Switzerland: Federal Council Publishes Draft Bill For Federal Act On The Transparency Of Legal Entities

On 30 August 2023, the Swiss Federal Council published a draft bill for the Federal Act on the Transparency of Legal Entities and the Identification of Beneficial Owners (Bundesgesetz über die Transparenz juristischer Personen und die Identifikation der wirtschaftlich berechtigten Personen) ("Transparency Act"). The Transparency Act aims at introducing a register of beneficial owners for Swiss legal entities, legal entities effectively administered in Switzerland, Swiss branches of foreign entities, and foreign entities acquiring real estate in Switzerland, which will not be public but available to law enforcement and other government agencies as well as financial intermediaries required to carry out due diligence on their clients. In parallel, it extends the scope of the anti-money laundering ("AML") due diligence obligations to a range of advisers, including lawyers, who assist clients in setting up legal entities, trusts or fiduciary relationships or are involved in mergers & acquisitions or in capital contributions. Currently, such advisers are – generally speaking – only subject to AML rules if they also act as a financial intermediary, because they have the power to dispose over assets. The change also brings along more detailed regulation than what was provided for under the current regime and the promise of more comprehensive enforcement.

1. INTRODUCTION

On 30 August 2023, the Swiss Federal Council published the draft bill for the Federal Act on the Transparency of Legal Entities and the Identification of Beneficial Owners (Bundesgesetz über die Transparenz juristischer Personen und die Identifikation der wirtschaftlich berechtigten Personen) ("Transparency Act") together with a comprehensive explanatory report ("Report").

This bill aims at implementing in Swiss law the recommendations of the Financial Action Task Force (FATF) and aligning Swiss law with the requirements that already exist under EU law.

2. PURPOSE OF THE LEGISLATION

The overarching goal of the proposed new legislation is to combat financial crime, including tax fraud and the financing of terrorism. To this end, the new legislation aims to increase the transparency regarding the beneficial owners of legal entities and to facilitate their identification by authorities.

One of the core elements of the Transparency Act is the introduction of a federal register to allow authorities as well as financial intermediaries to identify beneficial owners of entities or entity structures efficiently and reliably. It expands, in this respect, the legal framework introduced in 2014, which was revised in 2019, to require shareholders holding more than 25% in non-listed entities are required to disclose to the company within one month their ultimate beneficial owner (or the absence of a beneficial owner). Under the current regime this information was recorded in a register of beneficial owners was maintained by each entity, but was not accessible at a central location. This shortcoming will be addressed with the new federal register. The new regime will be further enhanced through more stringent enforcement tool and sanctions than the civil law measures provided by the Swiss Code of Obligations and the sanctions foreseen in the Swiss penal code.

The Transparency Act further includes measures to strengthen the anti-money laundering framework, including subjecting certain advisory services, including certain legal services, to the provisions of the Federal Anti-Money Laundering Act ("AMLA").

3. REPORTING PURSUANT TO THE TRANSPARENCY ACT

3.1 Scope

The Transparency Act would significantly expand the scope of entities to whom the reporting and related obligations regarding beneficial owners. The proposed new law will apply not only to corporations and limited liability companies but also cooperatives, investment companies with a fixed capital (SICAF), investment companies with a variable capital (SICAV), associations (Vereine) and foundations (Stiftungen) (article 2 (1) Transparency Act). Moreover, the Transparency Act captures entities incorporated under foreign law (i) who have a branch in Switzerland which is registered in the commercial register, (ii) whose place of effective management is in Switzerland, or (iii) who own or have undertaken to acquire real property in Switzerland.

By contrast, listed entities as well as companies who are controlled by more than 75% by one or more listed entities, occupational benefits institutions and entities that are held by more than 75% by corporations under public law fall outside the scope of application. 

3.2 Definition of Beneficial Owner and Control

Under article 4 of the Transparency Act, the beneficial owner of an entity is defined as the individual (i.e., natural person) who controls an entity through either (i) a participation in that entity of at least 25% of the capital or voting rights or (ii) other means which are to be further specified by the Federal Council in a federal ordinance. If no person fulfils these criteria, the highest member of the governing body of the entity is deemed to be the beneficial owner. The controlling stake pursuant to (i) above can be held by a person acting alone or in concert with others. The Transparency Act uses the same terminology for acting in concert as article 120 of the Financial Market Infrastructure Act regarding the disclosure of shareholdings in listed companies; accordingly, the same principles apply under the two acts when determining whether there is a case of acting in concert. 

Special rules apply under the Transparency Act for the determination of the beneficial owner in SICAV, associations, foundations, and trusts.

This approach is novel insofar as it does not follow the current approach for the reporting of the beneficial owner but does not either align with the rules applicable under the AMLA or self-regulatory instruments such as the CDB 20 or the SRO-SVV.

3.3 Reporting and Related Obligations

3.3.1 Overview

Currently, the onus of the disclosure duty is placed on shareholders holding an interest of 25% or more of the capital or voting rights to report their beneficial owner to the legal entity. By contrast, the legal entity has a purely ministerial role of recording the beneficial owners in a register of beneficial owners it maintains and the beneficial owner is not required to provide information to the shareholder. This regime will be enhanced by requiring the legal entity to verify the information they are provided before reporting this information to the register of beneficial owners. 

3.3.2 Obligations of the Legal Entities

Under the Transparency Act, legal entities are required to actively identify their beneficial owners and obtain the relevant information (name, date of birth, citizenship, address and country of residence and information on the nature and extent of control).

Further, legal entities will be required to verify the information on their beneficial owners through appropriate measures and request from their shareholders, the beneficial owners and third parties the relevant documentation. The law does not specify the measures that legal entities must take to comply with their verification obligations. According to the Report, the legal entity decides on the appropriate scope of measures and can do so pursuant to risk-based approach. For example, small or medium enterprises (SME) that have known their shareholders for a long time are usually not required to undertake any measures to verify the identity of their beneficial owners. The opposite is true where a legal entity has reason to believe that the person notified to it by a controlling shareholder is not the beneficial owner. The fact that the legal entity receives instructions on a regular basis from an individual other than the notified beneficial owner or that dividends are paid to an account which is not in the name of the beneficial owner can serve as indications that the true beneficial owner is someone other than the individual notified to the entity. It is, therefore, not clear whether the verification obligations go all the way to require legal entities to carry out an enhanced due diligence on their beneficial owners and, possibly, inquire on the source of wealth and funds used to acquire the interest in the legal entity.

The legal entity must document the information received pursuant to these measures and keep them on file so that they can be accessed from Switzerland at any time.

This obligation also applies to foreign entities that have a branch in Switzerland or that own real estate or have undertaken to acquire real estate in Switzerland. Accordingly, these companies have to store the information at their Swiss branch or place of effective management or engage a third party to keep the records on their behalf.

If, despite the measures taken, a legal entity is unable to identify its beneficial owner it must document such measures, e.g., keep copies of correspondence with which the information was requested. 

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