Switzerland: Implementation Of The Revised FATF Recommendations In Switzerland

Last Updated: 5 May 2015
Article by Peter Lutz

The Financial Action Task Force (FATF) Recommendations for Combating Money Laundering were revised in 2012. Swiss legislators followed with a speedy implementation that entails many important changes for financial intermediaries and other stakeholders.

New rules under the FATF revision

On an increasingly frequent basis, money laundering and the financing of terrorism are being combated on the basis of rules based, in turn, on international standards and recommendations. A leading role is played here by the Financial Action Task Force (FATF), of which Switzerland is a member. The recommendations issued by the FATF (FATF Recommendations) do not represent any directly applicable law, but rather constitute so-called "soft law", which must first be implemented into national law. A failure to implement could result in reputational damages or the imposition of sanctions by other states. In December 2014, following a somewhat heated debate, the Federal Parliament reached a consensus in this regard, making reference to the consequences resulting from a failure to implement the rules on a timely and consistent basis.

The legislative package that was adopted has an impact on a number of different areas of law. The deadline for a referendum against the implementation will expire on April 2, 2015, but a referendum is not anticipated and it is assumed that a speedy implementation will take place, in part already during the current year.

PEP

The Anti-Money Laundering Act (AMLA) assumes that transactions involving politically exposed persons - so-called PEPs – are particularly sensitive with a view to potential money laundering and that adherence to special duties is therefore necessary. The PEPs are now newly defined in the AMLA itself. As to date, foreign persons who have been entrusted with prominent public functions fall under the PEP definition. What is new, on the other hand, is the fact that even persons domiciled in Switzerland can be deemed to be a PEP, provided that they are entrusted domestically with prominent public functions in politics, the administration, the military or the judiciary.

Foreign politically exposed persons, so-called PEPs, retain this status even after their term of office has ended, an aspect that financial intermediaries must take into account in connection with the opening of business relationships.

What is also new is the fact that persons having a prominent function in an international organization or international sports association are also deemed to be PEPs. Furthermore, someone who is classified as a PEP now continues to be classified as a PEP even after that person has left office. Whereas this continued classification as a PEP is limited to 18 months in the case of Swiss PEPs, no such time limitation applies with respect to other PEPs. Currently, it is still unclear as to whether this continued classification as a PEP also applies in cases where the term of office ended prior to the effective date of the new rules.

Special due diligence obligations

A financial intermediary is required in each case to perform general due diligence inquiries to identify the contracting party. In addition, the financial intermediary must clarify the background and purpose of a transaction or a business relationship when, among other things, it constitutes a transaction or business relationship with an increased risk. The AMLA itself now stipulates that a transaction must be viewed as having an increased risk whenever a foreign PEP or a person closely associated with a foreign PEP (based on family, personal or business reasons) is involved in the transaction. In all other cases, an increased risk exists only if other criteria are fulfilled. Due to the expansion of the PEP definition both in terms of substance and duration, an increase in the number of these cases can be expected.

Beneficial owners

Whereas a financial intermediary has until now only been required to identify the beneficial owner in certain situations, it must now do so in each case, thus, including in the case of operating companies, applying the level of due care required under the circumstances. An exception applies to exchange-listed companies and the companies under their control. In the case of an operating legal entity, the beneficial owner is whoever directly or indirectly, either alone or in concert with third parties, owns at least 25% of the capital or voting interests or otherwise controls the company. If no such controlling ownership interest can be ascertained, the identity of the top member of the managing body, for example, the chairman of the board of directors or the CEO, is to be verified.

Cash transactions

The debate that received the greatest amount of attention in the public arena was the debate on a prohibition on cash transactions for amounts over CHF 100,000. This rule was not implemented in a strict form and therefore only applies in the case of public auctions under the Swiss Federal Act on Bankruptcy and Debt Collection. In day-to-day business, however, for example, in connection with a purchase of real estate, art, jewelry or cars, dealers must observe special due diligence obligations if they accept more than CHF 100,000 in cash in connection with a commercial transaction. In this case, they must identify their contracting party, ascertain the beneficial owner of the transaction and fulfil certain documentary obligations. If the circumstances surrounding the transaction appear unusual to the dealer, he must additionally clarify the background and purpose of the transaction. An auditor must then review compliance with these due diligence obligations. These due diligence obligations do not apply if the amount exceeding CHF 100,000 is processed via a financial intermediary (for example, a bank).

Notification to Money Laundering Reporting Office of Switzerland (MROS) and asset freeze

In the case of suspected money laundering, a financial intermediary is required to submit a report. This report does not, as it has to date, automatically result in a freeze of the relevant assets. The financial intermediary may continue to carry out customer instructions provided that this does not thwart a later seizure of the assets and does not constitute terrorist financing. A freeze of the assets takes place only if and when the Reporting Office gives notice that it is forwarding the matter to the criminal prosecution authorities.

A new requirement is the unlimited prohibition on providing information, i.e., the financial intermediary may not inform its customer about the report at any point in time. As an exception, disclosure is allowed if the financial intermediary is dependent on such disclosure in order to protect its own interests in civil litigation or criminal or administrative proceedings.

Terrorism lists

Lists of suspected terrorists have been maintained at an international level for some time now. The revised AMLA now governs the treatment of such lists. Lists issued based on Resolution 1373 of the UNO Security Council will be sent by the Swiss Federal Department of Finance, following a formal inspection, to the self-regulatory organizations to the attention of their member financial intermediaries. Financial intermediaries must then fulfil special clarification and reporting obligations if a contracting party is on the list.

Predicate offense for money Laundering

In the revised FATF Recommendations, fiscal offences are now explicitly included as predicate offenses for money laundering.

According to present Swiss law only fraud with regards to assets originating from a felony may constitute a predicate offence for money laundering. Fiscal offences are not felonies and are therefore not in the scope of a predicate offence for money laundering. When implementing the new FATF Recommendations, Swiss Parliament therefore agreed that tax fraud may constitute a predicate offense to money laundering if the evaded taxes amount to at least CHF 300,000 per tax year.

In contrast to a simple tax evasion, tax fraud is currently committed only when a person uses forged, falsified or substantively untruthful documents in order to deceive the tax authorities. Not before the pending revision of fiscal offences is introduced a taxpayer may commit a tax fraud when maliciously evading taxes. By not declaring a bank account held directly, a taxpayer commits a simple tax evasion only. Even if the account is held by a trust or a foundation, no tax offence is committed per se, and, thus, no predicate offence for money laundering is given.

Summary

The tougher, expanded obligations will trigger implementation costs. Financial intermediaries must incorporate the new rules into their clarification and documentation processes. It should be further noted that, as will be discussed in the following section, fundamental changes that the financial intermediary must take into account in connection with its business activities have also occurred in connection with company law issues.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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