When a man knows he is to be hanged in a fortnight," quipped essayist Samuel Johnson, "it concentrates his mind wonderfully." For Liechtenstein, the tiny banking haven snuggled on Switzerland's eastern border, concentration seemed in order last June. After years of cajoling, the world's richest nations had placed the principality on a blacklist of countries that failed to adopt sufficiently tight rules to deter money laundering. Although no specific misdeeds were mentioned, the designation by the Financial Action Task Force on Money Laundering would have made dealings with those countries difficult for major foreign banks. Banking and related services account for 40% of Liechtenstein's economy, and the sanctions promised a bleak future. "It was a real crisis for us," recalls Gerhard Mislik, one of Liechtenstein's senior judges.
Suddenly, Liechtenstein scrambled to set matters right. Within two working days, the parliament hurried through a bundle of new laws making it a crime for bankers or financial intermediaries to fail to report suspicious activity, and allowing Liechtenstein authorities to cooperate with foreign authorities to fight money laundering. The legislature also approved plans to hire new judges, prosecutors and police officers with special knowledge of economic crimes. "We see there is more criminality in the financial sector than we thought," admits Prime Minister Mario Frick. He added that the newly adopted legislation will lift the veil of banking secrecy in suspected money-laundering cases, but would not apply in tax cases.
The FATF was established by the world's seven richest nations in 1989. The principality is not alone in being prodded for failing to do enough to stop the flow of dirty money. In June this year, a French parliamentary committee lambasted Monaco, another tiny kingdom-cum-tax-haven, for imposing so few financial controls that "money laundering can thrive." Last February Austria narrowly escaped being booted out of the FATF, which has grown to 26 member governments and two regional organizations, by agreeing not to permit any more anonymous savings accounts to be opened. Even Israel was scolded for not doing enough to stop hot money from sloshing through its banks.
The FATF report epitomized the tough new stance being adopted by industrial nations to stamp out money laundering, the process of taking illegally obtained funds such as drug money and making them appear to come from legitimate business. Pressure has focused on tax havens because they attract money fleeing tax collectors and often employ bank-secrecy rules that make it hard to identify illegal cash. Money hidden from tax collectors is considered illegal in many countries, but not in places like Liechtenstein.
Almost by definition, it is impossible to know how much illicit cash is siphoned into havens far from the eyes of legal authorities. The U.S. stockbroking giant Merrill Lynch estimated in 1998 that more than $5 trillion, equal to a third of the savings of wealthy people worldwide, was held in offshore accounts. While only a small percentage of that is laundered cash, it's still a huge sum.