. LGT claims Spain issued an international arrest warrant for Kieber who was wanted for property fraud in 1997. The Liechtenstein authorities caught up with Kieber in 2001 and are said to have fined him €370,000.

In 2002, Kieber decided to leave Liechtenstein, but not before allegedly stealing copious amounts of secret client data from LGT and copying it all on to four DVDs that have since proved highly lucrative for him. At that point, Liechtenstein dropped all legal proceedings against him, saying it was convinced he would not damage his country's interests. The authorities were badly mistaken. In 2004, Kieber offered his information to the US and British tax authorities in return for cash. The Americans paid up and traced 50 tax evaders.

German reports yesterday claimed the British refused to pay Kieber until they had recouped the sums illegally stashed by UK tax evaders. Apparently, in January 2006, Kieber "got fed up" and approached Germany's equivalent of Britain's MI6, the Bundesnachrichtendienst (BND) foreign intelligence agency.

Kieber did not meet BND officers until May that year, and a month later they bought the data from him for a sum estimated to be in excess of €4m. However the information was procured, the data now threatens to be explosive for Europe's moneyed tax evaders, and not only those in Germany. The informer is now said to be living in Australia under an assumed identity

Despite his alleged differences with the UK tax authorities, Kieber was yesterday reported to have provided them, in return for £100,000, with the names of some 100 wealthy British citizens alleged to have evaded tax with the help of Liechtenstein accounts.

In Germany, BND officials boasted last week that they had "cracked an entire bank" just as financial police and state prosecutors who specialise in tax evasion pounced. They announced that the names of more than 1,000 wealthy Germans who were potential Liechtenstein bank clients had fallen into their net and that they were suspected of robbing the country's taxpayer of €4bn.

The first prominent German to be caught by tax police was Klaus Zumwinkel, the 64-year-old former head of the partly state-controlled postal service, Deutsche Post, a captain of industry and manager decorated with Germany's Great Federal Cross of Merit, a sort of latter-day Iron Cross first class for business leaders.

Zumwinkel, who earned more than €20m during his 18 years as Deutsche Post boss, is suspected of stashing at least €1m in a LGT account in Liechtenstein. Germany's state prosecutors tipped off television crews before they raided Zumwinkel's Cologne villa and offices to maximise the negative publicity. But Zumwinkel was just the tip of a tax-evasion iceberg; possibly more than 1,000 other Germans were involved. Further tax raids have been made and more are expected. Kieber's DVDs have enabled Germany's politicians to indulge in an almost unprecedented bout of righteous indignation. Now Chancellor Angela Merkel has demanded Liechtenstein open its secretive foundations to tax officials. She has threatened to isolate the country by refusing to ratify its accession to the Schengen passportfree zone, if it fails to comply.

The head of the Swiss Banker's Association has accused Germany of using "Gestapo" methods to track tax evaders, and Crown Prince Alois has accused the Merkel government of spying on his country and putting " iscal interests above the rule of law".

His response was hardly surprising. Crown Prince Alois von und zu Liechtenstein comes from a family which started buying land in what is now the world's most well-known tax haven in 1699. The purchases enabled the family to gain a seat on the Council of the Holy Roman Empire long before any prince of Liechtenstein lived in the principality. Even back then, the Alpine mini-state was an address of convenience for Europe's rich and powerful.

The crackdown on tax havens

By Sean O'Grady

"In this world, nothing can be said to be certain except death and taxes," goes Benjamin Franklin's aphorism. But tax havens are becoming a less certain feature of the financial landscape,because they are costing governments so much.

The US Treasury estimates that it loses $100bn (£51bn) in revenues; the TUC says the UK misses out on £25bn a year. Ireland recently found an extra €850m (£640m) through a fairly straightforward crackdown on the banks. In 2002, the US won back $75m by attacking fraud via the main credit card companies (where the offshore funds were accessed using credit cards issued by mainstream providers). Concerns about money laundering have also altered the tax authorities' attitudes to offshore havens.

Such a tough approach internationally has decimated the tax havens. Of the 38 "jurisdictions" so classified by the OECD, 35 are now "committed to improving transparency and establishing effective exchange of information in tax matters", including Jersey, the Isle of Man, Bermuda, Aruba and the US Virgin Islands. They all have low taxes and a discretionary tradition, but can no longer be completely relied upon to shelter your cash from unwelcome attention. Those truly tax-intolerant need to know that the only places that will automatically tell HM Revenue & Customs to get lost are the "uncooperative" regimes of Liechtenstein, Andorra and Monaco. But with OECD sanctions and tax authorities' bribes, how long before they too give up their secrets?

Strange to say, it may not be too long before the best tax haven of all may be the UK – if you can gain non-dom status. Even under the Government's latest plans, the super-rich would only have to pay a fee of £30,000 per annum for minimal disclosure, and that only kicks in if you've been here for seven of the past 10 years. Maybe Liechtenstein could ask Alistair Darling if it can can copy the idea.