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Blockchain Adds to Swiss Money Laundering Risks, Finma Warns

Blockchain Aggravates Swiss Money Laundering Risks, Says Finma

(Bloomberg) --

Switzerland’s financial regulator warned the nation is “particularly exposed” to money laundering risks given its traditional role as a magnet for the world’s wealthy as well as emerging threats from blockchain and banks’ lower profit margins.

Blockchain, which provides a digital record of all transactions on it, may tempt banks with efficiency gains but its anonymity and speed appeals to money launderers, the regulator warned in its 2019 Risk Monitor report. Squeezed margins may also be pushing some banks to accept new clients who are financially appealing but hail from emerging countries that present “strong risks,” Finma said.

“We want to give them a chance and we have done a lot to remove unnecessary barriers to enable projects” based on digital currencies, Finma Chief Executive Officer Mark Branson told reporters in Zurich on Tuesday. “But we are also not starry-eyed as these new business models come with new risks, or old risks in new shapes.”

Branson’s more ambivalent attitude to blockchain and the cryptocurrencies that use its underlying technology contrasts with the enthusiasm the Swiss government has shown in promoting “Crypto Valley” in the town of Zug, a half hour from Zurich. Swiss officials have also welcomed Facebook Inc.’s planned Libra cryptocurrency, while Finma has been more muted, stressing it will have to meet the “highest international anti-money laundering standards” to get a Swiss payment-system license.

Three years ago the cyberexortionists who hacked critical infrastructure around the world using the notorious computer virus WannaCry then turned to a Zug-based digital currency exchange to launder their criminal gains. That means Finma has to be just as vigilant to new and old techniques for hiding dirty money.

“When we talk about blockchain applications or payment systems, it’s clear that money laundering risks exist and are an important risk category for this kind of business model,” said Branson. “The same risks have to be supervised and regulated with the same intensity, new and old.”

Working with Swiss prosecutors, Finma has investigated a number of Swiss banks which have pursued clients caught up in scandals like the 1MDB affair in Malaysia or Petrobras case in Brazil without doing the necessary compliance and due diligence work to ensure they’re not taking in dirty money. Policing the banks however is tricky.

That was underscored last week by a Swiss court’s decision to throw out a 95 million Swiss franc ($96 million) penalty Finma had imposed on Lugano-based BSI Bank over its ties to the 1MDB scandal. While BSI was responsible for “severe violations of supervisory provisions,” Finma’s methodology for calculating its penalty was “incomprehensible,” the court ruled, and kicked it back to Finma to rethink the matter.

--With assistance from Catherine Bosley.

To contact the reporters on this story: Hugo Miller in Geneva at hugomiller@bloomberg.net;Jan Dahinten in Zurich at jdahinten@bloomberg.net

To contact the editors responsible for this story: Anthony Aarons at aaarons@bloomberg.net, Peter Chapman

©2019 Bloomberg L.P.