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Site contribution
Date: April 2006
Prepared by:
Rebecca Brunner-Peters, Director,
Legal & Compliance
Credit Suisse
P.O. Box
8070 Zurich
E-Mail:   rebecca.brunner@credit-suisse.com
Introduction
Switzerland’s laws, regulations and self-regulatory standards on anti-money laundering, customer identification and the duty of due diligence of financial intermediaries are of central importance to the success of the Swiss financial center and have been progressively expanded over the last decade to combat misuse of the Swiss financial system for money laundering purposes.
Swiss anti-money laundering regime is based on three main pillars:
1.  a very broad definition of laundering offences involving assets derived from any crime;
2.  a system of self-regulation in the financial sector (banking and non-banking), first introduced as early as 1977, accompanied by governmental monitoring; and
3.  a reporting obligation that, since 1998, has required professional financial intermediaries to report founded suspicions of money laundering. (This “reporting obligation” enhances the “reporting right” introduced under the Swiss Penal Code in 1994 to authorize financial intermediaries to report cases of suspected money laundering to the appro-priate authorities.)
Applicable Law
  • Swiss Federal Act on the Prevention of Money Laundering in the Financial Sector of October 10, 1997 (Money Laundering Act, MLA)
  • Ordinance of the Swiss Federal Banking Commission on the Prevention of Money Laundering of December 18, 2002 (MLO-SFBC)
  • Agreement on the Swiss Banks’ Code of Conduct with Regard to the Exercise of Due Diligence of the Swiss Bankers Association (CDB 03)
  • Directive on Combating Money Laundering of the Federal Office of Private Insurance, effective August 30, 1999
  • Ordinance of the Swiss Federal Gaming Board to Combat Money Laundering of Feb-ruary 28, 2000 (MLO-SFGB)
  • Ordinance of the Money Laundering Control Authority on the Due Diligence Obligations of Financial Intermediaries Directly Subordinated to the MLCA (total revision in 2003, entry into force on January 1, 2004)
  • Swiss Penal Code of December 21, 1937 (SPC)
  • Swiss Federal Law on Banks and Savings Banks of November 8, 1934
  • Swiss Federal Act on the Supervision of Private Insurance of June 23, 1978
  • Swiss Federal Act on Gaming and Casinos of December 18, 1998 (Federal Gaming Act, FGA)
    Detailed Information
    Penal provisions related to money laundering were first written into the Swiss Penal Code (SPC) in 1990, with the introduction of the specific offenses of money laundering (1) and the lack of due diligence in handling assets. (2) A second package of Penal Code amendments in 1994 resulted in the strengthening of measures related to the confiscation of assets of illicit origin (3) as well as a provision make it a crime to participate in a criminal organization (4) and a provision expressly permitting financial intermediaries to report cases of suspected money laundering to the relevant authorities. (5)
    Another important milestone in the combat against money laundering in Switzerland occurred in 1998, when the Swiss Federal Act on the Prevention of Money Laundering in the Financial Sector (Money Laundering Act, MLA) entered into force. The MLA introduced two new aspects: it extended the due diligence obligations relating to the combat against money laundering - already in existence for the banking sector - to all “professional financial intermediaries” and introduced a duty on the part of such intermediaries to report cases of suspected money laundering to the Money Laundering Reporting Office Switzerland (MROS) if based on reasonable grounds. This reporting duty arises whenever a professional financial intermediary knows, or presumes, on the basis of a founded suspicion, that assets involved in the business relationship constitute the proceeds of money laundering (6) or originate from another crime as defined in the Swiss Penal Code7 or that a criminal organization exercises the power of dispose of these assets. (8)
    The fundamental principles set out in the MLA require strict KYC rules, stringent obligations to establish and maintain documentation regarding identification, a duty to report suspected cases of money laundering and the introduction of complementary measures, such as the immediate freezing of assets upon the filing of a report and an obligation to refrain from notifying third parties
    of such report. Responsibility for the specific implementation and monitoring of the obligations under the MLA rests with the following Swiss federal supervisory authorities:
  • the Swiss Federal Banking Commission (SFBC) (banking sector);
  • the Swiss Federal Office of Private Insurance (FOPI) (life insurance sector);
  • the Swiss Federal Gaming Board (FGB) (casino sector); and
  • the Money Laundering Control Authority (MLCA) (non-banking sector). (9)
    The Money Laundering Control Office for Switzerland (MROS), which is part of the Federal Office of Police, is the authority responsible for receiving and assessing the reports of suspected money laundering submitted by financial intermediaries. It effectively performs a preliminary assessment to “weed out” reports lacking in substance and forwards the remaining cases of suspected money laundering on to the cantonal prosecuting authorities. It also operates, among other things, the data processing system for combating money laundering and compiles money laundering statistics. (10)
    At the international level, Switzerland plays an active role in the combat against money laundering and terrorism and is involved in the development and implementation of numerous international standards and agreements in this regard. (11) Switzerland has been a member of the Financial Action Task Force on Money Laundering (FATF) since its inception in 1989. Draft legislation is currently being introduced to enact the relatively minor changes in Swiss law needed to fully implement the 2003 FATF Forty Recommendations.
    The SFBC is the authority responsible for implementing and enforcing the due diligence, identification and reporting obligations under the MLA with respect to the Swiss banking sector. These duties under the MLA are supplemented by specific administrative regulations and guidelines relating to client identification and due diligence in the banking sector.
    The Swiss Banks’ Code of Conduct on the Exercise of Due Diligence (“CDB”) of the Swiss Bankers Association, for example, sets out detailed rules on verification of the identity of the contracting party’s identity, establishment of the beneficial owner’s identity, procedures for purposes of identification, document verification, clarification of the background of unusual transactions and the establishment and maintenance of records of transactions. The SFBC views the detailed know-your-customer (KYC) rules and obligations under the CDB, which have been in existence since 1977, as a minimum standard when assessing the applicability of penal measures as well as whether a bank meets the condition of “irreproachable activities” for purposes of granting or renewing a banking license. The CDB, based on the concept of self-regulation, has been updated many times, most recently in 2003, and sets out the standard of identification for bank customer relationships in general, whether they involve the opening of an account, the renting of a safe deposit box, the execution of stock exchange transactions, or cash transactions involving sums over CHF 25,000. Breaches of the CDB are monitored by a Supervisory Board independent of the Swiss Bankers Association and are subject to contractual penalties of up to 10 million Swiss francs. Breaches are reported to the SFBC, which then determines whether additional measures against the employees concerned or the institution are necessary.
    Whereas the CDB governs basic identification requirements applicable to business relationships in general, the SFBC’s Money Laundering Ordinance (“MLO-SFBC”) (12), contains more stringent due diligence requirements with respect to business relationships and transactions that are deemed to entail higher legal or reputational risks. Among other things, the MLO-SFBC requires SFBC-regulated intermediaries to take a risk-based approach to the prevention of money laundering, i.e., apply different levels of due diligence depending on the level of risk involved. The MLO-SFBC includes the following key points:
  • SFBC-regulated intermediaries must define risk categories for their particular business activity and use these categories to identify and flag all existing and new higher-risk business relationships; for these relationships, additional investigations, including as to the origin of the funds, must be carried out.
  • The decision to commence business relationships with politically exposed persons (PEPs) resident abroad must be taken at top management level.
  • The acceptance of any assets derived from criminal activity, including corruption and misuse of public funds, either in Switzerland or abroad, is clearly prohibited.
  • No business relationships may be maintained with persons suspected of having links to a terrorist organization; if such a business relationship is discovered, it must be reported immediately to the MROS.
  • With the exception of smaller institutions, SFBC-regulated intermediaries must use computerized systems to monitor and identify unusual transactions, which must then be investigated and assessed within a reasonable period of time.
  • All cross-border wire transfers must contain details of the party remitting the funds.
  • SFBC-regulated intermediaries with establishments outside Switzerland must ensure that these establishments comply with the fundamental principles laid down in the MLO-SFBC and must monitor their legal and reputational risks on a global basis, including with information reported by their foreign establishments.
  • Correspondent banking relationships with shell banks are prohibited. (13)
    The SFBC sanctions serious breaches of the due diligence obligations contained in the MLA and the MLO-SFBC either by initiating proceedings itself (under the MLO-SFBC) or by notifying the criminal justice or due diligence authorities responsible for prosecuting such cases. Parallel proceedings are also possible. As an extreme sanction, a SFBC-regulated intermediary risks withdrawal of its SFBC license. If members of the board or top executive management of a SFBC-regulated intermediary are responsible for serious breaches of due diligence obligations or organizational inadequacies in combating money laundering, they risk being restricted in or prohibited from performing their current and/or future functions on behalf of that intermediary by order of the SFBC.
    The obligations imposed by the MLA – the due diligence and identification duties and reporting obligation in cases of suspected money laundering – also apply to all private insurance institutions (14) that engage in activities in the area of direct life insurance or that offer or sell shares in investment funds. Although supervision of compliance by Swiss insurance institutions with these obligations rests as an initial matter with the Federal Office of Private Insurance (FOPI), the vast majority of Swiss life insurance companies are members of the Swiss self-regulatory organization created in 1998 by the Swiss Insurance Association (SRO-SIA) and are therefore under the direct supervision of the SRO-SIA instead of the FOPI. In turn, the SRO-SIA is under the direct supervision of the FOPI, which recognizes and approves the regulations issued by it. The SRO-SIA is required to maintain a register of member companies and inform the FOPI annually about its activities. In extreme cases, the FOPI may withdraw its recognition of the SRO.

    The FOPI’s Directive on Combating Money Laundering, which came into force on August 30, 1999, specifies how the duties imposed on insurance institutions under the MLO are to be fulfilled. Based on this Directive, the SRO-SIA has issued detailed regulations binding on its members that contain the provisions to be applied in combating money laundering. The regulations are based on the duty of due diligence, i.e., identifying the contracting party, establishing the financial beneficiaries, establishing the payees, clarifying the background and documenting these transactions. Member companies are also required to set up an internal body or office for combating money laundering. The SRO-SIA supervises its members to ensure they are complying with their obligations and requires them to file reports with it once a year.
    Casinos in Switzerland – which did not exist until the first casino license was granted in 2002 under the Federal Gaming Act - are subject to the MLA and bound to the same duties of due diligence, identification and money laundering reporting as banks, insurance institutions and other financial intermediaries. In granting a casino license, the supervisory authority, the Swiss Federal Gaming Board (SFGB), is required to clarify, among other things, the legitimate origin of the funds available for the casino operations. The Ordinance of the SFGB to Combat Money Laundering (MLO-SFBG) requires the identification of players and the beneficial owners of assets in the case of cashier transactions of CHF 15,000 (or CHF 5,000 if conducted in a foreign currency) as well as in connection with the establishment of any long-term business relationship involving the setting up of a player’s deposit, regardless of amount. A revised MLO-SFBG has beenproposed (15) that – in line with the FATF’s 40 Recommendations of June 2003 – would lower the identification threshold in connection with cashier transactions to CHF 4,000. The revised MLO-SFBG would also introduce the concept of transactions and business relationships with increased risk – with the exact criteria for determining the existence of increased risk to be defined by the casinos, although PEP relationships would qualify as business relationships with increased risk in all cases – and require in such cases a duty to clarify the economic background, origin of funds and business activities of the guest and beneficial owners of the funds. It would also require that a money laundering report be filed with the MROS even if a guest refuses to cooperate in connection with the required clarifica-tions. Further, it would permit the SFBG to require casinos to introduce IT-based monitoring systems.
    Casinos in Switzerland – which did not exist until the first casino license was granted in 2002 under the Federal Gaming Act - are subject to the MLA and bound to the same duties of due diligence, identification and money laundering reporting as banks, insurance institutions and other financial intermediaries. In granting a casino license, the supervisory authority, the Swiss Federal Gaming Board (SFGB), is required to clarify, among other things, the legitimate origin of the funds available for the casino operations. The Ordinance of the SFGB to Combat Money Laundering (MLO-SFBG) requires the identification of players and the beneficial owners of assets in the case of cashier transactions of CHF 15,000 (or CHF 5,000 if conducted in a foreign currency) as well as in connection with the establishment of any long-term business re-lationship involving the setting up of a player’s deposit, regardless of amount. A revised MLO-SFBG has been proposed (15) that – in line with the FATF’s 40 Recommendations of June 2003 – would lower the identification threshold in connection with cashier transactions to CHF 4,000. The revised MLO-SFBG would also introduce the concept of transactions and business relationships with increased risk – with the exact criteria for determining the existence of increased risk to be defined by the casinos, although PEP relationships would qualify as business relationships with increased risk in all cases – and require in such cases a duty to clarify the economic background, origin of funds and business activities of the guest and beneficial owners of the funds. It would also require that a money laundering report be filed with the MROS even if a guest refuses to cooperate in connection with the required clarifica-tions. Further, it would permit the SFBG to require casinos to introduce IT-based monitoring systems.

    Last but not least, for the financial intermediaries directly subordinated to the MLCA, the obligations ondue diligence stipulated under the MLA are defined in the Ordinance of the MLCA on the Due Diligence Obligations of Directly Subordinated Financial Intermediaries. This Ordinance was fully revised in 2003, effective January 1, 2004. The most important change made was an adoption of a risk-oriented approach comparable to that applicable under the MLO-SFBC to the banking sector. The directly-subordinated financial intermediary is now required to separate its clients and their transactions into at least two money laundering risk categories, those with normal risk and those with higher-risk, and develop criteria for the classification appropriate to the nature of the intermediary’s particular business. PEP relationships and transactions involving more than CHF 100,000 in cash, bearer shares or precious metals are automatically assigned to the higher-risk category. Further, the directlysubordinated intermediaries are required to introduce a monitoring system for their business relations and transactions. (16)

    Ever since the enactment of the MLCA, there have been a number of open questions concerning the definition of activities in the non-banking sector subject to the MLA versus those which are not, and further clarification is still in progress. Over the past months and years, the MLCA, as the supervisory authority of the financial intermediaries in the non-banking sector, has clarified that the MLA applies to persons engaged on a professional basis in: the transport of valuables, the custody and/or management of assets, the credit business, services related to payments, trading in raw materials, banknotes, coins, money market instruments, currency, precious metals, commodities, securities and/or derivative instruments, distribution or representation activities on behalf of a non-Swiss investment fund. (17)
    Frequently Asked Questions
  • What is a “financial intermediary”?
    The definition of “financial intermediary” is broad and includes banks, fund managers, certain insurance institutions, securities dealers and casinos. Financial intermediaries also include persons who accept or safeguard third-party funds or help to invest or transfer such funds. Article 2 paragraph 3 of the MLA contains a list of financial intermediaries covered by the MLA; this list, however, is not all-encompassing, thereby ensuring that further MLA-relevant activities may be covered.
  • How is the supervision in the area of the preventative combat against money laundering in the financial sector organized in Switzerland?
    Supervision of financial intermediaries under the MLA is divided up among the following Swiss supervisory authorities:
  • the Swiss Federal Banking Commission (SFBC)
  • the Federal Office of Private Insurance (FOPI)
  • the Swiss Federal Gaming Board (FGB)
  • the Money Laundering Control Authority (MLCA)
    The SFBC is responsible for banks, fund management and securities dealers. Insurance companies that sell direct life insurance policies or offer or distribute shares of an investment fund are supervised by the FOPI. The FGB supervises compliance with the anti-money laundering provisions by the casinos. These special supervisory authorities, which exercise general oversight with respect to the institutions who are subject to their supervision, must ensure that these institutions fulfill the duties imposed on them by the MLA.
    The MLCA supervises the other financial intermediaries who are not subject to special supervisory oversight, i.e., the so-called “non-banking sector” (e.g., asset managers, fiduciaries, money changers) on an indirect basis (via the self-regulatory organization, SRO) and on a direct basis (if they are not members of a SRO).
  • What is the difference between the Money Laundering Reporting Office (MROS) and the Money Laundering Control Authority (MLCA)?
    The MROS, on the one hand, is part of the Federal Office for Police Matters within the Swiss Federal Justice and Police Department. It functions as a relay and filter between the financial intermediary and the prosecuting authorities, analyzing concrete reports of suspicions it has received from financial intermediaries pursuant to Art. 9 MLA and distinguishing cases of money laundering suspicion from those lacking in substance. In connection therewith, the MROS undertakes independent clarifications, operating and consulting its own data processing system for combating money laundering. In the event that the financial intermediary’s grounds for suspicion that the assets involved in the business relationship are connected with money laundering (Art. 305bis SPC), stem from a crime or are subject to the control of a criminal organization (Art. 260ter clause 1 SPC) are corroborated, the MROS immediately forwards the report to the competent criminal prosecution authorities.
    The MLCA, on the other hand, is a department of the Swiss Federal Finance Administration. The mission of the MLCA is preventive in nature, i.e., to combat money laundering by ensuring compliance with due diligence duties in the non-banking sector. The MLCA takes appropriate measures if the statutory duties are not complied with. As in the case of financial intermediaries, the MLCA, too, is under a duty to file a report with the MROS in connection with suspected money laundering.
  • What does KYC mean?
    Banks as well as other financial intermediaries must comply with the know your customer (KYC) principles. They must, in particular:
  • identify their contractual partners, e.g. by copying the passport (natural persons) or the excerpt of the commercial register (legal entities);
  • verify the beneficial owner, in case of doubt whether the contractual partner is himself the beneficial owner, by filling in a specific form (Form A);
  • clarifying and documenting the economic background, origin of funds and business activities of the contractual partners and beneficial owners.
    Useful Links
  •  
  • Federal Office of Police
    “Combating Money Laundering in Switzerland, Status: October 2003”, available on the website of the Swiss
    Federal Office of Police, Federal Department of Justice and Police
  •  
  • Swiss Bankers Association
    The Agreement on the Swiss Banks’ Code of Conduct with Regard to the Exercise of Due Diligence (CDB 03).
  •  
  • Swiss Financial Market Supervisory Authority FINMA
    An unofficial translation of the Money Laundering Ordinance of the SFBC.
    Footnotes
    1.  Article 305bis SPC, penalizing the hindrance of the “establishment of origin, the discovery, or the confiscation of assets” when the perpetrator knows, or must assume, that such assets stem from a crime as defined under the SPC, even if the crime was committed outside Switzerland.
    2.  Article 305ter para. 1 SPC, requiring financial intermediaries to verify “the identity of the beneficial owner with the diligence that can be reasonably expected under the circumstances” in the case of financial operations carried out in the exercise of their profession.
    3.  Arts. 58-60 of the SPC. This includes a reversal of the burden of proof in cases of organized crime.
    4.  Art. 260ter para. 1 SPC
    5.  Art. 305ter para. 2 SPC
    6.  Art. 305bis SPC
    7.  Art. 9 SPC
    8.  Art. 9 para. 1 MLA in conjunction with Art. 260ter para. 1 SPC. Article 11 MLA protects the reporting intermediary against prosecution for violation of secrecy of office, of professional secrecy and commercial secrecy and for breach of contract, provided the intermediary has acted with the due diligence required under the circumstances.
    9.  E.g., certain non-bank lenders, payment transaction service providers, non-bank bureau de change, investment fund distributors not subject to the SFBC, asset managers and securities custodians not already regulated by the SFBC. These intermediaries may either become one of the SROs recognized by the MLCA or place themselves under the authorization/direct supervision of the MLCA.
    10.  Source: “Money Laundering”, p. 1, available on the website of the Federal Office of Police at: www.fedpol.ch
    11.  For further information, see “Combating Money Laundering in Switzerland, Status: October 2003”, chapter on “International Developments in the Fight Against Switzerland and the Role of Switzerland”, available on the website of the Swiss Federal Office of Police, Federal Department of Justice and Police (www.fedpol.ch)
    12.  Ordinance of the SFBC on the Prevention of Money Laundering of December 18, 2002, effective since July 1, 2003, with a one-year transitional period for certain provisions. This Ordinance replaced the 1998 Money Laundering Guidelines of the SFBC (Circular 98/1).
    13.  For further information, see SFBC Media Release January 17, 2003.
    14.  Within the meaning of the Federal Act on the Supervision of Private Insurance of June 23, 1978.
    15.  Available (in German) on the website of the Swiss Federal Gaming Board under: www.esbk.ch (only German, French, Italian)
    16.  “Combating Money Laundering in Switzerland, Status: October 2003”, p. 37, available on the website of the Swiss Federal Office of Police, Federal Department of Justice and Police (www.fedpol.ch)
    17.  Ibid.