Since 1 January 2016, art collectors and art businesses dealing in art, or storing art, in Switzerland must comply with new anti-money laundering and terrorist financing laws.
Key legislation in Switzerland
Money laundering is regulated in Switzerland by the Swiss Criminal Code (“SCC”) which makes money laundering a criminal offence and the Swiss Federal Act on Combating Money Laundering and Terrorist Financing in the Financial Sector (“AMLA”) which sets out the due diligence and reporting obligations which must be complied with in order to detect and prevent money laundering.
In February 2012, the Financial Action Task Force (“FATF”) revised its 40 recommendations regarding money laundering and terrorist financing (the “Recommendations”). The Recommendations provide an international standard for money laundering and terrorist financing. They set out a framework of measures which countries that are FATF members, including Switzerland, should implement in order to combat money laundering, terrorist financing and the financing of proliferation of weapons of mass destruction.
As an important financial centre, Switzerland has been subject to increasing pressure to adapt its own legal framework. On 13 December 2013, the Swiss Federal Council presented a bill to Parliament to implement the Recommendations. The resulting Swiss Federal Act on the Implementation of the Revised FATF Recommendations was adopted on 12 December 2014. Following the adoption of this Act, several key changes have been made to existing regulations, including amendments to the AMLA. These changes will affect the Swiss art market, in particular art dealers doing business there. Two significant changes relate to:
(i) restrictions on cash payments in excess of CHF 100,000 (approx. £70,000); and
(ii) the range of predicate offences which have been extended to include qualified tax offences. A predicate offence is a criminal offence that generates the criminal property which is being laundered. There are two offences, the predicate offence and the money laundering offence. Generally, no conviction for the predicate offence is necessary for a person to be prosecuted for a money laundering offence.
Restrictions on cash payments
A great deal of controversy surrounded the suggested changes regarding cash payments, not least because Switzerland has always been a country in which high value cash transactions have taken place. The initial proposal put forward to the Swiss Federal Council to ban cash payments exceeding CHF 100,000, unless made through a financial intermediary, was rejected. Instead, the Swiss Federal Council decided to impose due diligence obligations on traders accepting more than CHF 100,000 in cash. This limit is well above the European Union’s which is currently set at €15,000, and the U.S.’s which is set at $10,000 for cultural property.
Under the AMLA, a trader is defined as any individual or legal entity who trades professionally in goods and in the course of these activities receives cash payments of more than CHF 100,000. This threshold relates to the total value of the transaction and can therefore be a single payment of CHF 100,000 or alternatively several payments amounting to more than CHF 100,000. The definition of trader is wide ranging and could apply, amongst others, to art dealers, real estate agents, luxury car dealers and/or jewellers.
Any trader accepting payment of SF100,000 in cash or more must carry out the same client due diligence as a financial intermediary. Client due diligence means identifying and verifying the contracting party and establishing the identity of any beneficial owners. Other obligations include the following:
1. Being able to demonstrate an understanding of the economic background to and the purpose of a transaction. If a transaction appears to be unusual or if the dealer knows or has reasonable grounds to suspect that assets involved in an existing business relationship:
– may originate from a crime or qualified tax offence, or
– are connected to or under the control of a criminal organisation, or
– are subject to the power of disposal of a criminal organisation and serve the financing of terrorism
then the dealer must make a report to the Swiss Money Laundering Reporting Office immediately.
2. Training of staff and management of money laundering risks.
3. Preparation and maintenance of appropriate records of the parties and transactions carried out by the dealer.
4. Appointing an audit company licensed by the Federal Audit Oversight Authority to carry out an audit of the dealer’s compliance with the relevant obligations and to produce a report evidencing the same.
Failure by a dealer to comply with its obligations under the AMLA is a criminal offence and carries a maximum penalty of five years’ imprisonment and/or a fine.
In practice, the only way for a dealer to avoid having to comply with these obligations is to use a financial intermediary for cash payments exceeding CHF 100,000.
Unlike in the UK, there is no registration requirement if the dealer decides to accept large cash payments.
Qualified tax offences
From 1 January 2016, a new Article 305bis (1bis) has come into effect, which states that qualified tax offences are to be classed as predicate offences to money laundering. This change is not retrospective. Only qualified tax offences committed from 1 January 2016 onwards are considered to be predicate offences for money laundering purposes in Switzerland.
A “qualified tax offence” is defined as conduct that has an element of “tax fraud” and results in avoidance of tax exceeding CHF 300,000 per tax period.
As defined in art. 186 of the Federal Act on Direct Federal Taxes and art. 59 of the Federal Act on the Harmonization of Taxes, “tax fraud” is committed where a person uses forged or falsified documents or documents which it knows are incorrect with the intention of deceiving or misleading tax authorities and where the tax evasion is more than CHF 300,000. This may apply in the art market where a party provides financial statements, formal declarations on ownership of assets and/or other certificates of title or proof of ownership which are forged or falsified.
Where a dealer knows or has reasonable grounds to suspect that assets involved in existing business relationships are the proceeds of a qualified tax offence, he must make a report to the Swiss Money Laundering Reporting Office immediately.
It is noteworthy that qualified tax offences as predicate offences for money laundering can also be committed in respect of taxes payable outside Switzerland provided that the relevant conduct constitutes an offence in the relevant country, amounts to “tax fraud” from a Swiss law perspective (as defined above) and the evaded tax amount exceeds the equivalent to CHF 300,000.
In the wake of the judicial imbroglio involving Yves Bouvier, changes to the regulatory framework of the Swiss freeports seemed inevitable. The lack of transparency surrounding the description and value of artworks stored in freeports, as well as the absence of clarity regarding their ownership, has prompted the Swiss into action.
On 19 June 2015, the Swiss Federal Council acknowledged the first report produced by the interdepartmental coordinating group on combating money laundering and the financing of terrorism (CGMT). This report promotes increased supervision of freeports to ensure that artworks are exported on time and are not stored indefinitely. The report includes a paragraph specifically identifying freeports as a problem area not currently covered by the AMLA.
It is not yet clear how regulation in this area will develop but it is apparent that the CGMT believes freeport regulation needs to be tackled in the context of money laundering and is creating momentum for change. Further guidance on what approach will be taken is due to be published later this year.
By Rose Guest
Published 25 February 2016