The noose is tightening on Liechtenstein. Germany’s Chancellor Angela Merkel is threatening to isolate the tiny Alpine principality unless it cooperates in fighting tax evasion. The demands follow evidence implicating as many as 1,000 rich Germans, among them Deutsche Post AG boss Klaus Zumwinkel,who allegedly salted away assets in Liechenstein-based trusts to escape German taxes.
Liechenstein may protest at Merkel’s heavy-handed tactics. But it has little option but to clean up its act—just as most of Europe’s other tax havens have done. When the Paris-based Organisation for Economic Co-operation and Development (OECD) first took up the issue of what it delicately qualified as practising “harmful tax practices” in 1998, it investigated 47 jurisdictions and placed seven on its offending “black list.” Today, only three remain: Liechtenstein, Andorra, and Monaco.
Three main factors account for the progress. First, all governments, even those like Liechtenstein that defend bank secrecy, accept the need to stop money laundering that finances organized crime and terrorism. Second, Germany and other major powers concerned about lost tax revenues are asking questions about offshore accounts that frighten potential tax evaders. Third, countries tagged as renegade tax havens fear, rightly so, receiving a bad reputation for business.
Yet Liechtenstein refuses to compromise the secrecy it offers to private trusts or its refusal to cooperate with foreign tax authorities. Not only does it consider these as the hallmarks of its appeal as a financial centre, it is also furious that German security services paid an informant for information. Bank secrecy, the Liechtenstein Bank Association says, represents a fundamental human right and protection against a too powerful government.
But for all the crown prince’s bluster about resisting Germany on Thursday before Parliament, Liechtenstein’s stonewalling looks to be slowly crumbling. The principality recently signed a tax treaty with the US. A similar deal not only could satisfy German and European Union (EU) demands, it could even be good for Liechtenstein’s own financial services sector.