Swiss Legal Issues with Regards to the US Program for Swiss Banks

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Swiss Legal Issues with Regards to the US Program for Swiss Banks

By Alexander Troller & Corentin Mulkens*

 

Some historical background

 

In late 2008 and early 2009, the United States (US) media reported on a massive tax evasion scheme allegedly operated by UBS and accused other Swiss banks of fraudulent tax activities.  In response to the ensuing media furore, the Swiss and US governments looked for a way to settle outstanding tax issues between Swiss banks and the US government. Following discussions between the two countries, the Swiss government (i.e. the Swiss Federal Council) proposed on May 29, 2013 the urgent enactment of a Federal Act, the so-called “lex USA”, to the Swiss parliament (i.e. the Swiss Federal Assembly). The Federal Act purported to allow Swiss banks to cooperate with the US Department of Justice (DOJ), and to disclose certain information concerning the structure of the banks' business, including employee names, but excluding any data relating to bank clients.

 

The Swiss parliament, however, rejected the “lex USA” as inter alia the DOJ did not provide Swiss banks with any immunity from prosecution in return for the requested information. Nonetheless, the “Program for Non-Prosecution Agreements or Non-Target Letters for Swiss banks” (the so-called “US Program”, hereafter the “US Program”) was enacted.  The Program, alongside the related joint statement signed on August 29, 2013 by Switzerland and the US and the model authorisation of the Federal Council allowing Swiss banks to participate in the Program, is one of the three components of the solution to the tax dispute between the Swiss banks and the US.

 

The US Program provides for participation on a voluntary basis, and both the Swiss government and the Swiss Financial Market Supervisory Authority (FINMA) encouraged Swiss banks to participate.  Under the US Program, the Swiss participating banks may request a “non-prosecution agreement” (NPA) if they believe that they have committed tax offences (category 2), or a “non-Target letter” (NTL) if they have not committed any tax-offence (category 3).

 

Swiss legal issues

 

Prior to obtaining an NPA, Swiss banks have to “fully cooperate in the disclosure” of information that involves, inter alia, the structure of the Bank, the structure of the related business, the number of US-related accounts and the name of employees who operated in that business1. The last two points raise some issues with respect to Swiss criminal law, as well as Swiss data protection laws.

 

Indeed, article 271 paragraph 1 of the Swiss Criminal Code (SCC), prohibits any activity carried out on behalf on a foreign state, and provides:

 

Any person who carries out activities on behalf of a foreign state on Swiss territory without lawful authority, where such activities are the responsibility of a public authority or public official, is liable to a custodial sentence not exceeding three years or to a monetary penalty, or in serious cases to a custodial sentence of not less than one year.

For an activity to be qualified as “an activity carried on behalf of a foreign state”, it must be carried out in the interests of and intended for the said foreign state. Moreover, article 271 SCC implies that the nature and the purpose of the activity must be of an official nature. As the activity carried out on Swiss territory consists essentially in collecting, analysing and transmitting information, documents and data to the DOJ, it clearly meets the conditions for criminal liability provided for under article 271 SCC.

 

However, under the same provision, acts undertaken with “lawful authority” do not trigger criminal liability. As a result, the Swiss Banks intending to participate in the US Program have to request authorisation from the competent authority (i.e. the Swiss Federal Government) before turning over the information.

 

The standardised authorisation (hereafter the "Authorisation"), which confers the same rights and obligations to all participating banks, would only exclude the criminal liability provided under article 271 SCC. As a consequence, Swiss banks would still need to comply with other Swiss legal requirements. These requirements include, inter alia, banking secrecy based on the Swiss Federal Act on Banks (FBA) and data protection based on the Swiss Federal Act on Data Protection (FADP). Moreover, the Authorisation is granted for a limited period of one year (the said period may be extended on certain grounds).

 

Pursuant to article 47 FBA, disclosure of confidential information protected by Swiss bank customer secrecy is a criminal offence. Although the act does not expressly define “bank consumer secrecy”, it is generally agreed that all confidential information and documents concerning business relationships between Swiss banks and their clients are covered. The prohibition to disclose confidential information applies to all information that may be used to identify a bank’s client. It includes, obviously, bank account numbers, names, addresses, phone numbers, etc., but also covers fragmented information such as the specific amount and date of a money transfer. The criminal liability provided for under article 271 SCC, combined with article 47 FBA, would prohibit a bank from transmitting any bank’s client data to a foreign state under the US Program, even in cases where the client concerned would agree to the transmission.

 

The Authorisation subjects banks to an information duty according to which:

 

personal data of (current of former) members of staff and third parties can only be communicated if the persons concerned have been informed at least twenty days before the planned date for the transmission to the US authorities of the scope and nature of the data as well as the period which these data go back to2.

 

Persons (employees and third parties) whose data are to be transmitted to the DOJ have the right to object to such transmission and to file a legal claim for that purpose. Moreover, according to the Authorisation, said persons have to be informed by the Bank of their right to bring such legal action. As the deadline to transmit the data to the DOJ is approaching, any claim filed against such a transmission will prevent the banks from transmitting said data. The banks will then have to notify the DOJ that due to pending Swiss legal proceedings, they are not allowed to transmit the relevant data for the time being. Any Swiss court facing such an issue will weigh competing interests, taking into account any overriding public interest, between the person and the bank concerning the communication of the information to the DOJ.

 

Swiss banks also sometimes face vehement objections from “business introducers” (i.e. persons/companies who introduced clients to the banks), according to whom, they should not be considered as “… relationship manager, client advisor, asset manager, financial advisor, trustee, fiduciary, nominee, attorney, accountant, or other individual or entity functioning in a similar capacity known by the Bank to be affiliated with said account at any time during the Applicable Period” within the scope of the US Program3

 

Specific protection with regards to bank employees

 

According to the US Program4, each Swiss bank applying for an NPA must disclose “the name and function of the individual who structured, operated, or supervised the cross-border business for US related Accounts during the Applicable Period”. Even if the communication of employees' names is not covered by banking secrecy per se, it may however raise some issues regarding data protection, and as previously discussed, the transmission of such names is a prerequisite to request an NPA.

 

Some additional protection for bank employees was therefore necessary. The Swiss Federal Council specified that an agreement with professional staff associations must be concluded and that this agreement must:

 

include a duty of assistance under employment law and provide in particular for paying lawyers expenses relating to the defence of the interests of the members of staff; provide for settling cases of hardship for members of staff where the transmission of data concerning them puts them in a difficult situation personally, financially or professionally; provide for protection against discrimination by which the banks waive asking persons seeking employment the extent to which they are concerned by the transmission of data of the US authorities; provide for protection against dismissal where a member of staff establishes the likelihood of discrimination relating to a business relationship with a US person5.

 

In order to meet this requirement, an agreement between the Swiss Bank Employees Association (SBPV), the Employer’s Association of Banks in Switzerland (AGV Banken), and the Swiss Bankers Association (SBA), was negotiated and signed6. In a nutshell, the agreement implemented and enhanced the obligations imposed by the Federal Council’s Authorisation.

 

Relationship with FINMA

 

The Swiss Financial Market Supervisory Authority (FINMA) is the Swiss institution responsible for implementing the Financial Market Supervision Act and the financial market legislation. It has authority, inter alia, over banks. FINMA has publicly encouraged Swiss banks to participate in the US Program and to inform their US customers on the existence of the Offshore Voluntary Disclosure Program (OVDP).

 

The participating banks had a duty to report to FINMA by the end of 2013 the category they chose, the name of the elected independent examiner (required by the Program), and the identity of the contact person within the bank. Through the second FINMA statement, participating banks were granted an extension up to October 17 2014, to inform the FINMA whether they chose to participate in categories 3 or 4 or not to participate in any category. Banks also have the duty to report any non-prosecution agreement or the obtaining of non target letter. Any particular event (extension of a deadline, change of category, communication of false information, etc.) must be reported to FINMA too.

 

As a result of the lack of detailed information related to some aspects of the Program and in order to address interpretation issues related to Swiss law, a number of Swiss banks have come together to discuss and exchange their experiences of the US Program and the issues that need to be resolved from a Swiss legal or DOJ expectation perspective.

 

Next steps

 

Kick-off meetings have been held between the DOJ and participating Swiss banks and data regarding the Program start being sent to the DOJ.

 

On 5 Jun3 2014, the DOJ issued additional comments regarding the Program with a view to the next steps which will include, inter alia, the negotiation and determination of the penalties payable by the participating banks.  Further clarification and additional guidelines may still be issued by the DOJ at a later stage.

 

The Program is expected to run into 2015 and possibly beyond until each participating bank will have negotiated and obtained its NPA or NTL, as applicable.


1 Paragraph II.D.1 of the Program

 

2 Free translation of the Federal council authorization model, paragraph 1.4

 

3 Paragraph II.D.2.b.v of the Program

 

4 Paragraph II.D.1.b of the Program

 

5 Free translation of the Federal council authorization model, paragraph 1.5

 


* Alexander Troller is a partner at LALIVE.  He specializes in banking and finance; corporate and commercial law; litigation (domestic and cross border); white collar crime and compliance; employment; taxation and double tax treaties; construction, real estate and infrastructure; and energy law.  He can be reached at atroller@lalive.ch. Corentin Mulkens is an associate at LALIVE.  He specializes in taxation and double tax treaties; corporate and commercial law; banking and finance; and insolvency.  He can be reached at cmulkens@lalive.ch. 

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Geneva,
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Thursday, June 26, 2014
Taxation, Criminal Law / White Collar Crime, Finance & Banking