Whence Comes Liechtenstein’s Wealth?

VADUZ, Liechtenstein —  Whining cranes and rapping hammers are a constant backdrop as sleek office buildings, art galleries and opulent villas take shape on Liechtenstein’s once sleepy streets and rolling Alpine foothills.

Jewelers and luxury stores vie for space with banks, trust companies and tax consultants. Expensive cars jam roads that saw the arrival of traffic lights relatively recently.

Little Liechtenstein--the mini-country, as it fondly describes itself--has grown up. Fast.

The tiny principality of just 32,000 people is now so rich that the ruling prince wants to abolish the income tax.

But where, or rather whom, does the money come from?

South American drug barons, Russian underworld leaders and Italian Mafiosi, according to allegations leaked from a report by Germany’s intelligence agency, which reportedly described Liechtenstein as a money-laundering paradise.

Amid general outrage, Liechtenstein authorities have appointed a special investigator from neighboring Austria to look into the accusations that a network of top politicians, judges, police officials and financial advisors were involved in shady financial dealings.

“It’s not true. It’s a lie,” explodes Prime Minister Mario Frick when asked about the allegations in an interview.

“If you were to read that you were the prime minister of a corrupt, immoral, indecent country, how would you feel? I’m not an aggressive man, but . . . “ he says, his voice trailing off.

Extracts of the report, shown on Swiss television, alleged that one of the central figures is Hans Brunhart--Liechtenstein’s prime minister between 1978 and 1993 and now board president of one of the little country’s biggest banks, Verwaltungs und Privatbank AG.

Both Brunhart and the bank have denounced the accusations and say they are considering legal action against the German intelligence service.

Liechtenstein officials are particularly outraged that the German government has refused to hand over a copy of the report or divulge any of its sources.

“It’s like being accused of murder without a corpse,” fumes Frick.

Frick concedes that some money laundering does take place here-- while stressing it goes on in many countries--and says there is room to tighten existing laws, possibly by forcing financial officials to check the source of funds more closely and report suspicious transactions.

Officials have conducted 75 investigations into suspected money laundering, but have produced no convictions because of the problem of coming up with concrete proof, especially given that Liechtenstein has no intelligence service, the prime minister says.

But Frick says that at least the allegations have shaken Liechtenstein’s financial center out of its complacency--a view shared by government critics.

“Money laundering has been a taboo subject here,” says Paul Vogt, one of two left-wingers in the 25-seat Parliament. “People have never talked about it.”

Prince Hans-Adam II, whose family owns the Liechtenstein Global Trust, one of the country’s largest banks, also stresses the need to keep the principality clean of organized crime.

But he sees the German allegations as a possible tactic to pressure Liechtenstein into bringing its tax policy into line with neighboring countries.

Liechtenstein is home to an estimated 70,000 “letterbox” companies--more than twice the number of inhabitants--who have registered offices in the name of a Liechtenstein representative but operate abroad. It’s a handy mechanism to take advantage of Liechtenstein’s famously low taxes, which can be as little as 1%, and avoid detection at home.

German authorities have long fretted that wealthy Germans are using the principality to wriggle out of hefty tax bills.

But Hans-Adam insists his principality will resist pressure to raise taxes or change its laws.

“We have survived three [German] Reichs,” he says in an interview. “I think we have a good chance to survive the Fourth Reich.”

Liechtenstein, closely allied with neighboring neutral Switzerland, managed to stay out of World War II. It was so poor that Hans-Adam’s father, Prince Franz Josef II, had to sell some of the family jewels to bail out the government.

After the war the country grew from rags to riches thanks to innovative industries and its reputation as a tax haven. Its 1995 membership in a European free trade pact caused the financial services sector to explode.

Even though Liechtenstein remains bound to the Swiss by a 75-year-old customs union, it is increasingly standing on its own, including getting its own national telephone code last year after sharing Switzerland’s.

The booming economy has given the government plenty of cash--it ran a budget surplus of nearly $16 million in 1999. A $19-million art museum and a new national museum costing $16 million are going up in the heart of Vaduz alongside big new office buildings and banks.

The principality is far from becoming a rich man’s playground like Monaco, though. There are no penthouse suites, no private jet landing strips.

Vaduz doesn’t even have a railway station. Visitors have to come by bus.