In view of the dramatically changing regulatory environment, the LLB Group is having to confront numerous challenges. The diversity of regulations and their increasing complexity require constant further developments. That is why the LLB Group started to work on a new definition of the compliance function in 2012. 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 regulations, standards and codes of conduct as well as against corresponding legal, regulatory and internal sanctions. Group Legal & Compliance supports and advises the Group Executive Board regarding the assessment and monitoring of compliance risks.
Combating money laundering
One of the central tasks of Group Legal & Compliance is to fulfil legal and supervisory regulations governing money laundering. The fight against money laundering and the financing of terrorism has been a top priority of Liechtenstein for years, which has a zero-tolerance policy relating to 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 to accompany transfers of funds. In particular, the corresponding implementation regulations are included in the law on due diligence obligations to combat money laundering, organized crime and the financing of terrorism («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. The regulation of due diligence obligations in regard to transactions and business relations with persons in or from countries whose due diligence obligation measures do not meet international standards is a central point of this law. The law also focuses on particularly complex transactions and structures.
Early in 2012, the Financial Action Task Force (FATF) also updated some of its recommendations on combating money laundering and the financing of terrorism (40 recommendations plus 9 special recommendations). One item is: serious tax offences can in future be considered predicate offences for money laundering. Furthermore, the FATF has established the risk-based approach as the most efficient instrument for combating financial crimes.
In the fight against money laundering, the principle of «getting to know your customer» is considered crucial. Prior to the start of a business relationship, the party subject to the due diligence obligations establishes the identity of the client as well as of the economic beneficiary and creates a client profile. The principle of «getting to know your customer» ensures the greatest possible transparency in business relationships.
Avoidance of conflicts of interest
One key task of compliance is to make sure that employees observe applicable laws and regulations while doing their daily work. The main operative force behind compliance is each and every employee. The LLB Group ensures that client interests are safeguarded through internal directives and clearly defined processes. With this in mind, a further round of automatization is planned for 2013.
At LLB, knowledge as a resource and its targeted use play an important role. Accordingly, Group Legal & Compliance conducts systematic monitoring in a number of business divisions. The structured collection of information is made available to interested employees through a databank. They use this knowledge base as a reference source and to keep their knowledge up to date.
Deposit and investor protection
After the financial crisis 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 USA, committed themselves to applying «Basel III» as of 2013. The regulations, which will be progressively introduced by 2019, commit banks to larger capital buffers. The reforms aim at improving the regulation, supervision and risk management of banks and, as a result, at strengthening the resilience of individual banks and of the banking system as a whole. The USA has, however, indefinitely postponed the introduction of stricter capital directives. In the EU countries, Basel III regulations will only come into force on 1 January 2014 at the earliest.
The EU will transpose the Basel III regulations into current EU law within the framework of the «Capital Requirements Directive IV» (CRD IV) and the «Capital Requirements Regulation» (CRR). In accordance with the Agreement on the EEA, Liechtenstein will implement CRD IV regulations into national law. Since the CRR is a directly applicable regulation and its content has been mostly regulated to date by the «Capital Adequacy Directive» (CAD), the latter will probably be completely revised or replaced in its current form. A corresponding workgroup has taken up its work.
The equity regulations of the Principality of Liechtenstein, which are based on the standards of the Basel Committee on Banking Supervision, form the regulatory basis for the LLB Group. These capital and liquidity regulations have already been widely implemented by the Liechtensteinische Landesbank.
Efforts by the European Union have a direct impact on the EEA country Liechtenstein. The same is true for investor and consumer protection in private banking and the private client business. Bank deposits and investments in Liechtenstein are protected by the «Deposit Guarantee and Investor Protection Foundation» («Einlagensicherungs- und Anlegerschutz-Stiftung») of the Liechtenstein Bankers Association (LBA). According to Art. 9 of its statutes, private client deposits of up to a maximum of CHF 100'000.– are guaranteed. On account of new EU regulations, LBA is reworking the regulation of investor protection with the support of Liechtenstein banks and the FMA. In particular, they intend to increase the level of funding for protected deposits.
LLB is the only Liechtenstein bank with a state guarantee on savings deposits and medium-term notes. The guarantee is anchored in Art. 5 of the Law of 21 October 1992 on the Liechtensteinische Landesbank.
EU Markets in Financial Instruments Directive (MiFID)
The legal situation in Liechtenstein conforms to the international regulatory requirements of the EU, which aim to improve the integrity and transparency of the financial system as well as investor protection in the European financial market. The financial centre Liechtenstein 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 states. Besides, they are required to conduct precise client and product analyses as well as disclose information on remuneration and commissions.
On 20 October 2011, the European Commission published a legislative proposal for the revision of MiFID. This proposal foresees further regulation of financial markets and investment services. The EU Parliament (EP) adopted the draft amendment (MiFID II) and partially tightened it; for example, in the case of high-frequency trade (HFT), which the EP, among other things, wants to slow down by introducing a minimum holding period of 0.5 seconds for orders. Moreover, the amendment foresees far-reaching new corporate governance rules and additional stricter controls in the area of allocations. The enactment of the changes and with it the concomitant implementation of the regulations into national law as well as the application of the MiFID II regulations are to be expected in 2014 at the earliest.
The LLB Group’s client advisory service adheres to the MiFID EU financial markets directive as well as to its implementation into national law. The LLB Group sees this as an opportunity to improve client satisfaction by developing new instruments and solutions as well as high standards for its advisory services.
Improvements for EU funds
As one of Liechtenstein's largest fund providers, the LLB Group continually monitors the competitive situation in Europe. The law on certain undertakings for collective investment in transferable securities (UCITSG; UCITS: Undertakings for Collective Investment in Transferable Securities) and concomitant regulations governing the distribution of UCITS in the EU have been in force since 1 August 2011. The law improves investor protection, reduces administrative barriers and increases the efficiency of cross-border sales. Fund providers profit from an accelerated time to market, substantially shorter approval deadlines and a standardized approval process. Furthermore, the EU passport permits management companies to operate funds throughout the EEA without having to establish branch offices in individual countries. In July 2012, the EU Commission published a proposal for the harmonization of the liability of custodian banks (UCITS V).
At the same time, the European directive for alternative investment funds (AIF), which has to be transposed into national law as of July 2013, aims to consolidate all the funds not regulated by the UCITS Directive to date and to provide them with a regulatory framework. This means that the regulations for managers of real estate, infrastructure, commodity and renewable energy funds as well as of private equity and hedge funds will be unified. Management companies of non-UCITS funds will have to comply with stricter requirements for risk management and compliance.
As an EEA country, Liechtenstein is obliged to adopt the Alternative Investment Fund Managers Directive (AIFM). In addition to creating a legal framework that conforms to European law, Liechtenstein aims to increase the competitiveness of the fund location, both in the area of equity funds as well as for the areas of alternative investment funds, through a timely implementation of the directive in line with market requirements. In autumn 2012, the Parliament of the Principality of Liechtenstein implemented the AIFM Directive by passing the new law concerning the management of alternative investment funds («Gesetz über die Verwaltung alternativer Investmentfonds»). As of 22 July 2013, AIF managers at the Liechtenstein banking centre will only need one single licence to distribute and manage alternative funds throughout Europe, regardless of where these funds are domiciled.
The AIFM Law is oriented towards strict regulation of the management of alternative investment funds (previously referred to as management companies) and rather liberal regulation of products. Product authorization is only required in the case of leveraged AIFs. Other instances only require authorization by the FMA. The early implementation of the AIFM Directive means that Liechtenstein is one of the first jurisdictions to be able to offer its clients a functioning and efficient environment that is in line with the AIFM Directive. LLB is considered to be a pioneer of the Liechtenstein funds branch and can draw on many years of experience as a custodian bank. LLB has actively cooperated on the establishment of more than 250 private label funds for banks, asset managers, fund and insurance companies both at home and abroad. LLB Fund Services is specialized in customizing solutions and models for third parties, managing fund assets and carrying out important compliance tasks.