Switzerland: Overview of the Measures Taken by Switzerland in Relation to Money Laundering

Since the beginning of the 1990’s, Switzerland has reinforced the measures to fight against organized crime.

In 1990, articles 305 bis and 305 ter of the Swiss Criminal Code (Code Pénal Suisse "CPS") came into force. These articles together with article 260 ter CPS on the involvement in a criminal organization constitute the first set of measures taken by the Swiss legislator to fight against money laundering activities.

In addition to these first measures, the Money Laundering Act came into effect April 1, 1998 (Loi sur le blanchiment d’argent, "LBA"). This law was adopted to comply with international standards regarding money laundering, in particular with the Recommendations of the Financial Action Task Force (Groupe d’Action Financière Internationale sur les blanchiments de capitaux, "GAFI") and with the EU Directive of June 10, 1991.

Also worth to be mentioned is the Agreement on the Swiss banks’code of conduct with regard to the exercise of due diligence ("CDB").

As indicated above, the first measure taken to fight against money laundering was the introduction of articles 305 bis and 305 ter in the CPS in 1990.

Article 305 bis CPS punishes money laundering, by which is understood any act that hinders the identification of the origin, the discovery or the seizure of funds whose perpetrator knew or should have presumed derived from a crime.

According to the Swiss Supreme Court, this provision is aimed at any person, whatever his/her activity may be, and is therefore not limited to the financial sector.

In its commentary (Message du Conseil Fédéral), the Swiss Federal Council specifies that there is laundering when funds resulting from an illegal activity have been recycled on the financial market in another form beyond suspicion.

Moreover, the Swiss Supreme Court ruled that there was an act of hindrance within the meaning of article 305 bis CPS in the following cases :

• transfer of money resulting from a fraudulent activity from one account to another,
• transfer of funds to a man of straw or to a screen company,
• allocation of funds resulting from a crime into different accounts with different account holders or intermediaries

It should be noted that the breach of article 305 bis CPS must be deliberate; negligence is not punished.

Therefore, the perpetrator must want, or in any case be aware, that the behavior that he has chosen to adopt hinders the identification, the discovery or the seizure of funds of criminal origin.

The violation of article 305 bis CPS is punishable by a fine or by imprisonment, up to five or more years, when the perpetrator acts as a member of a criminal organization, as a member of a gang formed to engage itself systematically in money laundering activities, or makes an important turnover or gain in the money laundering business.

Article 305 ter paragraph 1 CPS punishes any person who, in the exercise of his/her profession, omits to verify the identity of the real beneficial owner with the vigilance that the circumstances require. Contrary to article 305 bis CPS which, as it has been previously mentioned, applies to any person whatever his/her activity may be, article 305 ter CPS is only aimed at persons who work in the financial sector, that is, persons working in banks, financial companies and accounting firms, as well as investment advisors, stockbrokers, business lawyers etc.

The fact of not having identified the beneficial owner constitutes, for the persons mentioned above, a violation of article 305 ter CPS regardless of whether the funds result or not from an offence. In such case, the financial intermediary is punishable even if the funds have a clean origin.

Article 305ter paragraph 2 CPS grants the financial intermediary the right – but not the obligation – to communicate to the competent authorities (Bureau de communication) his suspicions about the criminal origin of certain assets. The law text speaks of suspicion; therefore it does not mean proof stricto sensu, nor suppositions or vague impressions, but well-founded elements of suspicion likely to be supported before criminal prosecuting authorities.

It seems as though article 305 bis CPS has not had very much success on the practical side since up to this date very few communications have been made to the cantonal authorities.

In 1991, the Federal Banking Commission (Commission Fédérale des Banques, "CFB") enacted a circular whose object was to furnish interpretation criteria regarding articles 305 bis and 305 ter CPS, on the one hand and to take into account various international recommendations, on the other hand. The following year, that is 1992, the Swiss Bankers Association (Association Suisse des Banquiers, "ASB") adopted the CDB. Since July 1, 1998 a new version of the CDB ("CDB/98") and of this circular ("Circular CFB/98") came into effect. These new texts will be further discussed in the presentation of the new LBA.

As indicated above, the LBA came into effect April 1, 1998 and applies to all the financial intermediaries, that is, banks, insurance companies, investment funds managers, securities dealers, as well as, more generally, to all persons who, in a professional capacity, accept, keep in deposit or help invest or transfer funds belonging to third parties.

Therefore, the LBA does not aim at the simple financial advisor, who does not have a management activity properly speaking. However, it is important to stress that this financial advisor remains subject to the obligation of diligence provided for in article 305 ter CPS that has been mentioned above.

The LBA requires these financial intermediaries to inform the competent authorities (Bureau de Communication) when they know or presume, based on founded suspicions, that the funds that have been entrusted to them:

• derive from a crime,
• or are related with an offence of money laundering within the meaning of article 305 bis CPS,
• or are even likely to be disposed of by a criminal organization (art.260 ter CPS)

According to the LBA these financial intermediaries have two types of fundamental obligations: firstly, an obligation of diligence and, secondly, an obligation to communicate and to block the assets in case of suspicion of money laundering.

The obligation of diligence is provided for in article 3 to 8 of the LBA and it includes :

1. the obligation to verify the identity of the contracting partner,
2. the obligation to identify the beneficial owner,
3. the obligation to punctually repeat these verification procedures,
4. the obligation to clarify the economic background of the business relationship,
5. the obligation to keep documents and to take organizational measures to prevent money laundering.

1. The verification of the contracting partner’s identity

According to article 3 LBA, the financial intermediary must verify the contracting partner’s identity by asking him to show an identification document in the following cases :

• when entering a business relationship,
• when the transaction/s involves an important amount if it regards cash desk operations
• when, even if the amount is insignificant, there are signs of laundering.

Article 2 CDB/98 specifies the cases in which the verification of the contracting partner’s identity must be made, as well as the measures to follow : for example, a copy of an official identification document must be kept in the file for individuals, while an extract of the registry of commerce or any other equivalent document will be enough for legal entities.

Moreover, the CDB / 98 has fixed at CHF 25'000.- the amount from which cash transactions must be considered as an important amount. The CDB / 98 also specifies that the identity of the contracting partner must be verified even in transactions dealing with an amount below CHF 25'000.-, if it appears that this verification measure has been avoided by allocating different amounts over several transactions or if there are signs of money laundering.

A clear distinction must be made between "signs" (article 3 paragraph 4 LBA) and "founded suspicion" (article 9 LBA). The presence of signs of laundering will require the financial intermediary to verify each time the contracting partner’s identity, even if the transaction involves an amount below CHF 25'000.-, which does not mean that he must inform the authorities.

The appendix to the Circular CFB/98 includes a list of signs which may require the verification of the contracting partner’s identity. These signs have been classified into three different categories: general signs, particular signs, and qualified signs.

In order to avoid a detailed description of all the signs listed by the CFB in the appendix to the Circular CFB/98, here are some examples of the transactions which the CFB considers present particular risks of laundering:

Under general signs, the Circular CFB/98 mentions, for example, accounts used as "passage accounts" (compte de passage), that is, accounts in which funds are deposited and withdrawn shortly after their deposit, without a plausible explanation of the withdrawal from the client’s activity. The Circular CFB/98 also mentions the case of an account that has been inactive over a long period of time and which suddenly becomes very active without any credible reason.

As to particular signs regarding cash transactions, the Circular CFB/98 mentions, for example,

• the purchase of checks for important amounts by casual clients,
• the cashing of checks for important amounts by casual clients,
• the realization of cash transactions for amounts just below CHF 25'000.-

The Circular CFB/98 also mentions cash deposits made by many different persons to one and the same account, important and frequent transfers towards or from drug producing countries.

It should be noted that the presence of one or more signs listed in the appendix to the Circular CFB/98 must not systematically lead the financial intermediary to believe that he is in presence of a laundering operation. In effect, prior to informing the authorities it is necessary to proceed, in each case, to the usual verification regarding the economic background of the transaction. Moreover, this list of signs is not exhaustive; it needs constant adaptations to keep up with the change of circumstances and the new money laundering methods.

Finally, the financial intermediary must keep evidence of the verifications made, so as to allow specialized third parties to control the respect of the legal provisions (article 7 LBA).

1. Obligation to identify the beneficial owner

According to article 4 LBA, the financial intermediary must identify the beneficial owner of the transaction :

• when the contracting partner is not the beneficial owner or when there exists a doubt in this respect,
• when the contracting partner is an "auxiliary company" (société de domicile),
• during cash transactions involving an important amount, that is, exceeding CHF 25'000.-

The financial intermediary can generally presume that his client is the real beneficial owner of the funds. However, in certain cases it is necessary to proceed to supplementary verifications in order to determine the real beneficial owner of the funds. For example, according to paragraph 22 of the CDB/98, it regards cases in which a mandate is given to a person who is not closely related to the contracting partner or when the real financial situation of the person wishing to carry out a transaction is well-known to the bank and that the funds given do not correspond with this person’s financial status.

The already identified contracting partner must then hand over to the financial intermediary a written declaration in which he will designate the beneficial owner or will confirm to be the beneficial owner (so-called form A).

According to the circumstances, the financial intermediary must ask additional questions and demand plausible answers, which must be recorded in his files (article 7 LBA). If at the end of this "interrogatory" there are still serious doubts as to the veracity of the client’s written declaration, the financial intermediary will renounce to enter a business relationship or will inform the competent authorities (Bureau de Communication) of his suspicions. At this point, the fact of informing the authorities is a duty for financial intermediaries engaged in the banking sector, but a simple right for other intermediaries.

In case of business relationships established with an auxiliary company and cash transactions involving an important amount a written declaration of the contracting partner is required even if there is no doubt as to the identity of the beneficial owner. It is important to point out that the notion of auxiliary company also includes establishments of Liechtenstein Law, family foundations and trusts, the criterion being that these companies do not have their own premises and do not employ personnel.

In the CDB/98 (article 4 and § 3-37), the notion of beneficial owner of an auxiliary company has been modified to better take into account the objects of anti-laundering provisions. For instance, in case of an offshore company used by an independent asset manager for one or more clients, the bank must on one side identify, by means of the usual documents, the auxiliary company and the persons authorized to bind it by their signature, and on the other it must establish who the beneficial owner of the funds belonging to the auxiliary company is.

In addition, if the beneficial owner cannot be determined, which may occur in discretionary trusts, it is necessary to gather all the relevant information, such as the name of the founder, the names of the persons entitled to give instructions to the contracting partner or the group of persons who may be considered as beneficiaries of the trust.

The bank which violates this obligation to identify the beneficial owner may be sentenced to a fine of up to CHF 10 million. The CFB may also deliver administrative sanctions provided for by the Swiss Banking Law which may even lead, in serious cases, to the withdrawal of the banking authorization.

Moreover, according to article 305 ter CPS, the violation by the bank of the obligation to identify constitutes a criminal offence. The sanctions delivered against the employees responsible for this violation vary from a fine of up to CHF 40'000.- to imprisonment for a year or more.

Finally, it is important to underline that if the information is not rectified by the contracting partner or if the transactions made imply that the bank has been misled during the verification of the contracting partner’s identity, the bank has to terminate its relationship with the contracting partner unless the conditions of the obligation of communication according to article 9 LBA are fulfilled.

1. Obligation of punctually renewing the procedures of verification and identification of the contracting partner and of the beneficial owner

This obligation arises whenever doubts about the accuracy of the information given appear or whenever modifications have been made since the beginning of the business relationship.

According to Circular CFB/98, this occurs when, for example, it is only possible to contact the client through a third party or when the transaction orders come from persons with a mandate who do not seem to have a real business relationship with the client, or if the value and the scope of the transactions are not related with the contracting partner’s personal and financial condition.

2. Obligation of clarifying the economic background of the business relationship

This obligation arises as soon as the transaction or the business relationship seem unusual or when there is a laundering sign. In this case, the financial intermediary must automatically begin a clarification procedure, and ask for additional information.

The LBA does not include any other details. However, in the Circular CFB/98 there are elements which allow to determine what must be understood by unusual transactions. According to the Circular CFB/98, such is the case when the type of transaction or its amount are unusual taking the client’s personal and financial condition into account or if the economic justification or the legality of the transaction are not clear.

An adequate clarification of the economic background entails that the financial intermediary provides himself with a certain number of documented data that will allow him to make a judgement on the transactions, the goal and type of transactions, the contracting partner’s financial status, his business activity, the origin of the funds, etc.

In addition, and it is of extreme importance for the well functioning of the system, the financial intermediary must verify if the information received are plausible. In this respect, the "client profile", that most banks make when establishing a relationship, is an essential tool to determine the usual or unusual nature of a transaction as well as the plausibility of the responses given.

According to the Circular CFB/98, if the client refuses to cooperate by not giving the clarifications required by article 6 LBA, this must be regarded as a founded suspicion which triggers the obligation to communicate to the competent authorities. Therefore, the Circular CFB/98 is much more severe than what is provided for in the LBA and in the CDB/98.

 

Finally, it is important to stress that the violation of the obligation to clarify the economic background by the bank, given the case, can constitute a laundering act according to article 305 bis CPS. The sanctions delivered against the employees responsible may vary from a fine of up to CHF 40'000.- to a prison sentence for three or more years. In addition, the non-respect of article 6 LBA may trigger administrative sanctions delivered by the CFB.

3. Obligation to keep these documents for up to ten years after the termination of the business relationship

According to the "Message" of the Swiss Federal Council the financial intermediary must only comply with this obligation if the contact with a client develops into a real business relationship. For example, if the contacts he has had with a potential client makes him suspect that it might involve a person related with organized crime, the intermediary can renounce to enter a business relationship with this person. In this case, the financial intermediary is not subject to the obligation to establish and keep these documents. However, as soon as a relationship is established, i.e. when the account opening documents are signed, the obligation to keep these documents must be observed.

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Let us now mention the financial intermediary’s obligations when there is suspicion of laundering.

Articles 9 to 11 LBA introduce new obligations for all financial intermediaries, that is, the obligation to communicate and the obligation to block the assets under suspicion, provided that the following conditions are fulfilled :

1. there is a business relationship,
2. there are founded suspicions,
3. the funds involved in the business relationship have a criminal origin.

1. Existence of a business relationship

The obligation to communicate only arises when the parties engage themselves into a business relationship, that is, when the bank expresses its willingness to open an account or a deposit by communicating to the client the number of such an account or such a deposit.

In other words, if during the first contact with the potential client the financial intermediary refuses to establish a business relationship, he is not subject to the obligation to communicate the suspicion he had during this first contact.

The situation is a little different for the financial intermediaries in the banking sector. In effect, according to paragraph 6 of the Circular CFB/98, the financial intermediary who has obvious founded suspicions that certain funds have a criminal origin must inform the competent authorities even if he refuses to establish a business relationship with this client.

However, insofar as this obligation is only mentioned in the circular and not in the LBA, a bank who omits to communicate its suspicions when it has not yet established a business relationship, at first sight, is not punishable under the LBA.

However, in such case, the financial intermediary will always have the possibility -and not the obligation- to communicate his suspicions based on to article 305 ter CPS.

2. Existence of founded suspicions

Once the business relationship has been established, the obligation to communicate only arises when the suspicions are founded.

The notion of "founded suspicions" is for the moment probably the most vague notion of the LBA. This notion is not defined in the LBA, nor in the CDB/98 or in the Circular CFB/98.

According to the "Message" of the Swiss Federal Counsil suspicions are considered to be founded when there is a concrete sign or several indications that lead to believe that the funds have a criminal origin.

The indications listed in the appendix to the Circular CFB/98, which have been mentioned above, must serve as a basis to determine the existence of a founded suspicion in the banking sector. It will be up to the prosecuting authorities and to the Bureau of Communication to provide for additional elements.

For a suspicion to be considered as founded, the communication does not necessarily have to lead to a criminal conviction. The only important thing is that at the time of the communication, the financial intermediary has objectively founded himself on certain signs which may have led him to believe that the funds derive from a criminal origin, even if these indications prove to be unjustified at a later stage.

Article 11 LBA incidentally excludes any type of civil or criminal liability of the financial intermediary vis-à-vis his client as long as, at the time of the communication, he was before concrete elements which led him to suspect the criminal origin of the funds, and that he did not denounce them basing himself on simple vague impressions. If this is not the case, the financial intermediary may be held liable vis-à-vis his client.

Therefore, it is very important that the financial intermediary keeps all the documents regarding the steps taken, above all, those that founded the communication in order to be able to justify himself, given the case, vis-à-vis his client if the communication of his suspicions does not result in a criminal denunciation and equally vis-à-vis the authorities if the communication only occurs later.

The right to communicate according to article 305 ter al. 2 CPS and the obligation to communicate according to article 9 LBA complement each other. The obligation to communicate implies that the financial intermediary knows or presumes on the basis of founded suspicions that art. 305 bis CPS has been breached, while the right to communicate creates a supporting reason which permits to transmit indications in relation with the eventual criminal origin of the funds.

The violation of the obligation to communicate suspicions is punished with a fine of up to CHF 200'000.- (art. 37 LBA).

3. Criminal origin of the funds

The third and last condition which leads to the obligation of communication is the origin of the funds.

The financial intermediary must have a founded suspicion that the funds result from:

• a crime,
• an act of laundering within the meaning of article 305 bis CPS,
• a criminal organization who may dispose of these values.

The obligation to communicate according to the LBA does not exist when the violation suspected is a "délit" or a "contravention" (i.e. under Swiss criminal law, offences of minor importance in terms of penalty). For example, if the bank accepts funds knowing that they derive from a tax evasion, it is not subject to the obligation to communicate this information according to article 9 LBA.

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When these three conditions (existence of a business relationship, founded suspicion and criminal origin of the funds) are met, the financial intermediary must immediately inform the Bureau of Communication for laundering matters in Bern, according to article 23 LBA, by means of a mailed written declaration, and as far as possible, by fax.

This declaration must not only contain the client’s identification, the identification of the beneficial owners and the detail of the assets frozen but also the elements of fact that establish the founded suspicion.

The Bureau of Communication’s task can be summarized as follows :

• analyze the information furnished by the financial intermediaries and investigate the elements transmitted,
• keep up-to-date the data bank system that it establishes,
• establish statistics from the communications received and act as a take over and filter agent between financial intermediaries and criminal prosecution authorities.

In case of founded suspicion of laundering, the Bureau of Communication immediately transmits the data to the competent criminal authorities which will decide whether the internal blocking of the funds executed by the bank must be maintained or not. On the other hand, if the information transmitted to the Bureau of Communication excludes the criminal origin of the funds, such information will not be transmitted to the criminal authorities.

A fine of up to CHF 200'000.- may be inflicted in case of breach of the obligation to communicate suspicions.

As the financial intermediary communicates his suspicions, he must simultaneously block the funds he holds if they are related with the information furnished to the Bureau of Communication. The blocking of the assets must be maintained until the notification of a decision by the competent criminal prosecution authority, but at most during five banking working days starting from the day after the communication has been made to the Bureau. During this period, the blocking may only be lifted with the consent of the competent criminal authorities.

The blocking covers all the assets that the financial intermediary holds at the moment that the communication is made to the Bureau, as well as those that come into his possession during the blocking period and which are related with the transaction. This includes the supplementary fund deposits on the frozen account as well as the increase of value of the client’s assets following their management (e.g., interests, reimbursement of fiduciary deposits).

As long as the account remains frozen, the bank cannot authorize any withdrawals or transfers of the frozen assets. In the same manner, the bank cannot execute the instructions it may have received from its client before the blocking of the account and which have not already been executed, or that it may have received during the blocking of the account.

However, the manager is free to manage the frozen assets insofar as he has been entitled to do so by the client.

At the end of the five day period, the bank may free the funds and execute the client’s instructions, unless the criminal authorities have taken judicial blocking measures during this time period.

According to article 10 paragraph 3 LBA, the financial intermediary must not inform the persons concerned or third parties of the existence of the communication made. By third parties we understand persons with a mandate on the account, beneficial owners and the client’s lawyer. In practice, the interdiction to inform the client may create problems if the client comes to the bank during the five day period for an urgent transfer, for example for a property transaction. In this case, the bank will be in a delicate situation since it will not be able to execute his client’s transfer instructions nor inform him of the blocking of the funds. In fact, it will not always be possible to make the client wait until the end of the five day period.

If this occurs, it is recommended to immediately contact the self-regulating organization to which the financial intermediary is affiliated to or the Bureau of Communication to receive, insofar as possible, clear instructions on how to proceed vis-à-vis its client.

If the authority does not give a decision within the five banking working day period, the intermediary is free to decide if he may continue the business relationship with his client.

Finally, it is worth to underline that the financial intermediary who makes a communication and blocks his client’s assets does not incur any criminal or civil liability for breach of professional or business secrecy if he has acted with the diligence required by the circumstances, that is, if he has meticulously examined the dossier which has allowed him to conclude the existence of founded suspicions.

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The LBA is governed by the principle of self-regulation. All financial intermediaries must have the possibility to create their own organizations responsible to watch over the respect of legal obligations and entitled to deliver sanctions in case of violation.

Subject for quite a long time period to the supervision of the Federal Banking Commission, banks had already created a self-regulating organization well before the enactment of the LBA. The same is true for insurance companies since they are subject to the surveillance of the Federal Office for Private Insurances.

Professional associations that wish to become self-regulating organizations had to file with the control authorities, by March 1, 1999 at the latest, an application for recognition together with their by-laws and a regulation proposition which defines the application of self-regulation. Then, the financial intermediaries will have to become affiliated to a self-regulating organization recognized by the control authorities at the latest on March 31, 2000. The persons who are not affiliated to a self-regulating organization as of April 1, 2000 will be under direct supervision of the Control Authority (Autorité de Contrôle) in Bern. If these persons wish to continue their activity as financial intermediaries, they must ask the control authorities for an authorization to practice their profession.

In fact, if a financial intermediary is not affiliated to a self-regulating organization before April 1, 2000, the Autorité de

Contrôle will have the right to directly intervene, that is, it will:

• specify the obligation of diligence and will define the conditions that the financial intermediary must fulfill,
• supervise that the financial intermediary properly respects the obligation of diligence,
• organize controls on site that it will carry out itself or with the help of other auditors that it will have appointed. It will
• often deal with external auditors, who do not work in the bank, whose fees will run at the financial intermediary’s expenses.

The belonging to a self-regulating organization will also allow the financial intermediary to receive a continued training and to obtain answers to problems he might encounter regarding his activities and, given the case, to defend his interests before the control authority.

The coming into force of the LBA has considerably increased the number of persons and companies subject to legal provisions. In effect, the law no longer concerns all financial intermediaries, such as asset managers, brokers, agents de change etc. By adopting these measures, Switzerland has provided itself with an efficient instrument which places it in the avant-garde of the countries fighting against economic crimes.

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.