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Do sanctions matter in Switzerland?

Virtual Training EventFriday June 26th, 2020 14:00 -15:00 CEST

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PanelAnna Lippert is a Financial Crime Expert in a Swiss “Big Four” Consulting Firm. She has been advising global banks and industry clients in Switzerland, various EU countries, Australia and the U.S. for almost a decade. Anna focusses on drafting and enhancing sanctions compliance frameworks and technology. She holds a diploma in Macroeconomics (Dipl.-Volksw.), a Bachelor or Arts (B.A.) in Cultural Studies and various professional qualifications (including CAMS and CFE).

Thomas Hautle is Senior Legal & Compliance Officer at Bank Vontobel AG, where he also performssanction assessments and sanction framework analysis. He has been working in the Banking Industry for20 years and is an expert for Legal and Anti-Money Laundering related topics. Thomas works aslecturer for banking law and compliance and is attorney at law with a law degree (lic.iur.HSG) fromthe University of St. Gallen.

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What are Sanctions?

Sanctions

Financial Sanctions

Trade Sanctions/ Embargoes

Weapons’ Embargoes

Travel Restrictions

Diplomatic Restrictions

Economic and foreign policy tool issued by governments or international organisations used to coerce the behaviour of a target:

• States, Governments, e.g. North Korea• Individuals, e.g. Abu Bakr al-Baghdadi• Legal Entities, e.g. Banco Central de Venezuela• Things, e.g. vessels, airplanes, weapons• Groups, e.g. ISIL (Da’esh), MS-13 (Mara Salvatrucha)• Activities, e.g. Narcotics trafficking, cyber-warfare

Comprehensive, targeted or sectoral Unilateral (autonomous) or multilateral

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Why are sanctions relevant?

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United Nations Security Council (UN) European Union United States (primarily OFAC, BIS) United Kingdom (HMT, now OFSI) Countries, e.g. Switzerland, United Kingdom, China,

Hong Kong, Singapore, Japan, Russia, Australia andmany others

Some concepts Swiss specifics Extraterritoriality/ “Nexus” Secondary Sanctions Blocking Statute

Who issues sanctions?

Source: Council on Foreign Relations (www.cfr.org) 2019

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• For decades Switzerland did not join foreign sanctions issued by the UN or the EU due to its Neutral Status: the Law of Neutrality prohibits from adopting economic measures toward one belligerent party that could affect the outcome of a war.

• Today the Embargo Act regulates the coordination with UN and EU sanctions regimes. However the way such regimes are transposed varies:

• Embargo Act

• The Act is anchored to Article 184 paragraph 3 of the Swiss Constitution.

• The Act creates the legal base for Switzerland to issue Sanctions Ordinances and apply non-military international sanctions.

• The Federal Council is the competent body for ordering prohibitions, requiring authorizations, issuing duties of notification and reporting.

• The execution of Swiss Sanctions falls upon the State Secretariat for Economic Affairs (SECO, Department of Federal Councillor Guy Parmelin) and occasionally on other Federal Administrative Units.

• The Act provides a general framework for data processing/sharing and for the penalties issued for violating the restrictive measures contained in the Sanctions Ordinances.

• Federal Act on the Implementation of International Sanctions (Embargo Act, EmbG, SR 946.231):• Art. 1 para.1: “The Confederation may enact compulsory measures in order to implement sanctions

that have been ordered by the United Nations Organization, by the Organization for Security and Cooperation in Europe or by Switzerland's most significant trading partners and which serve to secure compliance with international law, and in particular the respect of human rights.”

• Turning Points in Swiss Sanctions Development

Rejection of SanctionsUse of Constitutional OrdinancesUse of Embargo Act Ordinances

Swiss Sanctions Development & Current Framework

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Embargo Act and Foreign SanctionsCurrent Legal Framework for Non-Military Sanctions

• Restrictive measures are based on four acts: Military Goods Act; Nuclear Energy Act; Goods Control Act and Embargo Act.

• UN – Since 2002 Switzerland is a member of the UN, therefore it has the legalobligation to fully transpose into internal law the resolutions of the SecurityCouncil (UNSC) issuing non-military sanctions. UNSC resolutions are part of theSwiss legal framework and can also be directly applied by the judiciary and lawenforcers.

• EU – Switzerland is not part of the European Union and European Law is not aSwiss source of law. However, Switzerland has been transposing EU Sanctions intoits legal framework due to the EU economic importance. Switzerland decides oncase by case basis if to transpose: fully (i.e. Zimbabwe Sanctions), partially (i.e. IranSanctions) or not transpose the EU restrictive measures (i.e. Russia and UkraineSanctions).

• No direct legal or political obligation to adopt foreign requirements for Switzerland(unless Switzerland has obligated itself by means of a (state) treaty or by own law –such as Embargo act)

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However:• The Money Laundering Ordinance of FINMA sets out obligations for business

relationships with higher risks. The residential domicile of a contractual party canbe an indication for higher risk.

• Further criteria are place (country) of the business activity, and the originatingand target country of payments

The national anti-money laundering requirements indicate an indirect obligationto observe and comply with international requirements

• Contractual partners (e.g. correspondent banks, custody banks, clearing houses,cash correspondence, brokers, card providers, institutional clients) require duediligence questionnaires to be completed.

• “Import” of international sanctions via private law links to companies abroadand/or which international sanctions must be observed - irrespective of the specificsanction; contractual obligation to observe the sanctions complied with by thecontractual party; “conditio sine qua non” for the business relationship.

Private Law obligation to observe international requirements

We are required to confirm whether Bank X or any of its subsidiaries have any direct/indirect Dealings or links involving a Sanctioned Country. These being Burma/Myanmar, Cuba, Eritrea, Iran, North Korea, Pakistan, Sudan, Syria.

• “Dealings” and “links” include sales to, purchases from, trade through or other business activities with or involving any person or entity

• Are you owned by any person/entity that is sanctioned by the UK, US, UN or EU

• Are you owned by any person/entity that is incorporated/based in, or resident in a Sanctioned Country

• Do you have a direct/indirect ownership interest in an entity that is subject to sanctions by the UK, US, UN or EU

• Do you have a direct/indirect ownership interest in an entity that is incorporated or based in a Sanctioned Country

• Are you directly/indirectly owned 25% or more by any person/entity that is incorporated or based in a sanctioned country

• Does any member of your company’s group of entities (including any entity directly or indirectly controlled by, in control of, or under common control with your company) have any transactions, investments, activities or planned activities with (or in) any person or entity located in Sanctioned Countries or with (or in) any entity owned or controlled by any entity located in Sanctioned Countries

• Is your company or company group involved in the maintenance or expansion of oil and gas production/import, nuclear program, weapons capability, or dual usage goods or equipment that may be used in those sectors for Sanctioned Countries?

• Have you identified any clients that are sanctioned – or otherwise targeted –by the EU, the UN or any other sanctions regime relevant to your institution or owned or controlled by an individual entity that is sanctioned, or otherwise targeted by the EU or the UN or any other sanctions regime relevant to your institution?

Embargo Act and Foreign Sanctions

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FINANCIAL SERVICES Traditional higher-risk areas: trade finance,

correspondent banking

Hot topics Payments Blockchain/ Crypto Private Equity/ Venture Capital Insurance sector Lookbacks

Where do sanctions matter?INDUSTRY Higher-risk areas: any company operating at a global

scale (territorial presence, products and services,employees, business partners)

Hot topics China/ Hong Kong Supply Chain Due Diligence Investor Due Diligence M&A Due Diligence Robust Compliance Frameworks

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Considerations for a sanctions compliance framework

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910

Governance & Oversight

Policies & Procedures

KY -anyone

Name List Screening

Transaction Screening

Case Management

Investigations & Reporting

Program Quality

Training & Awareness

Risk Assessment

LEGAL TECHNOLOGY

OPERATIONSCULTURE

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Financial Services Case StudyCREDIT SUISSE 2009, USD 536mAgencies: OFAC, DOJ, DANY (Fed)Facts: Policies and payment practices (“wire-stripping” in relation to Iran, Cuba, Burma and Libya) under which payments/ securities trades violating U.S. sanctions were knowingly processed in violation of IEEPA and TWEADiscovery: Partial (!) self-disclosureLessons: Self-disclose everything and cooperate extensively and substantially, avoid an “egregious” case at all cost!

UBS 2015, USD 1.7mAgency: OFACFacts: 222 transactions relating to investment-related activities (e.g. purchase/ sale of U.S. securities, PE investments, on a sanctioned client’s behalf) violating Global Terrorism Sanctions Regulations, 31 C.F.R. 594 (GTSR)Discovery: Activity was considered “internal” transfers, and was therefore not screened. Activity was identified by UBS after years of trading on the client’s behalf, and then disclosed.Lessons: Mitigating factors such as the presence of a robust sanctions compliance framework, investigation, remediation etc. are essential. “Not egregious”!

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Industry Case StudyLessons Learned Provision of software and digital services only! Potential current focus on enforcing Iran-related

sanctions? OFAC’s expectations for Non-U.S. industry participants

knowingly working with (U.S.-) sanctioned jurisdictionsare high!

Always ask yourself: Who benefits from the service I am providing? Are any U.S. origin goods or services involved? Where is data needed to provide my service

processed or hosted?

Société International de TélécommunicationAéronautiques (“SITA”) 2020, USD 7.8mAgency: OFACFacts: Provision of commercial services (network and ITservices) and software to sanctioned airline customers inviolation of the GTSR – and thus “[harming] foreign policyobjectives”Discovery: Not self-disclosed, not egregious findings based on an OFAC investigation

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“Special” Swiss Case Study

Sources: https://en.wikipedia.org/wiki/Viktor_Vekselberg | https://home.treasury.gov/news/press-releases/sm0338 | https://www.sulzer.com/ | https://www.oerlikon.com/en/ | https://www.schmolz-bickenbach.com/

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Links and online resourcesUSA

Office of Foreign Assets Control (OFAC) www.treasury.gov

New York State Department of Financial Services (NY DFS) www.dfs.ny.gov

New York County District Attorney (DANY) www.manhattanda.org

Bureau of Industry and Security (BIS) www.bis.doc.gov

Financial Crimes Enforcement Network www.fincen.gov

Congress Reports www.crsreports.congress.gov

Penalty Tracker https://violationtracker.goodjobsfirst.org

Switzerland

State Secretariat for Economic Affairs (SECO)

https://www.seco.admin.ch/seco/en/home/Aussenwirtschaftspolitik_Wirtschaftliche_Zusammenarbeit/Wirtschaftsbeziehungen/exportkontrollen-und-sanktionen.html

FINMA https://finma.ch/en/documentation/international-sanctions-and-combating-terrorism/

Lexology (not only sanctions and Switzerland) https://www.lexology.com/

Paying site https://iclg.com/practice-areas/sanctions/switzerland

European Sanctions (page on Switzerland)

https://www.europeansanctions.com/category/switzerland/

EU

European Commissionhttps://ec.europa.eu/info/business-economy-euro/banking-and-finance/international-relations/sanctions_en

EU Sanctions map https://www.sanctionsmap.eu/#/main

Maya Lester’s Blog https://www.europeansanctions.com/

ACAMS!https://www.acams.org/aml-resources/sanctions/

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Credit SuisseOFAC Settlement: https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Documents/12162009.pdf

Fed Cease & Desist: https://www.federalreserve.gov/newsevents/pressreleases/files/enf20091216a1.pdf

DOJ DPA: https://www.justice.gov/opa/press-release/file/978871/download

FINMA News: https://www.finma.ch/en/news/2009/12/mm-cs-usbehoerden-20091216/

UBSOFAC Settlement: https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20150827_ubs.pdf

SITAOFAC Settlement: https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20200226_sita.pdf

Enforcement Documentation

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Main Takeaways

Sanctions do matter to us in Switzerland – not only SECO

There is a lot to be learned from past enforcements

Stay up-to-date regulatory guidance, and consider the Swiss context