In the world of global financial crimes compliance, one national regulator that has become increasingly visible and assertive is the Swiss Financial Market Supervisory Authority (FINMA). FINMA’s supervisory and regulatory mandate extends across the Swiss financial sector to banks, insurance companies, financial institutions, collective investment schemes, and their asset managers and fund management companies.[1]
In carrying out that mandate, FINMA has been active on a variety of fronts relating to financial crimes. These include issuance of a revised Anti-Money Laundering (AML) Ordinance, sanctioning of leading Swiss bank Julius Baer for serious AML failings, and continuing cooperation with U.S. and other financial regulators and enforcement authorities.[2]
On April 2, FINMA published its 2019 Annual Report, which for the first time integrates FINMA’s Enforcement Report.[3] While the Report covered all aspects of FINMA’s supervisory and regulatory activity, it included three topics that are of particular interest from a risk and compliance perspective.
Enforcement Statistics
The Report presented the following statistical data regarding FINMA’s 2019 enforcement efforts:[4]
- Investigations: FINMA had 307 open investigations at year-end 2019, which represents a 14 percent decline from 2018 (355) and a 4 percent decline from 2017 (320).
- Enforcement Rulings: FINMA had 48 enforcement rulings in 2019. That represents a nearly 50 percent decline from 2018 (90) and a nearly 30 percent decline from 2017 (67). In addition, because FINMA rulings can be contested in court, there were 37 court rulings in 2019. Of those rulings, FINMA had 84 percent of its enforcement rulings upheld wholly or predominantly.
- International Cooperation: FINMA received 337 incoming requests for international assistance from other countries. That total reflects a 10 percent decline from 2018 (371) and a 25 percent decline from 2017 (444). It made 32 outgoing requests regarding enforcement proceedings that it was conducting. That total reflects a 10 percent increase from 2018 (29) and a 23 percent increase from 2017 (26).
Focal Points for Risk-Based Supervision
Consistent with its “risk-based approach to supervision,” FINMA stated that “money laundering remains one of the principal risks for FINMA’s supervised institutions and the Swiss financial centre.”[5] Another key area of FINMA’s supervision and enforcement activities was the FinTech sector. FINMA reported that it “paid close attention” to Initial Coin Offerings (ICOs) in Switzerland, conducting investigations into approximately 60 ICOs. With respect to more than 10 ICOs, FINMA identified a breach of the Swiss Anti-Money Laundering Act (AMLA)[6] and brought charges against persons responsible. FINMA made entries for eight additional cases on its warning list and initiated enforcement proceedings against three companies.[7]
In addition, FINMA “identified an increasing involvement on the part of Swiss providers in secondary market-related financial services in the crypto-area,” which included trading and custody of tokens as well as operation of trading venues and associated support activities. FINMA’s Enforcement Division conducted investigations into a number of those providers.[8]
FINMA also required a number of FinTech companies to comply with measures “to restore compliance with the law.” These measures included the repayment of unlawfully received public deposits under the Banking Act and the removal of the word “bank,” or the withdrawal of advertisements, in cases where FINMA had not granted a license.[9]
Finally, in December 2019, FINMA published its first-ever Risk Monitor. The Risk Monitor, which will be published annually every fourth quarter beginning in 2020, provides an overview of the main risks to the financial sector “with a time horizon of up to three years and the corresponding supervisory aims for the year ahead.”[10] It identifies six principal risks for its supervised institutions and the Swiss financial sector: (1) the persistent low interest-rate environment; (2) a “possible correction on the real estate and mortgage market”; (3) cyberattacks; (4) what FINMA described as “a disorderly abolition of LIBOR benchmark interest rates”; (5) money laundering; and (6) increased impediments to cross-border market access, particularly in the European Union.[11]
Money Laundering Enforcement Case Analysis
A notable feature of the Report was FINMA’s analysis of enforcement cases concerning the AMLA from recent years. FINMA conducted this analysis “to learn lessons that can be applied to regular money laundering supervision activities.”[12]
That analysis highlighted two types of features identified in those enforcement cases. The first feature was business relationships displaying risk factors (measured as a percentage of AMLA cases involving such business relationships):
- High level of assets under management and/or transaction volumes: 68 percent
- Client relationships with a beneficial owner with multiple domiciliary companies or private accounts: 50 percent
- Business relationships with profitability from institution’s perspective: 36 percent
- Relationships with government-affiliated clients: 32 percent
- Relationships involving independent asset managers: 27 percent
- Business relationships from markets with significant money laundering risks, where the institution is pursuing a growth strategy: 23 percent
- Business relationships in which an Executive Board/Board of Directors member/owner of an institution is heavily involved: 18 percent
- Business relationships in which multiple locations/units are involved: 18 percent
- Business relationships that do not correspond to the institution’s business model: 14 percent
- Pass-through transactions: 14 percent
- Business relationships that were taken over from a predecessor institution: 14 percent
- Retained correspondence business relationships: 9 percent[13]
The second feature was legal shortcomings and breaches in business relationships (also measured as a percentage of AMLA cases involving such business relationships):
- Clarification of “plausibility” (i.e., apparent legitimacy) of transactions: 100 percent
- Clarification of plausibility of business relationships: 86 percent
- Defective organization or risk management, or breach of guarantee of irreproachable conduct: 77 percent
- Failure to recognize a risk category and/or no license: 77 percent
- Breach of disclosure obligation: 55 percent
- Incorrect identification of beneficial owner: 50 percent
- Lack of overall monitoring of business relationships and transactions: 36 percent
- Documentation obligation: 36 percent
- Defective monitoring system for high-risk transactions: 32 percent
- Weak point, lack of risk awareness at second line of defense: 27 percent
- Lack of anti-money laundering training: 14 percent
- Defective monitoring of independent asset managers after having delegated client identification process: 14 percent[14]
Assessment
Overall, as the Annual Report reflects, FINMA has had a series of notable risk- and compliance-related accomplishments since 2018. In particular, although other national financial regulators have also been publicly reporting on risk trends and perspectives,[15] the FINMA Risk Monitor adds a welcome level of transparency to its risk-assessment and supervisory activities, as well as newly public guidance for benchmarking and compliance program evaluation by Swiss institutions.
Enforcement watchers should nonetheless take note of the significant declines in FINMA investigations and enforcement actions. Those declines, like those that other countries’ regulatory and enforcement agencies are experiencing,[16] are highly likely to continue at least through 2020, as banking activity and government operations slowly recover from the coronavirus pandemic.
In any event, attorneys advising financial institutions on AML compliance and AML compliance officers should peruse both the Risk Monitor and the Report’s enforcement case analysis with some care. That analysis indicates that AML compliance programs need to focus on two key tasks: (1) sustaining standard components of AML compliance programs, such as overall monitoring and training; and (2) informing business leaders and first- and second-line compliance team members of certain factors that would indicate the implausibility and illogic of certain types of transactions and business relationships from an AML perspective. Moreover, AML compliance officers should compare the FINMA risk factors to their own AML risk and compliance programs, to see whether and how other aspects of their programs can be strengthened. Despite the temporary downturn in its enforcement activity, FINMA can be expected, after the coronavirus pandemic is effectively controlled, to resume its vigilant oversight of the Swiss financial sector.
Footnotes
[1] See FINMA – an Independent Supervisory Authority, FINMA, https://www.finma.ch/en/finma/finma-an-overview (last visited Apr. 20, 2020).
[2] See, e.g., SEC Charges Swiss Resident in Insider Trading Case Involving Bioverativ Acquisition, Litigation Release No. 24,500 (June 13, 2019), https://www.sec.gov/litigation/litreleases/2019/lr24500.htm; Jonathan J. Rusch, FINMA Imposes Measures and Sanctions on Julius Baer for Serious Anti-Money Laundering Failings, Compliance & Enforcement (Mar. 13, 2020), https://wp.nyu.edu/compliance_enforcement/2020/03/13/finma-imposes-measures-and-sanctions-on-julius-baer-for-serious-anti-money-laundering-failings.
[3] See Press Release, FINMA, FINMA Publishes 2019 Annual Report (Apr. 2, 2020), https://www.finma.ch/en/news/2020/04/20200402-mm-finma-gb-2019.
[4] See FINMA, 2019 Annual Report 48, 52 (2020) [hereinafter Annual Report], https://www.finma.ch/en/~/media/finma/dokumente/dokumentencenter/myfinma/finma-publikationen/geschaeftsbericht/20200402_finma_jahresbericht_2019.pdf?la=en (PDF: 1.9 MB).
[5] Id. at 6, 28.
[6] Bundesgesetz über die Bekämpfung der Geldwäscherei und der Terrorismusfinanzierung [GwG][Federal Act on Combating Money Laundering and Terrorist Financing] Oct. 10, 1997, SR 955 (Switz.), https://www.admin.ch/opc/en/classified-compilation/19970427/index.html.
[7] Annual Report, supra note 4, at 48.
[8] Id.
[9] Id.
[10] Id. at 28.
[11] See Jonathan J. Rusch, FINMA Issues New Risk Monitor Identifying Key Risks for Financial Institutions, Dipping Through Geometries (Dec. 12, 2019), https://dippingthroughgeometries.blog/2019/12/12/finma-issues-new-risk-monitor-identifying-key-risks-for-financial-institutions.
[12] Annual Report, supra note 4, at 28.
[13] Id. at 29.
[14] Id.
[15] See, e.g., H.K. Monetary Auth., Hong Kong Banking Sector: 2019 Year-end Review and Priorities for 2020 (2020), https://www.hkma.gov.hk/media/eng/doc/key-information/speeches/s20200117e1.pdf (PDF: 474 KB); Nat’l Risk Comm., U.S. Office of the Comptroller of the Currency, Semiannual Risk Perspective (2019), https://www.occ.treas.gov/publications-and-resources/publications/semiannual-risk-perspective/files/pub-semiannual-risk-perspective-fall-2019.pdf (PDF: 496 KB); U.K. Fin. Conduct Auth., Sector Views (2020), https://www.fca.org.uk/publication/corporate/sector-views-2020.pdf (PDF: 5.4 MB).
[16] See, e.g., Aaron Nicodemus, Regulatory Slowdown Due to Coronavirus Makes Compliance Role Critical, Compliance Wk. (Apr. 6, 2020), https://www.complianceweek.com/regulatory-enforcement/regulatory-slowdown-due-to-coronavirus-makes-compliance-role-critical/28714.article.
Jonathan J. Rusch is Principal of DTG Risk & Compliance, a consulting firm specializing in corporate-compliance issues, and a Senior Fellow of the Program on Corporate Compliance and Enforcement at New York University School of Law.
Disclaimer
The views, opinions and positions expressed within all posts are those of the author alone and do not represent those of the Program on Corporate Compliance and Enforcement (PCCE) or of New York University School of Law. PCCE makes no representations as to the accuracy, completeness and validity of any statements made on this site and will not be liable for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with the author.