Switzerland: Law of Offshore
Investment Funds Law
Until the advent of FINMA, the Swiss banking sector was regulated by the Federal Banking Commission (FBC) under the Banking Law of 1934, as amended most recently in 2008. Banking is defined to include all deposit-taking activity, in whatever corporate format, but does not include the issuance of bonds or securities trading. The offices, branches, agencies and permanent representatives of foreign banks are covered by the law.
Banks are licensed by the FINMA. The main conditions for the granting of a license are as follows:
- If the banking activity is to be on any significant scale, the management and supervisory functions of the bank must be separated;
- The bank must conform with currently applicable minimum capital requirements, as set by the Federal Council;
- Officers must have good antecedents;
- Persons having 10% or more of the bank's capital (a 'qualified participation') must guarantee that they will not influence the bank in any negative way;
- The bank (and the persons concerned) must notify the FINMA of any change in a qualified participation;
- Corporate documents (statutes etc) must be lodged with FINMA, and any changes notified;
- Establishment of a foreign subsidiary or branch must be notified.
Banks with a controlling foreign shareholding must conform additionally to the following requirements:
- The home country of the controlling shareholder must guarantee reciprocity;
- The name of the bank must not indicate Swiss control;
- If the foreign owner is a group, it is likely that FINMA will require consolidated supervision;
- The foreign owner must keep the FINMA fully informed about its activities; in particular, changes in 'qualified participations' may lead to a demand for a new license.
FINMA applies world-standard equity, capital and liquidity rules to banks that it supervises. There are compulsory reserve requirements for banks which solicit deposits from the public, but these do not apply to private banks which avoid public solicitation of clients.
Banks licensed by FINMA must report both to FINMA and to the Swiss National Bank, and the latter has considerable reserve powers under the Banking Law. Reports submitted are however to be kept secret.
The Banking Law imposes strict secrecy on Swiss banks, but the Money Laundering Law 1998 (MLL) responded to increasing international concern by clarifying the circumstances under which banks should breach secrecy.
Under the MLL financial intermediaries were placed under a legal duty to report suspicious transactions and to retain clients' funds for a period of 5 days so as to give the authorities time to seize the assets should circumstances warrant such a response. Banks can be fined up to US$7m for non compliance with the money-laundering regulations. Other regulations include the requirement that customers be identified by way of adequate documentation, that staff be trained in money laundering detection techniques and that internal money laundering units be set up within institutions. Within 6 months of the law being passed USD124m of assets were seized.
See Other International Agreements for details of the regulations under which the Swiss authorities grant administrative and judicial assistance to foreign investigators.
In April 2002 the Federal Banking Commission announced that it wanted to introduce provisions to make information exchange with foreign securities regulators easier in order to prevent the misuse of the Swiss banking sector.
The banking watchdog made the announcement at a press conference in Bern, explaining to reporters that the recommendations had come about partly as the result of international pressure from the OECD, the EU, and the International Commission of Securities Commissions. The federal regulator revealed that it would be sending its proposals to then Finance Minister Kaspar Villiger, the government, and parliament for consideration.
Although in various ways the Swiss authorities have attempted to fall into line with the international campaign against money-laundering, they have not seriously dented the principle of banking secrecy. For instance, they refused to sign the OECD's declaration concerning 'Unfair Tax Competition' in late 1999, and in 2000, while they signed the OECD's 'Information Exchange' declaration, they stated that they considered they already conformed to its standards.
In mid-2001 the Swiss parliament decided to form a new central authority to combat financial crime in the country. The decision arose from concerns raised over just how efficient the system is regarding money laundering controls.
The Money Laundering Control Authority (MLCA) had been dogged by controversy with its director, Niklaus Huber handing in his resignation after bemoaning a lack of support from the Swiss finance ministry. His departure did not help to quash rumours, rife at the time, that the MLCA was under-staffed and under-funded.
And the MLCA branch, which is the first port of call for the banking industry when reporting suspicious transactions, the Money Laundering Reporting Office (MLRO), had not been free from difficulties either. In the previous year, four employees had resigned including senior official, Daniel Thelesklaf, who declared that he had not been awarded the necessary authority to deal effectively with financial criminal activities.
But Judith Voney, Mr Thelesklaf's replacement, told the local press that the office was indeed making headway. She said: 'We are investigating suspicious cases and the fact that we can forward them to the investigating authorities is a success in itself.'
Ultimately, the inconsistency of the system across the cantons is unhelpful to implementation of the law; so parliament has decided to try a different tack by removing the responsibility for prosecuting cases from the cantons and giving it instead to the new central authority which would also be responsible for notifying and investigating cases.
In addition to the forming of the new body, in 2003 additional legislation further centralised Switzerland's attempts to effectively tackle money laundering, organised crime and corruption. 'Under the new law, the Federal Police Office will receive the mandate to investigate cases with an international dimension. This will allow experts with specialist know-how to be more efficient in their investigations,' said Judith Voney.
The number of reports of suspicious transactions submitted to the Money Laundering Reporting Office of Switzerland (MROS) decreased for the second consecutive year in 2005. Most financial intermediaries under duty to report seemed to have less reason to suspect shady money transactions. Similarly, the number of reports from banking institutions decreased for the first time since the duty to report was introduced. As in previous years, the money transfer services accounted for almost half of the reports submitted. In its country assessment, the FATF evaluated MROS favorably.
While the number of reports received in 2004 had declined by 4.9% to 821 compared to the previous year, the number of reports further decreased by as much 11.2% to 729 reports in 2005. In 2005 MROS registered fewer reports filed by money transfer services, the business sector that accounts for the largest business volume, than in 2004. In fact, most businesses under duty to report suspicious money transactions contributed to the decrease in the number of reports.
In 2005, the Financial Action Task Force (FATF) assessed the Swiss financial centre and the measures for combating money laundering and terrorism financing for the third time. Also assessed was the cooperation of MROS with financial intelligence units of other nations. Taking into account the particular circumstances under which MROS operates, the FATF certified MROS as efficient and professional, an assessment that translates into 'largely compliant' with FATF standards.
In 2008 MROS has announced that, after a three-year slump, the volume of suspicious activity reports (SARs) had regained momentum, with SARs from the banking sector having reached a record high in 2007.
In 2012, MROS received a total of 1,585 SARs (down from 1,625 in 2011). The total value of assets involved reached CHF3.15bn, slightly under a total of CHF3.28bn in 2011. The banking sector accounted for 1,056 reports.
The high number of reports was attributed to retroactive reporting of multiple SARs by money transmitters, following a clean-up operation.
Of the SARs that MROS received in 2012, 86 percent were forwarded to the prosecuting authorities. There was a substantial increase in the number of forwarded SARs from the payment services sector.
In December, 2002, the Swiss Bankers Association issued new guidelines designed to separate research and banking activities in the country's financial institutions. The SBA said: 'The Board of Directors of the Swiss Bankers Association (SBA) has passed binding guidelines concerning the independence of financial analysis with a view to further strengthening the good reputation of Switzerland as a banking and financial centre. In particular, the SBA wants to ensure that financial analysis in Switzerland continues to remain independent and credible.'
The rules stipulate the establishment of so-called 'Chinese Walls' between a financial institute's research department and its other business areas, prohibit analysts from investing in firms or financial instruments which they assess or play a part in assessing, and ensure that analysts are not recompensed according to the success of specific transactions, making the possibility of biased analysis less likely.
In January 2009, the Swiss Federal Council announced the decision to bring into force the Federal Act of October 3, 2008 on the Implementation of the Revised Recommendations of the Financial Action Task Force (FATF) on Money Laundering with effect from February 1, 2009.
The decision was taken subject to the deadline for the petitioning of a referendum expiring unused on January 22, 2009. The bill is a blanket framework which will implement the 40 recommendations revised in 2003 and the nine special recommendations of the FATF in different laws, in particular the Anti-Money Laundering Act.
According to a statement from the Federal Finance Administration: "the move is designed to correct existing shortcomings in Switzerland’s defensive measures to combat money laundering and terrorist financing and improve compatibility with the FATF recommendations".
The Swiss government welcomed a new Stolen Assets Recovery Initiative launched in September 2007, by the United Nations Office on Drugs and Crime (UNODC) and the World Bank.
The Swiss Federal Department of Foreign Affairs stated that the new initiative corresponds with Switzerland's view that progress in the freezing, restitution and use of stolen or embezzled assets demands joint action at the international level.
"Switzerland is willing to contribute its experience in this area and to collaborate with the World Bank," the FDFA stated. "Switzerland has every interest in preventing the abuse of its financial centre as a result of the presence of assets of criminal origin. It has taken effective measures to prevent, uncover, freeze and return such assets. It takes the view that assets of criminal origin, especially those of politically exposed persons, should be restored to their country of origin whenever possible."The Swiss government believes that it has taken a leading position on restitution in comparison with other financial centres, having returned a total of USD1.6 billion in the context of the Marcos, Montesinos, Abacha, Kazakhstan and other cases.