The new Anti-Money Laundering Act (AMLA)[1] seeks to implement some of the main recommendations of the fourth mutual evaluation report by the Financial Action Task Force ("FATF") concerning Switzerland. Its aim is to increase legal certainty and strengthen the position of Switzerland as a financial center[2].
Since1st January 2023, the new AMLA requires financial intermediaries to comply with strict due diligence duties. The law will now explicitly provide for the verification of the identity of the beneficial owner and a general obligation to update client data. The objective is also to improve the transparency of associations exposed to an increased risk of terrorism financing.
This article will focus solely on modifications related to the verification of Beneficial Owners, client data obligations, as well as transparency obligations for associations.
Verification of Beneficial Owners
In its new form, Section 4 para. 1 1stphr. AMLA provides that the financial intermediary must identify the beneficial owner with the due diligence required in the circumstances and verify its identity in order to ensure that it knows who the beneficial owner is. The due diligence required in accordance with the circumstances, in terms of a risk-based approach, applies to both the identification and verification of the beneficial owner’s identity[3]. It is also possible to apply the risk-based approach regarding the manner in which the identity is verified[4].
A financial intermediary cannot solely rely on a written and signed declaration by their contracting party regarding the beneficial owner[5]. The intermediary has an obligation to critically examine the plausibility of such declaration[6]. In fulfilling this obligation, financial intermediaries must adopt a risk-based approach and leverage their own knowledge of the client’s profile, along with any available public information[7]. In case of need, the intermediary must also seek information from an external service[8]. For example, if a client is a legal entity with a complex ownership structure or multiple layers of control, financial intermediaries may have to engage external services to gather information on the beneficial owner(s).
The duty of corroboration must be performed in light of the specific circumstances of the business relationship, including its nature, complexity and the amount of funds involved[9].
When assessing the information provided about the beneficial owner, a financial professional is expected to exercise due diligence, which may include consulting computer databases at their disposal, whether they are freely accessible through a search engine or by subscription[10]. However, it is not necessary to conduct an in-depth inquiry for every business relationship, nor is it mandatory to use a third-party investigator in every case[11].
The concept of a risk-based approach to anti-money laundering measures requires financial intermediaries to carefully assess the likelihood of being involved in any illicit activity and to tailor their investigative efforts accordingly[12]. This involves striking a balance between the need for a thorough examination of business relationships and transactions and the practical consideration of doing so in a proportional and efficient manner. For instance, if a bank encounters a transaction or contract that it does not fully comprehend, it is essential that it either seek further information and documentation or decline to participate in the transaction[13]. This ensures that the bank does not become unwittingly involved in any illicit activities, such as money laundering or terrorist financing.
Financial intermediaries must identify high-risk business relationships by considering factors like location, nature of activities, transaction patterns, and ties to politically exposed persons, then internally designate and manage such relationships[14].
Swiss anti-money laundering legislation affords financial intermediaries the flexibility to determine the most appropriate means for verifying the identity of a beneficial owner, without mandating the collection of a copy of the individual’s identity card[15].Nevertheless, it is essential for financial intermediaries to exercise their discretion with prudence and care, while following a risk-based approach and assessing the plausibility of the information provided by the contracting party.
In case of multiple beneficial owners, financial intermediaries are not required to determine the percentage of ownership held by each beneficial owner[16]. However, this principle may not always apply to the identification of control holders of an operational company[17]. Banks must now verify the identity of the beneficial owner through a written and signed declaration by the client, rather than only in cases of doubt[18].
The requirement to verify the identity of the economic beneficiary is not a new obligation but rather a codification of an existing practice based on jurisprudence. The extent of the verification process will depend on the level of risk associated with the contracting party, though it should not result in significant material costs or a reduction in the cost/revenue ratio, particularly for activities conducted within Switzerland.
Client Data Obligations
Paragraph 1bis has been introduced in Section 7 AMLA, which provides that the financial intermediary must periodically check the required records to ensure that they are up to date and update them if need be. The periodicity, scope and type of checking and updating are based on the risk posed by the customer. The new provision requires a periodic verification of the documents obtained during due diligence and an update if necessary, following a risk-based approach[19]. The requirement to update client information applies to all business relationships, regardless of the risk level and extends to both the identity of the contracting party or the beneficial owner and other details in the client’s profile, such as the purpose and objective of the relationship[20]. While the risk-based approach may necessitate more frequent verifications for high-risk relationships, the obligation to update client information applies to all relationships, including pre-existing ones[21]. In the hypothetical scenario where a financial service contracted a client in1999 and new AML regulations were subsequently introduced, the financial intermediary would need to review the client’s file and update it according to the updated regulations, which may involve conducting a new risk assessment based on the current risk factors and client profile. The generic term “records” in this new provision covers various documents, information, or data collected to establish the client profile, such as the information recorded by the financial intermediary in the client’s file[22].
Financial intermediaries already regularly update their clients’ information, with banks often utilizing such opportunities to inform clients about products or services. However, small clients with whom personal contact is less frequent may lack such opportunities. These changes address this issue while ensuring that financial intermediaries have the flexibility to determine the frequency and extent of updates based on risk.
To ensure compliance, a financial intermediary should adopt a risk-based approach, maintain organized records, perform periodic review and updates, retain records for ten years, and respond promptly to authorities.
Transparency for Associations
The report by FATF highlighted transparency gaps in non-profit organisation, posing potential risks related to terrorist financing. To address these concerns, significant changes have been introduced to the law on associations.
In principle, an association is not required to register with the commercial register, unless it engages in commercial activities to achieve its objectives or is required to have its accounts audited[23].
Section 61 para. 2 no. 3 Civil Code provides that: [associations] must be registered if it primarily collects or distributes assets abroad, directly or indirectly, that are intended for charitable, religious, cultural, educational or social purposes[24]. An association may still be exempt from the registration obligation if[25]:
a. The annual amount of funds collected nor the amount of funds distributed has exceeded CHF 100’000.- in each of the last two financial years[26];
b. The funds are distributed through a financial intermediary within the meaning of the AMLA[27];
c. At least one representative of the association is domiciled in Switzerland[28].
Registration in the commercial register implies the obligation to keep accounts and present financial statements in accordance with Code of Obligations[29]. In addition, the associations concerned will have to keep a list of their members and ensure that they can be represented by a person domiciled inSwitzerland. From the perspective of debt collection law, the association is subject to enforcement[30].
Significant changes have been introduced regarding associations required to register, as they are now obligated to maintain a members’ list[31]. The new requirements include listing members by their full name or business name, along with their address and ensuring that the list is accessible within Switzerland at all times. It is important to note that certain obligations may apply to associations that voluntarily register with the commercial register, despite not being required to do so. It is important to note that existing associations affected by the recent amendment to the law are granted a grace period of 18 months from the entry into force of the modification on 19 March 2021 (i.e. from 1January 2023 to 1st July 2024, with regard to association law)to ensure compliance with the new obligations[32]. This transitional period allows associations to make the necessary adjustments to their internal processes and procedures, in order to fully adhere to the new legal requirements[33].
Outlook
It is advised to comply with Swiss anti-money laundering laws by adopting a risk-based approach, performing due diligence and corroborating the plausibility of the declaration made by the contracting party. While you have flexibility in verifying the beneficial owner’s identity, it is essential to exercise discretion and follow a risk-based approach.
It is also advised to be aware of the requirements under AMLA to periodically check and update client information obtained during due diligence, regardless of the risk level. While compliance may entail costs, these changes are necessary to ensure regulatory compliance and to protect your business from potential legal and reputational risks. It is therefore recommended to review your existing policies and procedures to ensure compliance with the new provision.
Regarding transparency for associations, it is advised to review your association’s activities and determine if registration with the commercial register and maintaining a members’ list is required. Should this be necessary, it is recommended taking proactive steps to ensure timely compliance within the transitional period of 18 months.
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This newsletter is for information purposes only. It does not constitute professional advice or an opinion. Please contact us on info@lecocqassocate.com for any questions.
Footnotes
[1] RS 955.0
[2] Federal Council Message (FF 20195237), N 5238.
[3] Federal Council Message (FF 20195237), N 5295.
[4] Federal Council Message (FF 20195237), N 5295.
[5] CR LBA-Matthey Sylvain, art. 4 N 37.
[6] Federal Council Message (FF 20195237), N 5295.
[7] Federal Council Message (FF 20195237), N 5295.
; CRLBA-Matthey Sylvain, art. 4 N 37.
[8] Federal Council Message (FF 20195237), N 5295.
[9] TheWolfsberg Group, Wolfsberg Anti-Money Laundering Principles for PrivateBanking (2012), ch. 1.3.
[10] CR LBA-Matthey Sylvain, art. 4N 38.
[11] CR LBA-Matthey Sylvain, art. 4N 38.
[12] CR LBA-Matthey Sylvain, art. 4N 39.
[13] CR LBA-Matthey Sylvain, art. 4N 39.
[14]Section 15 AMLO-FINMA.
[15] HeimKathrin/Wettstein Tamara, VSB 2020, art.27 N 6 ; CR LBA-Matthey Sylvain, art. 4 N 41.
[16] CR LBA-Matthey Sylvain, art. 4N 41.
[17] CR LBA-Matthey Sylvain, art. 4N 42.
[18] Section 20 para. 1 , section27 para. 1 CDB 20.
[19] Federal Council Message (FF 20195237), N 5296.
[20] Federal Council Message (FF 20195237), N 5296 ; CR LBA-Matthey Sylvain, art. 7 N 61.
[21] Federal Council Message (FF 20195237), N 5296 ; CR LBA-Matthey Sylvain, art. 7 N 61.
[22] Federal Council Message (FF 20195237), N 5296 ; CR LBA-Matthey Sylvain, art. 7 N 62.
[23]Section 61 Civil Code of Switzerland (CC).
[24] Section 61 para. 2 no. 3 CC ;Section 90 para. 1 lit. Commercial Register Ordinance (CRO).
[25]Section 61 para. 2ter CC ; Section 90 para. 2 CRO.
[26] Section 90 para. 2 lit. a CRO.
[27] Section 90 para. 2 lit. b CRO.
[28] Section 90 para. 2 lit. c CRO.
[29]Section 957 para. 1 Code of Obligations (CO) ; Federal Council Message (FF2019 5237), N 5335.
[30] Section 39 para. 1 no. 11 FederalBankruptcy Act.
[31] Section 61a CC.
[32] Section 6bbis final titleCC.
[33] Section 6bbis final titleCC ; Federal Council Message (FF 2019 5237), N 5320.
