In our experience as regular advisors to startups, regulatory requirements pose one of the biggest challenges for young companies. This is especially true for financial market regulation, which has been getting more and more comprehensive during recent years. The jungle of financial market laws can be difficult to navigate and there are many pitfalls you need to be aware of.
Somewhat of an evergreen for many companies, especially in the FinTech and Blockchain sector, are know-your-customer (KYC) and anti-money laundering (AML) requirements. The applicability of the Swiss Anti-Money Laundering Act is rather broad. Therefore, many different FinTech and Blockchain business models in connection with e.g. payment instruments, payment systems, lending activities or individual portfolio management are well within the touching points of the regulation.
This blogpost will give you an overview of how to approach anti-money laundering regulation as a startup. We will outline the different approaches you can take, the process of obtaining your membership with a Swiss Self-Regulatory Organization as well as ongoing know-your-customer duties. Additionally, we have prepared a brief overview of the regulatory framework.
The Swiss AML regulation is made up of three core principles:
The Anti-Money Laundering Act applies to all financial intermediaries. These can be divided into two different groups:
First, you need to find out whether your business is subject to the AML regulation in the first place. This will require an evaluation of your business model and the activities you conduct. As a rule of thumb, you should be alert if your activities somehow include assisting in transferring assets for, or holding assets of, clients or third parties.
Once you have established that you are subject to the regulation, there are basically three different approaches you can take:
If you decide to go with the third approach, you need to become a member of an SRO. The SRO will be supervising you to ensure you comply with all duties imposed by the anti-money laundering regulation. You are not allowed to start engaging in your business activities prior to having obtained an SRO membership.
The membership application process can be divided into the following steps:
Once an SRO member, you must ensure your day-to-day KYC procedures are working effectively. Know-your-customer can generally be described as the identification and the risk assessment of clients as part of their onboarding as well as an ongoing monitoring of the client relationship. In essence, this means collecting and storing information about the client based on which you assess money-laundering and related risks. Setting up your KYC procedures takes some initial work but will ultimately be a largely repetitive task to execute. There is also the possibility to onboard clients via digital channels, e.g., by means of video transmission and other forms of online identification if the FINMA guidelines on the subject are being met.
Financial market regulation is a hurdle for many startups, especially in the FinTech and Blockchain sector. Usually, the first challenge lies in assessing what laws and regulation apply to your specific business. With its broad applicability, chances are that you fall within the scope of AML regulation. While there are different approaches on how to handle the regulation, in most cases you will want to seek membership with a Self-Regulatory Organization.
The process of evaluating your business model and obtaining your membership involves several steps and does require some planning ahead. In any case, you need to wait until you become an SRO member before you can start conducting business. Once a member, you must ensure you properly execute your day-to-day KYC duties.