Topics » Bank client confidentiality
Bank-client confidentiality
Bank-client
confidentiality protects privacy in accordance with the constitution and laws of Switzerland. Article
13 of the Swiss Federal Constitution confers on every person "the right to receive respect for
his/her private and family life". This includes privacy in relation to financial income and assets.
However, this does not cover abuses, particularly of a criminal nature. Bank-client confidentiality has always been waived for criminal investigators, to whom banks are required to pass client information. The addition of new crimes to the statute books has led to the creation of new duties of disclosure, for example regarding insider trading (1988) and money laundering (1990). This also applies to foreign prosecuting authorities, through the medium of international administrative and judicial assistance.
The old double taxation agreement between Switzerland and the US from 1997 extended administrative assistance, which had been restricted to tax fraud, to "tax fraud and the like". In 2009 the Swiss Federal Government decided to adopt the standards of the OECD (Organisation for Economic Cooperation and Development) and, when conducting new negotiations with major financial centres, to offer administrative assistance in respect of tax evasion as well (Article 26 of the OECD Model Tax Convention). Switzerland has concluded corresponding new agreements with various countries, including the US, Germany and the UK. This does not, however, imply the automatic exchange of information, and there are conditions on administrative assistance (e.g. well-founded suspicion of a tax offence). Otherwise, bank-client confidentiality remains in place.
Legal basis
The Swiss banker's professional duty of client confidentiality is codified in Article 47 of the Federal Act on Banks and Savings Banks (available in German, French and Italian only), which came into force on 8 November 1934. The article stipulates that anyone acting in his/her capacity as member of a banking body, as a bank employee, agent or liquidator, or as a member of a body or an employee belonging to an accredited auditing institution, is not permitted to divulge information entrusted to him/her or of which he/she has been apprised because of his/her position. The same is true for stock exchanges and securities dealers pursuant to Article 43 of the Federal Act on Stock Exchanges and Securities Trading of 24 March 1995 (available in German, French and Italian only).
Although people traditionally speak of "banking secrecy", it is important to note that this duty of discretion is not intended to protect the bank but the client. In that sense, the term "bank-client confidentiality" is much more appropriate.
Swiss legislation also guarantees respect for privacy in other areas of professional activity, e.g. for doctors and lawyers. This is a question of protecting personal privacy, a basic right established under Article 13 of the Federal Constitution.
Although a desire for privacy can play an important part in an investor's decision to deposit his/her assets in a Swiss bank, it is not the sole or most important factor in the decision. One should not forget that Switzerland's political and monetary stability, its excellent banking infrastructure and the professional know-how and experience of its bankers are also attractive factors.
Limits of Swiss bank-client confidentiality
A banker's obligation to respect his/her clients' privacy is not absolute, and no protection is afforded to criminals. In particular, there is a duty for banks to provide information under the following circumstances:
The Swiss tax system is based on the principle of self-declaration by the taxpayer. Information and documents that a client requires from a bank for the tax authorities may only be passed from the bank to the client, not directly from the bank to the tax authorities. It is not the responsibility of the bank to oversee their clients' tax affairs. However, they may not assist in tax evasion by issuing misleading or incomplete attestations, as is expressly stated in the Due Diligence Agreement.
Swiss withholding tax is an effective means of fighting tax evasion. Most income (interest and dividends) from Swiss capital investments is subject to this 35% tax, deducted at source. The existence of a withholding tax is a strong incentive to declare taxable gains honestly, as investors (bank clients) can only demand a refund of the tax on making the corresponding declaration. This also applies to taxpayers resident or domiciled abroad, where a double taxation agreement makes provisions for partial or total reimbursement of withholding tax.
A comparable solution exists with the European Union through the agreement on the taxation of savings income (tax withheld by banks in favour of the European Union). The flat-rate tax negotiated with individual states – Germany and the UK for now – goes even further. Upon the relevant agreements entering into force, Swiss banks will collect and deliver a tax for the contracting partners and in doing so settle their tax liability abroad. This will also lead to the legalisation of untaxed existing holdings, complies with Switzerland’s strategy to focus on taxed assets and protects bank-client confidentiality, as the flat-rate tax will be transferred to the foreign tax authorities without naming the client.
Where tax fraud is involved, offences are dealt with by the competent authorities, towards which banks have a duty of cooperation, information and disclosure. Tax fraud occurs in particular when a taxpayer deliberately uses forged or falsified documents in order to deceive the tax authorities.
In such cases Switzerland extends international administrative assistance on the basis of its double taxation agreements or the second package of bilateral treaties with the European Union; it also extends international judicial assistance in criminal matters.
In the case of the US, the Swiss Federal Administrative Court ruled on 5 March 2009 that fraud could also exist where the US tax authorities did not intend to conduct an investigation due to the situation and that the taxpayer had anticipated this. In the specific case in question, a company controlled by the taxpayer (rather than the taxpayer himself) was the client of the bank, and the tax authorities were given inaccurate information about the control arrangements.
Since 2009 the Federal Council has, when negotiating double taxation agreements, offered administrative assistance in individual cases of well-founded suspicion of tax evasion, bringing the country into line with international standards (Article 26 of OECD Model Tax Convention). Switzerland, however, continues to rule out an automatic exchange of information in line with the EU model.
International judicial assistance in criminal matters
Switzerland assists the authorities of foreign states in criminal matters in accordance with the Federal Act on International Mutual Assistance in Criminal Matters of 20 March 1981 and supplementary international treaties. The arrangements allow assets to be frozen and if necessary handed over to the foreign authorities concerned.
International mutual assistance in criminal matters is based on the principles of dual criminality, specificity and proportionality. Under the dual criminality rule, Swiss courts do not use coercive measures – lifting the requirement of bank-client confidentiality for example – unless the act being investigated is punishable under the law of both the requesting state and Switzerland. Under the specificity rule, information obtained through the mutual assistance arrangement can only be used for the purposes of the criminal proceedings for which the assistance is provided. According to the proportionality rule, coercive measures such as waiving bank-client confidentiality are not granted in the case of minor offences or where there is a risk that the proceedings may adversely affect the interests of persons not directly involved.
International administrative assistance between supervisory authorities
FINMA may communicate information not available to the public to the supervisory authorities in foreign countries. However, the communication of such information is subject to these statutory conditions:
Consequences of violating bank-client confidentiality
Any violation of bank-client confidentiality, whether through negligence or intentionally, is punishable by a prison sentence of up to three years or by a fine (up to CHF 250,000 in the case of negligence). Violation of bank-client confidentiality remains a punishable offence even after the relationship with the client has come to an end or the banker has ceased his/her professional activity. The same applies to stock exchanges and securities dealers.
However, this does not cover abuses, particularly of a criminal nature. Bank-client confidentiality has always been waived for criminal investigators, to whom banks are required to pass client information. The addition of new crimes to the statute books has led to the creation of new duties of disclosure, for example regarding insider trading (1988) and money laundering (1990). This also applies to foreign prosecuting authorities, through the medium of international administrative and judicial assistance.
The old double taxation agreement between Switzerland and the US from 1997 extended administrative assistance, which had been restricted to tax fraud, to "tax fraud and the like". In 2009 the Swiss Federal Government decided to adopt the standards of the OECD (Organisation for Economic Cooperation and Development) and, when conducting new negotiations with major financial centres, to offer administrative assistance in respect of tax evasion as well (Article 26 of the OECD Model Tax Convention). Switzerland has concluded corresponding new agreements with various countries, including the US, Germany and the UK. This does not, however, imply the automatic exchange of information, and there are conditions on administrative assistance (e.g. well-founded suspicion of a tax offence). Otherwise, bank-client confidentiality remains in place.
Legal basis
The Swiss banker's professional duty of client confidentiality is codified in Article 47 of the Federal Act on Banks and Savings Banks (available in German, French and Italian only), which came into force on 8 November 1934. The article stipulates that anyone acting in his/her capacity as member of a banking body, as a bank employee, agent or liquidator, or as a member of a body or an employee belonging to an accredited auditing institution, is not permitted to divulge information entrusted to him/her or of which he/she has been apprised because of his/her position. The same is true for stock exchanges and securities dealers pursuant to Article 43 of the Federal Act on Stock Exchanges and Securities Trading of 24 March 1995 (available in German, French and Italian only).
Although people traditionally speak of "banking secrecy", it is important to note that this duty of discretion is not intended to protect the bank but the client. In that sense, the term "bank-client confidentiality" is much more appropriate.
Swiss legislation also guarantees respect for privacy in other areas of professional activity, e.g. for doctors and lawyers. This is a question of protecting personal privacy, a basic right established under Article 13 of the Federal Constitution.
Although a desire for privacy can play an important part in an investor's decision to deposit his/her assets in a Swiss bank, it is not the sole or most important factor in the decision. One should not forget that Switzerland's political and monetary stability, its excellent banking infrastructure and the professional know-how and experience of its bankers are also attractive factors.
Limits of Swiss bank-client confidentiality
A banker's obligation to respect his/her clients' privacy is not absolute, and no protection is afforded to criminals. In particular, there is a duty for banks to provide information under the following circumstances:
- civil proceedings (inheritance or divorce, for example);
- debt recovery and bankruptcy proceedings;
- criminal proceedings (money laundering, association with a criminal organisation, theft, tax fraud, blackmail, etc.). If circumstantial evidence gives rise to a suspicion that the financial assets are the proceeds of a crime, then financial institutions may inform the authorities without thereby breaching bank-client confidentiality; if the suspicion is well-founded, they must inform the Money Laundering Reporting Office;
- international administrative and judicial assistance proceedings (see below).
The Swiss tax system is based on the principle of self-declaration by the taxpayer. Information and documents that a client requires from a bank for the tax authorities may only be passed from the bank to the client, not directly from the bank to the tax authorities. It is not the responsibility of the bank to oversee their clients' tax affairs. However, they may not assist in tax evasion by issuing misleading or incomplete attestations, as is expressly stated in the Due Diligence Agreement.
Swiss withholding tax is an effective means of fighting tax evasion. Most income (interest and dividends) from Swiss capital investments is subject to this 35% tax, deducted at source. The existence of a withholding tax is a strong incentive to declare taxable gains honestly, as investors (bank clients) can only demand a refund of the tax on making the corresponding declaration. This also applies to taxpayers resident or domiciled abroad, where a double taxation agreement makes provisions for partial or total reimbursement of withholding tax.
A comparable solution exists with the European Union through the agreement on the taxation of savings income (tax withheld by banks in favour of the European Union). The flat-rate tax negotiated with individual states – Germany and the UK for now – goes even further. Upon the relevant agreements entering into force, Swiss banks will collect and deliver a tax for the contracting partners and in doing so settle their tax liability abroad. This will also lead to the legalisation of untaxed existing holdings, complies with Switzerland’s strategy to focus on taxed assets and protects bank-client confidentiality, as the flat-rate tax will be transferred to the foreign tax authorities without naming the client.
Where tax fraud is involved, offences are dealt with by the competent authorities, towards which banks have a duty of cooperation, information and disclosure. Tax fraud occurs in particular when a taxpayer deliberately uses forged or falsified documents in order to deceive the tax authorities.
In such cases Switzerland extends international administrative assistance on the basis of its double taxation agreements or the second package of bilateral treaties with the European Union; it also extends international judicial assistance in criminal matters.
In the case of the US, the Swiss Federal Administrative Court ruled on 5 March 2009 that fraud could also exist where the US tax authorities did not intend to conduct an investigation due to the situation and that the taxpayer had anticipated this. In the specific case in question, a company controlled by the taxpayer (rather than the taxpayer himself) was the client of the bank, and the tax authorities were given inaccurate information about the control arrangements.
Since 2009 the Federal Council has, when negotiating double taxation agreements, offered administrative assistance in individual cases of well-founded suspicion of tax evasion, bringing the country into line with international standards (Article 26 of OECD Model Tax Convention). Switzerland, however, continues to rule out an automatic exchange of information in line with the EU model.
International judicial assistance in criminal matters
Switzerland assists the authorities of foreign states in criminal matters in accordance with the Federal Act on International Mutual Assistance in Criminal Matters of 20 March 1981 and supplementary international treaties. The arrangements allow assets to be frozen and if necessary handed over to the foreign authorities concerned.
International mutual assistance in criminal matters is based on the principles of dual criminality, specificity and proportionality. Under the dual criminality rule, Swiss courts do not use coercive measures – lifting the requirement of bank-client confidentiality for example – unless the act being investigated is punishable under the law of both the requesting state and Switzerland. Under the specificity rule, information obtained through the mutual assistance arrangement can only be used for the purposes of the criminal proceedings for which the assistance is provided. According to the proportionality rule, coercive measures such as waiving bank-client confidentiality are not granted in the case of minor offences or where there is a risk that the proceedings may adversely affect the interests of persons not directly involved.
International administrative assistance between supervisory authorities
FINMA may communicate information not available to the public to the supervisory authorities in foreign countries. However, the communication of such information is subject to these statutory conditions:
- The information given by Switzerland may not be used for a purpose other than the direct supervision of banks or other financial intermediaries who are subject to official authorisation. No information may be passed on to tax authorities.
- The requesting foreign authority must itself be bound by official or professional confidentiality and be the intended recipient of the information. In administrative assistance of stock exchange supervisors, provisions on the public nature of the foreign proceedings take precedence.
- The requesting foreign authority may not pass the information received from Switzerland to other supervisory authorities without the prior agreement of FINMA or the general authorisation of an international treaty. Such information cannot be passed to criminal investigation authorities in foreign countries if mutual judicial assistance in criminal matters between the states involved would be excluded. This policy is designed to prevent states from bypassing the rules governing mutual judicial assistance in criminal matters. It applies only to administrative assistance between bank supervisory authorities, and not stock exchange supervisory authorities.
Consequences of violating bank-client confidentiality
Any violation of bank-client confidentiality, whether through negligence or intentionally, is punishable by a prison sentence of up to three years or by a fine (up to CHF 250,000 in the case of negligence). Violation of bank-client confidentiality remains a punishable offence even after the relationship with the client has come to an end or the banker has ceased his/her professional activity. The same applies to stock exchanges and securities dealers.
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