Germany Probe Casts Shadow on Liechtenstein Banks

VADUZ (Reuters) - The reputations of Liechtenstein and its banks were under the spotlight on Monday, under pressure from a probe in Germany that may show hundreds of prominent people hid their wealth in the tiny principality to dodge taxes.

Liechtenstein, one of only three remaining countries on the Organization for Economic Cooperation and Development's (OECD) blacklist of uncooperative tax havens, has been trying to burnish its reputation for years, saying its banks offered financial expertise, not ways to evade tax.

But Germany said this weekend it had uncovered hundreds of prominent tax dodgers in the country when it paid an informant 4.2 million euros ($6.17 million) for a compact disk with client data from a Liechtenstein bank.

Among those under investigation was the outgoing chief executive of Deutsche Post (DPWGn.DE), the logistics and mail firm.

"This is potentially a disaster for them (Liechtenstein and its banks). They've been struggling to overcome a bad reputation and become a more salubrious off-shore center," said Ted Wilson, a wealth management consultant at Scorpio Partnership.

About a third of Liechtenstein's economy depends on its banks. Together, they hold some 160 billion Swiss francs ($145.1 billion) in client assets, making the entire country's banking system roughly as big as one mid-sized Swiss bank.

A spokeswoman for the Liechtenstein government said the country would make an official statement on Tuesday, and declined to comment before that. The country's banking association could not be reached for comment.

Media in Liechtenstein criticized the way Germany had obtained the data, and bankers said the country had come a long way in improving its reputation for fighting financial crime.

"This is not very conducive, especially because Liechtenstein has done a lot in recent years ... There's been very good cooperation, also with Germany," a senior Liechenstein banker said, asking not to be named.

Like Switzerland, Liechtenstein will give foreign authorities access to bank data if a client is suspected of a crime, but tax evasion is not a crime in either country.

INDUSTRY OVERHAUL

The data leaks came just as Liechtenstein launched plans for an overhaul of its financial industry last week, saying it would no longer rely on attracting clients just by its banking secrecy, and proposing tighter regulation.

But that message went largely unheard over the din of the German probe, and shares in Liechtenstein banks plummeted on Monday, as markets feared clients could pull their money out of the Alpine state.

"The question is have they been aggressive enough in making it clear to clients that they've got to get their house in order," said Stephanie Jarrett, a tax expert at law firm Baker & McKenzie.

LGT Group -- owned by Liechtenstein's ruling family -- said last week client data had been stolen from one of its units six years ago, and Liechtensteinische Landesbank (LLB.S) said it had been blackmailed by someone threatening to sell data.

The OECD said it would remain critical of Liechtenstein as long as it did not implement the organization's tax transparency standards, which it says will reduce the incentive for German tax dodgers to park their money there.

"They have taken the political decision not to implement the standards, and that is regrettable for a country in the heart of Europe," said Jeffrey Owens, head of the OECD's tax department.

Private banks -- not just in Liechtenstein -- say clients are less interested in hiding away money these days than they once were, and selling millionaires ways to reduce taxes in legally compliant ways has become big business.

(Editing by Sam Cage/Will Waterman)