Virtual assets are an integral part of the global financial landscape. The country risk analysis is part of the KYC process. Virtual assets need to be assessed in a differentiated way.
The Swiss Anti-Money Laundering Act (AMLA) takes a risk-based approach to combating money laundering and terrorist financing. This is also derived from the first of the 40 recommendations of the Financial Action Task Force (FATF). This global basic principle for combating money laundering assumes that the risks of money laundering and terrorist financing are situation- and case-specific.
The AMLA therefore provides for different control intensities and periodicities depending on the risk of the respective business relationship. Depending on the sector, business relationships must be assessed on the basis of certain criteria. If a potential business partner is domiciled or resident in a high-risk country or is a national of such a country, this has a significant influence on the assessment in the KYC process.
Country risk is influenced by a number of factors, such as sanctions, compliance with OECD tax standards, the existence of double taxation and mutual legal assistance agreements, the Corruption Perceptions Index, participation in the AEOI international information exchange, the importance of the country for illicit drug trafficking and production, and many other factors.
In practice, country risk is often incorporated into the overall assessment of a potential business relationship within a risk assessment model (e.g. ratings).
The country risk assessment of virtual assets differs significantly from that of traditional assets. This is due to the special characteristics and regulatory challenges associated with cryptocurrencies and other virtual assets. For example, if virtual assets are classified as illegal in a particular country, money laundering regulations and other financial market regulations may not sufficiently cover these assets. As a result, virtual assets relating to such a country have a significantly higher risk than traditional assets, which may be subject to a comprehensive and modern regulatory environment in the same country.
One example of the different assessment of country risk is Hong Kong. The country risk remains low for traditional assets, while it is higher for virtual assets. One aspect is that the issuance of stablecoins in Hong Kong is only allowed if the management is physically present in Hong Kong. Risks also arise from the different regulatory approaches to cryptocurrencies in China and Hong Kong. Such aspects are key components of the specific country risk for virtual assets.
In general, the assessment of country risk for virtual assets is much more volatile than for traditional assets and sharp changes in the ratings occur much more frequently.
The country risk for traditional assets remains the basis for the virtual asset country risk valuation. The country risk for traditional assets is made up of factors that are independent of the type of asset. The country risk for virtual assets is to be applied on a subsidiary basis if such assets are part of the business relationship.
Country risk assessment is an essential part of the Know Your Customer (KYC) process. In many cases, traditional and virtual assets are subject to different standards of regulation. The country risk assessment must therefore be differentiated accordingly. A differentiated country risk assessment also follows the risk-based approach, according to which an overall assessment of potential business relationships should be performed.
Our MME's compliance team looks forward to advice you on country risk issues and the establishment of internal processes for compliance with the AMLA, sanctions and other financial market regulations.
