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| Talacker 41, 8001 Zurich, Switzerland, Phone: +41 43 443 72 00, Fax +41 43 497 22 70, info@amcham.ch |
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| Site contribution |
| Date: |
April 2006 |
| Prepared by: |
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| Caution: |
The author wishes to acknowledge the substantial contributions to this article by the law firm of Nobel & Hug. |
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Summary |
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| Among the various aspects of the Swiss financial center, one of the best known abroad is probably the bank customer privacy. In broad terms, bank customer privacy is the banker’s professional obligation to keep the details of a client’s financial and personal affairs – including the very existence of the relationship with the client – strictly private. The purpose of bank customer privacy is not to safeguard the interests of Swiss banks. Rather, the Swiss banker’s professional duty of bank customer privacy – breaches of which are subject to criminal prosecution under Article 47 of the Federal Law on Banks and Savings Banks of 1934 (“Swiss Banking Law”) - is designed to protect the private sphere of bank customers. Therefore, although the Swiss Banking Law refers to “banking secrecy”, it is more appropriate to refer to this duty of confidentiality as “bank customer privacy” or “bank customer secrecy”. |
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| At the same time, Swiss securities dealers and stock exchanges are subject to an analogous professional obligation to keep the details of a customer’s financial and personal affairs strictly private. This professional obligation of “securities dealer customer privacy” is set out in Article 43 of the Swiss Stock Exchange and Securities Trader Act (“SESTA”), and any violations of this obligation are likewise subject to criminal sanctions. (Unless the context requires otherwise, the term “bank customer privacy” will subsequently be used to refer collectively to both “bank customer privacy” and “securities dealer customer privacy”) |
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| As a basic matter, it must be noted that bank customer privacy is not absolute. Because bank customer privacy is based on the obligation of confidentiality implied in contracts between the customer and the bank or securities dealer, it can be lifted whenever the customer so chooses with a valid waiver. Further, although bank customer secrecy is strict in safeguarding a customer’s privacy, it is not intended to protect criminals. There are clear limits to bank customer privacy, and it will be lifted in the case of Swiss criminal investigations, in the course of providing international legal assistance in criminal matters, including foreign criminal investigations of money laundering, terrorism and insider trading, in cases of tax fraud, if money laundering activities are suspected and in certain other cases. |
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| In general, information must be disclosed by banks and securities dealers in the following situations: |
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in criminal investigations (suspicion of money laundering, membership in a criminal organization, theft, tax fraud, blackmail, etc.); |
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when providing international legal and administrative assistance (criminal investigations conducted abroad; investigations by financial market supervisory authorities; |
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in debt recovery and bankruptcy proceedings; and |
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in civil proceedings (e.g., inheritance and divorce matters). |
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| Bank customer privacy will not, however, be lifted in cases of simple tax evasion. The Swiss tax system is based on the principle that the taxpayer bears sole responsibility for meeting his tax obligations via the tax return. Tax evasion is discouraged by a 35% withholding tax at source on all interest and dividend payments of Swiss issuers or debtors, the highest in any OECD country, and such other measures as official tax assessment procedures. The existence of the 35% withholding tax encourages the person receiving taxable gains to declare them as the law requires, given that investors domiciled in Switzerland and those with tax credits can demand a refund of the tax in full, as can investors domiciled abroad, provided that a double taxation treaty provides for full or partial relief. Accordingly, the bank (or securities dealer) is under no obligation to provide information to the tax authorities in connection with tax proceedings or an appeal, unless asked to do so by the client. |
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| On the other hand, where tax fraud is involved, the offences are dealt with in ordinary criminal proceedings and Swiss bank customer privacy will be lifted. Tax fraud occurs when a taxpayer deliberately uses forged or falsified documents in order to deceive the tax authorities and obtain undue tax advantages. |
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| Although a desire for privacy can play an important role in an investor’s decision to deposit his/her assets in a Swiss bank, it is by no means the only factor. Other key factors enhancing Switzerland’s attractiveness as a financial center include its political and monetary stability, its excellent infrastructure, its diligence in combating money laundering and the high-quality services, professional know-how and wealth management experience of its banking institutions. |
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Applicable Law |
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Article 47 of the Swiss Banking Law |
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Article 43 of the SESTA |
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Detailed Information |
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1. Introduction, scope and legal basis |
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Swiss bank customer privacy is an important component of the general right to individual privacy established under the Swiss constitution (Art. 13). The protection of customer privacy also stems from the general provisions of the Swiss Civil Code protecting against illegal invasions of privacy, or the “sphere of confidentiality” (Art. 28 of the Swiss Civil Code). A person’s sphere of confidentiality encompasses all matters that the person wishes to keep secret in any perceivable or distinguishable way. More specifically, bank customer privacy also finds its basis in contract law, where an obligation of confidentiality is implied in contracts between the bank customer, on the one hand, and the bank or securities dealer, on the other hand, as an accessory obligation stemming from theprinciple of good faith that permeates Swiss civil law (Art. 398 para. 1 of the Swiss Code of Obligations and Art. 2 of the Swiss Civil Code).Swiss criminal law provisions – which sanction violations of bank customer privacy with imprisonment or a fine - are set out in Art. 47 of the Swiss Banking Law and, for securities dealers, Art. 43 of the SESTA. Bank customer privacy covers all information resulting from business relationships between customers and banks, or securities dealers, and violations of bank customer privacy remain punishable even after the relationship with the customer has come to an end or the banker has terminated his/her professional activity. The relevant provisions are as follows: |
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Whoever divulges a secret entrusted to him or of which he has become aware in his capacity as an officer, employee, mandatory, liquidator or commission of a bank, as representative of the Banking Commission, officer or employee of a recognized auditing company, and whoever tries to induce others to violate professional secrecy, shall be punished by imprisonment for not more than six months or by a fine of not more than CHF 50,000.
If the perpetrator acted negligently, the punishment shall consist of a fine not exceeding CHF 30,000. |
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Whoever
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discloses a secret which has been confided to him in his capacity as a member of a governing body, employee, mandatory or liquidator of a stock exchange or securities dealer, as a member of one of the governing bodies or employee of recognized auditors, or of which he becomes aware in any such capacity; or |
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attempts such breach of professional secrecy by inducement, shall be punished by imprisonment or with a fine. |
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| Both Art. 47 Swiss Banking Law and Art. 43 SESTA stipulate that provisions of federal and cantonal legislation relating to the obligation to inform authorities and testify in court take precedence over bank customer privacy. |
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2. Limits on Swiss bank customer privacy |
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It is important to bear in mind that Swiss bank customer privacy is not absolute. Bank customer privacy is flanked by rules to prevent its abuse, particularly through organized crime. Legitimate protection of personal rights, on the one hand, must be weighed against public interest, on the other hand, including the public interest in preventing criminal abuse of all kinds. For this reason, there are a series of legally defined limits to bank customer privacy. Both the Swiss Banking Law and the SESTA provide that bank customer privacy will be lifted if provisions of federal or cantonal legislation require a banker or securities dealer to provide customer information to authorities or testify in court. Instances of such legislation include the following: |
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In criminal proceedings in Switzerland, bank customer privacy is lifted and a banker or securities dealer is required to testify, provide information and/or deliver documents. |
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The Swiss federal and cantonal codes of civil procedure take precedence to bank customer privacy. Under most Swiss cantonal codes of civil procedure, the judge may decide at his discretion on whether or not bank customer privacy justifies a refusal to give evidence or testify. Bank customer privacy may also be lifted in connection with debt collection and bankruptcy cases.Under Swiss inheritance law, each successor, heir, representative, official administrator, executor and public liquidator (not the legatee) has the right to obtain information from a bank or securities dealer. Switzerland is a member of the Hague Convention on the Taking of Evidence Abroad in Civil or Commercial Matters (see the page on “Mutual Assistance”). |
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Switzerland grants mutual judicial assistance in criminal matters to foreign States on the basis of international treaties on mutual legal assistance (including the United States-Swiss Treaty on Mutual Assistance on Criminal Matters) as well as the Swiss Federal Law on International Judicial Assistance in Criminal Matters. The arrangements allow assets to be frozen and if necessary handed over to the foreign authorities concerned. Under Swiss law, one of the core principles for international mutual legal assistance in criminal matters is the condition of dual criminality, which means that an act has to be a criminal offence not only under the law of the requesting State, but also under Swiss law. Hence, Swiss courts will not order coercive measures – lifting the requirement of bank customer privacy, for example – unless, among other things, the act being investigated qualifies as a crime under the law of Switzerland as well as that of the requesting State (see "Bank client confidentiality", published on the website of the Swiss Bankers Association).
For further information, see the page on “Mutual Assistance”. |
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Under certain conditions, bank and financial market supervisory authorities from certain foreign countries may request and receive information from the Swiss Federal Banking Commission (SFBC), the regulator charged with rendering administrative assistance. Art. 23septies of the Swiss Banking Law and Art. 38 of the SESTA specify the conditions: among other things, the information must only be used for direct supervision of the institution concerned, the requesting foreign authority must itself be bound by official or professional secrecy (principle of “confidentiality”), and the foreign authority may not retransmit the information to another person or authority without the prior consent of the SFBC or the general authorization of an international treaty (principle of “specialty”). If the information to be communicated to a foreign supervisory authority concerns individual customers, the Federal Law on Administrative Proceedings applies, the customer may challenge any decision of the SFBC to the Swiss Federal Tribunal, and both the SFBC and the Federal Tribunal must guarantee the customer’s right to be heard and examine the case file.
It should be noted that fulfilling the conditions for administrative assistance is problematic in connection with requests from the U.S. Securities and Exchange Commission (SEC), which publishes so-called litigation releases, naming the defendants and the suspected violations in its court actions, on its publicly accessible website, and which must file civil lawsuits in public procedures in order to sanction investors not directly subject to its supervision (see the page on “Mutual Assistance”).
The Swiss-United States double taxation agreement (DTA) includes a provision that the United States and Switzerland exchange information necessary for the proper implementation of the DTA or “to prevent tax fraud and the like” in relation to the income taxes that are the subject of the DTA. In January 2003, Switzerland and the United States concluded a Mutual Agreement setting out criteria for interpreting the term “tax fraud and the like” and providing corresponding examples. Under this concept, Switzerland also provides administrative assistance even with respect to acts that cannot be committed under the Swiss assessment procedure, but that exhibit the same degree of illegality as tax fraud. |
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The Swiss Penal Code (Art. 30ter para. 2) permits Swiss financial institutions to inform the authorities without thereby violating bank customer privacy in the event that circumstantial evidence gives rise to a suspicion that the financial assets are the proceeds of a crime. At the same time, in the event that such suspicion is well-founded, the Swiss Federal Act on the Combatingof Money Laundering in the Financial Sector re-quires the financial institution to notify the Money Laundering Reporting Office and block the assets that are the object of the notification. For further information, see the page on “Anti-Money Laundering”. (Source: Swiss Federal Tax Administration website, announcement as of January 24, 2003) |
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Under a special federal decree of 1996, bank customer privacy does not apply to requests for records by the independent commission of experts appointed by the Swiss Federal Council to investigate the fate of assets that reached Switzerland as a result of the Nazi rule. Further, the Holocaust claims resolution process requires Swiss banks to publish names and other information on accounts of residents and non-residents that have been dormant since 1945. |
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3. The US Qualified Intermediary (QI) system |
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US citizens and US tax residents should be aware that many Swiss banks and securities dealers have concluded “Qualified Intermediary” (QI) agreements with the United States Internal Revenue Service (IRS). Pursuant to these agreements, the Swiss banks and securities dealers are required as from January 1, 2001, to disclose to the IRS the identity of US citizens and US tax residents who have invested through them in US securities. Swiss banks and securities dealers therefore now require their US customers to consent to such disclosure or, alternatively, decline to invest in US securities. |
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Frequently Asked Questions |
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Why does Switzerland have bank customer privacy? |
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In Switzerland, the concept of privacy in financial affairs has long been recognized as a component of the general right to individual privacy protected under Swiss civil law. In 1934, a special section was added to the Swiss Banking Act, making it a criminal offence for the banks or their employees or agents to improperly divulge information protected under bank customer privacy to any third party, including to foreign governments. This feature was designed to preserve the financial privacy of bank customers, regardless of persecution for racial, political or religious reasons. |
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Aren’t numbered accounts anonymous? |
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Contrary to popular misconception, there is no such thing as an anonymous Swiss account. Even when opening a numbered (or pseudonym) account, Swiss banks must clearly establish the identity of the customer and all beneficial owners to the account, and these accounts are also subject to disclosure in the limited instances in which bank customer privacy is lifted. The numbered accounts merely serve to provide a higher degree of confidentiality within the customer’s bank, i.e., the name of the account holder is known to a narrower circle of bank employees than in the case of an ordinary account. The due diligence requirements, however, are the same, and bank official must always know the identity of the customers and beneficial owners “behind the number”. |
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What is the difference between tax evasion and tax fraud? |
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A distinction is drawn in Swiss law between tax evasion and tax fraud. Tax evasion is committed when a taxpayer fails to submit a tax return or when a valid tax return is incomplete (e.g., as a result of false or incomplete entries). Tax evasion in Switzerland is generally punished in Switzerland with a fine and is therefore considered an infraction, not a criminal offense under the Swiss Penal Code. The Swiss tax authorities, not the prosecuting authorities, are responsible for pursuing cases of tax evasion. Tax fraud, on the other hand, is committed when, for purposes of tax evasion, falsified or non-genuine records such as accounts, balance sheets or income statements or other statements of third parties are used to deceive. The tax return itself is not considered to be a “document”. Tax fraud can also exist without documents being falsified when willful deceit is practiced to evade tax. Tax fraud is treated as a crime and is criminally punishable. (Source: “The Basis for International Mutual Legal and Administrative Assistance”, chapter 4, in: The Swiss Financial Center: A summary of important topics and developments in the financial sector, a specific sub-site of the Economic and Financial Affairs Division (DFA) of the Swiss Federal Department of Foreign Affairs, 2002) |
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