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Implications of Sanction Regimes on Financial and Non-Financial Institutions

Pursuant to the decision of the Zurich Commercial Court in 2020, US sanctions law was considered applicable to a Swiss bank. In the same year, a Swiss non-financial institution was found to have violated US sanction law, upon which a settlement was reached. As a result, both financial and non-financial institutions established or doing business in Switzerland are at risk of breaching foreign sanctions law and thus having to pay penalties. Hence, they are encouraged to familiarise with various sanctions regimes.

Author

Valérie Bourgaux, MLaw, LLM

Senior Associate | Compliance, RegTech & Managed Legal Services | AI, Metaverse, Data Protection & Whistleblowing Specialist | Legal, PwC Switzerland

+41 58 792 47 66

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Legal Basis and Sanction Authorities

The legal basis for the implementation of sanction measures is the Embargo Act (EmbG), which is designed as a framework law. The Federal Council is competent to issue coercive measures. Implementation and enforcement are the responsibility of the State Secretariat for Economic Affairs (SECO). Sanctions adopted by the United Nations (UN), the Organization for Security and Cooperation in Europe (OSCE) or by important trading partners of Switzerland, namely the EU, and which are intended to ensure compliance with international law, namely human rights, can be enforced by means of coercive measures.

The aim of sanction measures is to induce the addressees to behave in a certain way for political reasons and thus to prevent the endangerment of international security and peace. Possible coercive measures imposed by Switzerland include, for example, direct or indirect restrictions of transactions involving goods, services, payments and / or people. Addressees of such coercive measures may be countries, regimes and persons as well as entities linked to terrorism. Coercive measures may also restrict the trade of certain goods such as for example war material or military equipment. The precise coercive measures concerning specific states, regimes, etc. are regulated in separate ordinances based on the EmbG. No provision states the personal or local scope of the sanction measures. In practice, however, individuals and legal entities being established in Switzerland or conducting business in Switzerland are subject to the Swiss sanction regime and must therefore ensure compliance with its obligations.

Extra-territorial effects

In principle, foreign sanctions do not have any legal effect in Switzerland. In order to have legal effect, the foreign sanctions must be adopted. UN sanctions are exempt from this requirement. This is due to the fact that Switzerland has been required to support UN sanctions since its accession to the UN. The Federal Council has refrained from such an adoption with regard to the EU sanctions. The Office of Foreign Assets Control (OFAC) sanctions, US sanctions, are in principle only applicable to US persons. In recent years, however, the scope of application of OFAC sanctions has steadily expanded. More recently, a US person no longer needs to be involved US sanctions to apply extraterritorially. This means that any US connection is sufficient for the OFAC to extend its jurisdiction.

Implications of OFAC Sanctions on Financial Institutions

OFAC sanctions have a far-reaching effect and thus Swiss financial institutions run the risk of being affected by such sanctions. The violation of US sanctions can have significant impact on financial institutions. It can have a high financial impact, and in extremis even lead to the exclusion from the US financial market, threatening the existence of a financial institution. Since the ruling of the Commercial Court of Zurich in 2020, it has become evident that Non-US persons are prohibited from doing business with US sanctioned parties provided that the US financial market infrastructure is used. Thus, even Non-US persons may be bound by the US sanction regime. Pursuant to the court, the use of the US financial market infrastructure is to be assumed whenever transactions are conducted in US dollars. This type of transactions can also be prohibited for supervisory reasons.

Implications of OFAC Sanctions on Non-Financial Institutions

More recently, OFAC sanctions have had an impact not only on financial institutions but also increasingly on non-financial institutions. In 2020, a Swiss IT company agreed to a USD 7.8 million settlement with the OFAC for violating US sanctions. The Swiss IT company provided services to the aviation industry. The OFAC pursued the Swiss company on the basis that it provided flight planning, reservation, and messaging services to five airlines listed on the US sanctions list for supporting terrorism. In principle, it is not prohibited for a Swiss company to conduct business with OFAC-sanctioned parties. The reason whereby the OFAC pursued the Swiss company and alleged violation of US sanction was based on the location of the computing resources that the company used to deliver services to the sanctioned airlines. The computing resources being located in the US constituted the US nexus. Consequently, Non-US companies doing business with US sanctioned parties run the risk of having to pay high penalties for violating US law.

How can we support you?

Despite the fact that foreign sanction law does in theory not have a legal effect in Switzerland, its application on companies established in Switzerland, both financial and non-financial, should not be underestimated. This is particularly of concern with regard to US sanctions. Due to the existing legal uncertainties regarding the application of foreign sanction law and the related complexity, it is advisable to set up a strong compliance team and to invest in regular compliance trainings to mitigate risks. We also recommend implementing a compliance program and IT solutions such as a sanctions tool into the compliance process in order to detect possible sanctions breaches efficiently. We are looking forward to supporting you in these matters.

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Contact us

David Bundi, MLaw

David Bundi, MLaw

Director | Head of Compliance, RegTech & Managed Legal Services | Metaverse Strategy & Regulatory Leader | Legal, PwC Switzerland

Tel: +41 79 625 58 20

Valérie Bourgaux, MLaw, LLM

Valérie Bourgaux, MLaw, LLM

Senior Associate | Compliance, RegTech & Managed Legal Services | AI, Metaverse, Data Protection & Whistleblowing Specialist | Legal, PwC Switzerland

Tel: +41 58 792 47 66

Cedric Ming, MLaw

Cedric Ming, MLaw

Senior Associate | Compliance, RegTech & Managed Legal Services | Financial Crime Compliance, Metaverse, Digital Assets & NFT Specialist | Legal, PwC Switzerland

Tel: +41 58 792 18 55