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Dec 28, 2015

The Swiss Have Sent a Chilling Message to Banking Whistleblowers

“If governments who have been helped by Hervé Falciani will not protect him, they would make themselves guilty of wilful blindness or of looking the other way while a whistleblower is legally crucified.”

“If governments around the world who have been helped by Hervé Falciani will not protect him, they would make themselves guilty of wilful blindness or of looking the other way while a whistleblower is legally crucified.”

HSBC Private Bank, Geneva. Credit: Beat Strasser/Flickr CC BY-SA 2.0

HSBC Private Bank, Geneva. Credit: Beat Strasser/Flickr CC BY-SA 2.0

Geneva: In what seems to be a strong and unambiguous signal to protect banking secrecy and perhaps send a chilling note to future whistle-blowers, the Federal Criminal Court in Switzerland last month convicted former HSBC employee Hervé Falciani in absentia of industrial espionage and sentenced him to five years in prison. Falciani is a  computer expert who worked at HSBC Private Bank in Geneva before leaking details of accountholders to the French government in 2008. The court denied him the status of a whistle-blower, even as he was not convicted for breaking banking secrecy laws. It isn’t entirely clear yet how this conviction might impact the process of getting information on the accounts of those on Falciani’s HSBC list from Switzerland.

In September this year, another Swiss court decided the government had no obligation to respond to requests from foreign jurisdictions that were based on stolen information. The Swiss parliament will take a view on this issue next year. An effort to change the law to accommodate stolen information has been scuttled in the past. Automatic exchange of information will be a reality by 2018.

Not a whistle-blower?

Peter V Kunz, professor for business law and the dean of the law faculty of the University of Bern told The Wire, “Few people in Switzerland believed Falciani’s claim to be a ‘real’ whistle-blower. Primarily, he was out for the money but tried to change the story to a more sympathetic account when he did not succeed.”

In 2007, Falciani stole information on more than 100,000 account holders from across 203 national jurisdictions. He later passed on the information to the French authorities and the information was subsequently shared with other countries including India. The Swiss authorities had initially questioned him in 2008, but he has since evaded arrest. An international warrant had been issued against him. Having both Italian and French nationalities, Falciani cannot be extradited to Switzerland by those countries. He is unlikely to serve the sentence he has received.

Hervé Falciani, in 2012. Credit: eldiario.es/CC 3.0

Hervé Falciani, in 2012. Credit: eldiario.es/CC 3.0

Falciani was charged with unauthorisedly obtaining data, breach of trade secrecy, breach of banking secrecy and industrial espionage.

Ironically, he was not convicted for breaking banking secrecy laws.The court evidently judged that HSBC did not specially secure its data to prevent his access and that there is no evidence that he transmitted the data to anyone after 2008, his lawyer told The Wire in an email. Acts done before 2008 were not under prosecution since the 7-year limitation period had expired, the lawyer added.

In the end, the court convicted Falciani for industrial espionage, a provision that is rarely applied in Switzerland. Details of the judgment are yet to emerge fully. Article 273 of the Swiss Criminal Code dealing with that crime says that its purpose is to “protect the territorial sovereignty of Switzerland and its economic independence and security, by prohibiting the disclosure of trade or business secrets to foreign authorities and/or private persons.” This provision does not protect all kinds of information, but only confidential information including the identities of bank customers. The information that a company receives from its customers falls within the scope of this article, as suggested in a briefing paper by Bär & Karrer earlier this year, ‘Whistle-blowers in the Swiss Banking Sector: Legal Hurdles to Cooperating with Foreign Governments’.

“This ruling should be understood as a ‘wake-up call’ by a Swiss court to people (and governments) abroad that Switzerland is independent and willing to protect itself,” Kunz said.

Swiss authorities allege and maintain that Falciani tried to sell data in Lebanon after his theft. But there has not been sufficient evidence to support this.

Andy Marty, spokesperson of the Swiss Office of the Attorney General (OAG), told The Wire that the prosecutor advised the Federal Criminal Court (FCC) that Falciani is not to be seen as a “whistle-blower” because of his efforts to sell the stolen data.

In a press statement on the conviction, HSBC Private Bank said last month, “HSBC welcomes the decision of the Swiss Federal Criminal Court to sentence former IT employee Hervé Falciani to five years in prison for aggravated industrial espionage. HSBC has always maintained that Falciani systematically stole clients’ information in order to sell it for his own personal financial gain. The court heard that he was not motivated by whistleblowing intentions and that this was not a victimless crime.”

Swiss Federal Attorney General Michael Lauber had said in the past that prosecutors were not entitled to examine the Falciani data for money-laundering since it was based on data theft and went against banking secrecy rules. When the International Consortium of Investigative Journalists revealed the details in an extensive investigation called Swiss Leaks, the public prosecutor in Geneva initiated a probe against HSBC Private Bank Suisse. A few months later, in June 2015, however, there was a settlement when the bank agreed to pay $43 million to the canton of Geneva. Some called it “judicial realpolitik”. Olivier Jornot, Geneva’s prosecutor had then said it showed the weakness of Swiss law in fighting the entry of criminal funds into the financial circuit. But the prosecutor also acknowledged the progress the bank has made to improve its compliance function, internal processes and technology in recent years.

In a statement back in June, 2015, the bank had said that “the investigation found that neither the bank nor its employees are suspected of any current criminal offences. As part of the agreement to close the investigation, the bank would pay 40 million Swiss francs in compensation to the Geneva authorities for past organisational deficiencies. The bank acknowledged that the compliance culture and standards of due diligence in place in the bank in the past were not as robust as they are today.” As a result of the settlement, the Swiss will not prosecute HSBC or make public the findings of their investigation.

Letting off the Swiss arm of HSBC, one of the biggest banks in the world, with a fine while going after the individual who brought to light massive money laundering activities at the bank’s office in Geneva is what many find problematic. This conviction is seen as a political verdict, notwithstanding the original intentions of Falciani.

Some believe that the Swiss prosecution had no alternative than to go after him. “Swiss people are neither happy about Falciani nor about HSBC; many people here think that the treatment of HSBC was too lenient – but this would not be an excuse to not prosecute Falciani,” Kunz said.

Swiss banks have more than 25% of the global private banking business. Despite the meltdown in banking secrecy in the last few years, mostly because of the American pressure that led to sharing of information on US tax evaders, this conviction was important to safeguard future business, commentators say.

The case of Rudolf Elmer

Whistle-blower Rudolf Elmer says that by convicting Falciani of economic espionage, he has been made “a major enemy of the Swiss Confederation.” He is of the view that Swiss prosecutors will not go after major banks in Switzerland, for fear of alienating their clientele. The reaction would be a tremendous capital outflow of assets of banks domiciled in the country. This is definitely not wanted by the banks but more importantly by the government and the judicial system of Switzerland, he said.

Elmer’s was one of the first cases of whistle-blowing in the Swiss banking industry. A Swiss citizen, he was chief operating officer of a Swiss bank in the Cayman Islands until his dismissal in 2002. He disclosed information about undeclared accounts to the media and tax authorities in 2005. Later that year, the Zurich general attorney’s office opened an investigation against him on suspicion of violating banking secrecy. He was subsequently arrested and held in custody for more than 200 days. (His wife was also accused of violating banking secrecy laws). He rose to prominence in 2008 when WikiLeaks published  confidential banking documents provided by him. He handed more information to WikiLeaks in 2011. Elmer’s case has been a long and complicated legal battle with Swiss authorities over ten years that continues till today. He denies the charges against him and is of the view that he should not be prosecuted under Swiss banking secrecy laws because his data came from the Cayman Islands subsidiary.

Elmer is especially scathing about the canton of Geneva arriving at a settlement with HSBC Private Bank Suisse earlier in the year. “If a bank that has assisted in money laundering, can put money on the table it clearly means that justice can be negotiated.” Whistle-blower cases related to the financial industry are simply political cases because Swiss bank secrecy needs to be protected whatever it takes, he added.

Elmer wanted to know why the Swiss authorities have not sought a settlement with him. “Zurich’s Prosecution Office has never made me a financial offer to close my legal cases, which is considered a complex one similar to HSBC, Geneva – lasting more than 10 years. Those offers are only for powerful institutions within Switzerland.”

Whistle-blowers or not, banking secrecy in Switzerland has been and will be under attack. But there are complex dynamics unravelling domestically that will determine how long banking secrecy, albeit more diluted than before, will continue to exist in one of the strongest economies in Europe.

Domestic dynamics

The Swiss Federal Administrative Court, an institution that hears public law disputes pertaining to matters falling under the authority of the federal administration, ruled in September this year that the Swiss government was not right in responding to a request on administrative assistance for a case that came to light based on stolen information.

The request for administrative assistance was sent by France in 2013 and was complied with in October 2014. The complainant contested this. The complainant’s name was revealed to the French authorities, in a broader list, in 2010 by a UBS employee who shared data going against Swiss banking secrecy laws. The court favoured the complainant in its ruling. The court was of the view that data theft was punishable under Swiss law and therefore the Federal Tax Administration (FTA) “was not permitted to grant administrative assistance”. The case is not over yet and the verdict is open to appeal.

For now, a spokesperson at the secretariat of International Financial Matters in Bern, has clarified that on international cooperation on tax matters, banking information will be provided to a partner country as long as the applicable agreement allows for the exchange of such data (which in the case of India is the Swiss-Indian Double Taxation Agreement) and the request meets the criterion of ‘foreseeable relevance’.

The fight against banking secrecy in Switzerland suffered a setback with the recent announcement that the Swiss finance minister Eveline Widmer-Schlumpf, seen as something akin to a banking secrecy demolition czar, will step down at the end of her term. Widmer-Schlumpf leaves behind a strong legacy of cleaning up Swiss banks during her tenure but has also been criticised for giving in too much, too easily with respect to diluting the culture of banking secrecy.

As a result of federal elections held in October in Switzerland, the finance ministry will now be headed by Ueli Maurer, a member of the fiscally-conservative Swiss People’s Party, also known for its stance against immigration. There is also an on-going domestic initiative for a referendum on protecting banking secrecy for Swiss citizens, which could further complicate the terrain.

Earlier this month, the Swiss Senate, one of the two chambers of Parliament, accepted the legal groundwork for the automatic exchange of information on foreigners with bank accounts in Switzerland. This was already approved by the House of Representatives. This is a part of the larger architecture on automatic information exchange by 2018 set forth by the OECD. This will mark a shift from the current system, where information on tax evaders is shared based on requests for administrative assistance, on the back of independent investigation by the requesting country.

Switzerland has concluded automatic information exchange agreements with certain countries including Australia and the 28 European Union nations. It has also signed up for information exchange under the Foreign Account Tax Compliance Act (FATCA) with the United States.

External pressures

Switzerland may be appear to be serious in addressing reputational risks arising from being called a tax haven, but its treatment of whistle-blowers is disproportionate compared to how it deals with erring banks. International pressure, including by forums such as the G20 and OECD has come to bear on Switzerland. This pressure can also do more for cases such as Falciani’s.

As a result of Falciani’s disclosures, the United States, France, Belgium and Argentina have initiated criminal investigations looking into the role of HSBC Private Bank in aiding money laundering. There are reports that authorities in Spain, Greece and Italy are working with Falciani to get after tax evaders. In addition to cases pertaining to Falciani’s list, the US and HSBC are engaged in more than one legal battle including a Deferred Prosecution Agreement since 2012.

In a recent interview, Falciani has said that this conviction does not change anything and that he will continue to work with Indian authorities. An official with the Central Board of Direct Taxes, told The Wire that during investigation of tax evasion cases, including the cases of undisclosed foreign assets/income, Indian authorities do reach out to persons having useful information which could help the investigators. Such persons could include persons like Hervé Falciani, the official said.

Elmer calls out to governments like India’s to provide support to Falciani. “If those governments will not protect [him], they would make themselves guilty of wilful blindness or better simply looking the other way while Falciani is legally crucified,” he said.

Experts are watching this closely. Shu-Yi Oei, associate professor of Law at Tulane University Law School, said in a commentary in The Jurist, “The way in which one country reacts to the prosecutorial and investigative decisions of other countries in light of press-facilitated sunshine has the potential to be very instructive. It will be interesting to observe whether these dynamics result in more aggressive investigation and prosecution of the bank entities and the listed clients as a result of inter-country peer pressure, or whether the propensity to investigate and prosecute is reduced by other factors.”

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