The importance of monitoring relationships and transactions with increased risk

What infringements has FINMA determined?

Since 2010, Bank Mirabaud has maintained business relationships with structures linked to a now deceased businessman accused of tax evasion. As part of this business relationship, Bank Mirabaud managed up to USD 1.7 billion. FINMA determined that Bank Mirabaud had not sufficiently fulfilled its legal obligations to combat money laundering. In particular, Bank Mirabaud failed to adequately monitor transactions in connection with the businessman in question. Despite indications of increased money laundering risks, the economic justification and background of the transactions were insufficiently verified and documented.

What measures has FINMA taken and what are the consequences?

Until appropriate risk management has been implemented, Bank Mirabaud may not onboard any new clients with an increased risk of money laundering. In addition, FINMA has confiscated CHF 12.7 million in unlawfully generated profits. To ensure appropriate risk management, FINMA has required the internal control system to be expanded and corporate governance to be strengthened in terms of organization and staff. In addition, every existing client relationship and every high-risk transaction between 2018 and 2022 must be re-examined and, if necessary, documented. Bank Mirabaud will also need to create new incentives for appropriate risk management through its remuneration system. The bank will need additional resources to clean up and document client relationships and transactions. This can have a major financial impact. It is therefore important for financial intermediaries to fulfil the legal requirements when clarifying and documenting business relationships and transactions with increased risk. These requirements are outlined below.

When is a business relationship to be classified as business relationship with increased risk?

As part of their risk management, financial intermediaries are obliged to develop criteria for business relationships with an increased risk in a policy (Art. 13 para. 1 AMLO-FINMA). Criteria may include, for example, the domicile or residence or the type of business activity of the contracting party. However, the amount of assets involved, or the complexity of the structures can also be used as criteria. As part of a risk analysis, the financial intermediary must determine whether each criterion listed in the AMLO-FINMA is relevant to its business activities (Art. 13 para. 2 bis AMLO-FINMA). The financial intermediary may define its own criteria in a risk-oriented manner regarding its business model. But according to Art. 13 para. 3 AMLO-FINMA the following business relationships must always be managed as business relationship with increased risk:

1. business relationships with foreign politically exposed persons (‘PEPs’) or persons closely associated with them;
2. business relationships with foreign banks for which a Swiss financial intermediary conducts correspondent banking transactions; and
3. business relationships with persons domiciled in a country that is considered ‘high risk’ or non-cooperative by the FATF.

In the case of a domestic PEP, the business relationship has only been classified as business relationship with increased risk if further risk criteria are fulfilled.

When is a transaction to be classified as a transaction with increased risk?

The financial intermediary must also develop its own criteria for transactions with increased risk. According to Art. 14 para. 2 AMLO-FINMA, the following criteria should be considered:

1. the amount of inflows and outflows of assets;
2. unusual deviations in transaction types, volumes, and frequencies; and
3. country of origin & destination of payments.

According to Art. 12 para. 4 AMLO-FINMA, the following transactions are always considered as high risk:

1. transactions in the context of business relationships where assets (physical) totaling at least CHF 100,000 were brought in; or
2. payments from or to a country that is considered ‘high risk’ or non-cooperative by the FATF.

What measures must be taken if a relationship or transactions with increased risk was identified?

Financial intermediaries are obliged to continuously review whether a relationship or transaction poses an increased risk, both when entering and during the ongoing business relationship. If an increased risk is identified, extended clarification obligations are required (Art. 15 para. 2 AMLO-FINMA). The financial intermediary must act immediately after becoming aware of the risk and obtain additional information (Art. 17 AMLO-FINMA). This information includes, for example, the origin of the assets brought in, or the intended use of the assets withdrawn. This clarification can be carried out both through direct contact with the client and by consulting public sources. The information obtained must be checked for plausibility and carefully documented (Art. 15 para. 1 AMLO-FINMA).

a) Business relationship with increased risk

If a business relationship with increased risk within the meaning of Art. 13 para. 3 and 4 let. a-c AMLO-FINMA is identified, a member of the Executive Board must decide on the entry or continuation of the business relationship (Art. 19 para. 1 let. a AMLO-FINMA). In addition, a periodic review (usually annually) of all increased risk business relationships must take place to be able to decide on the continuation of the business relationship. Extended KYC clarifications are required so that a well-founded decision can be made.

b) Transaction with increased risk

To recognize an increased risk transaction, banks and investment firms are obliged to carry out IT-based transaction monitoring (Art. 20 para. 2 AMLO-FINMA). As already described, action must be taken immediately after the identification of an increased risk transaction. Clarification should be initiated within 10 days. If the transaction does not appear plausible after clarification, a MROS report must be filed.

What conclusions can be drawn from the Bank Mirabaud case?

Every financial intermediary should be aware of how important it is to have good anti-money laundering defenses in place. Otherwise, as the example of Bank Mirabaud shows, FINMA can order extensive measures with serious consequences for the financial intermediary. To avoid financial losses and reputational damage, the legal provisions should be strictly observed.