Money laundering and sanctions (2023)

A large number of new customers of the Swiss wealth management industry are to be found in emerging markets, where there is a significant threat of corruption. Experience has shown that the financial flows associated with corruption and embezzlement can involve not just politically exposed persons, but also state or quasi-state organisations and sovereign wealth funds. Particularly in asset management, the use of complex structures may further increase the risk. These not only include structures whose complex design leads to a lack of transparency about the beneficial ownership of assets. A web of business relationships, where the use of multiple domiciliary companies makes it impossible to establish the economic purpose can also be used to conceal the origins of criminal assets.

The Swiss financial centre has not been left unscathed by various money-laundering scandals in the past. A whole host of cases have shown that a bank’s compliance framework must be adapted in line with risk appetite. Among other things, the annual risk analysis plays a key role here. A financial institution not only needs to keep a constant eye on whether the risks it is assuming actually correspond to its business activities, but also ensure that these are mitigated effectively by control mechanisms.

The increase in 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 received by MROS and the corresponding calculations show an increase of 28% over the past year. This increase is twice as high as in 2021 and represents the strongest growth since 2018. 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 2022 (30%).

In addition to the well-established money-laundering risks (especially in connection with cross-border wealth management), risks in the crypto area are becoming increasingly apparent. While new technologies facilitate efficiency improvements in the financial system, the threat of money laundering and the financing of terrorism is 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 without adequate management of money-laundering risk could seriously damage the reputation of the Swiss financial centre.

In view of the war between Russia and Ukraine, the Federal Council took the decision on 28 February 2022 to adopt the packages of sanctions imposed by the EU. 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 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 the supervised financial institutions to adequately identify, limit and monitor all risks including legal and reputational risks and establish an effective internal control system. This also includes dealing with sanctions.

The correct observance of sanctions is operationally challenging and requires the utmost care. Breaches of sanctions regulations pose severe legal and reputational risks for the individual institutions, but also for the Swiss financial centre as a whole. Even if sanctions regulations are complied with, there are high reputational risks in dealing with high-risk clients (such as politically exposed persons) from sanctioned countries, which require particularly careful risk management.

(From the Risk monitor 2023)