Swiss Bankers Association published guidelines for corporate accounts
On September 21, 2018, the Swiss Bankers Assocatiion (Schweizerische Bankiervereinigung, or SBVg) published guidelines for its members covering the opening of corporate accounts for blockchain companies.
The guidelines are based on the principle that anti-money laundering (AML) and anti-terrorism regulation, like any other cross-cutting regulation, also applies to Blockchain / Initial Coin Offerings (ICOs) for all financial intermediaries involved. Therefore, the bank’s AML duties, which are generally incurred when opening company accounts, are based on the currently valid version of the Agreement on the Code of Professional Conduct
on Due Diligence of the Banks (VSB), the Anti-Money Laundering Regulation (MLA) FINMA, the Anti-Money Laundering Act (AMLA) and the Swiss Penal Code, as well as the bank-specific internal guidelines. The guide builds on the
VSB and covers additional questions in the blockchain context.
On the one hand, the guidelines deal with blockchain specific elements within the Know Your Customer (KYC) process, on the other hand they include concrete expectations for the issuers of tokens. The guidelines differentiate between companies with general points of contact to blockchain and companies with an additional connection to so-called cryptocurrencies as well as the issuance of tokens (ICO). When issuing tokens, the guide further distinguishes between financing via cryptocurrencies and financing through fiat currencies.
The guidelines only cover ICOs that are conducted by an operating company domiciled in Switzerland, and are based on the FINMA Guidelines on Immigration Requests concerning ICO , issued on February 16, 2018. Any international aspects, for example, because of ICO participants domiciled abroad, the risks resulting from the application of foreign legislation (tax, criminal, money laundering, capital markets, etc.) must be adequately captured, limited and controlled. In particular, foreign supervisory law must be complied with.
As shown in the graphic above, the guidelines consist of five sections, the path through the proposed due diligence questions is defined by whether an ICO is planned or not, and whether such ICO would allow funding through cryptocurrencies or not.
Basic due diligence questions for blockchain companies
The guidelines propose the following questions to be asked before any bank engages on account opening for blockchhain companies.
- Blockchain or DLT background
Detailed description of the touch points to blockchain and distributed ledger technology
- Business model
- Understandable description based on documentation, e.g. white paper
- Description of expected cash flows
- Description of the planned business processes
- To be compiled in country / business language
- Specification of the legal form
- Proof of operating entity
- The company demonstrates that it is operational (VSB 16) and has local substance
- If a start-up: The company defines business objectives, purpose as well as expected current income and expenditure
- Regulatory compliance
- The company has a dedicated contact for all compliance issues and has in particular:
• Knowledge of relevant regulations / regulations
• A description of how the company maps the relevant regulations
- Validation of business model post-account opening
- Account holders are required to inform the bank of any relevant change in the use of Blockchain technology or any upcoming ICO
- ICO relevance
- If the company plans to issue tokens in the next 12 months plans: continue with section “ICO”
- If the company does not plan to issue tokens: continue with section “buiness model”
- If the company receives capital in a traditional way, e.g. through issuing shares: continue with section “business model”
Expectations for the ICO issuer
- Use of funds
- ICO issuers state before the ICO launch that the project to be funded exists and the funds received in the account come from the ICO and are subsequently used for the advertised purpose. The ICO Organizer will provide the bank with the final Terms & Conditions
- Liquidity planning
- The ICO issuer will inform the account-holding bank before the ICO launch:
• Breakdown of fiat and individual cryptocurrencies
• In what amounts and in what frequency the funds converted in fiat currency are transferred to the account-holding bank
• Repayment pattern if the target amount is not reached
• Which companies executes the cryptocurrencies to fiat exchange
- Risk from foreign legal exposure
- An ICO issuer has appropriate policies. It implements measures to exclude ICO participants from countries according to the bank’s internal definition. Upon request, the ICO organizer will provide this information to the bank
- Anti-Money Laundering
- The bank initially assumes that the ICO issuer follows AML rules. The application of AML is based exclusively on the FINMA Guideline on ICO dated February 16, 2018
- If there is no AML subordination, the ICO issuer must state this. In cases of doubt, the issuer will in particular attach an exception request answered by FINMA
- Detailed description of the token to be issued in accordance with the Annex to the FINMA Guidelines for Filing Requests regarding Initial Coin Offerings (ICO) dated February 16, 2018 and the status of the development (market maturity, issue date)
- This documentation of the token, usually in the form of a white paper, is an essential part of the bank’s due diligence. Accordingly, it must be given to the account-holding bank as soon as possible
- Obligations post-ICO
- Continued legal obligations are derived from AML regulations
- At the request of the bank, the ICO issuer will proof that the current use of funds is in line with the announced purpose
- At the request of the bank, the ICO organizer submits that the restrictions for foreign ICO participants described above have been observed
- In principle, any measure designed to provide transparency regarding tokens upon completion of the ICO serves to mitigate risk and is welcomed by the account-holding bank
- Funding relevance
- If the ICO is financed partly or entirely via cryptocurrency: continue with section “funding through crypto”
• If financing is solely through fiat currency: continue with section “funding through fiat”
ICO with funding through crypto
- Risk minimization
- The cryptocurrency should basically be suitable for a wallet analysis. Deviations must be justified.
- Information on ICO participants
- Information to be gathered about each subscriber by the ICO issuer is generally derived from the requirements of the applicable regulations (eg SRO regulations and circular video and online identification of FINMA)
- Regardless of the subscription amount, the ICO issuer should register each participant and record the name, address (including country) and date of birth, nationalities and place of birth
- It is expected that at least a subscription amount in excess of CHF 15,000 will trigger an identification in accordance with the AML regulation
- Any further measures to increase transparency serve to reduce risks, especially against the background of possible violations of sanctions
- The information collected during identification also contains all relevant wallet addresses which the ICO participant uses for the capital payment
- ICOs of payment tokens are subject to the MLA. In accordance with FINMA’s practice, in this case, up to a threshold of CHF 3,000, a simplified identification requirement applies
- Check of relevant databases
- Alignment of subscribers with industry-standard risk databases (in particular politically exposed persons (PEP), terrorist and sanction lists) by the ICO issuer
- The reconciliation will be made available to the bank together with the internal guidelines for monitoring PEPs and sanctioned clients
- Background checks
- In general, the ICO issuer is recommended to apply a risk-based approach to the background check. A general traceability of the source of funds on the blockchain has not been prescribed. In principle, any additional transparency provided by the ICO organizer serves to reduce risk.
- In special cases or specific suspicions, a thorough review by a wallet analysis or additional documentation is recommended (eg in-depth due diligence instead of pure database reconciliation for large investment amounts or domicile in a high-risk country)
- An in-depth review by the ICO issuer is always recommended for subscriptions in excess of CHF 100,000 (either individually or cumulatively). This in-depth review includes the documented match between Wallet’s address and ICO contributors
- The account-holding bank reserves the right to demand information from the investors before the remittance and, in the case of its own specific suspicions, may also request further clarification from the ICO issuer (e.g., receipt of specific wallet analyzes)
- Quality of KYC/AML checks
- An ICO organizer who is not subject to the AML regulation should hire either a financial intermediary or a company specializing in AML compliance
- The results will be communicated to the account-holding bank. The results should also document compliance with the company’s PEP guidelines.
- Converting crypto- into fiat currency
- Crypto-exchanges and the conversion of cryptocurrencies into FIAT pose a particular risk for banks, as risks are concentrated here with regards to AML regulations
- Correspondingly, banks must set risk-reducing requirements for an exchange. For example, an exchange regulated under Swiss law or equivalently regulated or a third-party bank governed by Swiss law or equivalent.
- The definition of “equivalent regulation” should be based on the internal policies of each bank
- Suspicions of money laundering
- The participant is not admitted to the ICO. The responsibility for the exclusion lies with the ICO issuer
- The account-holding bank may refrain from necessary clarifications in the context of KYC and due diligence of a company with ICO on the basis of a corresponding consent of the corporate client in the contract or by means of a separate waiver of bank client confidentiality
- The bank should explicitly inform the corporate client about this fact and accordingly the ICO issuer is advised to declare this transparent in the ICO Terms & Conditions
ICO with funding through fiat
Regardless of whether the financing is done through tokens or shares, KYC duties (eg funds origin / Beneficial Ownership (BO) etc.) exist when financing through FIAT currencies as with a normal account opening.
In this context, ICO participants / investors must identify and identify beneficial owners in accordance with the AML regulations.
Specific business models
A final list and detailed discussion of all business models in the blockchain context is not possible. In the following, the most common touch points are discussed:
- For exchanges, the change of cryptocurrencies against fiat currencies or against other crypto currencies according to existing FINMA practice qualifies as a financial intermediary, in accordance with article 2 paragraph 3 of the AML regulations. The applicability of the Financial Market Infrastructures Act (FinfraG) must also be presented and examined by the applicant company.
- The same applies to the offer of the transfer of tokens. If the service provider has power of disposition over the private key (so-called custody wallet provider), the activity is considered to be a financial intermediary.
- For companies offering the possibility to procure their services or products against crypto-currencies, it is recommended to take part in the background checks outlined above