By John Tagliabue

High atop an Alpine ridge sits a prince in a 130-room castle, in a tiny domain that has made a name for itself by hiding people's money. It has also found a bit more international attention than it would like.

Last year, when German prosecutors investigated millions of dollars of secret donations to former Chancellor Helmut Kohl, the trail led to Liechtenstein, a principality the size of Fort Wayne, Ind. When Swiss investigators looked into millions of dollars of obscure "payments" involving the sale of a decrepit refinery to a French oil company, the money trail also led to Liechtenstein. In 1996, when American agents seized a Swiss launderer of Latin American drug profits, he confessed that he loved to do business in Liechtenstein since its banks never divulged much about its clients.

The affable 55-year-old Prince Hans Adam II, whose ancestors bought the country from the Austrian crown some three centuries ago, sees his nation of 32,000 people as merely offering banking privacy and low taxes. To him, bank secrecy and wafer-thin tax rates are services the country offers just like its dairy products and its leading export, dental prosthetics.

Since many of Europe's wealthy face income tax rates exceeding 50 percent, Liechtenstein offers a secluded place to squirrel away their fortunes. It also has a top income tax rate of just 18.9 percent. Taxes for holding companies or enterprises with no more than a mailbox here are a mere 1 percent.

But those kinds of lures have apparently attracted some unsavory elements. Liechtenstein's headaches began last November, when the German newsmagazine Der Spiegel published what it said were details of a German intelligence report that made accusations against Liechtenstein banks and fiduciaries - specialists in establishing mailbox corporations that are used to mask bank accounts. The enterprises were tied to a Sicilian Mafia group, Latin American drug lords and Russian gangs, the report said.

The article also asserted that a former Liechtenstein prime minister had assembled a network of banks, government workers and lawyers to help organized crime. Prince Hans Adam, in an interview, accused Germany of seeking to ruin Liechtenstein as a tax haven. To do so, he added, the Germans "did not hesitate to commit character assassination on a country and on individual people."

The prince's family bought the north of the tiny country in 1699 from the Austrian crown, the south around Vaduz in 1719, then united them seven years later to form the Imperial Principality of Liechtenstein, an independent state under the protection of the Austrian emperors. The prince's forbears abolished the army in 1868; the last Liechtenstein soldier died in 1938. In 1924, after the collapse of the Austro-Hungarian Empire following World War I, Liechtenstein entered a customs union with Switzerland, whose currency is the coin of the realm. Today, its banks live off bank secrecy laws and its burghers live on dairy farming and light industry.

It is not lost on Liechtensteiners that while German governments pillory their system, German politicians use it to hide campaign donations. In 1997, a local employee of one influential fiduciary gave Der Spiegel diskettes containing confidential client information. Among Germans stashing money here were not only well-known business people and an Olympic gold medalist, but also officials of Chancellor Kohl's political party, the Christian Democratic Union.

Still the Germans won't let up. In March, Finance Minister Hans Eichel, an outspoken proponent of more uniform tax rates across Europe, called Liechtenstein a "maggot in the bacon." Over coffee, the spokesman of the local bankers association, Philip Schädler, acknowledged that many of the charges in the German report had already been published in Liechtenstein, after several anonymous letters to the prince and the banks appeared here in 1997. Most people suspected then that the letters were the work of a disgruntled employee of the local Verwaltungs-Bank und Privat-Bank, but nothing was ever proved, Mr. Schädler said.

In Vaduz, the capital, population 5,000, everyone knows everyone else, and Heinz Frommelt, the justice minister, acknowledges the presence of "black sheep - a whole list of people whose names keep coming up" whenever foreign countries ask Liechtenstein's help in criminal investigations. Oddly, he said, none of the usual suspects appeared in the German report. Like most government officials, Mr. Frommelt says Liechtenstein has taken steps to bring its money-laundering laws in line with European standards, at least on paper. Banks and fiduciaries are now required to identify clients and the source of their money; suspicious movements of funds must be reported; legal assistance to criminal investigators abroad is guaranteed.

Yet when financial inspectors from the Council of Europe visited Liechtenstein in September, they came to very different conclusions. To lift bank secrecy, they found that requests must pass 12 appeal levels. They also found that the office for investigating bank reports of suspicious money has five overworked employees. So to learn where suspicious money comes from, the banks simply ask their clients. "The examiners fail to see how 'tipping off' in such circumstances can be avoided," the inspectors politely concluded in their report.

Peter Csonka, the team's secretary, said Liechtenstein had 80,000 trust companies - almost 3 for every citizen - as well as 280 lawyers and 80 trustees, most of whom "are in some business where the purpose is not totally clear." Financial policing, he said, "equals zero." Mr. Frommelt, the justice minister, promises fresh legislation this year to fill some gaps. To examine the charges in the German report, an Austrian prosecutor has been appointed independent investigator. This week, the prosecutor, Kurt Spitzer, presented his conclusions, requesting further investigations of about a dozen people, including two judges and two money managers, but said he found "no criminal community in the principality of Liechtenstein."

One hurdle to reform, some say, is the growing political dissent between the prince and the government on matters like constitutional reform and law enforcement. The prince, for instance, proposes contracting oversight of the banking system to private auditors, and suggests PricewaterhouseCoopers or Arthur Andersen. "I'm a proponent of outsourcing whatever can be done better," he said. For his part, Prime Minister Mario Frick wants the deletion of constitutional passages assuring the prince's immunity. "He could steal my car, and I can't do anything about it," Mr. Frick said. The prince recently annoyed politicians by mailing his own proposals for reform to all households and posting them on his Web site: www.fuerstenhaus.li

All the squabbling disturbs some here. Wolfgang Marxer, a former member of the 25-seat Parliament, complained that Liechtensteiners awash in newfound prosperity had little time to "pose questions about their identity." The country's youth, he said, "wants to study a little law, make money fast. The wheel of time has caught up with us." Prince Hans Adam admits that he has threatened half in jest to sell Liechtenstein to Bill Gates if its headaches get out of control. Mr. Marxer shook his head. "For all Liechtensteiners over 40," he said, "it's unthinkable to have a Republic of Liechtenstein."