On August 30, 2023, the Federal Council of Switzerland announced proposed laws (the “Press Release”) to strengthen its anti-money laundering (“AML”) efforts in important ways.

The proposal includes an obligation for attorneys and other advisers to conduct due diligence; the creation of a centralized, non-public register of beneficial owners (“BO”); and new measures concerning sanctions violations, real estate transactions, and precious metal traders.  

The Federal Council has found that “[m]oney laundering and terrorist financing pose a serious threat to financial system integrity” and that criminals (whether in Switzerland or over the world) misuse legal entities to conceal assets and in furtherance of illicit activity.  As a “major financial centre,” The Federal Council realizes that Switzerland is exposed to these risks.  In the eyes of the world, the United States and Switzerland often have vied for the dubious title of the world’s top haven for tax evasion and money laundering.  And Switzerland has been feeling the pressure due to being one of the world’s top economies which still has not implemented regulations for BOs.

The Federal Council published the proposed laws in German (which we do not review in this blog), and issued in English an FAQ and an informative graphic.  The Federal Council is seeking input until November 29, 2023, and will act on the legislation in 2024.

The aim of the proposed laws is to “contribute significantly to protecting the financial centre from funds of criminal origin, and to strengthening Switzerland as a business location.”  Although the Swiss financial sector has more robust safeguards against money laundering and terrorist financing activities, the FAQ explains that “there are gaps in other, nonfinancial areas in this respect” and that “it is necessary to also include particularly risky activities in the non-financial sector in efforts to prevent and combat financial crime.” The Federal Council has found that the “high money laundering risks associated with legal entities and trusts” require legislation to strengthen the Swiss framework. According to the Press Release, prosecuting authorities would benefit from increased transparency to more quickly and accurate identifying the true owners of legal entities. 

Attorneys and Advisers Will Have to Perform Due Diligence

The Federal Council has identified that certain “consultancy activities” (which include lawyers) carry an elevated risk and therefore require the imposition of AML due diligence rules. The high-risk activities concern assistance with entity formation and real estate transactions. The FAQ explains that the new due diligence requirement on the covered professionals will be similar to those applicable in the financial sector and will include the identification and verification of (1) clients and (2) the BOs of a transaction.

Touching on global AML concerns regarding the use of so-called shell companies, the FAQ explains that when “the client is a legal entity, the beneficial owner as well as the object and purpose of the transaction must be identified.” Furthermore, if the professional determines that the client or the transaction has a “particularly high risk profile,” the professional may need to verify the source of funds or request further information. It is unclear whether that determination follows an objective or subjective standard. And last, the professional must “appropriately record” the “steps undertaken in connection with due diligence.”  Despite these new obligations, the FAQ assures that “professional secrecy for lawyers and notaries is maintained.”  According to the FAQ, “the obligation to report to MROS [the Money Laundering Reporting Office Switzerland] ceases to apply if the information is subject to professional secrecy.”

Like the centralized BO register discussed below, this is another parallel development between the United States and Switzerland in the fight against money laundering and enhanced scrutiny of the potential use of legal service providers to further criminal activity. Very recently, the American Bar Association (“ABA”) voted to revise ABA Model Rule of Professional Conduct 1.16 and its Comments (the “Rule”).  The ABA revision, on which we blogged here, explicitly recognizes a lawyer’s duty to assess the facts and circumstances of a representation at the time the lawyer is engaged and throughout the representation to ensure that the lawyer’s services are not used to “commit or further a crime or fraud.”

The Centralized Register for BOs

The proposed Swiss laws for a BO register accessible to law enforcement are similar to upcoming requirements under U.S. Corporate Transparency Act (“CTA”) for the Financial Crimes Enforcement Network (“FinCEN”) to implement a database of BOs, set to take effect beginning in 2024.  We have blogged extensively on the CTA, including here, here, here, here, and here.

The Press Release describes the BO register as a repository of both legal entities and their BOs.  The Federal Department of Justice and Police will manage it, and the Federal Department of Finance will carry out checks.

Entities covered would be “legal entities” under Swiss law including, e.g.,

  • AG (Aktiengesellschaft, an entity with shareholders),
  • GmbH (Gesellschaft mit beschränkter Haftung, a type of limited liability entity),
  • SICAV (a type of investment company),
  • Cooperatives,
  • Foundations, and
  • Associations.

It also proposes to cover foreign entities operating in Switzerland.  A simplified reporting procedure applies to “most companies, especially sole proprietors, limited liability companies, foundations, and associations.”

The description of the types of covered entities appears similar to covered entities under the CTA, meaning entities that require a filing to come into existence.  Seemingly, legislators in Switzerland, just as much as in the United States, are attuned to the difficulty of capturing the appropriate scope of entities.

A BO is defined as “a private individual who controls a legal entity” with control seemingly defined as holding “[e]ither alone or together with a third party, [] at least 25% of the capital or voting rights in the company, or exert control in some other way.” If nobody meets one of these criteria, the FAQ provides that “the most senior member of management is deemed to be the beneficial owner.”

Similarly, the CTA provides for two BO prongs – one for 25%+ owners and another one for persons exercising “substantial control.”  FinCEN reviewed the comments to the proposed CTA regulations and noted in the preamble to the final regulations regarding BO reporting that some comments argued the regulations were too broad, too complex, and too difficult and costly to understand. Both the United States and Swiss agencies should consider being more cognizant of the real-world struggles by covered entities to accurately and timely identify BOs.

The FAQ explains that the responsibility of determining who is a BO falls on the covered entity. Furthermore, the covered entity would have to “use appropriate means to verify this information.”  Newly created covered entity have one month to report the BOs, with a one month deadline to report changes. Entities already in existence will receive a transitional period to register and provide the BO information.   The one-month deadlines and the differentiated registration periods for new- and already-existing entities under the proposed Swiss regime are strikingly comparable to the CTA’s requirements.

Further Measures to Strengthen the AML and Sanctions Framework

The last piece of the proposed laws are three additional measures intended to strengthen Switzerland’s AML framework.  The Press Release explains very generally that the proposed laws include a provision pertaining to the Swiss Embargo Act which aims to prevent the breach or circumvention of certain sanctions.  Unfortunately, the FAQ does not explain the provision with further detail except to note that it imposes “new preventive obligations with regard to compulsory measures” under the Swiss Embargo Act and should induce “financial intermediaries” to “take additional measures to prevent criminal acts.” 

The second measure pertains to due diligence obligations for real estate transactions involving cash.  While there is no prohibition on cash payments for real estate, the FAQ explains that nowadays “large cash payments are unusual in business transactions” and therefore necessitate due diligence obligations.  Switzerland is not alone in its concern that criminals may be inclined to engage in real estate transactions.  FinCEN periodically has published Geographic Targeting Orders and Alerts regarding enhanced due diligence for residential real estate transaction in specific geographical areas.  FinCEN furthermore has entertained the need for more due diligence under the BSA for residential and commercial real estate transactions not financed via a loan, mortgage, or other similar instrument, issued by a bank or non-bank residential mortgage lender or originator (see our blog post on this topic here).

The third additional measure pertains to cash payments made to precious metal traders:  new due diligence obligations would apply to payments exceeding CHF 15,000 (about $16,900).  This concern is echoed by FinCEN’s requirement that dealers of precious metals comply with the obligations under the BSA including implementation of an AML program.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. Please click here to find out about Ballard Spahr’s Anti-Money Laundering Team.  Please click here to read our article on potential money laundering and client due diligence issues facing attorneys.