Introduction
FATF proposals
Core elements of draft bill
Redefinition of predicate offences
Anti-money Laundering Act proposal on hold
Comment


Introduction

On February 27 2013 the government passed two draft bills proposing new legislation to combat money laundering and prevent tax evasion(1) (for further information please see "Government proposes to tighten legislation on money laundering and tax crime"). The first set of proposed rules aimed at implementing the Financial Action Task Force (FATF) recommendations (revised February 2012) into national law. The second set of proposed rules – a key element of Switzerland's white money strategy – introduced new diligence duties for banks and other financial service providers to the Anti-money Laundering Act in order to keep untaxed money away from the Swiss financial sector.

Public consultations on the FATF proposals and the Anti-money Laundering Act proposals took place until mid-June 2013. The Federal Council published reports summarising the feedback received from interested third parties on the FATF proposals(2) and the Anti-money Laundering Act proposals(3) in September and November 2013, respectively.

FATF proposals

The FATF proposals provided for a number of measures aimed at the implementation of the 2012 FATF recommendations into Swiss law. The State Secretariat for International Financial Matters summarised the measures on its website as follows:(4)

  • "Introduction of a disclosure obligation for holders of bearer shares and registered shares of unlisted companies and as an alternative to the depositing (registration) of bearer shares in electronic format with a third party, in order to increase the transparency of legal persons, and the extension of the due diligence requirement for establishing the identity of beneficial owners. The proposed measures must also meet the requirements of the Global Forum.
  • Obligation to establish identity and risk-based due diligence requirements for domestic politically exposed persons and those in intergovernmental organisations.
  • Extension of the predicate offence which already exists in the area of indirect taxation and the introduction in the Criminal Code of a new predicate offence for money laundering in the form of qualified tax fraud in the area of direct taxation.
  • Targeted broadening of the scope of the Anti-Money Laundering Act (AMLA), in particular to include purchases of real estate and movables exceeding the CHF 100,000 threshold. It will be mandatory for purchases exceeding this amount to go through a financial intermediary subject to the AMLA.
  • Extension of the time available for analysing reports and as a result modification of the freezing mechanism for financial intermediaries. The proposed measures will boost the reporting system's effectiveness.
  • Formalisation of the established practice in connection with foreign terrorist lists."

Core elements of draft bill


Responding to comments received during public consultations, the Federal Council noted in a September 4 2013 press release that, in addition to technical amendments, the following three major changes would be made to the draft bill:

"Bearer shares – Supplementing the measures proposed on 27 February, the Federal Council is examining the introduction of an alternative transparency measure in the event of dematerialised bearer shares being deposited with a third party (i.e. in the form of electronic registration). In contrast, it will not pursue the share immobilisation model (i.e. (physical deposit), as its introduction at the present time would interfere with the revision of company law.

Tax offences as predicate offences to money laundering – In the area of direct taxes, it is proposed to examine incorporating the predicate offence to money laundering in the Criminal Code rather than in the criminal law relating to tax offences. In this way, account is taken of the opinion of most consultation participants, who believe the implementation of tax offences as predicate offences should not interfere with the revision of criminal law relating to tax offences. The proposal of 27 February is maintained for indirect taxes, however.

Reporting system in the event of suspicions – The Federal Council is maintaining its main proposal of using the deferred freezing of assets to improve the effectiveness of the reporting system in the event of suspicions. Regarding the duty to report, however, the Federal Council has taken on the consultation proposals of setting a deadline for the analyses of the Money Laundering Reporting Office Switzerland (MROS) in order to limit the burden for financial intermediaries when performing their duties. Moreover, the right to report is maintained, thereby preserving a tried and tested system."

On December 13 2013 the Federal Council resolved to pass the amended bill on a Federal Act for Implementing the Revised Financial Action Task Force Recommendations to Parliament. (5)

Redefinition of predicate offences

The 2012 FATF recommendations require that "punishable tax offences (in connection with direct and indirect taxes)" constitute predicate offences to money laundering.

In the area of direct taxes, the draft bill therefore sought to introduce an aggravated form of tax fraud into Swiss tax law. It specified that tax fraud (ie, evasion of taxes using forged documents or through deliberate and malicious deception of the tax authorities) should no longer constitute a mere misdemeanour, but a felony – provided that the taxable element (eg, income) concealed from the tax authorities is at least Sfr600,000. The government was of the view that by making aggravated tax fraud a felony, it would automatically qualify as a predicate offence to money laundering.

In the area of indirect taxes (eg, customs duties and value added tax (VAT)), the draft bill extended the existing definition of 'serious crime' to cover not only cross-border traffic in goods, but also taxes on domestic transactions (notably Swiss VAT or withholding tax).

While the amendments proposed by the draft bill with respect to indirect taxes remained unchanged in the bill submitted to Parliament, the measures on direct taxes were significantly amended. Multiple respondents raised concerns that the proposed introduction of aggravated tax fraud could conflict with the pending revision of the Swiss tax crime regime (for further details please see "Tax crime regime to be revamped"). Moreover, the proposed threshold of Sfr600,000 of concealed tax elements was considered unsuitable and inappropriate by the majority of respondents. In response to these concerns, in the bill submitted to Parliament the government proposed to extend the definition of predicate offences to money laundering to include any evasion of direct taxes (ie, even a mere failure to report income or assets not involving any particular malicious act) where the amount of the evaded direct taxes exceeds Sfr200,000 per tax period.

Anti-money Laundering Act proposal on hold

The Anti-money Laundering Act proposal sought to impose an obligation on financial intermediaries (ie, banks, insurers, securities traders, asset managers or fiduciaries) to verify, when accepting assets from new or existing customers, whether these assets are taxed or will be taxed in the relevant jurisdiction (typically, the customer's country of domicile).

Public consultations showed that this proposal was almost unanimously rejected. Most respondents raised concerns that the new diligence duties, as proposed by the Federal Council, would go far beyond global standards. Commenters across the board dismissed the proposal as an overzealous 'Swiss finish', which would ultimately put the Swiss Financial Centre at an unreasonable disadvantage to its competitors. In view of the fast-developing discussions at the G20 and Organisation for Economic Cooperation and Development (OECD) level towards automatic exchange of information in tax matters, the new diligence duties proposed by the Federal Council were seen as regulatory zeal imposing rules on the banks, which at the date of enactment might already be outdated.

Since the broad opposition significantly diminished the chances of the Anti-money Laundering Act proposal passing Parliament, the Federal Council, by resolution dated November 29 2013, implicitly put the legislative process regarding this part of the bill on hold – and thereby, as most commenters noted, the white money strategy as a whole. In its press release of the same day,(6) the Federal Council noted that even though "banks and other financial intermediaries" had "to comply with enhanced due diligence requirements when accepting assets in order to prevent the inflow of untaxed assets", "the new requirements" would have "to be discussed in coordination with the conclusion of possible agreements on the automatic exchange of information between Switzerland and its main partner countries".

The Federal Council's plans now foresee that the stricter diligence duties of the Anti-money Laundering Act proposal may apply only with respect to bank accounts linked to states with which no agreements on automatic information exchange exist. Accordingly, the Federal Council instructed the Federal Department of Finance to submit a new proposal on the extended diligence requirements of financial intermediaries once the outcome of the international developments at the OECD and G20 level are known.

On February 13 2014 the OECD unveiled(7) a "new single global standard for the automatic exchange of information between tax authorities worldwide"(8) and informed that "more than 40 countries have committed to early adoption of the standard".(9) The new model rules seek to define a "Common Standard on Reporting and Due Diligence for Financial Account Information". Accordingly, the standard is not limited to setting rules for the automatic exchange of information in tax matters, but seeks to unify diligence duties imposed on financial intermediaries in all states implementing the new standard.

Consequently, the upcoming Anti-money Laundering Act proposal is likely to adopt such a standard as to allow similar diligence duties to apply to all bank accounts, irrespective of whether the accounts are linked to states with which agreements on automatic information exchange exist.

Comment

Two years after the launch of the government's strategy for a tax-compliant and competitive Swiss financial centre, the implementation of Switzerland's white money strategy remains a work in progress. While the implementation of the FATF Recommendations 2012 is on track, the idea of introducing a 'Swiss finish' on diligence duties of financial intermediaries which would apply on top of the upcoming provisions on automatic exchange of information in tax matters met with unanimous disapproval from interested groups and had to be dropped. The lesson to be learned by the Swiss government from this failure should be that future initiatives must focus on participating in the modelling of international standards, rather than on creating legislative peculiarities for purely domestic use.

For further information on this topic please contact Bernhard Loetscher or Axel Buhr at CMS von Erlach Poncet Ltd by telephone (+41 44 285 11 11), fax (+41 44 285 11 22) or email (bernhard.loetscher@cms-vep.com or axel.buhr@cms-vep.com). The CMS von Erlach Poncet Ltd website can be accessed at www.cms-vep.com.

Endnotes

(1) The press release is available at www.news.admin.ch/message/index.html?lang=en&msg-id=47934.

(2) The summary report for the FATF proposal is available at www.news.admin.ch/NSBSubscriber/message/attachments/31879.pdf.

(3) The summary report for the Anti-money Laundering Act proposal is available at www.news.admin.ch/NSBSubscriber/message/attachments/32958.pdf.

(4) See www.sif.admin.ch/dokumentation/00509/00510/00622/00624/00868/index.html?lang=en.

(5) The government's press release is available at www.news.admin.ch/message/index.html?lang=en&msg-id=51377. The message to the Parliament is available at www.news.admin.ch/NSBSubscriber/message/attachments/33156.pdf. For the draft bill submitted to Parliament cf, see www.news.admin.ch/NSBSubscriber/message/attachments/33158.pdf.

(6) The press release is available at www.news.admin.ch/message/index.html?lang=en&msg-id=51189.

(7) The press release is available at www.oecd.org/newsroom/oecd-delivers-new-single-global-standard-on-automatic-exchange-of-information.htm.

(8) The standard is available at www.oecd.org/ctp/exchange-of-tax-information/Automatic-Exchange-Financial-Account-Information-Common-Reporting-Standard.pdf.

(9) These early adaptors include Argentina, Belgium, Bulgaria, Colombia, Croatia, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, India, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Malta, Mexico, the Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, South Africa, Spain, Sweden and the United Kingdom; the United Kingdom's crown dependencies – the Isle of Man, Guernsey and Jersey; and the United Kingdom's overseas territories – Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat and the Turks and Caicos Islands. Switzerland, which was not among the early adaptors, welcomed the work of the OECD committee on financial affairs in a statement on February 13 2014, noting that it had actively contributed to the drafting of the standard. The press release is available at www.sif.admin.ch/themen/00502/00821/00904/index.html?lang=de.