Money laundering: Focus of conduct supervision (2020)

Effective conduct supervision builds trust in Switzerland as a financial centre. Although progress has been achieved, FINMA once again set its focus on combating money laundering and terrorist financing during 2020, particularly in connection with blockchain-based transactions. An additional focal point was the code of conduct set out in the new Financial Services Act, which financial institutions must observe in relation to their clients.

Although many institutions further improved their money laundering prevention measures, and succeeded in spotting a greater number of suspicious assets, which they then reported to the Money Laundering Reporting Office Switzerland (MROS), the risks faced by financial institutions operating in the cross-border asset management business remained high. Client relationships with wealthy politically exposed persons as well as state or quasi-state organisations and sovereign wealth funds involve a risk of corruption and embezzlement. Complex structures may entail an increased risk of money laundering, particularly when domiciliary companies are used.

Preventive money laundering supervision

In previous years, some wealth management banks were heavily embroiled in notorious money laundering scandals involving funds originating from emerging markets. Numerous enforcement cases (notably in connection with 1MDB, Petrobras, Odebrecht, Petróleos de Venezuela S.A. and FIFA) were concluded during this period and many institutions improved their anti-money laundering mechanisms in the course of this review. However, the risk situation remained unchanged. Even in 2020, FINMA encountered supervised institutions that were failing to exercise the appropriate due diligence when dealing with high-net-worth clients from emerging markets.

FINMA ordered several internationally operating banks to ensure that incomplete explanations from clients regarding the origin of funds or assets were followed up on and clarified. This applies in particular to high value assets from emerging markets that purportedly originate from inheritances, extremely fortunate investments or high-value cash gifts. Where such representations were made, the institutions were required to determine the precise origin of the assets and check, inter alia, whether the client could be acting as a front for another person.

FINMA also determined during 2020 that banks, in particular, were taking the reporting obligation seriously and reporting suspicious relationships to the MROS. In isolated cases, however, certain institutions had taken the view that a decision by the criminal prosecution authorities to discontinue legal proceedings meant that the assets could then be regarded as being of legal origin. FINMA reminded these institutions that the actions of the criminal prosecution authorities have no bearing on the origin of assets and that the relationships must continue to be monitored closely for any suspicious circumstances.

If the contracting partner of a financial intermediary is itself subject to an adequate level of prudential supervision and regulation in relation to combating money laundering and terrorist financing, the financial intermediary need not identify the beneficial owner. Regulations operate on the assumption that, in such cases, the prudentially supervised institution itself will comply with the obligations under anti-money laundering law. From time to time, FINMA determined that certain financial intermediaries were making excessive use of this option. In this respect, certain individual banks had entered into relationships with institutions registered in offshore jurisdictions, whose status as a bank was questionable. On several occasions, the clients of such institutions were found to be involved in suspected cases of fraud, insider trading and tax evasion. The Swiss banks were subsequently unable to provide the criminal prosecution authorities with the identities of the beneficial owners. FINMA reminded the institutions that they need to clarify, in each individual case, whether a specific foreign financial intermediary requires prudential monitoring measures or holds the necessary licence, particularly when such intermediaries are based in smaller countries. It does not suffice to simply rely on the general money laundering supervision arrangements that are in effect within a foreign jurisdiction. Similarly, regulations provide only for an exemption from the requirement to systematically identify the beneficial owner. So that high-risk transactions can be investigated, for example, it may still be necessary to obtain information about the beneficial owners.

FINMA investigates tip-offs concerning violations of the Anti-Money Laundering Act (AMLA), irrespective of whether they are received from the institution itself, other authorities or whistleblowers. It therefore remains in regular contact with exposed institutions, even during periods when audits and on-site supervisory reviews are not being conducted. In previous years, there was a rise in the number of tip-offs from the media, particularly from reports generated by investigative journalists. The “FinCEN Files” are a prominent example from 2020. This concerned over 2,000 reports of suspicions made to the USA’s anti-money laundering authority, the Financial Crimes Enforcement Network (FinCEN), which became public due to a data breach. In this regard, many financial intermediaries conducted extensive investigations, in some cases on their own initiative and in other cases at the request of FINMA. In doing so, the familiar pattern emerged, whereby a series of institutions were providing services to a high-risk customer base. A large number of the institutions handled the associated risks in a manner consistent with the regulatory requirements, made the necessary enquiries and reported suspicious clients to MROS long before publication of the FinCEN Files. Other such institutions will need to further improve their compliance framework.

Combating money laundering on the blockchain

Effective monitoring of compliance with the regulations poses a new challenge in terms of combating money laundering and terrorist financing in cases where transactions are executed on the blockchain. The usual monitoring principles that apply to combating money laundering continue to apply in these cases too. Hence, the standard Know Your Customer regulations must be complied with and the mandatory enquiries into the transaction must be carried out. In 2020, the Financial Action Task Force on Money Laundering (FATF) assessed the Swiss anti-money laundering regulations for virtual asset service providers and found them to be mostly compliant.

With respect to the rules governing payment transactions, FINMA is continuing to apply the approach set out in its FINMA Guidance 02/2019 “Payments on the blockchain”. According to this, the applicable Swiss provisions governing the exchange of information during payment transactions (also referred to as the “Travel Rule”) must be applied equally to blockchain transactions. Unless and until a technical solution is found that guarantees compliance with the “Travel Rule”, financial intermediaries subject to FINMA supervision may only send or accept cryptocurrencies to or from the external wallets of their own customers. In order to execute compliant transfers, financial intermediaries must verify, by appropriate technical means, their client’s power of disposal over the external wallet.

(From the Annual Report 2020)