Money laundering and sanctions

A large number of new customers of the Swiss asset management industry are to be found in the emerging markets, where there is a significant threat of corruption. Various global corruption and money-laundering scandals, as well as the numerous violations of money-laundering regulations by financial institutions, show that the risks for financial institutions involved in the cross-border wealth management business remain high. Experience has shown that the financial flows associated with corruption and embezzlement can involve not just affluent private clients who qualify as politically exposed persons, but also state or quasi-state organisations and sovereign wealth funds. Particularly in asset management, the risks are often increased further by the use of complex structures. These include not only individual structures that can lead to a lack of transparency regarding the beneficial owners due to their complex composition, but also webs of business relationships, whereby the economic purpose is not clear due to the use of multiple domiciliary companies and which can be used to conceal the origin of potentially criminal assets.
The Swiss financial centre was not unscathed by various money-laundering scandals in the past. Numerous cases clearly illustrated the following: a bank’s compliance framework must keep pace with risk appetite. Among other things, the annual risk analysis plays an important role here. A financial institution not only needs to keep a constant eye on whether the assumed risks actually correspond to its respective business activities, but also to ensure that these are sufficiently mitigated by control mechanisms.

The increase in the number of MROS reports in recent years may indicate a cultural shift as well as better monitoring systems, but also the continued existence of a number of very significant risks. The reports submitted to MROS and the corresponding calculations reveal an increase of around 12% compared with 2020. As in the previous year, transaction monitoring was the source of information that most frequently revealed suspicious conduct on the part of financial intermediaries in 2021 (33%). However, according to information from MROS, the high percentage of reports of suspicious activity that resulted from transaction monitoring are in part due to reports of suspicious activity in connection with the granting of COVID loans. Information from third parties and media reports are in second and third place again and together make up 42.6%, meaning that financial institutions remain heavily reliant on external information.

In addition to the well-established money-laundering risks (especially in connection with cross-border asset management), risks in the crypto area are becoming increasingly apparent, particularly in connection with cryptocurrencies. While new technologies facilitate efficiency improvements in the financial area, the threats of money laundering and the financing of terrorism are also heightened due to the potential for greater anonymity along with the speed and cross-border nature of transactions. In particular, cryptocurrencies are often used in connection with cyberattacks, or as a means of payment for illegal trading on the dark web. Money-laundering risks can be significant for FinTech companies too. Financial institutions active in this area that do not have adequate money-laundering risk defences could seriously damage the reputation of the Swiss financial centre.

In view of Russia’s invasion of Ukraine, the Federal Council took the decision on 28 February to adopt the packages of sanctions imposed by the European Union (EU). The State Secretariat for Economic Affairs (SECO) is responsible for checking that the sanctions are enforced. FINMA is responsible for monitoring the supervisory organisational rules in financial market law. These rules require that the supervised financial institutions adequately identify, limit and monitor all risks including legal and reputational risks as well as establishing an effective internal control system. This also includes dealing with sanctions. The ordinance on measures connected with the situation in Ukraine encompasses not only the usual financial sanctions against certain listed individuals and businesses, but also bans on providing certain financial services to Russian nationals as well as individuals and businesses residing in the Russian Federation. The correct observance of sanctions is operationally challenging and requires the utmost care. Breaches of sanctions regulations pose high legal and reputational risks for the individual institutions, but also for the Swiss financial centre as a whole.

(From the Risk monitor 2022)