Recent Developments in the Prevention of Money Laundering in Switzerland
- Switzerland
- 07/01/1998
I. INTRODUCTION
The purpose of this article is to review the recent developments in Switzerland in the field of the prevention of money laundering in the financial sector. They are reflected in the :
- Federal Act on the prevention of money laundering in the financial sector (Money Laundering Act, LBA) of October 10, 1997, in force since April 1, 1998;
- Agreement on the Swiss banks’ code of conduct with regard to the exercise of due diligence (Due Diligence Convention, CDB) of January 28, 1998, in force since July 1, 1998;
- Directives relating to the prevention and combat against money laundering (Circular CFB 98/1) of March 26, 1998, in force since July 1, 1998. II. LAW AGAINST MONEY LAUNDERING
As a preliminary point, it should be recalled that the LBA is not the first legislative Act applicable in the field of prevention of money laundering in general. In particular, article 305 bis of the Swiss Penal Code (CPS) - “Money laundering” - already since August 1, 1990 punishes the behaviour of “whoever shall have committed an act which is likely to hinder the identification of the source, discovery, or confiscation of property which he knew or should have known were proceeds of a crime” (art. 305 bis para. 1 CPS). In addition, art. 305 ter CPS, also in force since August 1, 1990 (but modified effective August 1, 1994) sanctions the “lack of due care in financial transactions” and, since August 1, 1994, includes “the right (...) to communicate… those signs forming the basis of the suspicion that the property constitutes the proceeds of a crime”.
However, it turned out that with the exception of Swiss banks, the system of self-regulation advocated by the Swiss Federal Council (Swiss Government) in its Message in favour of art. 305 bis and art. 305 ter CPS was not implemented in as “spontaneous” a way within the different professions as one could have thought. This is why the Federal Council considered it necessary to implement a law which provided express obligations on all the financial sector in matters of money laundering prevention, whilst leaving a significant place for self-regulation. The LBA thus takes into consideration the specificities of each profession via self-regulation whilst ensuring that all the preventive measures fixed by the respective professions are sufficient to prevent money laundering. In addition, the Federal Council wanted the LBA to introduce an obligation into Swiss law to report when faced with a suspicious transaction, thereby aligning Switzerland with the position adopted within the European Union and the Financial Action Task Force on Money Laundering.
1. Applicability of the LBA
The LBA applies to two quite distinct categories of financial intermediaries:
- Those who are subject to the banking law, to the law on investment funds, to the law on supervision of insurance, or the law on stock exchanges and the trading of securities (art. 2 para. 2 LBA), and thus already report to a special supervisory authority (e.g., the Swiss Federal Banking Commission).
- those who, whilst not subject to one of the foregoing, nonetheless must be considered as financial intermediaries : “persons who on a professional basis accept to hold on deposit or aid in the transfer of assets belonging to third parties…” (art. 2 para. 3 LBA). In particular, persons are targeted who:
- offer or distribute shares in funds, - undertake asset management,
- make investments as investments advisor, - hold or manage securities.
2. Obligations of Financial Intermediaries
Chapter 2 LBA places the following obligations on financial intermediaries:
- obligations relating to diligence; - reporting obligations in certain circumstances; - obligations to freeze assets in certain circumstances; - obligation to obtain authorisation and affiliation.
2.1. Obligations relating to Diligence
These obligations are provided for in art. 3 to 8 LBA and are inspired to a great extent by the Due Diligence Convention (CDB 1992) as well as by the CFB Circular 91/3 (implemented December 18, 1991 on the same subject as CFB Circular 98/1).
The due diligence obligations will not be treated in particular in this Section but will be addressed infra in the context of observations made on the CDB 1998 and the CFB Circular 98/1.
2.2. Reporting Obligations
A new step is taken with art. 9 LBA (reporting obligation), in comparison with art. 305 ter CPS (reporting right), as the former deals with a reporting obligation. The full text is reproduced:
“1) A financial intermediary who knows or presumes on the basis of founded suspicion, that assets involved in the business relationship are related to an offence under art. 305 bis of the Penal Code, that they are the proceeds of a crime or that a criminal organisation has right of disposal over them (art. 260 ter para. 1 Penal Code), shall without delay notify the Reporting Office for money laundering (Reporting Office) within the meaning of art. 23.
2) Attorneys and notaries shall not be subject to reporting obligations to the extent that they are bound by professional secrecy within the meaning of art. 321 of the Penal Code”.
At first glance, reserve being made to any future case law, the concept of “founded suspicion that assets involved in the business relationship are related to an offence under art. 305 bis of the Penal Code…” (art. 9 LBA) is not identical to the concept of “signs forming the basis of the suspicion that the property constitutes the proceeds of a crime” (art. 305 ter para. 2 CPS).
Situations could occur therefore where the financial intermediary considers that the signs under art. 305 ter CPS exist and therefore give him the right to communicate to the competent criminal authority but do not impose an obligation to communicate to the Reporting Office, as the signs in such cases would not be such as to give rise to a “founded suspicion” under art. 9 LBA.
In practice however, it is improbable that a financial intermediary would try to exercise such a subtle distinction between the two norms. It can be expected therefore, that the financial intermediary will report such facts to the Reporting Office as soon as he comes to the conclusion that he has signs founding the suspicion of a criminal origin as per art. 305 ter para. 2 CPS.
The right to communicate under art. 305 ter para. 2 CPS will remain useful insofar as certain persons not subject to the LBA (such as traders in precious metals, property brokers, luxury car dealers, etc.) will conserve the possibility of notifying their suspicions to the prosecuting Authority. Moreover, this “possibility” sometimes corresponds in practice to a duty, the breach of which could lead to a charge of accessory to money laundering under art. 305 bis CPS.
It should be emphasized that the reporting obligations of art. 9 LBA, just as the right of communication of art. 305 ter CPS, presupposes that the assets are of criminal origin within the meaning of art. 9 para. 1 CPS and 35 CPS. “Criminal”, within the meaning of Swiss law, is abuse of confidence (art. 138 CPS), theft (art. 139 CPS), aggravated and/or armed robbery (art. 140 CPS), fraud (art. 146. CPS), fraudulent use of a computer (art. 147 CPS), extortion and blackmail (art. 156 CPS), undue influence (art. 157 CPS), mismanagement - but only where the author acted with the purpose of procuring to himself or to a third party an unjust enrichment (art. 158 para. 1 in fine CPS), handling stolen goods (art. 160 CPS), etc., but not the illicit appropriation of a moveable asset (art. 141 CPS), the unauthorized use of assets (art. 141 bis CPS), the abusive use of cheques and credit cards, insofar as not done on a professional basis (art. 148 CPS), the deceitful use of third party financial interests (art. 152 CPS), the misappropriation of salary deductions (art. 159 CPS), insider trading (art. 161 CPS), manipulation of stock exchange rates (art. 161 bis CPS), breach of the manufacturing secrets (art. 162 CPS) as well as deceit in matters of allowances and tax or other contributions (art. 14 DPA).
It can be seen from the above list that it will often be difficult for the financial intermediary who is not aware of all the legal subtleties, to determine in which case he has an obligation to communicate a suspicion to the Reporting Office and/or advise the prosecuting Authorities.
The particular disposition for attorneys and notaries (art. 9 para. 2 LBA), concerns situations where the attorney or notary is acting within his typical professional activity and is protected by professional secrecy rules under art. 321 CPS. Conversely, however, as soon as an attorney or notary is acting as a financial intermediary as understood by art. 2 para. 3 LBA, he is subject to the reporting obligations on founded suspicions pursuant to art. 9 para. 1 LBA. The distinction will not always be easy to make. In this context, Form R CDB will be a useful element for this interpretation.
Finally, the Reporting Office has drafted communication formulas which contain a checklist of the points that must be covered when a communication as per art. 9 LBA is made.
2.3 Freezing of Asset Obligation
In correlation with the reporting obligations, the LBA provides that the financial intermediary shall immediately freeze assets entrusted to him if they are linked to the reporting. He shall then maintain freezing “until receipt of a decision by the competent prosecuting Authority, but only for a maximum of five working days from notification to the Reporting Office” (art. 10 LBA).
This five day period - which runs from the moment the intermediary has communicated his information - is very long, namely for the client who expects prompt execution of his instructions, but very short for the prosecuting Authority obliged to render a decision in a similarly short lapse of time.
Notwithstanding the fact that on the sixth day, the financial intermediary can in principle be freed from all freezing obligations, delicate situations can be expected whereby, notwithstanding the non-intervention of the prosecuting Authorities within the five-day period, the financial intermediary will still have doubts as to the criminal origin of the assets. In any event, the intermediary has the obligation to establish and keep all documents relating to the transfer in question. (“paper-trail”, art. 7 LBA).
In addition, at least during this five-day period, the financial intermediary could be placed in an uncomfortable situation whereby the LBA obliges him to refrain from notifying the client concerned of the communication he made to the Reporting Office (art. 10 para. 3 LBA).
What can be envisioned in practice is a pragmatic solution. For instance, the Reporting Office allowing the financial intermediary to execute the transfer instructions up to a maximum global amount agreed upon, depending on the circumstances of the case. The question to be asked in connection with the reporting obligation and the freezing of the assets is that concerning criminal and civil liability of the financial intermediary in the hypothesis that the communication and/or freezing is shown to have been unjustified. Art. 11 LBA provides that “a financial intermediary who reports a suspicion under art. 9 of this act or art. 305 ter para. 2 Penal Code and freezes the funds concerned cannot be prosecuted for violation of secrecy of office or professional secrecy or business secrecy nor be held liable for breach of contract if he has shown the due diligence required by the circumstances”.
The purpose of this disposition is laudable and should allow in most cases for an efficient protection of the financial intermediary. However, it will be interesting to see what case law will show with respect to the concept of “if he has shown the due diligence required by the circumstances”. Indeed, one can imagine that some clients will attempt to demonstrate that the communication and the freezing were unjustified even when and if the financial intermediary had all the elements in his possession to enable him to establish the licit origin of the assets in question and the perfect legitimacy of the instructions given.
2.4 Obligation to obtain Authorisation and Affiliation : Supervisory Authority and Self-Regulating Bodies
For all financial intermediaries subject to special laws such as banks, fund managers, insurance companies, and traders in securities, the authorisation to practice and supervision are within the jurisdiction of pre-existing supervisory authorities, namely the Federal Banking Commission on the one hand and the Federal Office for Private Insurance on the other. These supervisory authorities must ensure that all financial intermediaries reporting to them respect the obligations of diligence mentioned above (art. 12 LBA).
For financial intermediaries “caught” by art. 2 para. 3 LBA, i.e., those who are not subject to special laws and who are not subject to a pre-existing supervisory authority, the LBA provides that the due diligence obligations falling upon them shall be the object of controls on the part of the self- regulatory authority to which these financial intermediaries will have affiliated or for non-affiliated financial intermediaries, by the controlling authority for the combat of money laundering (Control Authority) (cf. arts. 13, 17 and 24 LBA).
Even if the preeminence of the self-regulating system is affirmed in the LBA, with the exception of attorneys and notaries who are acting as financial intermediaries, financial intermediaries are not obliged to be affiliated with a recognized self-regulatory authority. However, in order to avoid jeopardizing the purpose of the law which is to apply to the whole financial sector, it is provided that all financial intermediaries that are not affiliated to a recognized self-regulating body shall apply to the Control Authority for authorisation to carry on business and must for such authorisation to be granted fulfill certain conditions (art. 14 para. 1 and para. 3 LBA).
The exception with respect to attorneys and notaries is sometimes due to the delicate distinction made between activities protected by professional secrecy under art. 321 CPS and those which are not. The Federal Council in its message recognized that: “to give a decision on this subject demands in all cases knowledge of the file. If, in the exercise of its supervision of attorneys and notaries, the control authority had to decide such questions, or if the attorneys and notaries directly subject to its supervision asked its advice on a thorny problem, information covered by professional secrecy would, in such cases, have to be revealed to it before any decision be rendered. Thus the principle of professional secrecy rules of attorneys and notaries guaranteed by art. 321 CP would be jeopardized. Such possible jeopardy is incompatible with the importance that the jurisdiction provides for the absolute obligation of secrecy and confidentiality incumbent on attorneys and notaries in their typical activities.” (FF 1996 III 1094).
The Money Laundering Control Authority set up within the Federal Finance Administration has the duties to grant or withdraw recognition to or from self-regulating bodies, supervise such bodies and financial intermediaries for which it is directly responsible, approve regulations adopted by self-regulating bodies and amendments thereto as self-regulatory authorities, ensure that these latter enforce their own regulations; inform financial intermediaries for which it is directly responsible of the due diligence obligations provided by the LBA and, finally, keep a register of financial intermediaries for which it is directly responsible and of persons to whom it has refused authorisation to carry on business as financial intermediary. The Control Authority has the right to perform on-the-spot inspections either directly or by instructing an auditing body. As for professional secrecy, the Control Authority may not make inspections directly upon the self-regulatory authorities for attorneys and notaries but shall direct an auditing body to perform the inspection which shall itself be bound by such professional secrecy obligations (art. 18 LBA).
When a financial intermediary is not affiliated with a recognized self-regulatory authority, the Control Authority shall deliver an authorisation, upon request, for the exercise of the activity as financial intermediary. As per art. 14 para. 2 LBA, such authorisation will only be granted if the financial intermediary fulfills the following conditions:
- “is registered in the commercial register under a business name or has been officially authorised to carry on business;
- has established internal directives as and is organised in such a manner as to ensure compliance with obligations under this act; and
- is of good reputation and provides all necessary assurances to comply with obligations under this act.”
Of course, where subsequently to the granting of the authorisation the Control Authority learns that breaches of the LBA have been committed by financial intermediaries for which it is directly responsible, it shall take the necessary measures and namely the possibility of withdrawing the authorisation for the exercise of activity as financial intermediary, if the business or persons in charge of its administration and/or management no longer fulfill the required conditions or repeatedly breach their legal obligations (art. 20 LBA).
As indicated above, the LBA encourages the creation of self-regulating bodies as self-regulatory authorities which however shall not be recognized by the Control Authority unless they fulfill the following requirements:
- they have adopted regulations which set forth the due diligence obligations contained in the LBA and which define:
- the conditions for the affiliation and exclusion of financial intermediaries; - the manner of checking compliance with the obligations; and - appropriate penalties.
- They shall ensure that the persons and auditing bodies they have instructed to carry out inspections:
- possess the requisites of professional knowledge; - present all necessary assurances that inspections will be properly undertaken; and - are independent from the management and administration of the financial intermediaries to be inspected (art. 24 paras. 1 and 2 and art. 25 LBA).
3. The Money Laundering Reporting Office
The Reporting Office is part of the Central Office for the Combat Against Organised Crime.
Its duty is to verify information reported to it and it operates its own system for the processing of data relating to money laundering. When, on the basis of founded suspicion, it presumes that an offence under art. 9 LBA has been committed, it shall immediately notify the case to the competent prosecuting Authority (art. 23 LBA). From the very clear text of art. 23 LBA, the notification by the Reporting Office only takes place on the basis of founded suspicion.
According to first experiences made since April 1, 1998, it appears that the Reporting Office does not systematically notify the prosecuting Authorities but evaluates concretely in which measure the communication received from the financial intermediary allows the presumption, on the basis of founded suspicion, that money laundering has been committed.
Indeed, as of July 9, 1998, the Reporting Office had received 35 reports of founded suspicion since the entry into force of the LBA on April 1, 1998. 22 of them (63%) have been notified to the competent prosecuting Authorities. In addition, 6 reports have been made directly to the prosecuting Authorities in accordance with the right of communication under Art. 305 ter CPS.
4. Mutual Administrative Assistance
Arts. 29 to 32 LBA contain dispositions which regulate mutual administrative assistance and more precisely the collaboration among Swiss Authorities on the one hand and with foreign Authorities on the other. With respect to collaboration with foreign Authorities, certain precautions have been taken as to the nature of information which may be transmitted as well as to its use by the foreign Authority.
5. Penal Provisions
Art. 36 LBA provides that a person who acts as financial intermediary without authorisation or without joining a self-regulatory authority, shall be punishable by a fine of up to a maximum of CHF 200,000. For subsequent offenses the fine shall be a minimum of CHF 50,000.—. This disposition also provides that negligence is punishable.
In the event of a breach of the reporting obligation, the fine shall be up to a maximum of CHF 200,000.— (art. 37 LBA).
Finally, the failure to comply with a decision from the Federal Banking Commission, the Federal Office for Private Insurance or the Control Authority is punishable by a fine of up to a maximum of CHF 50,000.— (art. 38 LBA).
6. Effective Date of the LBA
The first date to retain is April 1, 1998. As from that date, all financial intermediaries as defined by art. 2 para. 2 and para. 3 LBA have the obligation to report their founded suspicions of money laundering within the meaning of art. 9 LBA.
As from the same date, all dispositions of the law are applicable to financial intermediaries understood by art. 2 para. 2 LBA.
Conversely, other financial intermediaries (art. 2 para. 3 LBA) will only be subject to the law in full after a two year delay following its entry into force, namely as from April 1, 2000. This means in particular that all financial intermediaries not subject to a special law shall become automatically subject to the direct supervision of the Control Authority as from April 1, 2000, if they have not affiliated in the meantime with a recognized self-regulating body as self-regulatory authority. Within the same time frame attorneys and notaries acting as financial intermediaries must be affiliated with a recognized self-regulatory authority.
To guarantee that from April 1, 2000 the law in full will be applicable over all financial intermediaries, all self-regulating bodies must by April 1, 1999 present a request for recognition and submit their regulations to the Control Authority for approval (art. 42 LBA).
Financial intermediaries subject to a special law and particularly banks which benefit from the long practice of the Due Diligence Convention (since 1977) and the Directives of the Federal Banking Commission (since 1991) should not see any major changes in their internal organisation.
This will not be same for financial intermediaries in other sectors. In particular, fiduciaries, independent portfolio managers acting on the basis of powers over bank accounts opened in the names of their clients (therefore not subject to the law on stock exchanges and securities trading) as well as attorneys and notaries who act as financial intermediaries, will have a significant amount of work to accomplish over these next months in order to conform to the requirements of the LBA.
III. THE DUE DILIGENCE CONVENTION
It is not by chance that this section addressing the Due Diligence Convention precedes the section addressing the CFB Directives relating to the prevention and combat against money laundering. Indeed, whilst the Directives are only in existence since seven years, the Due Diligence Convention, constantly re-enforced, last year celebrated its twentieth anniversary.
The most recent version dates from January 28, 1998 and became effective July 1, 1998. The rules relating to the verification of the identity of the contracting partner and the identification of beneficial ownership have been adapted to events which have taken place since the beginning of the decade. Namely, there is the introduction of art. 305 ter CPS, the adoption within the European Community (Union) of the Directive relating to the “prevention of the use of the financial system for money laundering”, the recommendations of the Financial Action Task Force on Money Laundering of February 7, 1990, modified on June 28, 1996, and of course, the LBA addressed in the previous section.
As indicated in its preamble, the CDB 1998’s purpose is to preserve “the good name of the Swiss banking community nationally and internationally” and establish “rules ensuring in the area of banking secrecy and when entering into business relations, business conduct that is beyond reproach”. For the first time in its 1998 version, the CDB clearly indicates in its preamble that the objective is also to “provide effective assistance in the fight against money laundering”, the purpose having always existed but thus far implicitly stated.
By virtue of CDB the banks undertake towards the Swiss Bankers Association, as supervisory authority in charge of safeguarding the interest and reputation of the Swiss banking sector, namely to :
“verify the identity of their contracting partners and, in cases of doubt, to obtain from the contracting partner a declaration setting forth the identity of the beneficial owner of assets”.
As indicated in its introduction, the Due Diligence Convention aims at implementing certain particular diligence obligations provided by the law on money laundering (art. 3 to 5 LBA) as well as the notion of care which the circumstances require when accepting assets (art. 305 ter CPS) (art. 1 ch. 3 CDB).
In practice, the CDB is binding on all the active banking sector in Switzerland, as well as indirectly and by analogy on securities traders subject to the LBVM and on investment funds subject to the LFP.
1. Verification of the identity of the contracting partner and identification of the beneficial owner (arts. 2,3,4,5,6 CDB)
1.1 Verification of the identity of the contracting partner (art. 2 CDB)
The banks undertake to verify the identity of their clients referred to in the Convention as their contracting partners. It should be mentioned that this rule not only applies to the opening of accounts or passbooks or securities accounts, but also for the entering into of fiduciary deposits, to the renting of safe deposit boxes, and to cash transactions exceeding CHF 25,000.—.
There are two additional cases to be added to the above, introduced in the 1998 version of the CDB, which require verification of the identity of the contracting partner (and identification of the beneficial owner):
- “entering into management agreements for assets deposited with third parties”.
This is to avoid that the contracting partner (and the beneficial owner) remains “unidentified” by depositing assets in a bank, established in a less stringent jurisdiction, yet has recourse to the services of an internal manager of a bank located in Switzerland.
- “the execution of transaction with securities, currencies as well as precious metals and other commodities…” (without any relation to accounts or deposits already opened or made with the bank).
Where transactions take place below CHF 25,000.—, the identity of the contracting partner must still be verified if it appears that the transaction has been split up for the purpose of avoiding such verification (ch. 8 para. 1 CDB).
In addition, if there is a suspicion of possible money laundering, than the identity of the contracting partner must be checked, independently of the limited amounts, unless the bank chooses to refuse a cash transaction or enter into a banking business relationship, as the case may be (ch. 8 para. 2 CDB; cf. however, ch. 6.2, CFB Circular 98/1, commented infra).
Ch. 17 CDB provides an interesting innovation in that where a contracting partner has already been the object of identification within the group to which the bank belongs, and in a way equivalent to Swiss requirements, it is not necessary to repeat the verification of identity procedure. However, this exception presupposes that the bank can obtain copies of all documents used for verification of the identity effected by the other affiliate of the group.
Finally, the bank is only authorised to delegate verification of the identity of its contracting partner to a third party if the latter has been duly informed of the contents and requirements of the CDB. In this case, the third party has to provide the bank with certified copies of the documents used to verify identity (ch. 18 CDB).
1.2. Identification of the Beneficial Owner (art. 3 CDB)
The identification of the beneficial owner must take place whenever the bank doubts the contracting partner is the beneficial owner. The bank must then demand a written declaration generally by way of a Form A which indicates who the beneficial owner is. In other words, the Due Diligence Convention provides that the bank may presume that the contracting partner is also the beneficial owner but this presumption is rebutted if unusual circumstances are present. The bank should have doubts e.g., in the following cases:
- when there is a power issued to a person who clearly cannot have sufficiently close links with the contracting partner;
- when the financial situation of the person who wants to undertake a transaction is known to the bank and that assets deposited or about to be deposited are out of proportion with the financial situation of this person (ch. 22 CDB).
With respect to company accounts, it should be emphasized that the identification of the beneficial owner must always take place where the contracting partner is a domiciliary company. Domiciliary companies mean companies, establishments, foundations, trusts, fiduciaries, etc. which do not exercise a commercial or manufacturing activity in the state of their registered offices or other commercial activities and which possess neither their own premises nor their own personnel working exclusively for them (or personnel occupied only with purely administrative tasks) (art. 4 CDB, ch. 34 CDB).
In such cases, the directing bodies of domiciliary companies must communicate the identity of the persons or companies which are the beneficial owners of the assets deposited (art. 4 para. 2 let b CDB).
The CDB 1992 for the first time contained specific rules with respect to trusts, namely making the distinction between revocable and irrevocable trust settlements. These provisions remain unchanged in the 1998 CDB (ch. 39 and 40 CDB).
It should also be recalled that, for the first time, the 1992 version of the CDB provided for a detailed regulation for global accounts and deposits, that is to say accounts or deposits opened by a contracting partner to deposit and manage third party assets (“omnibus accounts”), the composition of which not only constantly vary with respect to amounts but also with respect to beneficial owners. In this case, the contracting partner must provide the bank with an exhaustive list of the beneficial owners and must immediately communicate any modification to the bank (ch. 28 CDB).
With respect to collective portfolios, the 1998 CDB contains a useful note : “In the case of foreign collective investments with more than 20 investors as beneficial owners, the data … (in Form A) must be recorded only for the beneficial owners who hold … a minimum of 5 % of the assets deposited with the bank” (ch. 29 CDB 1998).
Another exception concerning the obligation to identify the beneficial owner is contained in ch. 30 CDB 1998. Indeed, in the 1992 CDB and previous versions, the identification of the beneficial owner was not required for accounts, deposits and fiduciary transactions of Swiss and foreign banks nor for brokers nor investment bankers who were subject to supervision by a recognized authority. This system has been revised to take into account the fact that other financial intermediaries subject to the LBA within the meaning of art. 2 para. 2 LBA, namely fund managers, life insurance companies, securities traders, as well as tax exempt pension funds, (art. 2 para. 4 let. b LBA) must be placed on an equal footing with banks. Ch. 30 CDB therefore provides as follows:
1. “No declaration of the beneficial ownership is required for banks who domiciled in Switzerland or abroad. Their definition is governed by the relevant specific laws of their country of domicile;
2. No declaration of beneficial ownership is required for other financial intermediaries domiciled or resident in Switzerland. This regulation also applies to other financial intermediaries domiciled abroad, provided they are subject to adequate supervision and an adequate set of anti-money laundering regulations;
3. Other domestic and foreign financial intermediaries are deemed : fund managements, life insurance companies, brokers and tax exempt pension funds. Their definition is governed by the relevant specific laws of their country of domicile;
4. The bank must require banks or other financial intermediaries to submit a declaration of the beneficial owners or take other measures if it has cause to assume misuse or if a general warning is issued by the Federal Banking Commission or the Swiss Bankers Association with respect to individual institutions or the institutions of a specific domicile”.
The Swiss Bankers Association by Circular NE 1365 D of April 28, 1998 has provided additional information on this subject : “financial intermediaries who have their domicile or seat abroad and who are subject to an appropriate supervision as well to an appropriate regulation with respect to the combat against money laundering within the meaning of ch. 30 para. 2 CDB 1998 mean those Country Members of the Financial Action Task Force on Money Laundering (FATF). The following states are currently members of this OECD organisation : Germany, Australia, Austria, Belgium, Canada, Denmark, France, Finland, Germany, Great Britain, Greece, Honk Kong, Iceland, Ireland, Italy, Japan, Luxembourg, New Zealand, the Netherlands, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, Turkey and the United States”.
Attorneys and notaries have the possibility to open accounts in their name on behalf of their clients without having to reveal the identity of the latter to the bank : This is a very restrictive exception defined within the attorney and notary professions (for example, cover or advance on procedural costs, assets linked to an inheritance distribution, ongoing execution of testamentary dispositions, funds linked to the ongoing liquidation or the dissolution of matrimonial assets within the context of a divorce or separation, funds placed as guarantees in the context of civil or public law matters, for example frozen deposit accounts for the purchase of shares, and finally deposits of funds in the context of a civil or public law proceedings before a tribunal or an arbitral tribunal as well as in the context of forced execution proceedings). In these restrictively interpreted hypotheses a Form R must be used (art. 5 CDB).
As was the case in the 1992 version, the CDB 1998 expressly provides for a procedure in the event of “changes or errors with respect to the verification of the contracting partner’s identity or the declaration of identity of the beneficial owner” noted by the bank during the course of the banking business relationship. It is provided that the bank must repeat the procedure of verification of identity of the contracting partner and identification of the beneficial owner where the bank has cause to doubt during the business relationship :
- “the accuracy of the information about the identity of the contracting partner;
- that the contracting partner is identical with the beneficial owner; - the accuracy of the declaration of the beneficial ownership”.
Such repetition must also take place “if there are any signs of unreported changes”.
It is provided that the bank must sever all banking business relations with the contracting partner where transactions undertaken give rise to suspicion that the bank was misled during the verification of identity of the contracting partner or where indications intentionally erroneous were provided as to beneficial owner. This is also applicable where doubts remain as to indications provided by the contracting partner after a repeated procedure of verification of identity of the contracting partner or identification of the beneficial owner.
Conversely, relations with the contracting partner can no longer be terminated where the conditions relating to the obligation to report (art. 9 LBA) are fulfilled (art. 6 CDB).
The practical importance of this disposition has increased incessantly during its six years of existence. It corresponds to the evolution of the CDB : originally designed to assure that the bank knew the identity of its client when the account was opened, the CDB has always sought to target more efficiently the maintenance and permutations of the banking business relationship. 2. Penalties
No major modification has been made in comparison with the 1992 CDB system. The maximum penalty remains the conventional fine of CHF ten million and a reprimand may be made in lesser cases.
IV. THE DIRECTIVES RELATING TO THE PREVENTION AND COMBAT AGAINST MONEY LAUNDERING
The Federal Banking Commission has made a total revision of its CFB Circular 91/3 “Directives relating to the prevention and the combat against money laundering” to adapt it to the LBA and to take into consideration practice since 1992. It is worth noting the principal changes introduced into CFB Circular 98/1 :
- extension of the application to securities traders and fund managers; - application by analogy of the Due Diligence Convention to securities traders and fund managers; - introduction of the reporting obligation; - obligation as to freezing and information on the client.
1. The Objectives
The Directives have five objectives.
Firstly, the aim is to advise financial intermediaries subject to the CFB supervision of the LBA’s requirements.
Secondly, it is to outline and detail the Federal Banking Commission’s practice with respect to the guarantees of an irreproachable banking activity (art. 3 para. 2 let.c LB) as well as to the adequate internal organisation of the banks (art. 3 para. 2 let. a LB), securities traders (art. 10 para. 2 let. d and 10 para. 2 let. a LBVM) and fund managers, sought by art. 2 para. 2 let. b LBA (art. 9 para. 4 and 5 LFP)).
Thirdly, the Directives provide elements of interpretation for arts. 305 bis and 305 ter CPS, as well as relevant dispositions of the LBA.
Fourthly, the Federal Banking Commission wished to take into account international recommendations.
Fifthly, the Directives also aim at “formalising certain principles previously highlighted by the Banking Commission in connection with assets of persons exercising important public functions, namely the prohibition against accepting funds arising from corruption or mismanagement of public assets, with particular attention to certain business relationships and their handling at management level” (free translation) (ch. 1, CFB Circular 98/1).
2. Scope of Application
“These Directives apply to financial intermediaries who are subject to global supervision outlined in art. 2 para. 2 let. a, b and d of the LBA, as well as to Swiss branch offices of banks and securities traders who are not subject to supervision by virtue of any special law within the meaning of art. 2 para. 2 LBA, but who exercise financial activities within the meaning of art. 2 para. 3 LBA, hereafter “the financial intermediaries”. Financial intermediaries may not use their foreign branch offices or the foreign companies of their group active in the banking or financial areas in order to avoid these Directives. They will ensure that the group’s companies and branch offices located in non-member states of the FATF respect the recommendations applicable to them, in the absence of contrary provisions. Financial intermediaries are to notify the Banking Commission in cases where local dispositions go against the application of these recommendations” (ch. 2).
3. Principles and Organizational Conditions
By taking into account the recommendations of the FATF, the Directives set forth the following requirements in terms of organization :
- obligation to adopt internal regulations (ch. 4.1);
- obligation to adequately train personnel (ch. 4.2);
- obligation to appoint an internal service for the combat against money laundering; these tasks can also be delegated to external persons or bodies (e.g., to a banking association or to auditors) (ch. 4.3.).
4. Behaviour when faced with Unusual Transactions
This is without doubt the most important part of the Directives, inspired by the FATF recommendations. Indeed, the intent is to recognize unusual transactions and the signs of possible money laundering, as well as indicate the behaviour to observe in the event of suspicions as to criminal origin of capital.
The Federal Banking Commission is aware that it is not up to a bank or another financial intermediary to search systematically during each transaction for a possible criminal act. No financial intermediary in any event would be able to afford it financially. Conversely, the Directives mention cases requiring particular attention on the part of the financial intermediary, as well as indicating supplemental verifications to be made. These are cases namely where at the beginning of the business relationship a client brings banknotes or securities in an amount over CHF 100’000.-. During the business relationship large cash transactions, as well as the existence of signs as described in an annex and illustrated with a non-exhaustive list of practical examples (see infra) (ch. 6.1. and 6.3), require that appropriate clarifications be undertaken.
When a financial intermediary is faced with such unusual transactions he must obtain the necessary information and check its veracity so that he can gain a sufficient appreciation of the economic background : aim and type of the transaction; financial situation of the contracting partner or the beneficial owner; commercial or professional activity of the contracting partner; same for the beneficial owner; origin of deposited or invested assets, etc. (ch. 6.4).
The financial intermediary can avoid making the above clarifications if, from the start, he refuses the business relationship. However, the Federal Banking Commission is nevertheless of the view - and this does not correspond to the text of the LBA - (cf. supra) - that if the financial intermediary has “manifest founded suspicions that the assets are of criminal origin”, he must report that fact to the competent prosecuting Authority and to the Reporting Office (ch. 6.2) (emphasis added).
The Federal Banking Commission has thus judged opportune to introduce another step in the incremental level of suspicion which gives rise to an obligation to report, not by virtue of the LBA but probably by virtue of art. 3 para. 2 let. c LB (assurances of an irreproachable banking activity, see also art. 3 para. 2 let. b LBVM and art. 9 para. 5 LFP).
5. Behaviour to observe in the event of Persistent Doubt or Suspicion of Laundering
5.1. Obligation to Report
If after having undertaken the clarification steps, the financial intermediary “knows or presumes on the basis of founded suspicion that assets are of criminal origin within the meaning of art. 9 LBA, he must without delay notify the Reporting Office for Money Laundering by following the instructions of the latter concerning the form and contents of the report”. The Federal Banking Commission emphasizes that “the obligation to report is also applicable if a client refuses to cooperate in the required clarification…” (ch. 7.1.).
5.2. Right to Report
It can happen that the clarifications required reveal no founded suspicion that the assets are connected with a criminal act within the meaning of art. 305 bis CPS, but neither do these clarifications eliminate all doubts concerning a criminal origin of the property. In this case the Federal Banking Commission repeats that the financial intermediary has the right to report within the meaning of art. 305 ter para. 2 CPS to the competent prosecuting Authority and to the Reporting Office (ch. 7.2.).
5.3. Continuation of the Business Relationship under a Particular Control
In case of doubt, but in the absence of founded suspicion, the financial intermediary can continue the business relationship without informing the competent Authorities. He must then scrupulously supervise the evolution of the business relationship namely by examining if the client in question does not subsequently undertake other unusual transactions within the meaning of the CFB Directives (ch. 7.3).
5.4. Termination of the Business Relationship
In the hypothetical situation where there is a doubt as to the existence of laundering but there is no founded suspicion, the financial intermediary can terminate the business relationship without having to notify the competent Authorities, but he must then make sure that any withdrawals of funds be in a manner which will allow, if necessary, the prosecuting Authorities to retrace them (“paper-trail”). The Directives emphasize that these obligations are also applicable if the financial intermediary has a doubt as to the existence of a case of corruption or misappropriation of public assets.
However, the financial intermediary does not have the right to terminate the business relationship nor authorize the withdrawal of significant sums if there exist concrete signs that measures by an Authority are imminent (ch. 7.4).
6. Behaviour following a Report
6.1. Freezing
The financial intermediary who has reported within the meaning of art. 305 ter para. 2 CPS or 9 para. 1 LBA must immediately freeze the assets entrusted, if they are linked to the reporting (art. 10 para. 1 LBA). The freezing must be maintained until receipt of a decision by the competent prosecuting Authority for a maximum - and this is specifically noted by the Federal Banking Commission - of five working days from the day after the day he sent his report to the Reporting Office or to the prosecuting Authority.
The management of client assets during this period can continue in accordance with the client’s instructions as well as within the context of the management powers previously conferred on the financial intermediary (ch. 8.1).
6.2 Behaviour in Absence of Measures from the Authority
The Federal Banking Commission considers that if the Authority does not communicate its decision to the financial intermediary within the five working day period, the latter is free to decide in which measure he intends to continue his business relationship with the client. In the hypothesis of a continuation of the business relationship, the Federal Banking Commission emphasizes that the financial intermediary has no obligation to limit acts of disposal by the clients. He can namely undertake cash payments and proceed to physical delivery of securities and precious metals (ch. 8.2).
6.3. Prohibition of Notification to the Client
In the absence of an express authorisation from the competent prosecuting Authority, the financial intermediary shall not notify the persons or third parties concerned of the reporting (ch. 8.3).
7. Drafting and Conservation of Documentation
The Directives cover the drafting and conservation of documents, in particular the documents relating to client identification. The Federal Banking Commission considers that “the financial intermediary must be in a position to determine within a reasonable period whether a person, who is in a contractual relationship with him, is the beneficial owner of assets over which he has (for certain accounts) a power of attorney and also if it has effected cash transactions subject to an obligation of identification; the financial intermediary must be able to provide this information within the same period upon request by the prosecuting Authority, as well as execute possible freezing requests. The financial intermediary must likewise be in a position to indicate the deposit accounts and other valuables of which the person in question is the beneficial owner or for which he has a power of attorney”. Finally, the Federal Banking Commission requires from financial intermediaries who do not have a central database of contracting partners, beneficial owners or attorneys-in-fact that they take all necessary measures at the organizational level and at the personnel level (ch. 9.1. and 9.2).
Reference to attorneys-in-fact is an innovation since until now cases of attorneys-in-fact were not expressly targeted by either CDB or CFB Circular 91/3. The purpose of this innovation is to fill a lacuna in the combat against economic crime. Indeed certain important cases have taken place these past years, including criminal acts by attorneys-in-fact. The fact that the latter were neither necessarily nor systematically listed impeded the efficiency of the request for information presented by competent prosecuting Authorities.
From a systematic point of view, it would have been more logical to include this innovation on attorneys-in-fact in the Due Diligence Convention.
8. Signs of Money Laundering (annex)
Annexed to its Directives, the Federal Banking Commission provides a list of signs relating to money laundering (A3 to A39). It emphasizes however “that one sign taken alone would not suffice to give rise to a founded suspicion of the existence of a laundering operation. However, the existence of a number of these signs may indicate such a presence”. The Federal Banking Commission also insists on the fact that this list of signs should not be considered exhaustive and will require an adaptation in line with changes, circumstances and new methods of money laundering.
The Federal Banking Commission also recalls that it is necessary to re-examine the plausibility of the client’s explanations as to the economic background of the transactions undertaken. It specifies also that the fiscal reasons affecting legislation on currency should not be accepted without examination (A1 and A2).
The Federal Banking Commission established three categories of signs. As general signs inter alia :
- assets are withdrawn shortly after having been deposited (pass-through accounts) where the client’s activity does not render plausible such an immediate withdrawal or;
- where the transactions have as a consequence that an account until then largely inactive becomes very active without having a plausible reason or event;
- where there are incompatibilities between the information and experience of the bank in connection with the client or the aim of the banking relationship.
As particular signs may be mentioned, inter alia : - exchange of a large amount of banknotes (Swiss or foreign) of small denominations against large denominations; - frequent large cash transactions without the client’s account being used for such operations;
- Absurd economic structure of the business relationship between a client and the bank (large number of accounts with the same establishment, frequent transfers between different accounts, excessive liquidity);
- Acceptance of transfers of funds from other banks without indication of the name or the account number of the beneficiary or repeated transfers of large amounts abroad with instructions to pay the beneficiary in cash.
As a sign, the Federal Banking Commission equally includes back-to-back loans without any recognizable legal purpose, as well as the holding in a fiduciary capacity of participations in companies not listed on the Stock Exchange and of which the bank has not determined the activity. Finally, the last particular sign quoted in the annex is the attempt by the client to avoid personal contact with the financial intermediary.
A new section in comparison with the previous CFB Circular is a qualified sign list. Contrary to the signs previously quoted, the presence of one such qualified sign automatically leads to the obligation to clarify, whereas this is not necessarily the case in the presence of signs from the other categories (ch. 6.3. let. c).
The qualified signs listed in the annex are inter alia :
- closure of an account and opening of another account in the name of the same client or members of his family without trace in the documentation of the bank (“paper-trail”);
- desire by the client to obtain a receipt for cash withdrawals or delivery of securities which were not really effected or which were immediately deposited within the same establishment;
- desire by the client to undertake payment orders with an incorrect indication of the giver of the order;
- request of the client which tends to have certain transfers transit not through his own account but on a nostro account of the bank or a “miscellaneous” account;
- acceptance of guarantees which do not correspond to the economic reality or granting of credits in a fiduciary capacity knowing that the cover is fictitious;
- criminal proceedings against the client of the financial intermediary for crime, corruption or misappropriation of public assets.
V. CONCLUSIONAs of August, 1998, the LBA exists and is being taken seriously by all concerned professions.
The adaptations in the process of being made will be heavy for the financial sector professions not already subject to, or made recently subject to, supervision of the Federal Banking Commission. Conversely, Swiss banks should not have too much difficulty in incorporating the new requirements into their internal directives.
The Due Diligence Convention and the CFB Directives no doubt constitute a reference base which will also be useful for “non regulated” financial intermediaries.
What will perhaps be most difficult in certain cases is to avoid that the relationship of trust and confidence created with the client changes to one of mistrust. This hopefully will be avoided, provided the financial intermediary takes even more care than is already the case in knowing his clients, their activities and their financial wealth. In addition, the more the financial intermediary knows of his client from the beginning of and during their business relationship, the less the latter may be annoyed by embarrassing questions at later dates. Moreover, the risk of an inopportune report to the Reporting Office or competent prosecuting Authority, i.e., one intervening in the absence of any money laundering activity, will be much less.
It should be emphasized, however, and kept in mind that the financial intermediary will inevitably be placed at times in a dilemma difficult to resolve. One can thus hope that the Authorities having the power to sanction will act with the necessary vigor in the context of the combat against money laundering, while taking into consideration with pragmatism and balance the concrete and often difficult or subtle situations faced by financial intermediaries in their day-to-day activities.
