Financial Crime World

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Banking Compliance Procedures in Liechtenstein: An Overview

Liechtenstein’s banking system is subject to a robust regulatory framework, ensuring the stability and integrity of its financial institutions. The country’s national authorities for banking regulation, supervision, and resolution are the Financial Market Authority (FMA) and the Monetary Institute (MI), which work closely together to maintain a high level of compliance.

Licensing Requirements

To operate as a bank in Liechtenstein, financial institutions must obtain a banking license from the FMA. The type of activities that trigger the requirement for a banking license include:

  • Taking deposits
  • Granting loans
  • Engaging in other credit-related transactions

The regulatory regime recognizes different licenses for various banking services, such as:

  • Commercial banking
  • Private banking
  • Investment banking

License Conditions

A banking license automatically permits certain other activities, including:

  • Payment services
  • Issuance of electronic money
  • Securities trading

However, these activities are subject to specific conditions and requirements set by the FMA. Liechtenstein’s regulatory regime also provides for a “license light” or “sandbox” approach for certain innovative financial services, allowing companies to test new products and services in a controlled environment.

Crypto Assets

The regulation of crypto assets is an emerging area in Liechtenstein. While there are no specific restrictions on the issuance or custody of crypto currencies, banks are required to hold them at a minimum level of 50% as collateral against other assets.

  • Crypto assets do not qualify as deposits and are not covered by deposit insurance.
  • The risk weights for crypto assets are set at 100%, reflecting their high-risk nature.

Capital Requirements

The capital requirements for banks that hold crypto assets are set out in the Banking Act (Bankengesetz) and the Capital Adequacy Directive (Kapitaladäquanzdirektive).

Application Process

The general application process for bank licenses in Liechtenstein involves submitting an application to the FMA, which must be accompanied by a detailed business plan and financial projections.

  • The average timing for processing license applications is approximately six months.

Cross-Border Activity

Mere cross-border activity is permissible in Liechtenstein, but banks are required to obtain a license from the relevant authorities in their home country. They must also comply with the country’s anti-money laundering (AML) and combating the financing of terrorism (CFT) regulations.

Corporate Governance

Liechtenstein’s banking system requires banks to maintain a high level of corporate governance, including:

  • Transparency
  • Accountability
  • An independent board of directors
  • A risk management committee

Remuneration Policies

Restrictions on remuneration policies apply to banks in Liechtenstein, with the aim of ensuring that compensation is aligned with sound risk management practices.

Basel III Framework

Liechtenstein has implemented the Basel III framework for regulatory capital, including requirements for common equity tier 1 (CET1) and total loss-absorbing capacity (TLAC).

Leverage Ratio

The leverage ratio is a key component of Liechtenstein’s regulatory framework. Banks must maintain a minimum leverage ratio of 3% to ensure that they have sufficient capital to absorb potential losses.

Liquidity Requirements

Liechtenstein has implemented the Basel III liquidity requirements, including:

  • Liquidity coverage ratio (LCR)
  • Net stable funding ratio (NSFR)

These requirements aim to ensure that banks maintain adequate liquidity buffers to meet their short-term obligations.

Financial Reporting

Banks in Liechtenstein are required to publish their financial statements on a regular basis. They must also submit interim reports, which are typically published quarterly.

Consolidated Supervision

The FMA exercises consolidated supervision over banks and other credit institutions in Liechtenstein, with the aim of ensuring that they comply with regulatory requirements and maintain sound risk management practices.

Risk-Based Supervision

The FMA uses a risk-based approach to supervise banks and other credit institutions, focusing on high-risk areas such as:

  • Credit risk
  • Market risk
  • Operational risk

The recent trends in bank regulation in Liechtenstein include increased focus on digitalization, fintech innovation, and environmental, social, and governance (ESG) considerations. The regulator(s) are also placing greater emphasis on risk-based supervision and enforcement.

Biggest Threat

In the view of regulatory authorities, the biggest threat to the success of the financial sector in Liechtenstein is cybercrime and other forms of financial crime, which require continued vigilance and cooperation between banks, regulators, and law enforcement agencies.