Enforcement tools – FINMA, financial markets supervision and money laundering
It was recently reported in the press that FINMA took several actions against certain Swiss banks and their executive managers, particularly in relation to several cases of money laundering.
Financial markets supervision
Such recent FINMA decisions provide us with an opportunity to outline the key enforcement instruments at FINMA’s disposal to enforce financial markets supervisory law.
As a preliminary remark, it should be recalled that the purpose of supervisory law is to protect creditors, insured persons and investors, as well as to ensure the loyalty and stability of the Swiss financial system. Contrary to what might be imagined, FINMA is not a criminal law enforcement agency.
The measures available to FINMA may be combined, depending on each specific situation. In principle, these measures are subject to appeal, except for certain urgent cases. They are detailed below, from the least to the most restrictive:
Declaratory ruling: reprimand
The declaratory ruling is the least incisive measure FINMA is entitled to take against an institution or a banker in a management position subject to supervision. FINMA will take this measure if the supervised institution or banker has seriously breached supervisory law, provided however that it considers that no corrective measures must be taken to restore compliance with the law. This will be in particular the case if the concerned institution has already taken the necessary corrective measures during the enforcement proceedings.
The primary aim of this type of sanction is to prevent the repetition of the alleged violations of supervisory law.
It should be noted that it is this sanction that FINMA has recently imposed on the former executive manager of the banking institution mentioned at the beginning of this legal news.
Restoration of legal order
If FINMA considers that a supervised institution is in breach of supervisory law, it takes the necessary measures to remediate the identified breaches. FINMA has considerable room for manoeuvre in this regard. Contrary to the other measures mentioned above, FINMA will restore compliance with the law even if no serious violation of supervisory law were found.
As examples of the restoration of compliance with the law, FINMA can request a supervised institution to change the composition of its board of directors, to permanently or temporarily limit the scope of its activities, or prohibit any new acquisitions (“asset deal” or “share deal”) for a limited period of time.
Publication of FINMA decision
FINMA may publish a decision regarding a serious violation of supervisory law, which has entered into force, i.e. when all appeals against the initial decision have been unsuccessfully exhausted. Even the names of the individuals involved in the case may be published. FINMA maintains a list of these companies and individuals on its website https://www.finma.ch/en/enforcement/enforcement-tools/publication-of-final-rulings/). The vast majority of those involved are those who carry out an activity subject to supervision without the appropriate authorization.
Forfeiture of profits or avoided losses
This measure applies both to FINMA supervised institutions and executive managers of supervised institutions, which have committed serious breaches of supervisory law.
Since the exact amount of the profits earned or losses avoided is often complicated to calculate, or would require disproportionate resources to do so, FINMA may work on the basis of its own estimations. The right to confiscation is time-barred after seven years.
As an example, in October 2020, FINMA issued a 70 million confiscation order against a bank in Ticino.
It should be noted that the current legislation does not allow FINMA to impose a fine on supervised institutions or their executive managers.
Appointment of an external investigator
External investigators are not members or employees of the FINMA and they are trained in the area of prudential supervision. The external investigator is mandated by FINMA to investigate alleged breach(es) of supervisory law or to ensure the proper implementation of a FINMA decision against an organization.
The powers of the investigator are set out and determined by FINMA on a case-by-case basis. They may be fairly broad, and in some cases the investigator may act instead of the organization’s bodies.
Costs of the investigator are charged to the institution that is the subject of FINMA’s enforcement measure. Since such costs can amount to several hundred thousand Swiss francs, this is an effective instrument that may hit hard the organization’s finances.
Prohibition from holding a management position
This measure has far-reaching consequences for the person against whom it is imposed. FINMA may prevent anyone who has seriously violated supervisory law from holding a managerial position in an institution subject to its supervision. The prohibition is limited to a maximum of five years.
This measure should not be confused with FINMA’s letter concerning the assurance of proper business conduct. Such a letter does not constitute an industry ban, but obliges the person receiving it to have FINMA review whether he or she is fit to hold a senior management position at an institution subject to prudential supervision. In practice, such letter often amounts to an industry ban.
Activity ban against employees
Following the entry into force of the FinSA and FinIA, FINMA may prohibit employees of a supervised company from trading in financial instruments or performing an advisory activity. Such sanction is imposed in case of serious violations of supervisory law or the internal regulations of the organization subject to FINMA supervision.
Depending on the seriousness of the facts and their possible recurrence, such a ban may be temporary or permanent.
Withdrawal of authorization of a supervised organization
The withdrawal of the authorization is the most restrictive measure and is imposed by the FINMA if the licensing conditions are no longer met or if the institution in question is in serious breach of supervisory law. FINMA must exercise restraint and proportionality when deciding on such a sanction.
The institution is then liquidated. It should be noted that if an institution is insolvent or overindebted, FINMA will then initiate bankruptcy proceedings entrusted to an external liquidator and immediately publish the required notices to creditors.
The liquidation measures may also be taken against a company carrying on activities subject to supervision without having the appropriate authorization.
This legal news is provided for information purposes only and does not constitute a legal or financial opinion given by its authors. All liability thereof is therefore excluded. We would be happy to advise you in relation to a specific case.