Anti-Money-Laundering – Implementation of the Revised FATF Recommendations

On December 12, 2014, the Swiss Parliament adopted the Federal Act for Implementing the Revised Financial Action Task Force (FATF) Recommendations. The Federal Act provides new and revised provisions in the field of anti-money laundering, criminal and corporate law. The revisions mainly focus on enhanced transparency on the ownership of legal persons, the clarification and extension of the definition of Politically Exposed Persons (PEP) and, most importantly, the extension of the scope of predicate offences for money laundering to include qualifi ed tax offences.

By Alexander Greter / Nicolas Bonassi (Reference: CapLaw-2015-31)

1) Introduction

In February 2012, the Financial Action Task Force (FATF) issued a revised version of its recommendations. These recommendations are recognized as international standards for combating money laundering and terrorist financing. With the adoption of the  Federal Act for Implementing the Revised Financial Action Task Force (FATF) Recommendations on December 12, 2014, the Swiss Parliament made important changes to existing regulations. The key changes concern the Federal Act on Combating Money Laundering and Terrorist Financing in the Financial Sector (AMLA), the Swiss Criminal Code (SCC) and the Code of Obligations (CO). The provisions regarding bearer shares and the transparency of ownership of legal entities will enter into force on July 1, 2015 and the remaining provisions will be applicable as of January 1, 2016.

2) Qualified tax fraud as predicate offence for money laundering

Under the current regime, only actions with regard to assets that resulted from a crime (crimes are criminal offences that are punishable with an imprisonment of more than three years) or with regard to assets that were under the control of a criminal organization are considered predicate offences for money laundering pursuant to the SCC. This does not include tax fraud with respect to the Swiss Federal and Cantonal direct taxes. Certain qualified offences with respect to VAT, customs duties and certain other levies are, however, already within the scope of predicate offences for money laundering. As of January 1, 2016 the scope of art. 305bis SCC will be extended to qualified tax offences. Tax offence means tax fraud pursuant to the Federal Act on Direct Federal Taxes (FDTA) and the Federal Act on the Harmonization of Taxes (FAHT). Tax fraud as per the FDTA and the FAHT is committed by tax evasion in the context of which false or falsified documents or documents with untrue content are used. Tax fraud is a qualified tax offence as per the revised SCC if the amount of evaded taxes in a particular tax period exceeds CHF 300,000.

The extension of the scope of predicate offences for money laundering has led to a consequential amendment to the scope of art. 350ter para. 2 SCC to enable financial intermediaries to file a suspicion report with the Money Laundering Reporting Office Switzerland (MROS) in case of observations indicating that assets originate from a crime in case the duty to report pursuant to the AMLA is not triggered. As of January 1, 2016, suspicion reports may also be filed in case of indications of a qualifi ed tax offence.

Qualified tax offences as predicate offences for money laundering can also be committed with respect to taxes payable outside Switzerland; provided that the relevant conduct constitutes an offence in the relevant country, amounts to a tax fraud from a Swiss perspective and the evaded tax amount exceeds the equivalent of CHF 300,000. The amount of evaded taxes is calculated in accordance with the laws of the country where the tax fraud occurred.

Only qualified tax offences committed as of January 1, 2016 are considered predicate offences for money laundering. Qualifi ed tax offenses with respect to assets that came under the control of a financial intermediary prior to that date may be relevant for anti-money laundering purposes if committed after January 1, 2016, e.g. because tax returns are filed in 2016 only or a tax assessment by the foreign tax authority with respect to a prior tax year is issued on or after January 1, 2016.

3) Transparency on the ownership of legal entities

The revised AMLA provides for a duty of financial intermediaries to identify the beneficial owner of a legal entity in all cases with effect as of January 1, 2016. The concept that an operating company is considered the benefi cial owner of its assets is dropped and only individuals can be the beneficial owners of assets under control of a financial intermediary. Financial intermediaries are therefore obliged to implement appropriate measures to identify the individuals that ultimately control a legal entity. No formal identification of beneficial owners is required with respect to contracting parties that are listed on a stock exchange or that are subsidiaries of listed companies. This includes entities listed on a foreign stock exchange; provided that the financial intermediary is satisfied that adequate transparency rules are applicable.

The extension of the duty to identify beneficial owners of operating companies requires that the legal entities themselves know who their benefi cial owners are. To that end, the revised CO introduces an obligation to report the acquisition of bearer shares of companies limited by shares as of July 1, 2015 in order to achieve transparency on the ownership of legal entities, as required by the FATF Recommendations. Acquirers of bearer shares will have to disclose their identity to the company or to a financial intermediary designated by the company. Acquisitions of listed bearer shares are exempt from the reporting obligation. This exemption is not limited to Swiss stock exchanges and applies to bearer shares listed on a foreign stock exchange, at least if the applicable reporting obligations are comparable to the respective obligations pursuant to the Federal Act on Stock Exchanges and Securities Trading. Similarly, bearer shares that were issued as book-entry securities according to the Book Entry Securities Act are not subject to the reporting obligation. For purposes of transparency, the revised CO also requires cooperatives to introduce a register of members.

In addition to the reporting obligations of acquirers of bearer shares, the CO requires the disclosure of persons acquiring 25 percent or more of the capital or the votes of a legal entity, regardless of whether the acquisition has been made alone or in concert with others and regardless of whether the shares are issued as bearer shares or registered shares. The notification of the entity or, in the case of bearer shares, designated financial intermediary is made by the acquiring shareholder and must contain the name and the address of the person for whom the shares are ultimately acquired. Again, no reporting duties arise if the shares of the company are listed on a stock exchange or if the shares of the company have been issued as book-entry securities according to the Book Entry Securities Act. The duty to report a benefi cial ownership will also apply to limited liability companies.

The companies limited by shares as well as the limited liability companies are required to maintain a register of shareholders for bearer shares and for the benefi cial owners of their shares. The company or, in the case of bearer shares, the financial intermediary maintaining the register has to be notified of any changes regarding the holders of bearer shares or the beneficial owners of shares. Failure to comply with the reporting obligations leads to the suspension of all membership rights and, after one month, the financial rights are forfeited. Pursuant to the transitional provision regarding the amendments to the CO the membership rights of existing holders of bearer shares will be suspended if they do not, within one month from the entry into force of the new provisions, report the required information to the company. The suspension will be lifted once the required information is filed. If existing holders of bearer shares do not file the required information with the company within six months, then, in addition to the suspension of the membership rights, their financial rights will be forfeited. The transitional provisions only refer to existing holders of bearer shares. Therefore, it must be assumed that existing holders of registered shares are not required to report the person for whom the shares are ultimately held (if different from the registered shareholder) to the company until there are any changes with respect to the identity of that person.

4) Further key points of the reform

At present, the AMLA does not contain any special provisions relating to Politically Exposed Persons (PEP). The term was defined inconsistently in the different ordinances and regulations of self-regulatory organizations applicable to financial intermediaries, but generally only included foreign politicians and offi cials. A uniform definition of PEP will be included in the AMLA as of January 1, 2016. This new defi nition will extend to persons who are or have been entrusted with leading public functions in politics, administration, military and justice abroad or on a national level in Switzerland, members of the board of directors or of the management of state-owned enterprises with national importance as well as persons who are or have been entrusted with a leading function in intergovernmental organizations or international sport associations. In the case of Swiss PEP, the status as PEP ends 18 months after the retirement from the relevant function. For foreign PEP and PEP from international organizations, no such pre-defined period is applicable. For these persons, a risk-based approach shall be used to define whether the PEP status must be maintained.

As of January 1, 2016 the AMLA will also apply to traders, i.e. individuals and legal entities that commercially trade in movable goods and in this context accept payment of cash. The original proposal of the Federal Council to introduce a general limit of cash payments of CHF 100,000 for transactions of movable goods and real property was not adopted. However, pursuant to the revised AMLA, a trader of movable goods accepting cash in excess of CHF 100,000 in the context of a commercial transaction is to a large extent subject to the due diligence obligations and the duty to document applicable to financial intermediaries and has to identify the contracting party as well as

the benefi cial owner. If a transaction appears to be unusual or if there are indications that the assets could originate from a crime or a qualifi ed tax offence or are under control of a criminal organization, the background and the purpose of the transaction have to be clarified and, where required, a report has to be filed with MROS. Traders who have to comply with the aforementioned due diligence obligations because they have accepted cash payments in excess of CHF 100,000 in one or several payments in the context of a commercial transaction will have to appoint an auditor to audit the trader’s compliance with the relevant obligations and produce a report to the relevant corporate body of the trader.

The reform also changes the provisions of the AMLA regarding the freezing of assets and the prohibition of information. Until now, a report to the MROS led to an immediate freezing of assets. Pursuant to the revised AMLA, the financial intermediary will, however, continue to execute client orders, despite having filed a report with MROS, provided that a paper trail is maintained. The assets should only be frozen upon a notifi cation by MROS to the financial intermediary stating that the report has been forwarded to a criminal investigation authority. An immediate freezing of assets is, however, still required with respect to assets of persons who were included in a list forwarded to the relevant financial intermediary by the Swiss Financial Market Supervisory Authority (FINMA), the Federal Gaming Board (ESBK) or the financial intermediary’s Self-Regulation Organization (SRO). These lists are prepared by the Federal Department of Finance based on data received from other countries on persons under suspicion of being involved with or supporting terroristic activities. Finally, the prohibition to inform third parties about a report to the MROS is decoupled from the freezing of assets. The prohibition to report will be applicable for an unlimited period of time with respect to any filing of a report to the MROS, including the filing of a suspicion report pursuant to art. 350ter para. 2 SCC. The revised provisions of the AMLA, however, clarify that a notification of FINMA, ESBK or the financial intermediary’s SRO by the financial intermediary is permitted. The possibility to notify certain other financial intermediaries of the fact a report to the MROS has been filed remains unchanged.

5) Practical relevance for the financial intermediaries

The extension of the predicate offences for anti-money laundering requires financial intermediaries to clarify the background of transactions and client relationships based on the revised art. 6 para. 2 AMLA if the financial intermediary has indications that assets under its control originate from a qualifi ed tax offence. Accordingly, financial intermediaries will have to adapt their internal control systems and, in particular, to define suitable criteria which trigger the background clarifi cation by the financial intermediary. The current non-conclusive list of criteria indicating money-laundering set out in the annex to the FINMA Anti-Money Laundering Ordinance relates to the identification of funds originating from a crime and does not adequately cover qualifi ed tax offences. In light of the diversity of tax systems and the fact that certain elements which may, in practice, frequently be seen in the context of tax offences (e.g. retained mail agreements or structures including trusts and/or private investment companies) are widely used for valid purposes and may, therefore, not be suitable indicators of tax offences. Moreover, the fact that a tax offence will only trigger a reporting obligation if the evaded tax amount exceeds CHF 300,000 in a particular tax year allows financial intermediaries to define quantitative criteria. In case a financial intermediary knows or has strong indications that a tax offence was committed, it has to determine whether the tax offence is qualified, i.e. exceeds the threshold. This requires financial intermediaries to calculate or estimate the evaded tax amount which implies that the financial intermediary has or obtains adequate information about the applicable tax laws.

Although the revised AMLA does not provide for a general obligation to check tax compliance before establishing a new business relationship, it is likely that in the future, a risk-based approach will be applied to assess tax compliance at inception. The commitment of Switzerland to participate in the automatic exchange of information within the OECD as of 2018 as well as the international exchange of information with the U.S. based on FATCA and with the UK and Austria based on the respective Withholding Tax Agreements will be of relevance in this context. Financial information about clients with residence in the U.S., the UK and Austria and, as of 2018, the EU or other countries having entered into an agreement with Switzerland regarding the automatic exchange of information will be automatically transmitted to the relevant foreign tax authority. Alternatively, a withholding tax is deducted by the Swiss financial intermediary in the case of the UK and Austria. Therefore clients who are tax resident in one of these countries will likely cease depositing untaxed assets in Switzerland. This can be taken into account in the context of the risk-based approach to the review of tax compliance of clients. It should be noted, however, that on June 5, 2015, the Swiss Federal Council submitted a dispatch to Parliament proposing the introduction of a general obligation of financial intermediaries to check tax compliance of their foreign customers with respect to the assets held by or transferred to the financial intermediary.

Alexander Greter (
Nicolas Bonassi (