Legal Challenges of Economic Sanctions for Swiss Financial Providers

The publication "Practical Considerations Regarding the Implementation of Economic Sanctions by Swiss Financial Service Providers" by Fabian Maximilian Johannes Teichmann and Chiara Wittmann discusses the legal challenges and implications of implementing economic sanctions in Switzerland. It highlights the need for robust anti-money laundering (AML) mechanisms and the continuous adaptation of due diligence procedures. This paper also addresses the importance of clear definitions and compliance frameworks to ensure effective sanction implementation.

Switzerland's decision to implement economic sanctions against Russia, in line with the European Union (EU) and United Nations (UN), marked a significant shift given its traditional stance of neutrality. This move was influenced by considerable international pressure and aimed at curtailing Russia's aggression in Ukraine. While the political decision to impose sanctions is made at an international level, the responsibility for implementation falls on national institutions, particularly financial service providers. The authors cover the legal framework, the challenges, methodology and their 3 main key findings.

Legal Frameworks and Compliance

• Sanction Regulations and AML: The effectiveness of sanctions is heavily dependent on a robust AML framework. Swiss financial institutions must adhere to the Financial Action Task Force (FATF) recommendations and EU directives, which mandate comprehensive customer due diligence (CDD) and continuous monitoring to prevent money laundering and terrorist financing.
• Swiss Ordinance: The Swiss “Ordinance instituting measures in relation to the situation in Ukraine” includes specific restrictions, such as a ban on deposits from Russian nationals or entities exceeding CHF 100,000. This requires precise legal definitions and compliance mechanisms to ensure adherence.

Challenges in Legal Compliance

• Circumvention Tactics: One of the primary challenges is the sophisticated methods used by criminals to circumvent sanctions. These include using straw people, online financial services, forged documentation, and legitimate business fronts to disguise the origins and destinations of funds. Legal professionals must be adept at identifying these tactics to enforce compliance effectively.
• Resource Limitations: Smaller financial institutions may struggle with the extensive resources required for thorough compliance. This includes costs associated with enhanced due diligence, regular audits, and training programs. Despite these challenges, non-compliance can result in substantial fines and legal repercussions.
• Resource Limitations: Smaller financial institutions may struggle with the extensive resources required for thorough compliance. This includes costs associated with enhanced due diligence, regular audits, and training programs. Despite these challenges, non-compliance can result in substantial fines and legal repercussions.Political and Legal Alignment: Switzerland’s non-membership in the EU poses additional challenges. Swiss laws must be rapidly adapted to align with new EU sanction packages, often under significant time constraints. This requires efficient legal processes and cooperation between regulatory bodies and financial institutions.
• Language Barriers: Legal and compliance officers often face challenges with foreign language documents, especially those in Cyrillic characters. This complicates the verification process and increases the risk of oversight.
• Beneficial Ownership: Identifying the true beneficial owners of assets is crucial for legal compliance. Criminals often use complex structures to conceal their identities. Legal professionals must ensure that compliance officers are well-trained to uncover these hidden relationships.
• Compliance Costs: The financial burden of maintaining compliance is significant. Large institutions like UBS allocate hundreds of millions of francs annually for regulatory compliance. These costs include implementing advanced technologies, conducting internal audits, and ongoing employee training.

Methodology

The research involved 70 expert interviews with compliance officers and suspected criminals to understand the methods of money laundering and sanction circumvention. A subsequent survey of 200 compliance officers helped identify common practices and weaknesses in current compliance mechanisms.

Key Findings

• Deposit Restrictions: The deposit ban on Russian nationals and entities requires clear legal definitions and thresholds to be effective. This restriction is intended to disrupt economic relationships and impose costs on sanctioned states.
• International Cooperation: Effective implementation of sanctions requires strong international cooperation. Swiss financial institutions must align with EU regulations and ensure consistent application across different jurisdictions.
• Enhanced Due Diligence: Legal frameworks must support enhanced due diligence procedures. This includes regular updates to compliance protocols and the use of advanced technologies to monitor and analyze transaction patterns.

You can find more on this topic here: Fabian Teichmann, Chiara Wittmann (2023). https://www.emerald.com/insight/content/doi/10.1108/JMLC-12-2022-0167/full/html