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Russia sanctions present "reputational and operational risks" for institutions, according to FINMA

In its Risk Monitor 2022, the Swiss Financial Markets Authority (FINMA) cautions that the risks presented by money laundering have "remained high" in the country over the previous year.

The authority has highlighted seven major risks that it believes are the seven "important risks" that monitored institutions are currently confronting in the financial sector.


The Swiss financial center is "particularly exposed to money-laundering risks" since it is a "leading global cross-border wealth management hub for private clients," according to FINMA.


The regulator issued a warning, stating that failure to comply with reporting and due diligence requirements might have "legal consequences and reputational damage for financial institutions both in Switzerland and abroad."


"In the past year, money-laundering risk has remained high. In addition, compulsory sanctions in connection with the war in Ukraine pose reputational and operational risks for the supervised institutions ," according to FINMA.


The watchdog also issued a warning, noting that a "significant threat of corruption" exists in emerging economies, where many new clients of Swiss asset management companies might be located.

According to FINMA, "Various global corruption and money-laundering scandals, as well as the numerous violations of money-laundering regulations by financial institutions, show that the risks for financial institutions involved in the cross-border wealth management business remain high."


Additionally, FINMA issued a warning that the adoption of "complex structures" frequently increases the risks associated with asset management.


"These include not only individual structures that can lead to a lack of transparency regarding the beneficial owners due to their complex composition, but also webs of business relationships, whereby the economic purpose is not clear due to the use of multiple domiciliary companies and which can be used to conceal the origin of potentially criminal assets."


A bank's compliance framework "must keep pace with risk appetite," according to FINMA, which also advised financial institutions to keep a "constant eye" on whether the risks they have assumed are appropriate for their respective business activities and to make sure they are "sufficiently mitigated by control mechanisms."


According to financial institutions' reports to the Money Laundering Reporting Office Switzerland (MROS), there has been an increase of 12% since 2020.


Additionally, the regulator stated that hazards in the cryptocurrency industry are "increasingly apparent."


"While new technologies facilitate efficiency improvements in the financial area, the threats of money laundering and the financing of terrorism are also heightened due to the potential for greater anonymity along with the speed and cross-boder nature of transactions," according to FINMA.


The EU-imposed sanctions following Russia's invasion of Ukraine were approved by the Swiss Federal Council, and FINMA is in charge of overseeing the supervisory organizational regulations under financial market law.


According to these regulations, the regulated financial institutions must effectively identify, restrict, and monitor all risks, including those involving the law and their reputation. They also need to set up an efficient internal control system.


"The correct observance of sanctions is operationally challenging and requires the utmost care. Breaches of sanctions regulations pose high legal and reputational risks for the individual institutions, but also for the Swiss financial centre as a whole," according to FINMA.


The following seven major risks for the financial sector were identified by the 2022 Risk Monitor: interest rate risks, credit risks related to mortgages, credit risks related to other loans, risks from cyberattacks, risks related to the fight against money laundering, and risks due to heightened barriers to cross-border market access.

By fLEXI tEAM



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