Swiss Federal Administrative Court puts certain limits to FINMA’s enforcement activities

The dispute arose from FINMA’s enforcement proceedings against a Swiss bank active in wealth management. After appointing an investigation agent, FINMA concluded that several client relationships initiated between 2009 and 2020 had been maintained in breach of AML due diligence duties over a long period, and ordered disgorgement of CHF 440’117 in profit, together with a package of additional measures, which included (i) a ban on onboarding new PEP of Russian nationality or domicile, and new commercial clients domiciled in Russia or with Russian/Belarusian nationality and a substantial nexus to those countries, (ii) reporting duties towards FINMA and (iii) the appointment of an audit agent.

The bank challenged the decision on both procedural and substantive grounds.

The Court rejected the bank’s procedural complaint that its right to be heard had been breached. It held that the bank had been able to comment extensively on the investigation report and on the possible consequences and that FINMA was not obliged to pre-disclose every contemplated measure or every element of its internal reasoning before issuing its decision.

• Practical takeaway: The Court drew an important distinction between the right to be heard and the adequacy of the substantive reasoning. A party is entitled to a meaningful opportunity to respond, but not to advance notice of every possible outcome or measures that it intends to take nor to review the draft of the authority’s factual background (in line with FINMA’s former practice).

Key topic 1: Ex ante assessment

A central feature of the judgment – and likely its most important implication beyond this specific case – is the Court’s insistence on an ex ante assessment of the situation. FINMA had relied heavily on later developments, including sanctions-related information, media coverage, and geopolitical shifts after 2022, to argue that the client relationships should already have been viewed as highly risky at an earlier stage. The Court found that, in the circumstances then prevailing, the Russian nationality of the UBOs, the former work of one UBO for the KGB, and the trading of equipment destined for Russia did not, on their own, require classification of the relationships as high-risk under the applicable AML rules or warrant the more intensive review FINMA later advocated. It also criticized FINMA’s approach for drawing too strong an inference from isolated documents and later sanction-related information, rather than assessing whether concrete red flags existed at the time the bank processed the transactions. The Court characterized this as an impermissible hindsight bias (“unzulässiger Rückschaufehler” / see the full citation of the relevant paragraph at the end of this Legal Insight).

• Practical takeaway: The Court considered that the relevant question is what the bank knew, or should have known, at the time of client onboarding and transaction processing. Therefore, from a practical perspective, the existence of documentary evidence in the bank file supporting the business rationale, the risk assessment and the transaction logic at the relevant time are important elements to avoid later hindsight-based criticism.

Key topic 2: Disgorgement

Under Article 35 of the Swiss Financial Market Supervision Act (“FINMASA”), disgorgement is an exceptional remedial measure designed to neutralize gains obtained through a serious breach of supervisory law.

Sub-topic 2A: Threshold for disgorgement

In this respect, the Court reaffirmed that internal bank policies may help to assess organisation, risk culture and control effectiveness, but they are not themselves supervisory provisions and cannot, on their own, support disgorgement. This point was key given the importance that FINMA had given on alleged deviations from the bank’s internal compliance framework.

• Practical takeaway: The Court did not accept that a breach of internal rules automatically translated into a serious breach of supervisory law, which is a prerequisite for disgorgement. In particular, a confiscatory measure cannot be grounded on a merely internal standard if the public-law threshold in FINMASA is not met.

Sub-topic 2B: Causation for disgorgement

The Court also tightened the causation analysis. It held that FINMA may only disgorge profit that can be causally linked to the serious supervisory breach relied upon (as opposed to ordering he disgorgement of the profit obtained on the overall client relationship between 2017 and 2022, as FINMA had done in the challenged decision).

• Practical takeaway: The Court's reasoning means that disgorgement cannot be made on mere weaknesses in customer files or transaction documentation. It rather presupposes the proof, with the required degree of probability, that the relevant profit would not have been earned had the bank complied with its legal duties.

Sub-topic 2C: Time limitation of disgorgement

The Court confirmed that the seven-year limitation period for disgorgement under Article 35 (4) FINMASA begins to run at the time of the supervisory breach (here: the alleged failure to corroborate certain transactions), and not at the time the profit is later realized.

• Practical takeaway: In ongoing client relationships, FINMA may not rely on later fee income from the same relationship to “resurrect” transaction-based conduct that is already time-barred. In turn, if concrete indications of a predicate offense under the Swiss AML rules exist and the bank fails to file a report with the MROS, the limitation period does not begin to run until either the report has been filed or the criminal authorities are otherwise in possession of the complete information.

The decision clarifies that FINMA must tailor its own remedial measures to the corrective actions already taken by the institution prior to the final ruling. Where a bank has proactively identified and addressed deficiencies, FINMA is required to take those efforts into account. Considering the measures taken by the bank, the additional measures imposed by FINMA were not justified and therefore disproportionate.

• Practical takeaway: The decision underscores that institutions which have already taken credible remediation steps can use those efforts to challenge or narrow further remedial orders. The purpose of enforcement proceedings must remain to restore compliance with the law.

While the judgment touches upon a number of interesting technical questions regarding disgorgement, its most important contribution for future cases lies probably in the Court's rejection of hindsight-based reasoning. By insisting that supervisory breaches be assessed strictly from an ex ante perspective, the Court has set a marker that should guide (i) the banks' contemporaneous documentation of risk decisions and (ii) the future enforcement practice by the regulator.

In our view, this is particularly important for historic client relationships, where risk indicators that only became apparent through later developments – such as subsequent sanctions, media coverage or geopolitical shifts – must of course be taken into account in the ongoing risk management processes, but cannot be used to retroactively in an enforcement scenario to recharacterize a relationship as having been high-risk from the outset. Whether this reasoning will ultimately stand, however, remains to be seen: FINMA has announced its intention to appeal the decision to the Swiss Federal Supreme Court, so the final word on these questions has not yet been spoken.

The decision is also noteworthy from an institutional perspective. In a number of previous cases, the Swiss Federal Administrative Court left FINMA considerable leeway in shaping enforcement measures, deferring to the regulator's margin of discretion (“Ermessensspielraum”) in a manner reminiscent — at least in spirit, if not in doctrinal structure — of the deference historically afforded to US agencies under the Chevron doctrine. Just as the US Supreme Court recently curtailed that deference in Loper Bright Enterprises v. Raimondo (2024), the Swiss Federal Administrative Court here sets substantive limits on FINMA’s discretion. This is particularly relevant in light of the ongoing public debate on the expansion of FINMA’s enforcement toolkit (see the recent interview with FINMA's Chairwoman, Marlene Amstad, in the NZZ / link) and the regulator's bid for additional powers. The publication of the proposals of the Swiss Government on this topic is expected to occur in the coming weeks.