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Swiss bearer shares not yet doomed as money laundering reforms meet stiff opposition

Monday, 11 June, 2018

The Swiss federal government's proposed implementation of Financial Action Task Force and OECD Global Forum transparency recommendations has met strong opposition, in particular its plan to abolish bearer shares and to expropriate shareholders who do not convert them in time.

Switzerland was examined by the OECD Global Transparency Forum in July 2016, and by FATF in December 2016. Both organisations' reports found that the country's rules for identifying the ultimate beneficial owners of qualified interests in legal entities, introduced the previous year, were insufficient.

In January this year, the Federal Council tabled a bill to implement the Global Forum's recommendations. This proposed the compulsory conversion of bearer shares into registered shares, as well as sanctions against shareholders who do not report beneficial owners, and against companies that fail to keep a register of shareholders and beneficial owners. Unlisted companies will no longer be allowed to issue bearer shares, and holders of bearer shares that did not report them to the issuing company for conversion within 18 months will be expropriated.

There are already restrictions in Switzerland on the use of bearer shares. An acquirer is obliged to report them to the issuing company along with his or her name and address, and the company must enter this information into a register.

The federal government's concern is that, if its new measures do not go far enough, it might not get an overall rating of 'full compliance' at the next review, which takes place this summer. That would put Switzerland at risk of remaining on the European Commission's 'grey list' of jurisdictions that have not fully demonstrated tax transparency, or even being placed on the black list of non-cooperative jurisdictions.

However, the consultation on the draft bill, which ended on 24 April, drew considerable opposition. Swiss law firm CMS von Erlach Poncet says the measures are opposed by three out of Switzerland's four most powerful political parties, not least because they go beyond what the FATF or the Global Forum demanded – a phenomenon nicknamed the 'Swiss Finish'.

'The abolition of bearer shares is not a measure necessary to align with international standards', say Bernhard Loetscher and Flavia Widmer of CMS von Erlach Poncet. 'The rules on transparency of legal entities enacted in 2015, which confirmed the feasibility of bearer shares, were at the time recognised as compliant with the FATF's respective recommendations. Moreover, those rules have proven to be effective.'

The new proposal would 'entail severe consequences for approximately 60,000 companies in Switzerland', say Loetscher and Widmer. 'The number of shareholders and creditors affected is likely to be many times higher. The proposed expropriation of recalcitrant holders of bearer shares conflicts with the constitutional guarantee of ownership.' They also note another measure in the bill – a new obligation for companies to maintain a Swiss bank account – is widely seen as an inappropriate encroachment on economic freedom.

'In its present form, it is unlikely that this proposal will find the requisite support in Parliament', says Loetscher and Widmer. 'Bearer shares are not yet doomed to disappear in Switzerland.'

A second consultation paper to remedy the defects identified by FATF appeared earlier this month. It proposes the introduction of due diligence obligations for certain services that concern the establishment, management or administration of companies and trusts outside Switzerland, and will introduce an explicit duty on financial intermediaries to verify up-to-date beneficial ownership information. This consultation is open until 21 September 2018.

Sources