I. IDENTIFICATION DUTIES AND THEIR EXCEPTIONS
In a recent presentation on the subject of the Money-laundering law and its application, to the Geneva Business Community, the Swiss Attorney-general Carla del Ponte had the opportunity to exchange views not only with bankers, but with representatives of a wide range of professions. It illustrated the complexity of the subject and emphasized its sometimes controversial aspects.
While the Attorney-general recognizes that not only the legislation but also the bankers' attitude have changed concerning active or negligent participation in the laundering of money coming from criminal activities, she complains about the bankers' lack of cooperation in reporting suspicious clients on the one hand and the multiple exceptions to an effective application of the law to all professions on the other hand.
It is indeed a fact that the Swiss banking community has long since created its own regulation "in order to preserve its good name and establish rules ensuring a business conduct that is beyond reproach, in the area of banking secrecy and when accepting funds".
To ensure effectively that the banks do not favour financial criminality, three agreements have been signed between the banks and the Swiss Bankers' Association since the original one of 1977, respectively in 1982, 1987, and 1992.
The 1992 Agreement in the main fixes the practical administrative procedures to be followed by the banks in order to be in conformity with the requirements of due diligence specified by art. 305 ter of the criminal code. In a previous release for BM, we commented on the articles 305 bis and ter of the Swiss criminal code and the right for professionals to report to the competent Swiss authorities for criminal prosecution and the federal authorities designated by law, any grounds for suspicion that assets could originate from a criminal offence.
The banks are also obliged by the Banking Law Art 3, par 2,a and 2,c, to fulfill the criteria of irreproachable business activity and of appropriate administrative organization.
And last, the Federal Banking Commission has issued guidelines to explain its opinion on the requirements of the above-mentioned articles of the Banking law, to act as an aid to the banks in interpreting Art 305 bis and ter of the criminal code, and to ensure that the banks take into account the recommendations of the EC concerning Money Laundering.
The combination of the three regulatory elements prevents the bankers from denying responsibility in the case of criminal funds channeling through their operations, if they cannot give evidence that they have formally respected the diligence duties. The identification procedures are a part of the annual audit process and the bank's auditors have to report on their client's compliance with them.
The procedures concerning the verification of the identity of the beneficial owner of funds tightened successively in 1987 and 1992 and there are now very few exceptions:
1. The limit of cash transactions for which identification must be established (through a declaration by the contracting partner) decreased from 100'000 to 25'000 (which corresponds to the ECU 15'000 limit provided for by the EC 1991 Recommendations). For the rest, the basis of identification has not changed: In any case when entering into a business relationship, if there is any doubt as to whether the contracting partner is personally the beneficial owner, the bank shall require by means of a form A, a written statement setting out the identity of the beneficial owner (CDB art 3).
2. The B verification forms have been eliminated. Using these forms, the banks could previously accept funds from an attorney or a notary, who declared to know the beneficial owner and was not obliged, by virtue of his own professional secrecy, to divulge his client's name. The 1987 CDB limited the exemption from disclosure to attorneys or notaries acting in the pursuance of their profession (not as fund managers), provided that their mandate was not of temporary nature and would not be contracted with the sole purpose of hiding the identity of the owner of the funds. This was subject to the attorney/notary filling in a form "B1". Finally, the 1992 CDB, article 5, suppressed the form "B1" and introduced the form "R" which very specifically applies to attorneys or notaries admitted to the bar in Switzerland, declaring that the bank account is held exclusively for one of the following purposes:
- Winding-up, and related short-term deposit of advances on legal costs, security, fees under public law, as well as payments to or from third parties or authorities - Deposit and related investments of assets from a pending division of inheritance or execution of a will, or from a pending separation of property in a divorce or separation. - Deposits and related investments of assets in matters of civil and public law before ordinary courts or courts of arbitration and in execution proceedings. According to the attorney-general, the existence of the form "R" exception is a weakness limiting the efficiency of the overall system.3. Another exception concerns the "Global deposit accounts". These are opened by a third party, generally a fund manager, who deposits with the bank the assets (funds or securities) that he manages for several beneficial owners. The CDB 92 art 3, ch 24 provides that the fund manager must provide the bank with an exhaustive list of the beneficial owners and inform the bank of any change in this list (addition or withdrawal). The bank may waive the information about the beneficial owners if the fund manager is domiciled in Switzerland, and if he can provide a declaration by the prosecution authorities that they would forward any information or blocking requests to him directly. To benefit from the waiver, the fund manager must further abide by Art 2 to 6 and 9 to 15 of the CDB. The Swiss Bankers Association, in a circular dated 21 February 1994, has specified that this clause applies to individuals/companies who are members of the SBA and manage at least SF 250 million with the bank.
4. The 1992 CDB brought no material change to the procedure concerning the domiciliary companies. In case an account is held by a domiciliary company or by a company held by a domiciliary company, the bank must determine the identity of the persons controlling such companies by requiring the contracting partner to fill in a Form A. The identity of the persons controlling a domiciliary company must be ascertained and kept on file. But the CDB 92, with its article 36 introduced for the first time specific rules concerning the Trust entities. In case of organised associations of individuals, assets, or patrimony without specific beneficial owners, instead of identifying the beneficial owners on Form A, the contracting partner is required to provide a written declaration containing information about the actual settlor of the Trust, the persons authorised to instruct the contracting partner, the persons who are likely to become beneficiaries (e.g. "members of the settlor's family"), and the curators, protectors etc.
While the prosecution authorities, and Mrs. del Ponte in particular, admit that the combination of regulation and law have severely limited the possibilities for the banks to allow money launderers easy access to their services, they think that all these efforts are still insufficient to fight effectively against criminality:
The main flaw in the system is that it does not apply to those professions frequently used by the criminals, who have adapted their methods of laundering money, to the evolution of banking regulations, i.e. non-bank financial institutions, trustees, fund managers etc.
The other issue is the absence, in the law, of an obligation to report suspicious transactions. According to the attorney-general, the most painful (and efficient way) to hit the criminals is to seize their money, which is impossible if the banks merely close the accounts of suspicious clients, thus forcing them to leave but enabling them to get away with the funds.
A last issue is the fact that the criminal money often uses the same circuits as those used for tax evasion, which is not a criminal offence in Switzerland.
All these three aspects are highly controversial subjects on which we will try to shed some light in our forthcoming articles.
For any further information on this topic, please contact Deloitte & Touche SA, Geneva, Marie-Christine Chalon, Senior Manager in charge of Fraud Prevention and Fraud investigations (41-22-788 02 46) or enter a text search "Deloitte and Touche" and "Business Monitor".
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
