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JURIST's Switzerland Correspondent is Cyrill P. Rigamonti, Esq., Dr.iur., University of Zurich Faculty of Law.
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Extension of the Swiss Money Laundering Act to Non-banking Financial Industries

[Zurich; Special to JURIST] This second report on the latest developments in Swiss law will discuss the ramifications of extending the Swiss Money Laundering Act to non-banking financial industries. An English version of the Act is available on the Federal Money Laundering Control Authority's Web site at http://www.efv.admin.ch/gwg/e/mla.pdf.

A. Background

In line with recent efforts to crack down on criminal organizations engaged in money laundering on a global level, Switzerland has revised its Federal Penal Code ("FPC") to include provisions penalizing money laundering and the lack of due diligence in financial transactions (Art. 305bis and 305ter FPC). In addition to these efforts aimed at preventing money of a criminal origin from being introduced into the ordinary stream of financial transactions, the Swiss legislature enacted the Swiss Money Laundering Act of 1997 ("MLA"), which entered into force on April 1, 1998, for banks, insurance companies, brokers and investment funds.

For the Swiss banking sector, uniform standards of due diligence in financial matters were nothing new. The Swiss Bankers Association (the "SBA") had adopted a Code of Conduct in 1977, which established the diligence to be exercised in financial transactions. This Code of Conduct was amended several times and ultimately served as a source of inspiration for the MLA. As of April 1, 2000, however, after a transition period of two years, the MLA applied for the first time to the non-banking financial sector.

B. The Money Laundering Act's Objective

The MLA's objective was and is to remedy the following shortcomings:

(i) the rules against money laundering existing before the enactment of the MLA, some of which were very sophisticated, were adopted by the SBA on a purely voluntary basis, which is why there was no uniformity across the entire financial sector;

(ii) except for the banking and insurance industries, there was no governmental authority controlling whether and how the pre-existing rules of diligence were implemented in practice; and

(iii) there was no institutionalized exchange of information between private entities in the financial sector and law enforcement agencies, because there was no formal duty to report suspicious activity.

The MLA now creates a uniform standard of duties of diligence for the whole financial sector and establishes a duty to report suspicious activity to a specialized new government agency called the Federal Reporting Office for Money Laundering, a subdivision of the Federal Police Agency. Furthermore, the MLA considers the needs of the different branches within the financial industry by providing the possibility of self-regulation, i.e. financial intermediaries have the opportunity to set up a so-called "Self-Regulating Body" with its own regulations as a supervisory authority over the particular type of business involved. For instance, there is a Self-Regulating Body exclusively for attorneys and notaries, who, under certain circumstances, qualify as financial intermediaries.

C. Supervision of Financial Intermediaries in the non-Banking Sector

The key term of the MLA is "financial intermediary", which is defined as any person who professionally accepts, keeps in deposit, or helps invest or transfer assets belonging to third parties. Every financial intermediary must be either a member of a recognized Self-Regulating Body or be recognized by the Federal Control Authority as being subject to its direct control. Any person or entity in the non-banking sector intending to act as a financial intermediary must first obtain a license either from the Federal Control Authority or become a member of a recognized Self-Regulating Body. This generally requires that the future financial intermediary be entered into the Commercial Register and that it ensure compliance with the duties of diligence arising under the MLA by organizing itself and implementing internal guidelines mandated by the MLA. The individuals in charge of the administration of its business must also enjoy a good reputation in the community and warrant compliance with the duties of the MLA.

Switzerland takes a three-tiered approach to control compliance with the MLA: (i) Financial intermediaries which are already under the supervision of a Federal Agency, e.g. the Swiss Banking Commission, will remain under the supervision of their respective authorities, which will also control compliance with duties arising under the MLA. All other financial intermediaries must choose between (ii) being subject to supervision by the Federal Control Authority established under the MLA or (iii) being supervised by a Self-Regulating Body recognized by the Federal Control Authority.

Again, for established players in the financial business, such as banks and insurance companies for instance, there is no substantial change. However, other financial intermediaries, particularly in the non-banking sector, will now be subject to governmental or self-regulatory supervision specifically tailored to enforcing compliance with the MLA.

Any person who acts as financial intermediary without prior authorization by the Federal Control Authority or without first joining a Self-Regulating body is subject to criminal liability and must pay a fine of up to a maximum of CHF 200'000.

D. Duties of Diligence

The MLA requires that financial intermediaries comply with certain duties of diligence aimed at establishing the identity of the business contact and the true owner, as well as the origin of the funds involved. When initiating a business relationship, the financial intermediary must identify its customer by means of a supporting document, i.e. a copy of a valid passport for natural persons and an excerpt from the Commercial Register for legal entities. If there are any doubts as to whether the customer is also the beneficial owner of the funds involved, if the customer is a domiciliary company, or if a transaction involves a significant cash amount (currently approx. USD 10,000 for financial intermediaries subject to control by the Federal Control Authority), the financial intermediary must also request a written declaration from the customer certifying the identity of the beneficial owner. In addition, whenever a transaction or a business relationship seems unusual or whenever there are signs of a criminal origin of the funds involved, the financial intermediary must check the purpose and the economic origin and background of the transaction or business relationship. Furthermore, the financial intermediary must document any transactions executed and keep the documents on file for at least ten years after the transaction was executed or after the conclusion of the business relationship. Finally, financial intermediaries must take measures necessary to prevent money laundering, in particular must they provide for internal controls and sufficient training of their personnel.

E.Obligations in the Event of Suspicion of Money Laundering

Any financial intermediary who suspects (i) that assets involved in the business relationship are related to criminal money laundering as defined in art. 305bis FPC, (ii) that they are the proceeds of a crime or (iii) that a criminal organization has a right of disposal over them, must without delay notify the Federal Reporting Office for Money Laundering. In other words, while businesses professionally dealing with financial matters were allowed to report any suspect behavior under federal penal law, they are now obliged to do so by virtue of the MLA. Furthermore, any financial intermediary must immediately, and without any notice, freeze assets entrusted to it until receipt of a decision by the competent prosecuting authority, if the assets are somehow connected to the matter the financial intermediary has reported to the Federal Reporting Office. It should be noted that any person who violates the reporting obligation will be punished by a fine up to CHF 200,000.

F. Practical Issues of Implementation

Despite the fact that financial intermediaries in the non-banking sector were granted a transition period of two years in order to prepare for the entering into force of the MLA, some of the smaller businesses were caught off guard, especially when their activities covered by the MLA did not constitute their core business. Furthermore, for one-person businesses, the administrative requirements may be rather cumbersome, given the fact that detailed internal guidelines and training programs are necessary in order for the financial intermediary to show how it will implement the duties of diligence arising under the MLA. It is therefore difficult to establish how many businesses in the non-banking sector, which now qualify as financial intermediaries, are performing their services without a license and maybe without even knowing that a license is required. In fact, the first criminal proceedings are already pending.

Dr. Cyrill P. Rigamonti, Esq.
JURIST Switzerland Correspondent
August 4, 2000

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