Money laundering supervision (2022)

During the year under review, FINMA analysed numerous offered and planned services in the crypto area. It provided the institutions with further details of its expectations in relation to the money laundering regulations. FINMA also communicated these expectations to the self-regulatory organisations (SROs) responsible for the money laundering supervision of numerous providers. Generally positive trends were seen with respect to the preventive reports being made to the Money Laundering Reporting Office Switzerland (MROS), for which transaction monitoring has increasingly been serving as a source of information. (…)

Money laundering supervision: findings concerning the handling of complex structures

Combating money laundering is one of FINMA’s core tasks. As part of its money laundering supervision activity in the year under review, it also conducted checks on the preventive measures implemented by banks and issued clarifications regarding their respective requirements.

As part of its money laundering supervision, FINMA identified that a number of banks had weaknesses in how they dealt with complex structures. A number of major money laundering scandals have emerged in recent years, in cases such as Petrobras, Odebrecht, 1MDB, Panama Papers, FIFA or PDVSA and, in the wake of these, the institutions made improvements to their anti-money laundering measures. However, in 2022 there was still potential for improvement in terms of compliance with the relevant due diligence obligations. In this regard, the supervisory activity focused on the criteria for classifying complex structures; investigations into the reasons for using domiciliary companies; and ensuring efficient transaction monitoring mechanisms for such structures.

In various cases, it was found that there were either no defined criteria at all for classifying the complexity of a structure, or that such criteria were being applied too mechanically in that, by way of example, a specific number of involved companies had been specified as a sole criterion. FINMA also found that institutions were not adequately investigating the background reasons behind structures set up by third parties and that, consequently, they had not been accurately assessing the risks. It was also discovered that one bank had not been presenting the complex structures held in its client portfolio in their entirety, and had failed to classify all of the affected business relationships as high-risk relationships, despite the fact that they should have been designated as such.

On-site supervisory reviews performed in connection with money laundering supervision

As an important supervisory tool, on-site supervisory reviews also produced further findings in 2022. A selection of these findings is set out below:

Target markets: In some cases, banks had not been adhering to the specifications they had defined for their target markets. Business activities falling outside the scope of the defined target markets entailed a significantly higher risk of money laundering due to a lack of coordination on the implemented risk management measures.

Risk analysis: The risk analysis required under the FINMA Anti-Money Laundering Ordinance (Art. 25 para. 2 AMLO-FINMA) is an important tool which strategic management can use to identify and minimise risks, as well as to determine the relevant risk criteria for the financial institution’s activity. Furthermore, it also helps to identify any money laundering risks that are not in line with the bank’s risk appetite. During the course of the on-site supervisory reviews, it was apparent that, although a risk analysis had been performed in each case, the analysis had not distinguished between inherent risks and residual risks. In many cases, moreover, there was no list of the measures being taken to reduce the residual risk.

Quality of the reports to the Money Laundering Reporting Office Switzerland

In recent years, the number of suspicious transaction reports being submitted by banks to the Money Laundering Reporting Office Switzerland (MROS) has grown significantly. In order that the MROS can process these reports effectively, and is then in a position to swiftly implement measures based on the findings drawn from those reports, the quality of the reports is also a very important factor. On numerous occasions during 2022, FINMA observed a lack of quality in the suspicious transaction reports submitted to the MROS by financial intermediaries. For example, documents were missing, factual circumstances had not been correctly recorded, or account information had not been provided in sufficient detail. The MROS has confirmed this state of affairs.

Systematic shortcomings in data quality may be indicative of organisational defects and deficient processes and control measures among the financial intermediaries.

Money laundering supervision of crypto business models

The Swiss provisions governing the information to be exchanged in the course of payment transactions (also referred to as the “Travel Rule”) also apply in the blockchain domain (see FINMA Guidance 02/2019 “Stringent approach to combating money laundering on the blockchain”). In order to comply with the Travel Rule, financial intermediaries must verify their clients’ ownership of the wallets that enable access to the cryptoassets. In this respect, FINMA deems various methods to be appropriate (see “FINMA 2020 Annual Report”).

Time-boxing procedure and wallet login

The time-boxing procedure is a new addition to the list of appropriate verification methods. Here, an amount is transferred directly by the clients in lieu of a prior microtransaction. The clients must give prior notice of the transaction and the desired amount, whereupon the financial intermediary will make the address and a short time box available to them. The agreed transaction can be executed within these specifications. Proof of ownership is established by verifying whether these requirements are being complied with. A further new feature involves clients logging in to their wallets in the presence of the financial intermediary’s employees. Provided that the procedure is adequately documented, this measure is also appropriate for the purposes of FINMA Guidance 02/2019 “Stringent approach to combating money laundering on the blockchain”.

Revision of the FINMA Anti-Money Laundering Ordinance

Implementation of the amended Anti-Money Laundering Act (AMLA) necessitated changes to the FINMA Anti-Money Laundering Ordinance (AMLO-FINMA), which entered into force on 1 January 2023. In particular, the AMLO-FINMA has been supplemented to the effect that financial intermediaries are required to issue an internal directive on the criteria to be applied for the purposes of the risk-based, periodic checks that must be carried out to ensure that client data are up to date.

FINMA clarified that, with respect to the physical distribution of virtual currencies (purchasing, selling and exchanging cryptocurrencies, particularly via ATMs) as well as for the purposes of exchanging virtual currencies for different anonymous means of payment, financial intermediaries must implement precautionary technical measures to ensure that the threshold of CHF 1,000 is not exceeded within a 30-day period. This clarification was issued to address the recent cases of abuse that have been identified.

(From the Annual Report 2022)