Liechtenstein’s crackdown on Russia-linked trusts has begun to spill into the offshore wealth system, leaving service providers fearing unpaid fees and stranded assets in the British Virgin Islands, Bahamas and the Cayman Islands.
The Alpine principality, a hub for foundations and trusts, triggered mass resignations by fiduciary and directors this year as it attempted to enforce western sanctions on Russia.
This left hundreds of “zombie trusts” – structures that hold everything from cash to superyachts linked to Russia – with no-one authorised to manage assets or basic functions.
The paralysis has now spread problems to other jurisdictions where the trusts were active, according to experts.
Offshore corporate agents and financial advisers including in the Cayman Islands, Bahamas and BVI – where many Liechtenstein trusts hold subsidiaries – warn that companies will soon fall behind on annual registration fees and suffer from an inability to make investment or governance decisions.
A Liechtenstein trust is often the main shareholder of an entity in a location such as the BVI, which can then own another entity somewhere such as the Bahamas, avoiding various levies such as on capital gains and VAT.
‘Domino effect’
Many of these assets cannot be run on their own and rely on instructions from fiduciaries in Liechtenstein to pay employees, insurance costs and other management services decisions.
“There is a domino effect due to the multilayer structure of these trusts. The mismanagement of these orphaned structures will have repercussions beyond Liechtenstein – it is not only about getting paid, it is also being able to speak to people for investment decisions on assets,” said Johannes Gasser, partner at Gasser Partner, one of Liechtenstein’s biggest law firms.
US Treasury Secretary Scott Bessent, whose administration has pursued a stricter sanctions regime than the EU © Photo credit: AFP
“Liechtenstein has a lot at stake for how it handles and resolves this.”
One financial adviser with direct knowledge of the situation in the BVI said that if entities were unable to pay annual fees, and were struck off, the assets would vest in that local government. In the BVI that would put them under British jurisdiction until the company was reinstated through a court process.
Liechtenstein took tougher action against the trusts after the US Treasury pursued a stricter sanctions regime than the EU, threatening secondary sanctions if a trustee serviced a listed person or entity.
Trusts pose “very high” money laundering risk, says ministry
Liechtenstein’s Financial Market Authority last year advised fiduciaries – a person or entity legally authorised to manage assets on behalf of others – to terminate relationships with potentially exposed clients, even if they were not sanctioned.
Hundreds of Russian-linked entities
Officials in Vaduz say the problem is contained.
A government statement this month put the number of Russian-linked legal entities at 218, of which 71 are considered “orphaned” – incapable of acting because trustees or directors have resigned. It said the remaining 147 trusts remained under investigation.
But lawyers contacted by the Financial Times have estimated that up to 800 entities could have a Russian connection and be affected.
The government of Liechtenstein did not immediately respond to a request for comment.
Two lawyers in contact with offshore entities in Caymans and BVI said there had been attempts to find ways to absorb some of the assets of the ungoverned structures in Liechtenstein and find legal means to take them over and head off the problem, but had so far been unsuccessful.
Another Liechtenstein-based lawyer said they had been contacted by an adviser in Bahamas about the issue this month. “The person is worried that if their Liechtenstein trust is liquidated, the Bahamas entity it ultimately owns would just be floating – because nobody can act for it.”
The situation has worsened since the Liechtenstein Bar Association in September instructed lawyers not to represent anyone listed by the US, according to two lawyers involved. The guidance, intended to shield practitioners from secondary sanctions, has in effect deprived some clients of legal representation.
“Things are becoming tighter in Liechtenstein. This sweeping approach means we just can’t have any Russian clients anymore – even if they are not listed or designated persons,” said one of the lawyers. “This is becoming a global problem.”
