Combating money laundering in the context of financial market supervision

Regulation of money laundering in Switzerland is based on two pillars. Firstly, money laundering is a criminal offence punishable by the criminal authorities (Art. 305^bis of the Swiss Criminal Code). Secondly, the Federal Act on Combating Money Laundering and Terrorist Financing in the Financial Sector (Anti-Money Laundering Act, AMLA) requires financial intermediaries to comply with due diligence and disclosure requirements in respect of client transactions. FINMA has issued a detailed ordinance in relation to this Act (FINMA Anti-Money Laundering Ordinance, FINMA AMLO).

Combating money laundering through supervision

Within the scope of its prudential supervision responsibilities, FINMA monitors compliance with the regulations on combating money laundering by financial service providers such as banks, securities firms, insurers and institutions under the Collective Investment Schemes Act. Insurers may alternatively choose to join the self-regulatory organisation of the Swiss Insurance Association (SRO-SIA) which monitors insurers' compliance with AMLA. Supervisory organisations (SO) authorised by FINMA monitor compliance with anti-money laundering legislation by independent portfolio managers and trustees. They also involve FINMA when necessary.

Furthermore, individuals and companies in the para-banking sector – credit card companies, trustees or payment service providers, for example – are also subject to anti-money laundering legislation. For the purposes of monitoring their compliance with due diligence and disclosure requirements as set out in the AMLA, these individuals and companies must be affiliated to a self-regulatory organisation authorised and supervised by FINMA.

Requirements for financial intermediaries

All financial intermediaries - whether supervised by FINMA or monitored by an SO or SRO - must comply with a range of due diligence and disclosure requirements in relation to combating money laundering, including the following:

• They must verify the identity of the contracting partner and identify the beneficial owner of the assets brought in.
• If a business relationship or transaction appears unusual or if there are indications that the funds stem from criminal activity or serve to finance terrorism, the financial intermediary must clarify the financial background and purpose of the business relationship or transaction.
• Business relationships and transactions with heightened risk, such as business relationships with clients in high-risk countries or with politically exposed persons (PEPs) must be recorded and clarified in greater detail.
• The financial intermediaries must implement the necessary organisational measures to prevent money laundering and financing of terrorism, including issuing internal directives, training staff and performing inspections.
• If there is any suspicion of money laundering in a business relationship, the financial intermediary must submit a report to the Money Laundering Reporting Office (MROS) of the Federal Department of Justice and Police.

FINMA engages recognised audit firms to assist it in monitoring compliance with these requirements among its supervised institutions. FINMA may also perform its own on-site inspections. If FINMA discovers any breaches of the law or other irregularities, it takes measures to correct them and may implement sanctions where provided for by law see Enforcement tools.

The SO and SRO also regularly monitor compliance with AMLA provisions through recognised audit firms or occasionally with their own auditors. If the SO and SRO detect irregularities, they are obliged to take commensurate countermeasures. Moreover, the SRO are responsible for sanctioning irregularities. If an SO identifies serious legal violations, it must inform FINMA immediately. FINMA is responsible for taking appropriate countermeasures to restore compliance when serious legal violations have been committed.

Industry-specific regulations

Additional anti-money laundering regulations apply to institutions which are subject to prudential supervision; these differ from industry to industry.

Banks and security firms

The obligation to verify the identity of the contracting partner and identify the beneficial owner is governed by the special provisions of the "Agreement on the Swiss banks’ code of conduct with regard to the exercise of due diligence (CDB 20)" of 13 June 2018. This agreement was enacted by the Swiss Bankers Association (SBA) in a self-regulatory procedure and approved by FINMA.

The SBA appoints a supervisory committee to investigate and punish any violation of its code of conduct. In such a case, the offending bank must pay a penalty of up to CHF 10 million depending on the severity of the violation, the degree of culpability and the bank’s financial situation.

Insurers

In relation to the Anti-Money Laundering Act, insurance companies may choose to be supervised by FINMA or be affiliated to the self-regulatory organisation of the Swiss Insurance Association (SRO-SIA) (in German and French)). This organisation supervises its members’ compliance with money laundering requirements on FINMA’s behalf, while non-members are supervised directly by FINMA. The SRO-SIA regulations (in German and French) also apply to non-members. In contrast, the rules on inspection, auditing and sanctions only apply to members. The SRO-SIA may caution its members or impose a fine of up to CHF 1 million.

Institutions under the Collective Investment Schemes Act

Similar to banks and securities dealers, fund managers, asset managers of collective investment schemes and CISA investment companies are subject to the CDB 20 rules in respect of verifying the identity of the contracting partner and identifying the beneficial owner.

Independent portfolio managers and trustees

FINMA authorises independent portfolio managers and trustees. The SO are responsible for the regular monitoring of anti-money laundering measures at their affiliated independent portfolio managers and trustees. AMLO-FINMA applies to independent portfolio managers and trustees. The SO must inform FINMA about serious violations of anti-money laundering legislation. FINMA is responsible for taking the measures required to restore compliance.

What is money laundering?

Money laundering is defined as channelling funds from illegal activity into the legal economy. The money laundering cycle can be broken down into three phases:

1. Placement: In the first phase, proceeds of crime are introduced into the legitimate financial system. For example, cash is paid directly into a bank account (or cheques acquired) and the funds are subsequently withdrawn and transferred to other accounts.
2. Layering: The money launderers carry out a series of currency conversions or reallocations of funds. To disguise the source of the money, they may buy and sell investment instruments and transfer the money to other bank accounts, particularly in countries with less stringent rules on combating money laundering. Alternatively, the money may be used to buy goods and services to make it appear legal.
3. Integration: If the money launderers succeed in using the first two phases to make their funds from criminal activity appear legitimate, they channel the money back into the legal economy by purchasing property and luxury goods or setting up companies.

Financial intermediaries must comply with stringent due diligence and reporting requirements. Tasked with ensuring compliance, both the Swiss Financial Market Supervisory Authority FINMA, the supervisory organisations and the self-regulatory organisations seek to prevent money laundering. This in turn enhances the credibility and proper functioning of the financial system.