In view of the dramatically changing regulatory environment, the LLB Group has to confront numerous challenges. The diversity of regulations and their increasing complexity require constant further development. As a result, the LLB Group optimized the definition of the compliance function in 2013. 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, 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 anti-money laundering requirements. The fight against money laundering and terrorist financing has been a top priority of Liechtenstein for years, which has a zero-tolerance policy towards 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 accompanying transfers of funds. In particular, the corresponding implementation regulations are included in the law on professional due diligence to combat money laundering, organized crime and terrorist financing («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. This resulted in the provision of an increased monitoring obligation for complex structures, complex and unusually large transactions as well as for transaction patterns that have no apparent economic or recognizable legitimate purpose. Moreover, monitoring obligations were tightened in cases of transactions and business relations with persons in or from countries whose measures regarding due diligence obligations do not correspond to international standards.
Early in 2012, the Financial Action Task Force (FATF) updated some of its recommendations on combating money laundering and terrorist financing (40 recommendations plus 9 special recommendations). One item is: serious tax offences can in future be considered predicate offences to money laundering. Furthermore, the FATF has established the risk-based approach as the most efficient instrument for combating financial crime. In February 2013, the EU Commission adopted a proposal to revise the directive on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing. The Proposal amends certain points of the Third Anti-Money Laundering Directive with the Fourth EU Anti-Money Laundering Directive, which is expected to be implemented in 2015 / 2016.
A working group headed by the Financial Intelligence Unit (FIU) is currently considering the domestic implementation of the Directive in Liechtenstein. The Government is planning to draw up a bill by the end of 2014, on which the Landtag (Parliament) will have the final decision in 2015.
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.
The LLB Group defines the rules of conduct for dealing with conflicts of interest in its ruling «Rules of Conduct für Mitarbeitende und Organe der LLB-Gruppe» (rules of conduct for employees and special bodies of the LLB Group). It also contains criteria for preventing the use of confidential information and aims to avert legal infringements and risks to reputation.
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 are expected to 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.
Besides more stringent risk-based capital adequacy requirements calculated using complex models the Basel Committee had also proposed the introduction of a simpler way of measuring bank debt as early as 2010: the leverage ratio is defined as capital relative to unweighted total on-balance sheet assets and off-balance sheet commitments. In mid-January 2014, the Central Bank Governors and Heads of Supervision who comprise the governing body of the Basel Committee on Banking Supervision adopted a worldwide unified definition of the maximum leverage ratio. From 2018 onwards, banks must hold capital of at least 3 percent of their total on-balance sheet assets and off-balance sheet commitments.
As well as leverage ratio requirements, changes to the new liquidity requirements for banks were proposed. Together with more stringent capital requirements they aim to make banks notably more resilient against financial shocks than they used to be. Minimum standards for the liquidity coverage ratio (LCR) for banks and for the net stable funding ratio (NSFR) were agreed upon for the first time as part of «Basel III». The objective is to ensure that banks put aside enough high-quality liquid assets and are able to finance themselves in an appropriate manner over the long term in order to survive stress situations. The higher liquidity should prevent downward spirals during crises and waves of selling and value destruction triggered by distress sales of less liquid assets.
The EU is implementing Basel III regulations into current EU law. The package consists of the Capital Requirements Regulation (CRR) and the Fourth Capital Requirements Directive (CRD IV). CRR introduces the first EU-wide supervisory regulations for all banks in the member states. It aims to ensure that international standards for bank capital are complied with in all EU member states. CRD IV gives EU countries more flexibility and the right to oblige domestic banks to put aside more capital than required in order to protect them, for example, from the negative consequences of real estate bubbles.
Liechtenstein will transpose CRD IV regulations into national law in accordance with the EEA Agreement. The latter will probably be completely revised or replaced in its current form since CRR is a directly applicable regulation and its content has been mostly regulated to date by the «Capital Adequacy Directive» (CAD). A corresponding working group has taken up its work. The capital adequacy 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.
EU Markets in the Financial Instruments Directive MiFID II
The legal situation in Liechtenstein conforms to the 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 member states. Besides, they are required to conduct precise client and product analyses as well as disclose information on compensations and commissions.
The LLB Group’s client advisory service adheres, as far as applicable, to the EU financial markets directive MiFID as well as to its implementation in national law. The LLB Group sees this as an opportunity to improve client retention by further developing new instruments and solutions as well as high standards for its investment counselling and asset management.
On 20 October 2011, the European Commission published a legislative proposal for the revision of MiFID I. This proposal provides for further regulation of financial markets and investment services. The EU Parliament (EP) adopted the draft amendment (MiFID II) and partially tightened it; for example, high-frequency trade will be made more transparent and subject to stricter supervisory controls, position limits on commodity trading will be stricter and investor protection will be improved. In future, throughout the EU, minutes must be taken of the information given to individual clients at bank branches and a more comprehensive recording made of information given by phone. The minutes and recordings must document why a financial product was recommended and how it suits the client’s risk profile.
In mid-January 2014, the EU bodies reached a fundamental agreement on the legislative package «Markets in Financial Instruments Directive II» (MiFID II). The package will probably come into force around the end of 2016. MiFID II modernizes the current MiFID, a cornerstone of EU financial market regulations. Its aims are to provide uniform regulations for the securities and capital markets in Europe as well as to create more market transparency and to mitigate the effects of stock market turbulence for clients.