Anti-Money Laundering: Progress Made And Gaps In Swiss Measures
March 15th, 2011
March 15th, 2011
Switzerland has made distinct progress in its combat against money laundering. Yet there are still significant gaps. Switzerland was the trailblazer in the fight against money laundering in the 1990s, but it is now following in midfield. Implementation is still at a high level, but when it comes to the non-banking sector and the reporting of suspect cases, the Swiss Anti-Money Laundering Act (AMLA) still has considerable shortcomings. The standard is higher in the banking sector precisely because the internationally active banks must conform to more than just the Swiss AMLA.
The international anti-money laundering standard is laid out in the 40 Recommendations of the Financial Action Task Force on Money Laundering (FATF). These FATF Recommendations list the persons and entities that should be subject to money laundering legislation. In addition to banks and insurance companies, these include a range of other players such as accountants, tax advisers, notaries, lawyers, trust and company service providers, real estate brokers, traders (if substantial cash payments are involved) and casinos.
In Switzerland, dealers in valuable items (e.g. art dealers), real estate agents, tax consultants, as well as investment consultants, trustees, lawyers and notaries only become subject of the law when they are involved in financial transactions – they escape from the scope when they are in an advisory role only.
Because all major financial centres have adopted a broader scope of application than Switzerland, there is the risk that such players may gravitate towards Switzerland on account of these gaps. This regulatory arbitrage is the booby trap that could mean damaged reputations in the future. It is interesting that the former pariah Liechtenstein has prudently brought the activities of trust companies comprehensively within the scope of anti-money laundering legislation.
This shortcoming in the AMLA is all the more regrettable because Switzerland has made considerable headway in other areas in the fight against money laundering, for example as regards establishing the identity of beneficial owners. Identifying a beneficial owner is a core element of any modern anti-money laundering legislation. The FATF Recommendations require that not only the customer must be identified, but also the person who ultimately owns or controls a customer and/or the person on whose behalf a transaction is being conducted. In the case of legal entities, this verification must include measures to understand the ownership and control structures of the contracting partner. It is not enough in this process merely to rely on customer-supplied information. Such information must also be verified. This conception raises big challenges for contracting parties because they generally have no direct contractual link with the beneficial owner. They depend on the customer (the contracting partner) to provide information on the identity of the determining person who in fact controls the customer.
Switzerland has also been a path-breaker in another aspect of international regulation, namely the “risk-based approach,” which aims to ensure a more targeted and efficient application of anti-money laundering regulations. The higher the risk that the assets involved may have money laundering connections, the more steps the financial intermediary must take to limit that risk. Switzerland introduced the risk-based approach in 2002 for banks, describing in detail the measures that must be taken in high-risk areas. Yet there are still gaps in the non-banking sector in this respect.
The biggest shortcoming in Switzerland’s anti-money laundering strategy is that the reporting requirement in the event of suspected money laundering is not sufficiently fleshed out. The reporting requirement has long been controversial in Switzerland. It was introduced in 1998, ultimately under pressure from the FATF. Yet the Parliament decided to attach unnecessarily high prerequisites to the reporting requirement. The basic principle remains that the transmission of customer data is fundamentally a breach of banking secrecy, and a waiver is only possible when “reasonable suspicion” exists. The reporting threshold in Switzerland is considerably higher than in other centres. This accounts for the rather small number of reported suspected cases, and the FATF criticized Switzerland on that score in its latest country review.