Switzerland: The Evolution Of Swiss Banking Secrecy And Current Trends In Enforcement

Of the four cornerstones to the Swiss banking system, confidentiality or secrecy is the most commonly misunderstood. Many different countries around the world have policies and laws that support one level or another of banking secrecy.

Banking secrecy was not invented recently, or even this century, but has existed as long as banks have existed. The Swiss Supreme Court recognised its existence as a civil concept before there were express statutory provisions to that effect. Banking secrecy can, in part, also be explained by the small and tightly knit society of Switzerland. It is important to note the cultural and social impact on the banking community. In this country of just over six million people there are strong social influences on many professional aspects of life. Banks and bankers are not immune from these influences. The Swiss are reserved about their personal financial transactions. In a landslide public vote the Swiss people decided to maintain banking secrecy.

What makes Switzerland special is that officers of a bank may be prosecuted criminally for violations of the Swiss banking secrecy statute. Under Swiss law it is the customer’s secret not the bank’s that is protected. This is an important and not commonly known distinction. This statute can place Swiss banking officials in a position of being held criminally liable for simply doing their jobs.

The criminal statute that covers Swiss Banking Secrecy is found in Art. 47 of the Swiss Banking Act (SBA):

1. Whoever divulges a secret entrusted to him in his capacity as officer, employee, mandatory, liquidator or commissioner of a bank, as a representative of the Banking Commission, officer or employee of a recognised auditing company, or who has become aware of such a secret in this capacity, and whoever tries to induce others to violate professional secrecy, shall be punished by imprisonment not to exceed six months or by a fine not exceeding 50,000 francs.
2. If the act has been committed by negligence, the penalty shall be a fine not exceeding 30,000 francs.
3. The violation of professional secrecy remains punishable even after termination of the official or employment relationship or the exercise of the profession.
4. Federal and cantonal regulations concerning the obligation to testify and to furnish information to a government authority shall remain reserved."

In addition, to the aforementioned criminal protection the customer enjoys civil protection also. Under the same statute, the bank, not the individual banker, is exposed to Swiss administrative law sanctions.

While there was civil protection of banking secrecy before, Art. 47 SBA, enacted in 1934, added criminal sanctions for violators. During these critical pre-war years Switzerland attempted to protect itself from Nazi Germany’s aggression and further secrecy statutes were enacted. These measures were introduced to protect individuals politically and economically, and - in view of the many ongoing conflicts in our world - are still sadly needed today. Any future modification to this statute would not be made as a result of any basic societal change in Switzerland; but rather, would be the outgrowth of the effects of the development of shrinking global capital and currency markets.

Swiss banking secrecy is highly valued because it can protect, to a large extent, against intrusions by Swiss (and foreign) tax authorities. Even in cases of suspected tax evasion, Swiss and foreign tax authorities are not allowed to pierce the banking secrecy veil. This is not the case when tax fraud (deception of the tax authorities i.e. submitting forged documents etc.) is involved. In these cases banks would be required to reveal information to the investigating criminal authorities. Another benefit for the protection of the customer lies in the fact that Art. 47 SBA provides for punishment of a bank official who may have acted negligently in disclosing confidential information, for example, by sending a bank statement to the wrong address. Additionally, the courts have interpreted the concept of secrecy very broadly.

Swiss secrecy is not absolute and can be pierced. Switzerland does not grant protection through the secrecy statute for criminal activities. In this context, Switzerland has enacted several laws that are considered unique in the international community. For example, if a foreign government establishes criminal activity to Swiss authorities which is punishable under both jurisdictions, the foreign authorities may request that the veil of secrecy be pierced. In civil litigation, various Cantons of Switzerland have individually implemented additional international co-operation in this area. Further, Switzerland as a whole, is a member of several international conventions in the criminal as well as in the civil field (for example, European Convention on International Legal Co-operation in Criminal Matters; The Hague Convention on the Taking of Evidence etc.). The banks of Switzerland have been participants in and observe the rules of conduct accepted world-wide through these agreements.

Over the years many unscrupulous individuals and corporations have tried to exploit the Swiss banking system using its secrecy statutes. In response to these attempts the Swiss government has implemented new criminal law statutes, five of which are discussed briefly below. First, on August 1, 1990 Art. 305^bis Swiss Penal Code (SPC) was enacted to curtail money laundering attempts. This statute has been frequently and effectively applied since its inception. Second, the statute regarding the confiscation and forfeiture of assets has been expanded upon and applied more broadly recently. This statute has been used successfully against personal and financial assets held by criminals in Switzerland (Art. 58 and 59, SPC). Third, „know your customer", meaning the bank or financial service provider must know the owner(s) of all personal and corporate accounts (i.e. the beneficial owners of the assets). This became a criminal statute on August 1, 1990. The banks are required to reveal this information in the context of a criminal investigation (Art. 305^ter SPC). Fourth, Insider trading is also being addressed in the context of enhanced international legal co-operation (Art. 161 and 162, SPC). Finally, the concept of guilt by association is applied to organised crime figures or those who participate with or support these groups (Art. 260^ter SPC).

Switzerland has also recently (1997/98) enacted new administrative law statutes to help facilitate the exchange of information between the Swiss Banking Commission and foreign banking authorities and Security Regulators (Art. 23^sexies SBA and Art. 38 of the Swiss Law on Securities). Due to these modifications information can now be shared internationally regarding banking and security transactions. This would include, but not be limited to, disclosure statements regarding the assets and the financial stability of banks and financial institutions. There is a requirement that the government regulator or banking authority receiving this information must be professionally and/or legally obligated to retain the confidentiality of the information. If this requirement is not met and the confidentiality is not guaranteed, the information must not be shared under Swiss law. Further, information may not be shared with a third party without the prior consent of the Swiss Banking Commission or the general authorisation in a special Treaty. It should be noted, that these regulations apply to information regarding individual customers also. However, there are additional regulatory requirements when requesting information on individual customers.

In 1977, the Swiss banks voluntarily entered into a private agreement (Agreement on the Swiss Banks’ Code of Conduct with Regard to the Exercise of Due Diligence). This agreement was binding for a period of five years. It has been renewed in the past and is in force until June 30, 1998 and will be renewed again that time. This represents the very serious commitment of the Swiss Banks to preserve the good name of the Swiss banking community, nationally and internationally. The Agreement establishes rules for due diligence when accepting funds. First, by requiring verification of the identity of the contracting party and if necessary, the beneficial owner („know your customer"). Second, by not actively assisting in tax evasion or similar acts by delivering or misleading statements. Third, by excluding active assistance in the flight of capital. The Swiss Bankers’ Association has appointed a Supervisory Board composed of five independent experts to investigate and enforce violations under the Agreement. In the event that the Agreement is violated, the delinquent bank is required to pay a fine of up to 10 million Swiss francs. For the most current case summaries (January 1, 1995 through December 31, 1997) refer to the report of the Supervisory Board, published by the Swiss Bankers’ Association in Basel, Switzerland or in the Swiss Review of Economic and Financial Law (SZW 1998).

With regard to money laundering, the Swiss Banking Commission issued new guidelines that have affected existing administrative and criminal laws. These guidelines became effective on May 1, 1992 and apply to banks only. They contain general requirements that the banks must follow when opening new accounts, or when there are suspicious transactions by customers. According to these guidelines a bank may inform the criminal authorities of irregular transactions without facing charges of having violated the criminal secrecy provision of Art. 47 SBA (see above). The bank is authorised to temporarily freeze assets or it may terminate the relationship with questionable customers. The bank must ensure that a papertrail is maintained, documenting suspicious transactions. In addition, to the above mentioned general regulations, there is also a summary list of additional situations that the banks should consider suspicious. These guidelines will be updated sometime during the summer of 1998. They will certainly reflect the new provisions of the Law against Money Laundering effective on April 1, 1998.

In another effort to crack down on criminal and immoral activities in the Swiss financial markets, Switzerland has passed a new Law against Money Laundering that applies to banks and to all providers of financial services. This law became effective on April 1, 1998. One of the key provisions requires all providers of financial services to inform the criminal authorities if they became aware of any suspicious transactions by their customers. In effect this new provision requires banks and financial service providers to scrutinise as never before their customers’ actions. The new law is similar to the guidelines issued by the Swiss Banking Commission, that applies only to banks. The new law outlines parameters regarding the identification of the owner(s) and/or beneficial owner(s)of the account. The freezing of assets and the termination of the account is possible when there is suspicion of illegal activity.

As time goes on, it will become apparent if this law, effective on April 1, 1998 has the necessary power to curb money laundering activities in Switzerland. As it requires new standards of all financial service providers, not just banks - it may succeed where other laws have failed. If this is the case, it may become an additional foundation of support to the integrity of the Swiss banking system. Switzerland has, and will continue to enact legislation and enforce guidelines to insure that the banking and financial systems of the country will withstand internal and external attacks in the years to come.