PART 2: HOW DOES BANKING SECRECY WORK IN SWITZERLAND?
The protection of clients’ personal information has historically been of paramount concern in the Swiss banking sector. Swiss banks are well regarded for their discretion in that respect and there is a suite of Federal laws in which banking secrecy is enshrined. However, the protection of banking clients’ privacy is becoming increasingly limited, mainly in an effort to combat global tax evasion, money laundering and the financing of terrorism. Switzerland has taken a number of measures to align itself with this combat, which has seen, and will continue to see banking secrecy become more restrictive. Data protection Swiss Banks.
This newsletter sets out the laws which enshrine banking secrecy in Switzerland. The second part of the newsletter will briefly cover the restrictions thereupon as well as the most significant planned restriction of banking secrecy in Switzerland, being the implementation of an automatic exchange of tax information.
This newsletter forms part two of a set of four publications discussing and analyzing data protection in Switzerland. The first publication, released on our website in July 2015, discussed the Swiss data protection laws as well as the limits and applicable remedies and penalties. The third publication, for release in early 2016, will look at significant challenges faced by data protection. The fourth and final publication, which will also be released in early 2016, will present a comparison of the Swiss data protection laws with the European Union and the United States’ data protection laws.
What is Banking Secrecy?
Banking secrecy, or the protection of banking clients’ information, relates to the obligation of a financial institution and its officers and employees to protect and keep confidential information acquired while handling a client’s business. Data protection Swiss Banks.
The information that must be kept confidential by financial institutions includes any information concerning the business or personal affairs of the client. The obligation of confidentiality extends to the fact that the financial institution and the client have actually engaged in dealings at all; in other words, whether the client is in fact a client of that institution.
The concept of banking secrecy must be read in light of the limitations on banking secrecy, as the limitations thereupon are becoming increasingly significant and wide-reaching.
Specific Protection of Banking Secrecy
Article 47 of the Swiss Federal Act on Banks and Savings Banks (“Banking Act”) and Article 43 of the Swiss Federal Act on Stock Exchanges and Securities Trading Act (“SEST Act”) are the two main provisions protecting banking secrecy. Both are worded identically except to the extent that the former relates to a bank’s duty, whereas the latter refers to the duties of a trader or others working in the stock market.
Article 47 of the Banking Act protects all banking clients of banks based in Switzerland notwithstanding that the client might live in Switzerland or abroad.
If a bank (or a trader or a person working in the stock market, as the case may be) intentionally reveals any secret in which they have been confided, or becomes aware of in the course of their professional role or tries to induce others to violate professional secrecy, then that person can be imprisoned for up to three years or receive a fine. If the banking secrecy is violated as a result of negligence, the penalty is less serious but that person can still receive a fine to the maximum of CHF 250,000.
The duty to adhere to the banking secrecy remains with a bank and its employees even after the termination of the mandate and after the employee has left the employ of that bank (Article 47(4) of the Banking Act and Article 43(4) of the SEST Act).
Article 47 of the Banking Act and Article 43 of the SEST Act both contain restrictions, wherein any provisions in federal or cantonal law requiring one to advise the necessary authorities or to give evidence in court remain in place.
As a way to protect banking secrecy, account holders are entitled to numerated accounts (also known as “lettered accounts”). The more sophisticated “pseudonym” account names are also used in banks in Switzerland, where an account is not known by a number or letters but a name which is not the same as the name of the actual account, such as “John Doe”. Another measure taken by banks to ensure banking secrecy in Switzerland is to offer to clients for the bank to retain all communications (such as monthly statements) on the bank’s premises – a “hold mail” (“banque restante”) technique which results in overseas clients not being in possession of statements of their Swiss accounts.
Finally, pursuant to Article 23 (1) of the Banking Act, Swiss banks must ensure that the systems in place as well as the bank structure conforms with and protects banking secrecy. Failure to do so can result in the bank losing its FINMA license.
General Protection of Banking Secrecy
Article 13 of the Federal Constitution of the Swiss Confederation of 18 April 1999 (to which reference is made in the first newsletter in this series) protects the right to privacy, upon which the basis for Articles 47 of the Banking Act and 43 of the SEST Act is formed.
Data Protection Act
Article 1 of the Federal Act on Data Protection of 19 June 1992 (which is also referred to in the first newsletter of this series) protects personality rights and the fundamental rights of a person when their personal information is collected. The information collected about individuals by a bank falls directly within the scope of this this Act and must be kept private by banks.
Article 162 of the Criminal Code of 21 December 1937 (“Criminal Code”) contains a protection for business and trade secrets by forbidding those who are tasked with keeping such secrets in a professional or contractual context from disclosing the secret or to use it to their advantage.
Article 273 of the Criminal Code provides that anyone who seeks out a commercial or trade secret and makes it available to a foreign government or a foreign corporation faces up to three years imprisonment or a fine.
Finally, Article 321 of the Criminal Code states that where anyone in a professional position is in possession of confidential matters and, knowing that their position would mean that such secrets would be given to them, divulges the confidential information, the punishment can be up to three years imprisonment or a fine.
Civil Code and Code of Obligations
Article 28 of the Civil Code of 10 December 1907 (“Civil Code”) provides for a very broad duty to protect the personality of a person, which sets forth a general obligation for others (including legal entities) not to interfere with the private life of others. The right to privacy has been determined by the Swiss Federal Tribunal as all information related to the private life of an individual, which may also include financial information and data.
Article 398 of the Code of Obligations of 30 March 1911 (“Code of Obligations”) stipulates that a service provider (such as a financial institution) is responsible for the good and faithful execution of its duty and to actively protect the interests of its clients. The agent also has an obligation of discretion, covering information that a client or a third person provides to the banker within the context of the agreement
Limitations on Banking Secrecy in Swiss Law
While the duty of confidentiality of banks is a core element of a banking relationship, it is not absolute. Recent international trends have seen the banking secrecy principle diminished by virtue of laws with respect to double taxation as well as laws combatting money laundering, the storage of proceeds obtained from criminal activity and the funding of terrorism.
Obligation to disclose during civil law proceedings
Article 166(1)(b) of the Civil Code allows banking secrecy to be lifted during civil law proceedings where it is proved that the interest in finding the truth takes precedence over the duty of secrecy.
This can arise during divorce or inheritance cases based on a court order, however the party requesting the information must prove that the bank account exists. Banking secrecy is lifted at the time the information is disclosed pursuant to this provision.
Bankruptcy declared in Switzerland
Under the Federal Act on Debt Collection and Bankruptcy of 11 April 1889 (“DCB”), if the bankruptcy judge considers it necessary, Article 162 of the DCB allows them to request a list of assets of a debtor. Article 163 of the DCB however requires that the bankruptcy judgment be prepared and sent to the Bankruptcy Office, who will then prepare the list of assets. It is at that time that the banking secrecy doctrine ceases to exist for the debtor banking client. Article 162 with respect to bankruptcy deals with all of the banking client’s assets.
In pursuit by seizure, the debtor and the bank are obliged to provide to the enforcement office the information necessary for the execution of the seizure.
Bankruptcy declared abroad
Article 166 of the Federal Act on the Private International Law of 18 December 1987 states that “[…] a decision of foreign bankruptcy returned in the State of the debtor’s residence is recognized in Switzerland if the requisition is made by the bankruptcy administration or the creditor […]”.
Pursuant to Article 91 of the DCB, the bankrupt or insolvent must initially assist in the seizure of its assets and to disclose information regarding the assets and their own debtors, even if the bankrupt or insolvent is not in possession of the assets. Pursuant to Article 91(4), anyone in possession of assets or anyone who is a debtor of the bankrupt or insolent has the same obligations as the bankrupt or insolvent in respect of disclosing information on assets and the debtor details.
Thus, the bank can be obliged to disclose all property held by it on behalf of the insolvent debtor and at that time, the banking secrecy doctrine no longer applies. The creditor can then request that assets deposited in Swiss banks be frozen pursuant to Article 271(1) of the DCB.
Tax fraud (and tax evasion)
Tax fraud requires the use of false, counterfeit or incomplete documents with the intent to deceive tax authorities. Swiss criminal courts then prosecute and determine penalties pursuant to applicable criminal procedural codes.
Banking secrecy does not protect tax fraud under Swiss law. Pursuant to Article 188(2) of the Federal Act on Direct Federal Taxation of 14 December 1990 (“DFT”), banking secrecy is lifted at the trial of a banking client being prosecuted for tax fraud and accordingly, the bank must disclose information relevant to the alleged offence.
Historically, Switzerland made the distinction between tax fraud and tax evasion. Currently, Articles 175 to 179 of the DFT which deal with tax evasion do not treat tax evasion as a criminal offence but as an infringement of the law, punishable by fine, punitive taxes or additional taxes. Therefore, unless the treaties or agreements entered into between Switzerland and other states require the disclosure of banking information of a client on the basis of tax evasion, Swiss law as it currently stands does not require such a procedure.
The entering into a number of treaties and agreements with other jurisdictions, as discussed below, is slowly seeing the distinction between tax fraud and tax evasion being broken down for the purpose of non-Swiss residents (being residents in jurisdictions with which Switzerland has entered into double taxation agreements or tax information exchange agreements) with accounts in Swiss banks.
Article 305bis of the Criminal Code states that where a person hides information as to the origin, the discovery or the confiscation of assets about which they knew, or should have known, came from a crime, can be imprisoned for up to three years or receive a fine. If the hidden information relates to a criminal organisation, a group committing money laundering or if the amount in question is significant then the penalty can be up to five years’ imprisonment or a fine. The banking secrecy is thus lifted at the time the bank knows, or should have known, about the funds originating from a crime and discloses the information to the Swiss prosecuting authorities.
Additionally, Article 9 the Federal Act on Money Laundering of 10 October 1997 (“AMLA”) states that a bank must immediately notify the Money Laundering Reporting Office if they are aware or suspect, on a reasonable basis, that assets have a connection with the proceeds of a crime or money laundering, or if they suspect proceeds come from a crime, originate from a criminal organisation or finance terrorism. In the circumstances, the bank must block all funds in their control until a decision by the relevant authority is made.
Article 10a prohibits the bank from notifying the relevant client or any related third party that the funds have been blocked.
Pursuant to Article 11 of the AMLA anyone who, in good faith, discloses the information falling within Article 9 or who blocks the proceeds pursuant to Article 10 cannot be pursued for breaching banking secrecy or for breach of contract.
FINMA’s Money Laundering Ordinance of 8 December 2010 (“Ordinance”) requires banks to conduct adequate due diligence on its clients and transactions (Articles 10 and 11), particularly in the case of transactions that present a high risk (Articles 12 to 19). In addition, Article 26 of the Ordinance states that a bank can delegate to another business the task of verifying the identity of a contracting party, a beneficial owner or any other information relating to a client’s file.
Criminal activity and terrorism
Article 305ter of the Criminal Code states that anyone who, in the course of their professional capacity, accepts, keeps or assists in placing or transferring assets belonging to a third party without verifying the beneficial owner of the funds can be imprisoned for up to one year or receive a fine. Article 305ter also expressly states that the affected persons can advise the Money Laundering Reporting Office if the person suspects that assets are proceeds of a crime.
Article 260ter of the Criminal Code states that anyone who takes part in a criminal organisation or receives income from criminal activities can be imprisoned for up to five years or receive a fine.
Finally, Article 260quinquies of the Criminal Code states that anyone who finances those involved in violent crime aimed at intimidating a group or a population or preventing an international organisation or a population from carrying out or preventing an activity (in other words, engages in terrorism) can be imprisoned for up to five years or receive a fine. However, if a bank simply deals with funds that end up being used to fund terrorism, this is not prima facie a crime under Article 260quinquies to establish the beneficial owner of the funds that end up funding terrorism.
In addition, if any authority, local or foreign, makes a request for information by way of a request for judicial assistance, Article 8 of the Federal Act on International Mutual Assistance in Criminal Matters of 20 March 1981 (“IMAC”) gives the power of the Swiss Attorney General’s office or the Swiss tax authorities to require the protected information to be provided if the information was used to protect a crime according to local and foreign law.
There is currently draft legislation amending both the AMLA and the Ordinance, which will further reduce the banking secrecy doctrine.
International Agreements implemented by Switzerland limiting Banking Secrecy
The below section provides an overview of a number of the international agreements which affect clients with Swiss bank accounts. This section does not purport to explain the detailed processes but rather to allow the reader to appreciate that the particular agreements affect those with Swiss bank accounts.
European Union residents
In respect of the European Union Agreement further to Council Directive 2003/48/EC, European Union residents with bank accounts in Swiss banks based in Switzerland are required to pay interest on income from capital in that bank. Pursuant to that agreement, the information that is disclosed depends on the option chosen by the client, however it is possible for the bank to merely provide the details of the client to the member state and the amount proportionate to 35% of the interest payments is automatically withheld. With the information provided under this agreement, it ensures that the affected clients do not pay tax in both their country of residence and in Switzerland.
In March 2014, the European Union Council of Ministers adopted an updated version of the respective directive (Directive 2014/48/EU, to take place from 2017), the intention of which is to reduce and identify tax evasion by residents of the member states. Any agreement with Switzerland on the basis of the New Directive will likely require Swiss banks to disclose more information about its clients’ activities, particularly where clients have entered into trust or foundation arrangements, thus removing their own name from the scheme.
Double Taxation Agreements
Pursuant to double taxation agreements under the Organisation for Economic Co-operation and Development’s Model Tax Convention and other tax information exchange agreements entered into with other jurisdictions, Switzerland exchanges on request information relating to the payment of taxes of residents of some 115 countries with which Switzerland has an agreement.
The two agreements signed between Austria and Switzerland and the United Kingdom and Switzerland in respect of taxation matters will require banks to provide information on their clients’ undeclared capital, future incomes and capital gains. This also applies to Austrian or UK citizens who have assets in Swiss bank accounts in foundations or trusts. Where the affected client opts to voluntarily disclose information about their assets in Switzerland, more information is provided than if the client opts to allow the Swiss bank to automatically make a payment on the undeclared capital, future income and capital gains.
US Persons – FATCA
The Agreement between Switzerland and the United States of America relating to FATCA requires Swiss banks to provide to the US Internal Revenue Service information about US Persons’ bank accounts in Swiss banks where authority to do so has been given by the affected client. Where authority has not been given, the total number and value of American residents’ Swiss bank accounts must also be provided and the IRS can at a later stage ask the particular bank providing the aggregated statements for further information. However, a more-wide reaching “model 1” of FATCA is currently being negotiated in respect of Switzerland.
A “US Person” is defined in Article 2(1)(26) of the Agreement between Switzerland and the United States of America relating to FATCA to include citizens or resident individuals, a partnership or corporation organized in the US, trusts and US persons with control over trusts or estates.
Automatic Exchange of Information
Finally, and crucially, pursuant to the OECD and G20’s standards for the automatic exchange of tax matters, from 2018, Swiss banks will be obliged to disclose client and financial information about residents in participating jurisdictions on investment income, including interest and dividends, account balances, capital representing income or assets and other financial income information. Account information will need to be looked into to reveal clients behind shell companies, trust or similar structures to obtain information.
Swiss Taxpayers and Residents
The international agreements mentioned in this newsletter do not yet affect Swiss taxpayers and residents domiciled in Switzerland. In fact, as recently as 4 November 2015, the Swiss Federal Council in session decided to withdraw proposals to restrict the banking secrecy doctrine for Swiss taxpayers and residents for the purpose of tax fraud.
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(1) Article 47 of the Swiss Federal Act on Banks and Saving Banks of 8 November 1934, Article 43 of the Swiss Federal Act on Stock Exchanges Securities Trading of 24 March 1995 and Article 1 of the Federal Act on Data Protection of 19 June 1992.
(2) ATF 70 II 127, JT 1945 I 24
(3) Marc Bauen, Nicolas Rouiller, “Swiss Banking” (2013) Schulthess, p101
(4) Maurice Aubert et al, ”Le secret bancaire suisse” (1995) Editions Staempfli + Cie SA, 192.
(5) European Commission, “Revised Savings Taxation Directive” <http://ec.europa.eu/taxation_customs/taxation/personal_tax/savings_tax/revised_directive/index_en.htm> (9 December 2014).
European Commission, “Proposal for a Council Directive repealing Council Directive 2003/48/EC“ (18 March 2015), 129.
(6) Swiss Bankers Association, “FATCA (Foreign Account Tax Compliance Act )” <http://www.swissbanking.org/en/fatca.htm> (2014), Yearbook of the Swiss-American Chamber of Commerce.
(7) Arthur Grosjean, Tribune de Genève, “Le secret bancaire n’est pas mort” http://mobile2.tdg.ch/articles/563afb4987da8b83b8000001 (5 November 2015).