Liechtenstein Woes

Chancellor Merkel, speaking at a joint news conference after talks on Wednesday, Feb. 20, with Liechtenstein's Prime Minister Otmar Hasler in Berlin, said the meeting was "constructive" and stressed that she not given the principality any ultimatums, but said she expected action.

"Time is of the essence," Merkel said. "The faster action is taken, the better the basis for good relations."

However, the chancellor criticized Liechtenstein's banking secrecy and said she expected an agreement giving Berlin insight into German investments in the Alpine tax haven.

"What is possible with the United States should be possible with the European Union," Merkel told reporters.

The chancellor was refering to an accord which binds Liechtenstein banks to divulge information to the US's tax authority -- the Internal Revenue Service (IRS) -- about investments made by US citizens in the principality.

Need for greater transparency

That demand was just one of many made amid an ever-widening tax fraud scandal involving some four billion euros ($5.8 billion) members of Germany's elite have reportedly hidden in secret accounts in Liechtenstein.

Hasler, who is also his country's finance minister, acknowledged the principality's willingness to work with Germany:

"We have good relations with one another and are interested in keeping it that way," he said.

He also pointed to certain reforms that were underway regarding Liechtenstein's law on foundations, which have in the past been used by wealthy Germans to conceal untaxed income from German inland revenue.

"Liechtenstein is on a road to reform that was initiated independently of events of recent days," Hasler said.

Still, Germany continues to demand that Liechtenstein comply with the rules of the Organization for Economic Cooperation and Development (OECD) regarding unfair tax competition and financial transparency.

"It is also important that Liechteinstein apply the third European directive on money-laundering in order to allow for a calculation of someone's real fortune and thus improve the transparency needed to fight money- laundering," Merkel's spokesman told reporters. Germany itself has yet to ratify those guidelines.

This week, the Paris-based OECD sharply criticized the "excessive" secrecy of banks in Leichtenstein, which shares a spot with Monaco and Andorra on its blacklist of uncooperative tax havens.

Possible leverage for more cooperation

Meanwhile, a European Union diplomat told an AFP new agency reporter that Germany may threaten to delay Liechtenstein's admission to the Schengen zone of passport-free travel due to the tax fraud dispute. There is, however, no confirmation of such a threat.

"Certain member states could have an interest in putting pressure on Liechtenstein" and "slow down the ratification of the (Schengen) treaty," the diplomat told AFP on condition of anonymity.

Interior ministers from the EU's 27-member bloc are scheduled to sign an agreement on February 28 on Liechtenstein joining the zone, but it would have to ratified by all members.

Liechtenstein critical of German approach

The tax evasion scandal broke last Thursday, when police raided the home and office of Deutsche Post head Klaus Zumwinkel, one of Germany's most respected business leaders. Zumwinkel is accused of having stashed millions of euros in Liechtenstein to escape taxes in Germany.

The raids since have widened across the country, and are expected to continue for weeks. Not only the country's business elite, but also wealthy sports and entertainment stars are believed to have deposited billions of euros in Liechtenstein.

The principality, situated between Austria and Switzerland, has been critical of Germany's investigation, particularly regarding the way German authorities paid millions of euros for data about the alleged tax fraud. The informant, who provided a CD containing information on foundations managed by Liechtenstein Bank LTG, is viewed as a thief in Liechtenstein.

"In Liechtenstein, spying on business secrets and passing on the information is punishable by law. And this will be prosecuted in Liechtenstein," Prime Minister Hasler said earlier.

In the European edition of the Financial Times, Hasler noted that his country's banking system had twice been inspected and approved by the International Monetary Fund (IMF).

"Liechtenstein accordingly has a system for combating money laundering, organized crime and financing of terrorism that has been recognized by international experts and that complies with existing international standards to a high degree," he said.

Discovering German tax evaders was a matter for German officials and not for Liechtenstein, Hasler said.