Money laundering, legal privilege and international cooperation in Switzerland

By Dario Item

What is hiding behind the Swiss bank system? Is it really about the criminal banks we can find in movies, books, or TV series? Mr. Dario Item, attorney-at-law, leads us in a journey through the true “Swiss model”, showing us how it is changing under pressure from European legislation.
For decades, Switzerland has been seen as the beating heart of money laundering. All the funds that entered Swiss banks were protected by strict secrecy, which forbid letting information about account holders out. Or, at least, this is what was believed, and that – at least partly – still is believed. But as Mr. Dario Item shows us, reality is much more complex and less banal than how popular imagination would depict it.
Swiss banks have signed a large number of international agreements, many of which are centered on administrative collaboration between banks. The country’s bank policy has thus made strides towards transparency and conformity to the laws of other nations. Despite this, to the general public Switzerland remains a land of tax evasion and money laundering. Why?
This essay from Mr. Item tries to give an answer to this question, starting from the origins of the Switzerland “phenomenon”. Chapter after chapter, he examines the judiciary aspects and the law changes that have occurred in the last years.

How the essay on the “European Switzerland” is developed

The monograph shows the transition from the old Switzerland to the new “European Switzerland”. To this goal, it is developed as follows.

• Chapter I. How and why Swiss bank secrecy formed, the repercussions on a moral plane and the peculiar nature of the Swiss model.
• Chapter II. The legislative aspects of bank secrecy in Switzerland and which activities are still subject to it.
• Chapter III. How the Swiss legal system adjudicates money laundering, how it is punished, and what it does to stop it.
• Chapter IV. The agreement between Switzerland and the European Union to fight frauds and other illegal activities that threaten the civil and financial interests of both sides.

Who is Mr. Dario Item, Attorney-at-law

Mr. Dario Item joins the Cantone Ticino Lawyer Register in 1998. The following year, in 1999, he also joins the Cantone Ticino Bar Association. He is a member of the Swiss Federation of Lawyers and Notaries, and since 2000 he has been working together with the law firm I&P Law Office SA from Lugano.
Mr. Item has worked and still works in several facets of the law profession. Banking and Finance, about which this monograph talks, is but one of these. He also works in the following fields:

• Criminal Law and International Letters Rogatory;
• Trusts and Fiduciary Activites Law;
• Estate Planning;
• Civil Liability Law;
• Civil Arbitration and Litigation.

Over the years he thus developed a deep knowledge of several facets of his career, mostly linked to the economic and international fields. It is also in part thanks to this that he nowadays is Ambassador of Antigua and Barbuda to the Kingdom of Spain, the Principality of Monaco, and the Principality of Liechtenstein.

• Language: English
• Publisher: Dario Item
• Release date: May 21, 2019
• ISBN: 9788834116913

Book preview

Dario Item

Money laundering, legal privilege and international cooperation in Switzerland

Copyright © 2010 Dario Item Tutti i diritti riservati.

Index

Preface - Secrecy and money laundering in the new European Switzerland

CHAPTER I - The Swiss model: from a crime banking reputation towards an effective financial market integrity policy

1. Switzerland as a bank for criminals?

1.1 The moral aspect of banking secrecy

1.2 Creation and consolidation of the Swiss model

1.3 The choice of international cooperation (principles of speciality and proportionality)

2. Comments on the evolution of Swiss and international legislation governing banking secrecy and money laundering

2.1 Corporate crimes and white collar crime

2.2 Towards change

2.3 In general: changes to legislation concerning money laundering...

2.4 … and banking secrecy (outline)

3. The peculiar nature of the Swiss model

3.1 Cooperation obligations and the soft/hard law means of control

3.2 SROs and oversight authorities: outline

CHAPTER II - Banking, lawyers' and notaries' secrecy in Switzerland

1. Banking secrecy in Swiss legislation

1.1 General concepts and legal basis

1.2 Salient features of the institution

1.3 Civil and criminal consequences of breach

1.4 Bank, tax and Euro tax secrecy

2. The Convention relating to the obligation of bank diligence (CBD 2008) and the FINMA 1 ordinance on money laundering

2.1 The obligation of bank diligence 2008: history and purpose

2.2 Scope and contents

2.3 The FINMA (Swiss Financial markets regulatory body) ordinance1114

3. Bank secrecy regarding lawyers and notary publics

3.1 Lawyer, notary public and financial intermediary

3.2 In practical terms: activities subject to secrecy

CHAPTER III - Money laundering in the Swiss legal system

1. Article 305bis: money laundering

1.1 The origin of the regulations

1.2 Objective crime elements

>a) Asset value

b) Criminal provenance

c) The money-launderer

d) The offending conduct

e) Punishable actions

f) The effects

g) Self laundering

1.3 Signs of money laundering regarding reporting suspicions

1.4 Mens rea in respect of the offence: intention and knowledge of criminal provenance

1.5 The punishment

1.6 Aggravated money laundering article 305bis paragraph 2

a) perpetrator member of a criminal organisation

b) Perpetrator/member of a gang

c) Money laundering as principal activity

1.7 The general laws which are applicable

1.8 Money laundering, aiding and abetting and handling stolen goods

2. Article 305ter: duty of diligence in financial operations and reporting right

2.1 Preconditions

2.2 Article 305ter chapter 2: the right to report information

2.3 Objective elements

a) Persons involved

b) Management

c) Bad faith failure to conduct verification

2.4 Mens rea: intentions

3. The federal law on money laundering (MLA)

3.1 Scope

3.2 The financial intermediaries and their obligations

3.3 Organisations and regulatory procedures

3.4 FINMA315

CHAPTER IV - Money laundering, according to the cooperation agreement between the European Union and the swiss confederation on combating fraud and all other unlawful activities harming their financial interests

1. Preliminary notes

1.1 International cooperation and the favor rogatoriae

1.2 The FATF: 40 recommendations and 9 special recommendations

2. EU legislation

2.1 Administrative and judicial cooperation between the member States of the European Union: judicial assistance in criminal matters

2.2 The provisions of conventions to safeguard the financial interests of member states

2.3 Tax and customs assistance

3. The cooperation agreement between the EU and the Swiss confederation to combat fraud and other illegal activities harming their financial interests

3.1 Scope

3.2 Money laundering: relations with applicable Swiss law

3.3 Cooperation and international judicial assistance on tax offences and money laundering

3.4 Cases of rejection or restriction of the requests for cooperation (articles 3-4)

3.5 Official secrecy and confidentiality (articles 5-6)

3.6 Articles 7-11 of the agreement: extent, competencies and proportionality of the requests for assistance

3.7 Forms of mutual assistance (articles 12-20)

3.8 Forms of cooperation (articles 21-24)

3.9 Rules regarding judicial assistance (articles 25-31)

3.10 Requests for banking and financial information (article 32)

3.11 Further provisions relating to criminal judicial assistance (articles 33-38)

Conclusions

Bibliography – Webliography

Preface - Secrecy and money laundering in the new European Switzerland

«Money is like manure, of very little use except it be spread»¹.

When the London-based philosopher FRANCIS BACON uttered these words, between the 16th and 17th century, the phenomenon of money laundering was certainly not widespread, and neither did criminal organisations have the extensive, robust structure that they nowadays boast.

His criticism was obviously directed elsewhere.

However the farsightedness shown by the simple concept underlying this aphorism (in other words avoiding excessive concentration of wealth and therefore overexposure on the part of its owner) already heralded what was soon to become the key principle of modern criminal dynamics: concealing the amount and origin of proceeds of crime in order to distract attention from the criminal activity which is the source of such proceeds.

In other words money laundering.

This is why mutatis mutandis, Bacon's maxim is so clear-sighted, also - above all - in a social and economic system which is now so highly globalised and marked by a transnational criminal dimension which the English philosopher would certainly not have been aware of.

Increasingly used in drug and weapons trafficking, money laundering² is now implicated – to a large extent - in the proceeds of crime seized from criminal organisations, both at a local and international level (including terrorist organisations).

Essentially, money laundering entails the investment of economic assets in lawful activities often identified with the sale of movable or immovable property or the repeated transfer of money between multiple bank accounts.

When required to oversee financial markets and ensure that they function effectively, and thus coming up against the increasingly urgent need to tackle distortion of these markets, (especially when the origin of funds is unlawful), modern legal systems have in turn endeavoured to provide balanced answers which respect all the interests at stake, endeavouring particularly to reconcile the requirement for oversight with the - legal - requirements for a free market and confidentiality.

In fact the complex relationship between the matter of banking secrecy and money laundering, above all in situations which are quite particular such as in Switzerland, is paradigmatic. For decades regarded as a veritable tax haven in the heart of Europe, Switzerland long ago accepted the many demands for change coming from the rest of the continent, opening up to European legislation on such issues as legal assistance in criminal matters and entering into a number of international agreements designed to enhance administrative collaboration between States.

In so doing, the Confederation overcame the particularly conservative opposition of many in Switzerland and finally embarked on a policy to adapt the nation's legislation to the pressing requirements of a common financial market which increasingly needs transparency and regulatory consistency.

Far from wishing to cover all aspects of such a wide-ranging field, this essay aims to succinctly trace the origins of and the reasons for the Swiss phenomenon (Chapter I) going on to address issues of banking secrecy (Chapter II) and money laundering (Chapter III) in light of recent legislative changes and agreements. Lastly, given its great practical importance, relations between the Confederation and the European Union are explained in accordance with the recent provisions of the agreement to co-operate in combating fraud and other illegal activities affecting their financial interests (Chapter IV).

CHAPTER I - The Swiss model: from a crime banking reputation towards an effective financial market integrity policy

1. Switzerland as a bank for criminals?

1.1 The moral aspect of banking secrecy

Regarding banking secrecy and the self-serving, harmful use which may be made of such secrecy, there is unfortunately a widely held belief in the proverbial discretion of Swiss banks.

In this regard, obviously, the deep-rooted position of banks, intermediaries and financial traders can come across as the culmination of a national system which to a certain extent is protectionist or at least mildly suspicious of international cooperation. Indeed, given the efforts taken by federal authorities to strengthen the international cooperation process, this belief draws its lifeblood both from the apodictic prejudice referred to above as well as (to a great extent) from the undeniable difficulties of interpretation which are inherent in the complex regulatory and legislative fabric.

And this is not all: geared to legal debate ever since the beginning of the last century, the age-old moral question linked to banking secrecy (and thus to the delicate problem of ascertaining the origin of money managed or kept in Swiss banks) reached its inauspicious zenith during the Second World War and even today plays a key role in political and legislative discussions³.

The position expressed by the current president of the Confederation, ARNOLD KOLLER, before the federal Assembly on 5 March 1997⁴ is typical: the scathing criticism of the country, which is accused of organising a stubborn, arrogant lobby in connivance with its banks, was undermining the country's economic strength and its ethics and morality and also distorting Switzerland's image in the eyes of its own citizens.

At the height of this trial before the media, and specifically on 7 May 2007 United States authorities published their Eizenstat Report and further drew attention to the responsibilities of the Confederation regarding the aforementioned issues (and especially the role played by Switzerland during the war)⁵. The Federal Council adopted a clear position against the accusations contained in the report, to the point of criticising the document rapporteur, condemning the «[...] political and moral opinions which go beyond a mere historical analysis and therefore needs to be clarified. [...] the harshest criticism concerned Switzerland's conduct after the war, the chapter in its history which particularly troubles the Federal Council and to which it intends to pay close attention. [...] representing Switzerland as the Nazi's banker is, for the Federal Council, a unilateral judgement [...]»⁶.

Circumscribing the contents and limits of the discussion to the current situation, the moral doubt as to the advisability of banking secrecy or certain ethical obligations on the part of financial intermediaries (including lawyers when requested), continues to provide inspiration for the doctrinal dispute and in any case heralds possible future changes to the law.

As the archetype for conduct which is undeniably characterised by discretion, when not cloaked in secrecy which is excessively accommodating towards clients (and as such abominable), the idea of Switzerland as first the Nazi’s bank⁷ and later the bank of criminals unconsciously continues to fuel the collective imagination with the suspicion of embezzlement and political opportunism⁸. In this regard RAPPO expresses the following opinion:

«[…] La seconde guerre mondiale permettra à la Suisse d’accéder au rang de places financières internationales de première importance. La Suisse apparaissant alors comme unique marché libre de l’or et des devises, le franc a continué a jouer le rôle de valeur refuge et de moyen de paiement international. L’attitude de la Suisse pendant cette période et en particulier ses relations avec l’Allemagne ont fait l’objet de nombreuses controverses […]»⁹.

What is certain, both in the eyes of professionals and simple lay men, is that Switzerland was and remains an economic/financial market whose policies tend to be conservative, tailored to maintaining its privileged status in the European landscape. This policy, though theoretically legitimate (and of course advocated by those who regularly import capital of whatever origin), has often been to the detriment of incisive checks, ending up by impeding the work of the foreign authority seeking legal assistance and often inappropriately preventing investigations.

1.2 Creation and consolidation of the Swiss model

Nevertheless it should be stressed in this regard that the model usually referred to in the context of the Swiss financial market (involving Switzerland’s proverbial discretion) nowadays comes across as being dated and out of keeping with the economic and financial situation. Nevertheless the model corresponds to the product of an evolutionary process which was as rapid as it was significant from the legal point of view, and it seems advisable to briefly look at the key milestones.

The typical Swiss model became famous over a period of time which was relatively short, between the mid-19th century and the early 1970s.¹⁰

Throughout Europe, and especially in England¹¹, the industrial revolution distorted the old traditional model based on bank deposits, imposing a view of savings which was geared solely to investments (known as merchant banks). Despite the number of British banks and the great competence acquired by these institutions (veritable owners of the European economic market)¹² Switzerland could count neither on the quantity nor the quality of financial entities operating on its territory.

Up to 1850, especially, the role of the (few) Swiss banks in the international scenario could be considered decidedly marginal¹³. After that date however thanks to the first commercial investments (albeit local) but also and especially due to the gradual acquisition of funds from individuals, the major Swiss banks for the first time sought to close this gap and thus reposition themselves outside the national boundaries.

With great strategic foresight they focused on asset management of private investors and small savers¹⁴. It was precisely this latter category, increasingly looking for anonymity, which determined the start of a new, increasingly important requirement for protection, thereby laying the foundations for the modern fiduciary relationship and inaugurating the first, embryonic form of personalisation of the bank/client relationship.

From this moment the concept of bank secrecy began to take shape and gradually acquired the importance which is given to it nowadays by all investors: a concept which shortly thereafter was to take on the structure of the legal institution which we are familiar with today, thereby ensuring that the Swiss Confederation (whose financial market, more than any other, was formed in this way) was able to play a leading role.

It was with the advent of the First World War however that the situation underwent a further, decisive change towards affirmation of the newly created Swiss model: the precariousness of the economic and social situation in Europe and the Soviet Union, with the ensuing devaluation of most foreign currencies, contributed greatly to the reputation of Swiss banks. Confident of the stability of their currency (still relatively safe) and the policy of neutrality adopted by the Federal government, they exponentially increased their power through raising capital from across Europe and thus began a rapid, inexorable expansion of turnover, with an increase in Swiss banks’ reputation and number of facilities.

Following the rapid recovery of the German economy initiated by ADOLF HITLER, the Swiss authorities proceeded to reform their financial system, adopting a law on banking secrecy and injecting capital into the Wehrmacht's rearmament programmes. Having assimilated the Third Reich's anti-Semitic policy, the Confederation’s companies and banks completed their own arianisation process.

For these reasons, the Second World War consecrated the Swiss financial centre amongst the international elite. Within the space of just 50 years, after two world wars, with a turnover which in the same period rose from 6.4 billion francs to 36.7 billion francs¹⁵, the number of banks increased from around 400 in 1906 to 1500 in 1956. Nevertheless, the controversial role played by the Federal government in the Third Reich's trafficking¹⁶, laid Switzerland open to charges of moral bankruptcy, guilty inertia and meanness¹⁷. The doubts, which were certainly legitimate, as to the origin of funds managed during the period¹⁸ and the constant refusal to compensate the heirs of Jewish victims (citing grounds which were often specious)¹⁹, constituted (and still do) strong grounds for censure: nevertheless, and this should certainly be emphasised, any investigation into the logical consistency of banking secrecy and an evaluation of its role as a factor favouring democracy, must out of necessity, be considered separately from the - legitimate - emotive arguments tied to historical events and instead any analysis the sector must be suited to legal arguments which are more pertinent to the rationale.

1.3 The choice of international cooperation (principles of speciality and proportionality)

Over the last 50 years in fact, federal legislation has attempted to adapt - on an ongoing basis - to pressing international public order needs and has likewise agreed to undertake an increasingly penetrating tax investigation into cash flows.

This openness, whilst demonstrating willingness by the Confederation to ensure policy convergence to combat international crime, nevertheless entails the slow but inexorable weakening of certain historical legal principles²⁰.

Amongst these, proportionality and speciality constitute striking examples: the first (of constitutional importance), in the face of widespread application of the criterion of potential utility²¹ within the scope of letters rogatory procedures, has become almost inconsistent. This is not only due to the restrictive exegesis authenticated by the legislator but also on account of inconsistent interpretation of the aforementioned principle: all this has not only given rise to practices which often conflict, but has also proved to be a harbinger of «legal uncertainty sometimes affecting the safeguarding of legal interests of third parties which are worthy of protection and which are not involved in the foreign criminal proceedings and sometimes the very efficacy of international assistance»²².

Whereas with regard to the principle of speciality according to which the authority making the formal request should use the information and documents obtained by the letters rogatory procedure in a manner which is relevant to the request, the scope of same is mitigated by the reformulation of article 67 paragraph 2 IMAC LAW²³ and by the practice of spontaneously producing documents (proving the existence of accounts with Swiss banks). The effect of this decision is for the holder of a bank account to waive application of this principle beforehand²⁴.

The constant refinement of international agreements and the systematic strengthening of cooperation between states, resulting in an irreversible process of osmosis between domestic legislation and agreements, has thus lead to a gradual reduction in national sovereignty and with it the ensuing adaptation of regulations.

Regarding the issue, to the extent that it is relevant here, an example of this can be found in the prosecution of conduct on the grounds that money laundering has been committed²⁵. Even more troubling, in this regard, are experiences related to what is known as global fishing expeditions, a reprehensible practice²⁶ which is often exacerbated by the misuse of anti money laundering measures, letters rogatory procedures and expert use of the mass media.

This latter distortion, in particular, usually comes about through a procedural measure of a certain importance or one which is capable due to its intrinsic peculiarities, of causing a stir: at this point, with the mass media focusing on the case, public pressure becomes an improper tool to use in the private sector when it is subject to anti money laundering obligations. This mechanism therefore encourages the adoption of measures by financial operators which are increasingly restrictive, to such an extent as to involve the public prosecutor’s office, encouraging it to make spontaneous reports to foreign judicial authorities (indicated to the mass media as the party which initiated criminal proceedings).

The danger that a witch-hunt is triggered, at this point, is not that far from the truth, also because the investigators could intentionally leak information relating to the proceeding with the specific aim of activating the aforementioned mechanism and, in a certain sense, bypassing the strict rules governing the making of formal requests to foreign authorities²⁷.

2. Comments on the evolution of Swiss and international legislation governing banking secrecy and money laundering.

2.1 Corporate crimes and white collar crime

A proper examination of the crime of money laundering and the related insidious matter of banking secrecy, makes it advisable to insist on clear distinction between the various parties who in different capacities, contribute to rendering a hypothetical situation real.

The events under discussion, as such, undoubtedly constitute the manifestation of criminal intent: such intent however is transformed into action solely through the interaction between on the one hand organisations (or criminal gangs) and individuals or entities which are unrelated to the world of crime on the other hand.

The latter, usually best placed to launder dirty money, hide amongst the ranks of financial traders, asset managers and bankers. That is why, in these cases, one can easily imagine that the doctrine of bank secrecy can be speciously abused in order to hide unlawful conduct and so provide unlawful coverage for white-collar criminals²⁸.

This particular type of crime represents a relatively new problem: its origins which have their roots in gradual establishment of a new macro category of workers (embracing the self-employed and office workers), date back to the late 19th century.

In particular the early approaches to antisocial behaviour on the part of individuals belonging to the upper class, educated and respected both socially and professionally, can be traced back to 1899, the year in which the pioneering book La Delinquenza Bancaria [Bank Crime] was published by the Italian positivist RODOLFO LASCHI²⁹ and the equally important contribution made by The Theory of the Leisure Class written by the Norwegian-American sociologist THORSTEIN VEBLEN³⁰. The former, reflecting on the causes of crime committed by the newly affluent classes, posited a dominant role played by psychological and sociological factors, but at the expense of the then prevailing belief as to the impact of genetic or physiognomic factors³¹. The latter, whose work was well known to SUTHERLAND, laid the foundation for studies into economic and financial criminality.

This phenomenon of criminals in suits and ties, in all its vastness, became increasingly important in the early 20th century and achieved its consecration in the period between the 1930s and the 1940s³².

The merit of the first logical and systematic in-depth analysis of the phenomenon, made in those years (1939), culminating in a definition of white-collar crimes must be given to EDWIN SUTHERLAND³³. The existence of white-collar crimes, in the original idea of the person who invented the theory, represented a simple explanatory premise of a much more structured theory of differential associationism, which had been perfected by SUTHERLAND together with DONALD CRESSEY just a few years previously (1939)³⁴.

Under this theory, designed to explain criminal phenomena through the study into learning human behaviour within the scope of interpersonal dynamics with elements of the social group to which they belong, analysis of criminal phenomena in the affluent class provided the inspiration to exploit the very idea on which differential associationism was based: people are not born criminal they become criminal only because they are poor.

Where present, however it is the unconscious acquisition of conformant unlawful behaviour (although unconventional in the strict sense) that shapes the criminal intent of the disadvantaged person. In this regard, as a genetic predisposition or a negative social environment alone are no longer of significance, an upper-class criminal represented the best proof of the accuracy of this conjecture.

The model of criminality theorised in those years was structured into three key elements, and it appears obvious that this corresponded to contemporary economic or financial crimes: these elements are, in particular the particular type of crimes committed, the professionalism or social status of the perpetrators and the environment (read: society) in which they operate.

It is from this latter point of view, probably the one revealing the state of health of the country and its institutions, the proper attitude and the reactions of the related economic and social fabric become of prime importance for the rejection of malignant cells: in this regard, as we have already noted, the attitude of the Swiss financial sector has certainly been receptive and has tangibly contributed to the drafting of legislative solutions which are now in force.

In any case, within the context of this phenomenon, however, money laundering in some way represents the archetype of what are known as desk crimes and thus exempted from the possibility of raising objections on the grounds of banking secrecy in any investigations as to the identity of the perpetrator.

Money laundering has however evolved and has repositioned itself due to the inexorable internationalisation of organised crime, thereby taking on a new transnational role.

In this regard, the connections between white-collar crimes and what are known as corporate crimes are obvious; corporate crimes consist of unlawful acts committed at the corporate level by individuals or institutions (and therefore regarding the issue under discussion, banks, financial consultants, lawyers and notaries) or otherwise corporate crimes insist of crimes committed by organisations (corporate) set up to commit crimes or to launder money at a higher level³⁵.

Despite this, as for many other crimes of this type (business or tax fraud, bankruptcy, corporate crimes of various kinds etc), one fails to grasp why public opinion is so overly indulgent. Social evaluation of this type of activity, in most cases, is often characterised by inaccuracy and ignorance, leading to abnormal levels of goodwill vis-a-vis the professional or member of the upper class who commit crimes. This phenomenon had been censured by SUTHERLAND, who (already in the 1940’s had recognised that there was a sort of social (and often judicial) immunity with regard to white collar crime which could apparently not be reconciled (theoretically and practically) with breach