Will the AML rules soon cover lawyers too?

Posted on July 23, 2018 by Croce

On 1 June, the Federal Council launched a new consultation procedure with a view to amending the Anti-Money Laundering Act (AMLA) yet again. The latest targets to come into the sights of the authorities are “advisors”: lawyers, notaries, tax specialists and even accountants if they provide certain services, in particular company and trust creation, management and administration. Under this draft law, these professionals would, like financial intermediaries and dealers, be subject to the AMLA and required to perform the due diligence set out in it.

Concretely, the draft law covers any preparatory work or services supplied on a professional basis in the following areas:

creating, administering and managing legal entities or structures;
organising contributions to these;
purchasing and selling companies;
providing an address or premises to house the head offices of relevant structures;
acting as a nominee shareholder for these entities, or providing assistance for this.

As readers will recall, these activities are only currently subject to the AMLA if the intermediary accepts assets belonging to others or holds them on deposit, or assists in investing or transferring them. The same applies to activities carried out as an executive body of a domiciliary company. If advisors do not handle flows of money, they are not subject to the AMLA. The draft law, which is based on relevant recommendations from FATF, constitutes a new departure for Swiss legislation, in particular as regards lawyers. Up until now, the services they provide were divided simply into traditional (advisory services, legal representation, etc.) and non-traditional (trustee services, asset management, etc.).

Defining the concept for a structure will also fall within the scope of the AMLA.

It will therefore encompass trusts and all offshore companies (both trading and non-trading) and Swiss domiciliary companies (which are of course different from commercial companies because they are generally created simply to hold and administer assets). Swiss trading companies are excluded. Because of the safeguards in place when a Swiss company is created (capital payment account, requirement to use a notary, foundation report, etc.), the Federal Council considers that only foreign companies pose a risk.

The duty of due diligence imposed on “advisors” will be very similar to that currently applied to dealers. It includes requirements to check the identity of the contracting partner, identify the beneficial owner, create and keep documents and clarify the background to and aim of the services to be supplied. Lawyers will need to organise themselves appropriately.

However, if the lawyer suspects money laundering or terrorist financing, or if they are unable to fulfil their duty of due diligence, they will be required to refuse the business, or terminate their relationship with the client. They will specifically not have to inform the Money Laundering Reporting Office Switzerland (MROS). This is because lawyers do not actually manage flows of money when providing their services (whereas one of the reasons for informing the MROS is so that assets of criminal origin can be tracked and confiscated) and also to avoid endangering the lawyer-client relationship (confidentiality).

According to the Federal Council, an auditor will ensure the system is effective. (The idea of using a self-regulation body for lawyers similar to the system in place for financial intermediaries was rejected.) The auditor will be required to inform the Federal Department of Finance (FDF) if they suspect a lawyer of having failed to fulfil their duty of due diligence. The lawyer will be liable for a maximum fine of CHF 500,000 if they have acted intentionally, and CHF 150,000 if they have simply been negligent.

Note also that the Federal Council has decided not to impose due diligence requirements for advisory services relating to property sales or purchases, as it considers the current system sufficient (involvement of banks, notaries, etc.).

Beyond the risk of a loss of confidence between the lawyer and their client, and the ethical questions (is it actually any more morally correct for a lawyer to put together a defence strategy to help a client accused of money laundering escape a prison sentence and carry on their activities unpunished?), this new draft law also poses some practical difficulties.

Given that clients consult lawyers in the initial stages of creating an entity or trust, or even when they are just considering the idea, how can the lawyer be expected to determine in advance whether the structure, once it is created, is going to be used for money laundering or terrorist financing? It is easy to imagine, ten years down the line, the prosecutor saying to the lawyer “Well, you should have known your client intended to use this new company for dubious purposes!”

Without a doubt, the risk of sanctions will discourage many lawyers from giving legal advice in this area – and that appears to be the FATF’s intention. Evidently, advisors that do risk working in this field will use all possible means of obtaining guarantees from their clients, by having them sign certifications and disclaimers.

The consultation process lasts until 21 September, but we already foresee some very heated debates in parliament!

Are trusts set to become part of the Swiss legal landscape?

Posted on May 17, 2018 by Croce

Switzerland, a civil law country, already recognizes foreign trusts.

Will trusts be included into Swiss domestic law?

At the end of April, the Council of States Legal Affairs Committee decided to follow its National Council counterpart and pass a committee motion requiring the government to prepare a bill to introduce trusts into internal Swiss law.

As readers will recall, a trust is a legal relationship created when a settlor uses a trust deed to transfer specific assets to one or more people (the trustees), who must manage or use them for a purpose established in advanced by the settlor, for one or more beneficiaries.

Some people are hailing this as a way of reinforcing the attractiveness of Switzerland as a financial centre. We are less convinced; read on to find out why.

Firstly, Switzerland is not, and never will be, a common law country. Although there is a fiduciary concept in Swiss law, it is absolutely not comparable to the notion of a trust, first and foremost because a trust is not a contractual relationship!

Also, our civil code makes no distinction between legal ownership and equitable ownership. So we would have to start by reforming the real rights that exist under Swiss law before we could integrate the concept of a trust. None of the civil law jurisdictions that have attempted such a reform have really managed to make this type of structure stand. The opposite is also true; the foundation, a stalwart of civil law, has never been significant in English-speaking countries.

In any case, trust companies have not waited for us to incorporate trusts into Swiss law to set up here. There are three separate reasons for the high number of trustees in Switzerland:

At present, trusts are very lightly regulated in Switzerland compared to jurisdictions such as Singapore or the Cayman Islands, where a licence can cost up to USD 100,000 per year. In Switzerland, no authorisation or specific qualifications are needed to be a trustee, and in fact no financial guarantees are even required (insurance, capital, etc.). Trust companies are subject only to anti-money laundering and terrorist financing rules. However, this situation is set to change radically when the new Swiss laws on financial services and financial institutions (LSFin and LEFin) come into force;
Unlike in other countries including the UK, in Switzerland trustees are not taxed on the trust’s income and assets, which makes life considerably easier;
Switzerland is recognised across the globe as a financial centre where clients can hold and manage their trust assets with complete peace of mind (in banks, with wealth managers, etc.).

As the information above shows, it is perfectly possible for a trust to be based in Switzerland but subject to the law of a foreign country. Integrating trusts into local law is not going to attract more of them to the country.

In addition, will Swiss law be able to offer settlors the same flexibility as Bahamian, Cayman Island or Cook Island law, in particular as regards protection against creditors and inheritance planning? Although trusts were initially used for tax planning purposes, make no mistake: their primary purpose today is most definitely inheritance planning and protection against creditors when engaging in risky activities (including marriage). However, our legal system has rigid and well-established traditions relating to statutory inheritance entitlements, divorce settlements and claims for fraudulent conveyance or action to set a transaction aside in a bankruptcy. It is unlikely that the Swiss legislator will create gaping exceptions for trusts, just to make Switzerland more attractive as a financial centre. Consequently, we can legitimately wonder in what sense such legislation would be useful.

It is pointless to argue that it would offer clients a reputable jurisdiction in which to domicile their trusts, because the options already include the UK, Singapore, New Zealand and the USA.

It is also important to consider the tax angle. Although there is a Swiss Tax Conference circular regarding the tax treatment of trusts in Switzerland, it is clear that the tax authorities, be they federal or cantonal, pay very little heed to such structures. In the vast majority of cases they are treated as transparent and taxation is calculated as if the assets belonged to the settlor or the beneficiaries.

We must also add that it will take numerous years for courts to build up a reliable set of precedents in this area.

And finally, it would also be necessary to reform Swiss foundation law: currently, with the exception of foundations operating in the public interest, family foundations can serve only to meet the cost of raising, endowing and supporting family members. Incorporating only charitable trusts into internal law would not be a significant change, because the current law on charitable foundations already serves this purpose very well.

For all these reasons, we believe that unless trust law is completely overhauled, the confusion and insecurity generated by integrating such structures into our legal system would outweigh any benefits. In our opinion, recognition of foreign trusts is all that is required. Given that Switzerland ratified the Hague Convention in 2007, nothing further is needed.

The end of the road for bearer shares in Switzerland?

Posted on January 23, 2018 by Croce

Last Wednesday, the Swiss Federal Council opened a consultation (lasting until 24 April 2018) into discontinuing bearer shares in Swiss companies limited by shares not quoted on the stock exchange. The draft bill will be debated by parliament in autumn 2018. If it becomes law, existing bearer shares will be converted automatically into registered shares. Companies will be required to adapt their articles of association within two years of the new law being passed.

Companies will also be required to keep a register of beneficial owners of shares (family name, given name and address). Failure on the part of a shareholder to report information and failure on the part of a company to keep a register will become criminal offences (new). A shareholder, creditor or registrar may also bring a case before a civil judge to have this failing in company procedures rectified.

Scrapping bearer shares would represent a minor revolution for Switzerland. It would bring our country into line with other financial centres such as the United Kingdom, Singapore, Hong Kong and the USA. However, it is important to understand that this change is not a Swiss initiative. It is a result of pressure from the Global Forum on Transparency and Exchange of Information for Tax Purposes, which seems to assume that all human beings have criminal intentions. Switzerland’s aim is to adapt its law to ensure the ticks go in the right boxes (and sanctions are avoided) during its next Peer Review, due to begin in the second half of 2018.

From a legal point of view, it is true that new provisions introduced by the FATF law on 1 July 2015 have brought bearer shares and registered shares very close together, to the point that the two securities have become almost identical in terms of anonymity and transfers. Consequently, the formal abolition of bearer shares as outlined in the project would not fundamentally alter shareholders’ rights and obligations.

Under the current law, anyone who buys bearer shares is required to inform the company within one month. They are required to provide their given name and family name (for an individual) or business name (for a legal entity) together with their address.

If, following the acquisition, one person or entity holds 25% of the share capital or voting rights, the identity of the beneficial owner must also be disclosed.

The buyer must produce an official piece of photographic ID (passport, identity card or driving licence) or a copy of a Commercial Register entry. Proof of share purchase is also required.

If anything is missing, the shareholder’s membership rights (e.g. voting rights) and their economic rights (payment of dividends) in relation to the shares are suspended until all the obligations have been fulfilled.

Under the new draft legislation, holders of bearer shares who have not informed the company of their identity as outlined above are required to rectify the situation within 18 months of the law entering into force so that their shares can be converted. If they have not communicated their details within this period of time, their rights to the bearer shares will cease definitively and the shares will be cancelled. The board of directors will then issue the company’s own shares to replace them. These will be paid up using contributions gained by the company as a result of the cancellation. The company is then free to use the replacement shares as it sees fit, by selling them, distributing them to shareholders, cancelling them and reducing the share capital, keeping them, etc.

In addition, limited companies (and also sole proprietorships, partnerships, branches and other legal entities) will be required to hold a bank account in Switzerland if they made sales of CHF 100,000 or more during the previous financial year. The idea of this is to bring companies within the scope of Swiss legislation against money laundering, because bankers are required to check the identity of contracting partners and beneficial owners.

Furthermore, as well as the authorities, financial intermediaries will be permitted to consult company registers (register of shareholders and beneficial owners) for the purposes of fulfilling their legal obligations. The idea of creating a central electronic register of owners of registered shares has been rejected at this time.

Finally, holders of registered powers of attorney representing Swiss branches of companies based abroad will be required to have access to information regarding shareholders of the main company abroad and the beneficial owners of the shares, and to be able to communicate this information to financial intermediaries and the authorities. This obligation is a simple legal prescription, with no sanctions attached. However, financial intermediaries will no doubt refuse to enter into a business relationship with a company that is unable to provide the information.

As we have outlined above, the consequences of this modification on Swiss company law will be minor. The impact is above all psychological, as the right to anonymity has existed since 1936. However, it is regrettable to see supranational bodies once again dictating changes in Swiss law. In addition, there is no guarantee that all these measures will work. A determined criminal will happily create a false document and use a nominee company to hold shares. The threat of a fine will prove little deterrent.

In Switzerland, a company limited by shares is known as a société “anonyme”. Perhaps the time has come for a new name…

New measures to fight mass immigration and unemployment in Switzerland

Posted on January 11, 2018 by Croce

Introduction

In late 2016, the Swiss Federal Assembly adopted the revision to the Federal Act on Foreign Nationals (LEtr) in order to implement the initiative against mass immigration accepted by the people and the cantons on 9 February 2014 (article 121a of the Constitution (Cst.) and more generally to fight unemployment in our country.

A major feature of the change in the law is a requirement for employers to give notice of vacant positions when the unemployment rate exceeds a certain threshold for the profession in question (based on the 5-figure code from the Swiss Standard Classification of Occupations 2000).

This measure aims to ensure that workers available on the Swiss labour market take up the vacant positions offered, and to fight mass immigration, in particular from the European Union.

Concretely, employers will be required to inform their region’s employment services of vacant positions if the national employment rate for the relevant professional category stands at 5% or more. A transitional threshold of 8% will apply until 31 December 2019. This will give employers and the implementing authorities time to adapt their processes and resources to the new rules.

The Federal Council adopted the changes to the implementing ordinances on 8 December 2017. The new provisions will come into force on 1 July 2018.

The unemployment statistics

Unemployment rates are calculated based on statistics from SECO and measure the number of unemployed workers registered with the regional employment offices.

In 2016, average unemployment stood at 3.6% across all professions and all cantons, according to labour market statistics.

Under the 8% threshold, looking at the 2016 statistics the requirement to communicate vacant positions applies mainly to the construction and hotel sectors. Once the 5% threshold is in place however, 88 profession types out of the 383 listed will be affected. These will include retail employees, drivers, domestic staff and the catering and cleaning sectors.

According to the Federal Council, at the 5% threshold the requirement will apply to around 218,000 vacant positions out of the approximately 700,000 filled each year. With the bar set at 8%, the number will be less than 75,000.

Employers’ obligations and the procedure

The information employers are required to communicate includes:

– profession sought;

– activity and specific requirements;

– location;

– employment basis (part-time, etc.);

– start date;

– contract type: temporary or permanent.

Vacant posts can be communicated via the employment services internet portal, by telephone or in person.

For five working days, information about vacant positions will be accessible exclusively to job seekers registered with the public employment services. Employers will not be permitted to advertise elsewhere (for example, in a newspaper) before the end of this period.

The five days are counted from the day after the employment services confirm receipt of the information. Saturdays and Sundays and national, cantonal and regional public holidays are excluded.

Within three days of receiving complete details of a vacant post, the employment services will send the employer relevant jobseekers’ details, or inform them that no one fitting the profile is available.

Employers themselves will then decide which candidates they consider suitable. There will be no direction on this, and no justification will be required. Similarly, employers will be free to organise their recruitment process as they see fit.

However, they will be required to invite suitable candidates to an interview or skills assessment. If they do not do so, they will have to tell the employment services why.

Lawmakers refused to compel employers to justify a decision not to take a suitable candidate’s application further. Similarly, employers will not be required to justify why a specific candidate was not chosen.

However, they will need to provide the following information: 1) a list of the people they consider appropriate, 2) who they have called for interview or a skills assessment, 3) whether they have employed one of the candidates proposed, or 4) whether the position remains vacant.

The notification procedure will not apply to contracts lasting 14 calendar days or less. Neither will it apply to employment contracts offered to former apprentices or family members or to positions filled by staff (including interns) already employed within the employer’s own group.

The cantons will have the facility to ask the Federal Council to introduce a requirement to notify vacant positions for a specific profession for a maximum period of one year, if the employment rate for the canton in question is 8% or more (or 5% from 1 January 2020). This request can be submitted jointly by several cantons if they all meet the requirements.

Penalties

Employers that intentionally breach the requirement to communicate vacant positions or to offer an interview or skills assessment will be liable for a maximum fine of CHF 40,000. If they unintentionally fail to comply, the maximum fine will be CHF 20,000.

Conclusion

This issue is important, both in the minds of the population and for the Swiss economy, and the parliament and Federal Council have taken the steps required to offer more opportunities to Swiss workers and strengthen the implementation of legislation regarding foreign nationals. The idea of requiring employers to notify vacant positions in order to reduce additional inflows of foreign labour is a good one, so long as compliance with international agreements such as the AFMP is maintained. It is however impossible at this stage to predict whether the desired results will be achieved, as this is the first time such a measure has been taken in Switzerland.

The transitory period is welcome, as the new requirement will oblige firms, and smaller businesses in particular, to reorganise, train specialised staff and perhaps even create legal departments. It will undoubtedly increase administrative costs for companies.

Lastly, it is important to note that the Federal Council has the power to change the threshold at any time, should the state of the labour market render this necessary.

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The contents of this newsletter are not to be construed as a legal or tax opinion or advice. Should you require more information, please either email us or get in touch with your usual contact at CROCE & Associés SA.

This newsletter is available in French and English.

New transaction reports for securities trading from 2018

Posted on December 5, 2017 by Croce

From January 2018, the Swiss Financial Market Infrastructure Act (RS 958.1, FMIA) which came into force in early 2016, will require participants admitted to a trading venue (Swiss securities dealers, foreign participants authorised by the FINMA, etc.) to report all the information required for the transparent trading of securities.

Similar requirements are already in place or will be added (depending on the types of counterparty) for OTC and ET derivatives. These will not be covered here.

Trading platforms (which in practice are the SIX Swiss Exchange, and the BX Berne eXchange) and multilateral trading facilities will be required to supervise price formation and the transactions conducted within their venues more closely to detect insider trading, price and market manipulation and any other violations of statutory or regulatory provisions. If a violation is suspected, the FINMA and possibly the relevant prosecuting authority will be informed.

Non-admitted securities traders will also be subject to the same transparent trading and reporting rules (article 15 paragraph 2 of the Federal Law on Stock Exchanges (LBVM; RS 954.1)).

Reporting requirements apply to all of a participant’s securities transactions (sale, purchase, etc.), whether proprietary or carried out on behalf of a client.

The following must be reported:

- the title and number of securities bought or sold;
- the volume and the date and time at which the transaction was concluded;
- the price;
- information required to establish the identity of the beneficial owner (new!).

The notion of beneficial owner will be the same as that used for provisions against money laundering.

However, operating legal entities, foundations and collective investments schemes will be identified by an internationally standardised Legal Entity Identifier (LEI). If no LEI is available, the BIC (business identifier code) or Commercial Register number, preceded by the country code, may be used. In the case of a trust, the trustee should be declared.

For natural persons, the nationality (country code), date of birth and a confidential identification number created by the participant will be used. This means that the person’s family name and given name will not be reported.

However, the system will be different for transactions on the European market (including for Swiss residents): under MiFID II/MiFIR, the first five letters of the person’s given name and family name must be reported (CONCAT code). Nevertheless, an identifier such as a passport number, personal number or social security number can be used and has been adopted by numerous EU countries that do not use CONCAT codes.

CROCE & Associés honoured by Acquisition International Legal Awards 2017

Posted on November 30, 2017 by Croce

Acquisition International has announced the winners of the 2017 Legal Awards and our firm is delighted to have been honoured. CROCE & Associés SA has been named the

“Best international Commercial Law Firm – Switzerland”

The 2017 Legal Awards, which are now in their sixth year, acts as the ultimate guide to the very best that the legal industry has to offer.

Nominated by clients, peers and fellow professionals, the Legal Awards provide a comprehensive go-to resource for those seeking the truly outstanding legal professionals from around the world, who go the extra mile to get the job done in style.

We are very pleased and honoured to receive this recognition on an international level for our legal expertise. All of our attorneys and staff have worked very hard to achieve and exceed our goals and it is a great reward to be noticed for our efforts.

The legal environment is a fast paced and exciting market, with increased competition and technological advances providing a raft of challenges for many legal practices over the last twelve months.

Political and economic issues have also affected the markets globally, and lawyers are increasingly having to adapt to ever evolving legislation and regulation. In addition, as the market becomes increasingly global the rise in cross-border issues means legal professionals are having to constantly update their skills.

Click here to read the official press release for the 2017 Acquisition International Legal Awards.

Automatic Exchange of Information (AEOI) and voluntary tax disclosure in Switzerland

Posted on November 23, 2017 by Croce

The Swiss Federal Tax Administration (FTA) said in a policy statement on 13 September 2017 that from 30 September 2018 it would no longer accept a voluntary tax disclosure regarding elements covered by the automatic exchange of information (AEOI).

The FTA considers that information obtained under the AEOI will be known to the authorities by this date at the latest, and that consequently taxpayers disclosing the information after this date will be doing so solely because they know that the authorities are aware of their irregular tax situations.

For exchange of information arising after 2017, this rule will apply by analogy from 30 September of the year during which the relevant AEOI first occurred.

The statement does not apply to other situations and for these there is no fixed timescale for voluntary tax disclosure. (For example, voluntary disclosure by a taxpayer resident in Switzerland regarding a domestic bank account, as automatic exchange of information does not operate within the country.)

As you will be aware, voluntary tax disclosure is a procedure under which a taxpayer who has omitted to disclose elements of their income or wealth can correct their tax situation without incurring a penalty or criminal proceedings (late payment interest is however due). This procedure also applies to heirs. It covers both cantonal and communal taxes and direct federal tax.

Conditions for using the procedure are as follows:

the disclosure must be being made voluntarily and for the first time;
no tax authority may be aware of the omission;
the taxpayer must cooperate fully with the tax authorities to determine the back taxes to be paid;
the taxpayer must make every effort to pay the back taxes due.

The information that was omitted is assessed for tax for the previous ten years (for example, if the disclosure is made in 2017, back taxes will be due for the tax periods from 2007 to 2016).

For heirs (who can act independently of one another), back taxes are due only for the three tax periods before the date of death, making the procedure highly advantageous.

This simplified back tax procedure does not apply to estates which are officially liquidated or liquidated under bankruptcy rules.

For all subsequent voluntary tax disclosures, the fine is reduced to one fifth of the tax not paid, if all the other conditions listed above are fulfilled.

If the FTA becomes aware of a failure to pay tax other than via a voluntary tax disclosure, the taxpayer risks:

additional tax for the last ten years, plus default interest,
a fine of between one third of and three times the tax not paid,
criminal proceedings.

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CROCE & Associés SA regularly assists individuals in their voluntary tax disclosure process. A preliminary in-depth study is made in coordination with the banks, trustees and public notaries to compile the data and to evaluate the costs of the voluntary tax disclosure, so that the client can make an informed decision.

The corporate tax reform in the canton of Vaud will be effective in 2019.

Posted on November 1, 2017 by Croce

Switzerland: The government of the canton of Vaud has just announced that the corporate tax reform (“CTR III“) will enter into force on the 1^st of January 2019, without waiting for the federal tax project to be adopted (“Tax Proposal 17“).

So, from 2019, the total effective rate of tax on profits (Confederation, canton and municipality) for legal entities domiciled in Vaud will be 13.79% (compared to the current rate of 22.3%).

In addition, a single rate of tax on capital will be adopted, at 0.6‰ (0.06%) (Tax on profits will continue to be credited against tax on capital).

These changes will place the canton of Vaud among the most fiscally attractive places in the world for companies (ahead of Hong Kong, Singapore, London etc.) without being considered a tax haven.

In addition to changes to tax rates, other measure are planned, firstly to compensate for the reduction in tax revenues (CHF128 million annually), and secondly to sustain jobs and maintain families’ living standards.

So, Vaud canton intends to increase family allowances, reduce health charges and boost government funding for childcare. In addition, the canton plans measures to reduce rental value of the real estate properties.

Almost two-thirds of the cost of the corporate tax reform will be met by the private sector, in the form of higher employers’ social contributions.