Financial Action Task Force Report: progress in Switzerland’s AML/CFT regime
15 Dec 2016

2016 Financial Action Task Force report finds Switzerland’s AML/CFT regime to be robust and achieving good results. But the country has a high level of vulnerability to money laundering and there are still improvements to be made.

Switzerland has made substantial progress since its previous Financial Action Task Force assessment in 2005. For a jurisdiction once practically synonymous with financial secrecy, a particularly significant development was the 2009 agreement with the United States, which granted the IRS access to information about thousands of UBS accounts held in Switzerland by U.S. taxpayers.

But if Swiss banks no longer offer the profound discretion for which they were once infamous, other options remain on the table: Bloomberg reported in September on the growing popularity of Alpine Gold Vaults, which unlike Swiss banks have no obligation to report suspicious transactions. The world’s oldest and largest Free Port in Geneva has featured in a number of scandals this year that raise questions about its due diligence procedures, including most recently the discovery of antiquities looted from Palmyra among its deposits. 2016 also saw Swiss banks heavily implicated in the laundering of funds stolen from 1Malaysia Development Berhad. As a result of investigations in Singapore, two Swiss private banks have been ordered to cease operations and UBS and DBS have paid fines for more than twenty violations of AML controls.

These challenges to the integrity of the Swiss financial sector fuel a degree of scepticism about the country’s commitment to a truly rigorous AML/CFT regime. Swiss authorities have increasingly talked the talk, but some financial crime prevention professionals question the extent to which developments in regulation have real political will behind them—especially developments which threaten elements of the traditional Swiss ‘offer’ to potential customers.

The 2016 FATF report, released this month, takes a more positive view. It notes various factors which expose Switzerland to a high risk of money laundering, especially in connection with offences committed abroad. Half of the nearly $7 trillion under management in Switzerland (4.1% of all global assets under management) belongs to foreign customers, and the country remains the world leader for cross-border private banking. A 2015 risk assessment carried out by Swiss authorities identified fraud, corruption and organised crime as the main predicate offences for illicit funds entering the country. In addition, although the report suggests a more limited risk of terrorist financing through Switzerland, it identifies Swiss banks, money transfer and credit services as potentially exposed.

FATF suggest that Switzerland’s risk-based approach to financial crime prevention has, on the whole, been successful. Authorities, financial institutions and other relevant professions all have a good understanding of the money laundering and terrorist financing risks that they face, especially since the 2015 risk assessment. Regulated industries are monitored closely and Swiss authorities are generally willing to provide information to investigating agencies in other jurisdictions when appropriate. Most importantly, there is clear evidence of willpower to prosecute financial crimes. Convictions have been obtained for a wide variety of money laundering offences, including large scale, highly complex schemes, and there is also provision to seize assets in cases where there is no realistic likelihood of conviction.

However, even in the case of successful convictions the sanctions imposed are not always “proportionate and sufficiently dissuasive”, according to the report. There are also a number of blind spots in Switzerland’s AML/CFT regime: due diligence on longstanding customers whose risk may have developed over time is often not up to date; the potential for the misuse of Swiss legal entities has not been fully analysed and mitigated against; and the reporting of suspicious transactions by financial institutions, although improving, is still below par. In addition, FATF recommend that Swiss authorities remove the current, somewhat arbitrary limits on the information that can be exchanged with foreign investigating agencies under mutual assistance requests.

Overall, FATF gives Switzerland’s AML/CFT regime more consistent ratings than it gave the U.S. in a report also published this month (KYC360 analysis here). Switzerland’s effectiveness is mostly ‘substantial’ and in a few areas ‘moderate’. Unlike the U.S. no elements are rated as being of ‘high’ effectiveness, but nor are any considered sub-par (‘low’). There is little in the report to substantiate cynicism about the will of Swiss authorities to enforce regulation—indeed, the report explicitly praises their commitment to prosecute money laundering. However, action on FATF’s recommendations regarding the reporting of suspicious transactions and information sharing will be especially important to foster goodwill with international partners, and to secure Switzerland’s still somewhat uncertain reputation as a financial centre of integrity.

Amos Wittenberg, Editor, KYC360

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