The Federal Act on Illicit Assets comes into force today. Its contents are of relevance not only to those who are directly affected by the measures ordered by the Swiss Federal Council, but also for any person managing, dealing with or otherwise aware of assets of foreign politically exposed persons (PEPs) on Swiss soil.

As the 'Arab Spring' (2011) and the Ukraine Crisis (2014) have shown, without any appropriate body of law, the Swiss Federal Council thought that it had no choice but to make use of an emergency clause of the Swiss Federal Constitution to freeze the assets of the overthrown political leaders of the relevant countries and members of their inner circles.

On 18 December last year, in order to provide the Federal Council (Switzerland's 'seven-headed president') and the other competent authorities with a formal legal basis for the deployment of Switzerland's policy in the area of the recovery of illicit assets, the Swiss Parliament passed the Federal Act on the Freezing and Restitution of Illicit Assets of Politically Exposed Persons Abroad. Let us examine some of its main provisions.

The freezing of assets

There are two distinct grounds that may lead to the freezing of assets.

* Freezing in view of mutual legal assistance (article 3). This provision codifies the practice developed by the Federal Council under the Swiss Federal Constitution. It enables the council to freeze assets in Switzerland that are either placed at the disposal of, or beneficially owned by, PEPs (including the close relatives of office-holders), whether in person or through legal entities. For the purposes of consistency, the notions of PEPs and closely related persons are inspired by the definitions provided by the Financial Action Task Force and the Anti-Money Laundering Act.

The aim of the preventive freezing of assets in accordance with article 3 is to avoid the dissipation of assets and to give time for the state of origin to ask for 'mutual legal assistance' from Switzerland, as long as all of the following is the case.

• The government of the state of origin or certain of its members have lost their power or a change of the regime in place appears inevitable. In other words, the Federal Council is not allowed to intervene if the government of the state of origin is corrupt but still in place.
• The degree of corruption of the state of origin is notoriously high.
• It is likely that the relevant assets were acquired by corruption, mismanagement or other crimes.
• The safeguarding of Switzerland's interest requires the freezing of such assets.
• The Federal Council orders the assets to be frozen by issuing an ad hoc ordinance, to which is enclosed the nominative list of the targeted individuals (art 5). Such a list will be available online and may be amended under certain requirements. The freezing ordinance itself is not subject to appeal (art 21 III). To challenge the freezing of assets, the concerned person has to ask the Federal Department of Foreign Affairs (FDFA) to remove it from the list (art 20 I), and this body will then make a decision that is subject to appeal. Any freezing ordinance based on article 3 may be rendered for a period of four years (art 6 I), renewable for additional periods of one year up to a limit of ten years.

* Freezing in case of failed mutual legal assistance (art 4). In the event that mutual legal assistance has failed, the Federal Council may decide, in view of their forfeiture, to freeze assets in Switzerland that are either placed under at disposal of, or beneficially owned by, PEPs or their close relatives, whether in person or through legal entities. Such a freezing can only happen if all of the following is the case.

• The assets were previously frozen in pursuance of mutual legal assistance proceedings initiated at the demand of the state of origin.
• The state of origin is unable to meet the requirements of the mutual legal assistance proceedings because of the collapse of all or a substantial part of, or the dysfunction of, its judicial apparatus (this is known as the 'failing state situation').
• The safeguarding of Switzerland's interest requires the freezing of such assets.

The freezing of assets is, however, also possible if, after the receipt by Switzerland of a request for mutual legal assistance, it appears that the co-operation with the state of origin is excluded because of concerns that the latter is unable to comply with the elementary procedural principles set forth in the European Convention for the Protection of Human Rights or in the International Covenant on Civil and Political Rights (article 4 III). The rationale here is that it would not serve Switzerland's interests if the efforts deployed to return illicit assets are jeopardized merely because the state of origin is not complying with procedural principles. One can appeal against the freezing decision rendered in case of failed mutual legal assistance before the Federal Administrative Tribunal (Art. 21 I).

Asset forfeiture (article 14)

After a reporting institution has frozen assets in accordance with art 4, the Federal Department of Finance might ask for an administrative forfeiture, upon instruction of the Federal Council, before the Federal Administrative Tribunal. The law will presume that assets have a criminal origin if (i) the wealth increased in an exorbitant fashion, and (ii) the degree of corruption of the state of origin was notoriously high during the relevant period of office. In the case of a forfeiture, the restitution of assets to the state of origin will be made through the financing of projects of public interest.

The Money Laundering Reporting Office of Switzerland - a 'one-stop-shop'

Duty to report and to inform (art 7)

Any individual or entity holding or managing (e.g. banks, wealth managers, fiduciaries, etc.) or otherwise aware of assets in Switzerland subject to freezing measures in view of mutual legal assistance (art 3) must report such assets promptly to the MROS. Due to their professional secrecy, attorneys and notaries are exempted from that duty to report.

The MROS shares the information it collects with the FDFA and the Federal Office of Justice. Subject to certain restrictions, in particular if there is a risk of depreciation, the relevant assets may continue to be managed while they are frozen.

Any failure to comply with freezing orders or the breach of the duty to report to MROS may end in a criminal prosecution (art 25-27).

Transmission of information to the state of origin (art 13)

As part of the catalogue of measures intended to support the state of origin in view of the restitution of frozen assets, the Federal Act on Illicit Assets contains a central innovation: subject to certain restrictions, the MROS is entitled to spontaneously transfer any information – including banking information – gathered in the application of such an Act to its foreign counterpart, for the purposes of helping the state of origin with the filing, or completion, of a request for mutual legal assistance (art 13). No actual means of evidence can be provided, but the MROS's report to its foreign counterpart may contain detailed information such as the bank account number, account holder's name, beneficial owner's name, etc. The person in question may not appeal against the information being shared in this way. He will, instead, have to take action against the transmission of information in the context of an appeal either against a freezing decision based on article 4 or against a closing order in the context of the mutual legal assistance proceedings.

* Dr Andrew Garbarski can be reached on +41 58 261 57 22 or at andrew.garbarski@baerkarrer.ch; Tali Paschoud can be reached on +41 58 261 57 63 or at tali.paschoud@baerkarrer.ch