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November 20, 2008

Take the Money and Run

By Spear's

While Liechtenstein still offers discretion and privacy from probing tax authorities, Singapore is proving itself an attractive rival. O’ar Pali reports.

The tiny principality of Liechtenstein has spent decades building a reputation as the savvy investor’s choice for offshore banking, known for its stringent adherence to banking secrecy principles. However, in August the authorities publicly announced plans to cooperate with other states in tax evasion cases. After years of coming under fire from the German government, the principality has finally embraced new transparency laws.

The goal, according to Otmar Hasler, Liechtenstein’s prime minister, is to repair its reputation as a ‘legitimate financial centre’ and do away with its infamous role as a tax haven for international hot money. Nevertheless, the road to transparency is not necessarily paved with gold. In particular, talk of a pending investor exodus and capital flight out of Liechtenstein is already making the City gossip rounds.

Since Heinrich Kieber, a former LGT Group employee, sold a disc containing client information to the German government for €5 million, Liechtenstein has been under pressure from not only Germany but also the EU and US. Kieber’s disc contained financial details about investments totalling €4 billion which belonged to about 1,000 wealthy Germans who had failed to disclose these holdings to the German authorities. Once the files became public, Germany, Britain, Italy and the US started to investigate their citizens with Liechtenstein accounts.

The tide turned when, in September, Liechtenstein’s parliament adopted several EU directives into national law, including an EU Transparency Directive, the Disclosure Act and the Data Protection Act, which allowed Liechtenstein to join the Schengen area. A new executive branch, known as the Data Protection Unit, was also established, with a new data protection commissioner elected by parliament. The new body’s aim was to highlight the data-protection vis-à-vis the executive branch of the state.

Roland Leithäuser, a spokesman for the Liechtenstein government, explains that, although final amendments to the new version of the Disclosure Act and to the laws regulating banks, investment firms and other financial institutions will not be finalised and implemented until autumn 2009, an integration with European databases such as the Schengen Information System (SIS) and Eurodac has already been achieved ahead of Liechtenstein’s accession to the Schengen and Dublin agreements.

Despite these regulatory reforms, the Liechtenstein offices of large accounting firms such as Deloitte refuse to comment on the new transparency initiatives until an official decision has been made. Leithäuser, however, says that by incorporating ‘the directive into national law, Liechtenstein has joined the objectives of creating a transparent single [European] financial market’.

While the Liechtenstein government is busy appeasing international tax watchdogs, LGT, Liechtenstein’s largest bank, announced in the summer that net profits had slipped by almost 10 per cent, while total assets under administration declined by 7.3 per cent, driven by withdrawals from its offshore operation that had in turn been prompted by unwelcome publicity over stolen data and speculation over the impact of upcoming transparency laws.

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Perhaps this explains the strong feelings against Germany held by Hans-Adam II, Liechtenstein’s monarch and owner of LGT, who declined to lend one of his paintings to the Jewish Museum in Berlin, commenting: ‘As far as German-Liechtenstein relations are concerned, we wait for better times, although I am optimistic. For the past 200 years we have managed to survive three German Reichs and I hope we will also survive a fourth.’

Germany–Liechtenstein relations are not likely to improve any time soon, clearly, which spells further political and economic uncertainty for the region.

So, where is a safer spot to place your money these days? Singapore, for one, has become the world’s fastest-growing private-banking centre and has for years served as the astute investor’s second home. The global head of Société Générale’s private-banking business, for example, thinks Singapore could be the main beneficiary of the Liechtenstein tax-evasion investigation.

While Liechtenstein has come under attack, Singapore has worked hard to raise its appeal to international investors as a tax haven, with a government that prioritises business and its twin virtues of efficiency and confidentiality.

Singapore’s robust banking secrecy laws, reliable legal system modelled on UK common law, well-regulated financial sector and political stability have already made it a top banking destination. Its legitimate and regulated economy, 4.5 million well-educated residents and single-minded focus on developing as the world’s leading offshore financial centre command great appeal among the world’s investors.

Bill Lexmond, managing director of the wealth planning consultancy at UBS, which is Singapore’s largest bank, explains that his clients look to Singapore when ‘they want a place that is not going to change radically in the next few years, either from a legal and tax environment or from other external government policies’. Furthermore, Singapore is more politically independent than Liechtenstein and can afford to be tax-competitive. In 2002 it effectively abolished estate duty tax for everyone except those domiciled in Singapore. When Hong Kong decided in 2005 officially to abolish estate duty, Singapore was quickly able to follow suit by sanctioning the same tax break in 2008.

Lexmond says Singapore will not raise taxes even in a difficult economic environment because the country has carefully managed its funds so that there are significant surpluses, and even in years when the economy turns soft and it runs a deficit, monetary policy is sufficiently vigilant to contain inflation.

‘In the fourteen years I have been here,’ he adds, ‘there has been a bit of a shift from income taxes to consumption taxes, which is like VAT and is now pitched at a 7 per cent rate. However, at the same time income tax has gone down from 30 per cent to 18 per cent for companies, and to 20 per cent for individuals, so that the increase in consumption taxes has been more than offset through lower tax elsewhere.’

More and more institutions are making their way to Singapore and hence increasing investor awareness. Still, the region has also managed to enhance its cultural desirability. In 2008 alone the government has allocated around $170 million to fund the Singapore Tourist Board, and in recent years it has also focused on schooling, cultural attractions and lifestyle.

The 2008 Singapore budget ambitiously declared: ‘The government aims to develop Singapore as a vibrant city that is a centre of knowledge, talent and enterprise.’ With the rising pressure on European tax havens, and Singapore’s own vigilant efforts to position itself as a global financial centre, the goal may just be a possibility.

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