On 1 January 2016, the revised Agreement on the Swiss banks’ code of conduct with regard to the exercise of due diligence (CDB 16) will come into effect. A revision of the former agreement from 2008 has become necessary due to the recently introduced broad revisions to anti-money laundering regulations (see CapLaw-2015-31). The CDB 16 provides new and revised due diligence obligations for Swiss banks with regard to anti-money laundering and counter-terrorist financing. The revisions mainly focus on (1) the introduction of the concept of controlling persons for operating legal entities and partnerships, (2) new or revised template declaration forms as appendices to the CDB 16, and (3) a fundamentally revised framework and formal structure of the CDB 16.

By Robin Hauser (Reference: CapLaw-2015-60)

1) Introduction

The “Agreement on the Swiss banks’ code of conduct with regard to the exercise of due diligence” (CDB), established in 1977 and extended ever since, is a key part of the Swiss banking supervision system which allows for the delegation of certain duties to self-regulating organizations. The Swiss Bankers Association regularly issues these self-regulation guidelines, which FINMA recognizes as minimum standards that need to be complied with by all Swiss banks and securities dealers. The guidelines specify the duty of due diligence in identifying the contracting party, the beneficial owner and other relevant persons, while prohibiting active assistance in the flight of capital and tax evasion. The statutory bank auditors, FINMA, and the CDB Supervisory Board verify compliance with these guidelines. In the event of a failure to comply with the CDB, a fine of up to CHF 10 million may be imposed on the bank in question by the Swiss Bankers Association and FINMA may take appropriate supervisory measures. The CDB is generally revised on a five-year cycle. However, due to the enactment of the Federal Act for implementing the Revised Financial Action Task Force (FATF) Recommendations of 2012 and the consequent changes concerning the AMLA and the MLO-FINMA, a new release for the CDB from 2008 (CDB 08) has been postponed from 2013 to 2016.

On 24 November 2015, the Swiss Bankers Association has again published a written commentary to the CDB 16 (Commentary), which is intended to clarify the code in order to contribute to uniform implementation of the CDB 16 and the new or revised forms.

2) The Concept of the “Controlling Person”

The due diligence obligations under the CDB 08 were focused on establishing the identity of the beneficial owner of assets deposited with the bank while operating companies in particular were considered to be the beneficial owners of their assets. The revised AMLA, however, provides for a duty of financial intermediaries to identify the beneficial owner of a legal entity in all cases with effect as of 1 January 2016. In this context, the concept that an operating company is considered the beneficial owner of its assets is dropped and, with limited exceptions, only individuals can be beneficial owners of assets held with a Swiss bank. Against this background, the CDB 16 introduces the concept of the controlling person together with a distinction between (i) establishing the identity of the beneficial owner/controlling person of operation legal entities and partnerships, and (ii) establishing the identity of the beneficial owner of assets deposited with the bank. It is important to note that the newly introduced duty to establish the identity of the beneficial owner of operation legal entities and partnerships focuses on the entity/partnership itself, whereas the already existing duty to identify the beneficial owner relates to the assets held in the account with the Bank. In contrast to the approach under the FATF guidelines, the concept of the controlling person, and the obligation to identify such controlling person, only applies with regard to operating entities or partnerships. For domiciliary companies, defined by the CDB 16 as companies that are not operating, the rules regarding controlling persons do not apply, and the contracting party of the bank has to establish the beneficial owner of the assets deposited with the bank instead. In case of an operating company, the contracting party has to disclose any fiduciary holding of assets, i.e. whether a third person is the beneficial owner of the assets held in the account. The bank would then have to obtain the relevant information regarding such beneficial owner on a separate form A. This concept is reflected in the new Form K in the appendix to the CBD 16.

A controlling person of a legal entity or partnership is defined as individual who either (i) directly or indirectly owns at least 25% of the capital rights or voting rights in the contracting party, (ii) controls the contracting party in any other way, or (iii), as a substitute, if no controlling person can be determined, holds the position of the highest managing director (e.g. the chairman of the board of directors or the CEO). The contracting partner must confirm the name, first name and actual domicile address of the controlling person by using Form K. There are different concepts that can be applied when performing the above analysis and the Commentary published by the Swiss Bankers Association provides further guidance in this respect.

The CDB 16 also provides for a number of exceptions regarding the obligation to identify the controlling person behind the contracting party, including companies listed on a stock exchange (including subsidiaries of such companies), public authorities, banks and other financial intermediaries, certain non-profit organizations, simple partnerships, condominium owners and common ownership collectives.

3) Further Key Points of the New Release

Further key points of the reform can be summarized as follows:

• Presumption of Beneficial Ownership: Under the CDB 08, the bank was generally entitled to assume that the contracting partner is also the beneficial owner of the assets. Only if the contracting partner was not the same as the beneficial owner, or if his identity was in doubt, the banks and securities dealers had to require the contracting partner to provide a written declaration of the identity of the beneficial owner. Under the CDB 16, this assumption is limited to natural persons only, and even then the bank is required to make an appropriate written note to file of the fact that the bank has no doubts that the contracting partner is identical to the beneficial owner. For legal entities the bank always has to request a declaration on the identity of the controlling person/beneficial owner.
• Exceptions for Fund Managers, CISA Investment Companies and Others: The rule that banks and securities dealers as contracting partners are not required to provide a declaration of beneficial ownership was extended. It now also includes fund managers, life insurance companies (with certain exceptions), CISA investment companies and CISA wealth management companies, as well as tax-exempted pension schemes with registered office in Switzerland or in a foreign country, provided that they are subject to appropriate supervision and regulation with respect to combating money laundering and terrorist financing or do not manage secondary accounts for unnamed clients.
• Identification of Ordinary Partnerships: As a new general rule, the identity of at least one of the partners has to be verified in addition to any authorized signatories vis-à-vis the bank.
• Swiss Attorneys Authorized to Provide Authentication: A copy of an identification document may now be authenticated by an attorney accredited in Switzerland recognized for this purpose by the bank establishing the business relationship.
• Certification of Electronic Signatures: Identification provided from the data base of a provider recognized according to the Federal Law on the Certification of Electronic Signatures (CertES) together with electronic authentication of the customer is now considered a valid authentication.
• Exemption from the Execution of Commercial Transactions: The bank does not have to obtain a statement concerning the beneficial ownership of the assets for the execution of commercial transactions regarding parties for whom the bank does not act as a depositary bank from its contracting partner, as long as payment and delivery are carried out via a different bank.
• New Restrictions for Collective Investments or Investment Companies: The rule that if the contracting partner is a collective investment or an investment company with more than 20 investors, the bank does not have to obtain a statement concerning the beneficial owners, was restricted to cases in which the collective investment or investment company is subject to an appropriate supervision or regulation with respect to combating money laundering and terrorist financing. In this context, collective investment forms and investment companies with a domicile in high-risk countries and non-cooperative jurisdictions according to FATF do not qualify for this exemption.
• Delegation of Identification to Financial Intermediaries: The bank may delegate the identification of the contracting partner and the establishment of the controlling person and the beneficial owner to a different financial intermediary as far as this intermediary is subject to any prudential supervision or regulation with respect to combating money laundering and terrorist financing. It was further clarified that the establishment of a business relationship by correspondence by the mandatory is prohibited.

4) New or Revised Forms as Appendices to the CDB 16

In the context of the above revisions, new or revised template declaration forms as appendices to the CDB 16 were introduced:

• New Form K for Controlling Persons: As described above, this new form is to be used to establish information on the controlling person of operating legal entities and partnerships that are not quoted on the stock exchange.
• Revised Form T for Trusts: The information required for trusts is to be provided by the contracting partner using the revised Form T. Under the CDB 08 this form was used broadly as declaration for any organized association of individuals, assets or patrimony without specific beneficial owners. Under CDB 16 it can only be used as declaration for trusts. Whereas the information requested by the former Form T mainly related to the actual settlor, the (class of) beneficiaries, and the protector, the revised Form T further requires (i) a declaration on the type of trust (discretionary or non-discretionary) and its revocability (revocable or irrevocable), (ii) information on the ultimate economic (not fiduciary) settlor of a pre-existing trust if the trust results from a restructuring of a pre-existing trust (re-settlement) or a merger of pre-existing trusts, and (iii) information on protectors, if any.
• New Form S for Foundations and Similar Constructs: The information required for foundations and similar constructs is to be declared by the contracting partner using the new Form S. Associations of individuals or asset-holding entities where no specific individuals are the beneficial owners are to be treated similarly to foundations, while for operating foundations the controlling persons are to be declared on a Form K. In addition to the declarations required previously, the new Form S also requires (i) a declaration on the type of foundation (discretionary or non-discretionary) and its revocability (revocable or irrevocable), (ii) information on the ultimate economic (not fiduciary) founder of a pre-existing foundation if the foundation results from a restructuring of a pre-existing foundation (re-settlement) or a merger of pre-existing foundations, and (iii) additional information on persons having to determine or nominate representatives of the foundation, if any.
• Form I for Insurance Wrappers: The obligations of financial intermediaries under the AMLA when dealing with life insurance policies with separately managed accounts/securities accounts (insurance wrappers) are set out in the FINMA newsletter 18 (2010). These obligations of the newsletter to identify the insured person, and if different, the actual premium payer are now reflected in the CBD 16.

5) New Formal Structure of the CDB 16

For the CDB 16 a new formal structure with rearranged chapters and articles is introduced. In order to enhance comprehensibleness, general provisions have been condensed and simplified. In particular the provisions relating to the identification of the controlling person are combined in a separate chapter to make the difference to the determination of the beneficial owner visible.

6) Practical Relevance for Financial Intermediaries

The new rules governing the identification of contracting partner and the establishment of the controlling person and the beneficial owner must be applied with respect to any new business relationship established after 1 January 2016 (when the CDB 16 comes into force) or where the procedure for the identification of the contracting partner or the establishment of the beneficial owner needs to be repeated after that date.

The practical relevance of the CDB 16 must not be underestimated. The identification of the controlling persons of legal entities that are not listed on a stock exchange, including holding or real estate companies, will be challenging for banks and securities dealers, in particular with regard to multilevel and/or split ownership structures and legal entities domiciled outside FATF countries. In addition, banks and securities dealers will have to address any potential risks represented by these newly identified persons (e.g. U.S. persons). To ensure compliance with the new guidelines, banks and securities dealers will have to review internal directives, adapt the client onboarding processes and IT systems, and train their employees. Further, considering the commitment of Switzerland to participate in the automatic exchange of information within the OECD as of 2018, banks and other financial intermediaries might be well advised to systematically process the information provided on the controlling persons and beneficial owners as it might be subject to reporting duties to other countries under the Common Reporting Standard.

Robin Hauser (robin.hauser@lenzstaehelin.com)