New measures will bring Switzerland further into line with international standards and with the EU in relation to legislation in this area.

A number of measures have been proposed by major industrial nations to crack down on money laundering, a drive that has accelerated since the attacks on the US on 11 September 2001. One country that will be affected is Switzerland, which brought into force legislation implementing regulations on 1 February this year. Switzerland has gone a long way to bringing its rules into line with those of other measures although some issues of controversy remain.

Background

The regulations were proposed by the Financial Action Task Force, a group that was established in 1989 by a Group of Seven summit in Paris to develop and promote national and international policies to help eliminate the threat posed by money laundering to the banking system and financial institutions.

In 2001, efforts to stamp out money laundering were extended to developing standards to squeeze terrorist financing.  There are currently 34 members of FATF, made up of 32 countries and  international organisations, and 20 observers.

In 1990, FATF published 40 Recommendations on money laundering, updating them in 1996, and in October 2001 they expanded their mandate to deal with terrorist financing, creating nine Special Recommendations – there were originally eight, with the ninth created in 2004.  The aim of these was to provide a comprehensive and consistent framework of measures for combating money laundering and terrorist financing.  FATF monitors compliance by member countries with their recommendations  by carrying out "mutual evaluation reports" on individual jurisdictions to assess the effectiveness of national policies in dealing with money laundering and terrorist financing.  IMF and World Bank also carry out assessments.

The 40 recommendations

The 40 Recommendations outline measures which national systems should have in place within their criminal and regulatory systems.  They also include preventative measures to be taken by financial institutions and certain other business and professions, and measures in relation to international cooperation. 

The recommendations set out the scope of the criminal offence of money laundering and the type and level of offences to which nations should apply the crime of money laundering.

For example, the recommendations cover measures such as tracing to confiscate money and other laundered property, and call for customer due diligence and record keeping to be carried out by financial institutions and certain other non-financial businesses and professions.  This includes particular measures to be taken in relation to politically exposed persons and cross-border correspondent banking and other similar relationships.  Special attention is recommended for complex, unusual transactions and unusual patterns of transactions.  Provisions are set out for the reporting of suspicious transactions and compliance. 

Other measures to deter money laundering and terrorist financing include moves against the establishment and continued operation of shell banks.  It is also suggested that consideration be given to reporting by banks and other financial institutions and intermediaries of currency transactions over a specified amount, and that countries consider applying the recommendations to non-financial businesses and professions, other than designated ones, that pose a money laundering or terrorist financing risk.

Measures are suggested to deal with countries that do not comply sufficiently with FATF Recommendations, as well as for the regulation and supervision of financial institutions and designated non-financial businesses and professions.  The establishment of a competent authority to deal with suspicious transaction reports or other information relating to money laundering or terrorist financing is also recommended. 

Recommendations are also made to ensure the transparency of legal persons and arrangements and in relation to international cooperation, mutual legal assistance and extradition, where appropriate.

United Nations

Countries are required to ratify and implement United Nations legislation in relation to the suppression of the financing of terrorism and to criminalise the financing of terrorism and associated money laundering.  They include measures to freeze and confiscate terrorist assets, and requirements for financial institutions and other entities subject to anti-money laundering obligations to report suspicious transactions related to terrorism. 

International cooperation is called for, as is the licensing of persons or entities providing a service for the transmission of money and measures to monitor wire transfers.  The recommendations also suggest countries should review laws in relation to non-profit organisations so that the latter are not used for terrorist purposes and recommend measures to detect and deal with the cross-border transportation of currency and bearer negotiable instruments.

EU and UK

The European Union has implemented the FATF recommendations in its Second and Third Money Laundering Directives of 2001 and 2006 respectively.  The First Directive, passed in 1991, established the framework for customer/client identification, record-keeping and central methods of reporting suspicious transactions upon which the subsequent Directives have been built.  All three directives have been implemented into UK law, the Third Money Laundering Directive taking effect as the Money Laundering Regulations 2007 which came into effect on 15 December 2007.

Switzerland

In 2005, FATF carried out an assessment of the anti-money laundering/counter-terrorist financing (AML/CTF) measures in Switzerland.  In October 2005, they produced a report summarising these and the level of compliance they provided with the FATF recommendations and suggested how the Swiss measures might be strengthened.

Following this assessment, the Federal Council of the Swiss government prepared a report in 2006 to put Swiss laws into line with the FATF blueprint. In June 2007, the Federal Council adopted a draft document, which was enacted on 3 October 2008.  On 19 January 2009, the Federal Council took the decision to bring into force the Act with effect from 1 February, subject to the deadline for a referendum to be petitioned expiring unused on 22 January 2009.

In addition to amendments required to the Anti-Money Laundering Act, implementation of the Recommendations requires changes to a number of ordinances of supervisory authorities in the areas of money laundering and terrorist financing, a number of which have already been revised including the Agreement on the Swiss Banks' Code of Conduct on the exercise of due diligence, or Due Diligence Convention, agreed last year.

Measures to be implemented

The measures in the new legislation include the extension of the Anti-Money Laundering Act to the fight against terrorist financing.  In addition, measures said to enshrine into legislation widespread current practice in relation to due diligence are included, as is a "minor cases clause" which allows the due diligence obligations to be relaxed in the case of ongoing relationships where small sums are involved and the legality of the business relationship is evident. 

Measures in relation to the reporting of suspicious transactions have been strengthened, and new predicate offences have been created.  Predicate offences are the criminal activity from which the proceeds of crime are generated.  Money laundering is a derivative offence, which can only be committed if the original predicate offence is committed.  The new offences created are smuggling committed by criminal organisations, counterfeiting of goods and product piracy.  Insider trading and market manipulation are to be dealt with through the reform of Stock Market Criminal Law.

Special Recommendation IX on the detection and prevention of the physical cross-border transportation of money relating to terrorist financing and money laundering will also be implemented, as will provisions to improve the exchange of information between national authorities and in relation to the delegation of legislative powers.

The impact

The new legislation is intended to correct shortcomings in Switzerland's defensive measures to combat money laundering and terrorist financing which were identified in the FATF's 2005 evaluation report, and to improve compatibility with the FATF Recommendations, where they are not already part of Swiss AML/CTF law.  In bringing in these measures, the Federal Council was seeking to demonstrate its intention to be actively involved in the international community's efforts in this area.

Going forward, the measures bring Switzerland further into line with international standards and with the EU in relation to legislation in this area and should go some way to countering arguments that Switzerland provides a refuge for those involved in criminal or terrorist activities. 

However, nothing in the new measures changes the position with regard to tax evasion, which in Switzerland, remains a civil offence.  Only the commission of tax fraud, a criminal offence, justifies the lifting of bank secrecy, as the US authorities have recently contended with in their investigation into whether UBS assisted US customers to evade tax in their home country.

Until this distinction between tax evasion and tax fraud is withdrawn, the perception is likely to remain that people seeking to evade tax in their own jurisdictions can find a safe haven in Switzerland.  For this reason, EU countries particularly, and the international community, are unlikely to regard Switzerland as fully compliant with the fight against all forms of criminal activity until they have addressed this issue.