Tax-exempt assets: Can a Swiss bank refuse to execute its client’s instructions?

Tax-exempt assets: Can a Swiss bank refuse to execute its client’s instructions?

During 2015, the Courts have addressed clients’ objections on the new policy of Swiss banks on tax-exempt assets. This consists in refusing any transfer order to another banking account opened in a place other than the place of residence of the client in question.

A fortiori, cash withdrawals are refused. In an international context, banks fear being complicit of tax fraud laundering, a concept unknown in Switzerland until 1st of January 2016.

In order to justify their position, banks argue a legal impossibility to execute the instruction of the client pursuant to article 119 of the Code of Obligations. Such execution would contravene to foreign mandatory provisions, which generally criminalize tax fraud laundering.

These mandatory foreign provisions would be applicable in Switzerland pursuant to article 19 of the Swiss Federal Act on Private International Law, according to which, when required by legitimate and manifestly predominant interests under the Swiss concept of law, a mandatory provision of foreign law can be taken into consideration if the situation referred to, is closely connected with.

The banks in question also hide behind the obligation prescribed by the Federal Act on Banks to offer a guarantee of irreproachable banking activity, as well as on FINMA’s position on legal and reputational risks on the framework of cross-border banking activities. Lastly, banks refer to their terms and conditions as well as their internal guidelines.

In October 2015, ruling on the appeal of a bank, the Federal Court confirmed two decisions of the higher courts of the canton of Ticino, ruling in favor of the clients who objected to internal and unilateral freezing measures of a bank. According to these cantonal court decisions, a bank cannot legitimately refuse the cash withdrawals of the balance of an account that the bank suspects is not declared to the tax authorities of the place of residence of the client in question.
The right of the client has been previously considered as a « clear case » by the cantonal courts issuing a judgment after summary proceedings, in reference to the Swiss Civil Procedure Code. The legal questions raised by the appeal of the bank regarding the legal impossibility to execute the client’s instruction due to the fact that they contravene to mandatory provisions of a foreign law, have not been examined on the merits by the federal Court due to procedural grounds of admissibility.

Furthermore, in its appeal, the bank had not provided the internal guidelines adopted following the position taken by FINMA on the legal and reputational risks of the cross-border banking activities and therefore this aspect has not been dealt with, neither by the cantonal courts nor by the federal Court. The questions raised by this new banking policy with regard to the assets suspected to be hidden from the tax authorities, have not received a clear answer by the federal Court. Nonetheless, the few cantonal decisions issued on this context are in favor of the clients.
In a judgment of February 2nd 2015, the higher Court of the canton of Zurich decided that, with the exception of the provisions of Swiss money laundering law that regard in particular the freezing of assets in cases of suspicion of money laundering under Swiss Law, there is no other legal basis of the Swiss legislation that justifies a unilateral freezing of an account.

More recently in Geneva, a client of a bank, national of a European country has obtained a release from an action of a bank objecting to a summons to pay, which was notified to the Bank, for the total assets placed in the account of the client. The first instance Court determined at the end of a hearing in summary proceedings that the account statement which shows a positive balance in favor of the client, is considered an acknowledgment of debt by the Bank.
The legal impossibility argued by the Bank had not been demonstrated, and the foreign mandatory provisions were not applicable, the circumstances not being closely connected to the French law.

The banking relationship is governed by the Swiss law, the bank has its seat in Switzerland and the beneficial owners have recently taken residence in Switzerland. The first instance Court has in addition considered that the Bank’s terms and conditions did not expressly prohibit the restitution of the banking assets in similar cases. The internal guidelines relied upon by the bank in question could not be invoked against the client. Finally, the bank cannot argue any unpredictable fundamental change of circumstances to amend the contract according to the principle clausula rebus sic stantibus.

In its judgment of January 11th 2016, the first instance Court concluded that there is no mechanism which expressly prohibits a bank to return the assets to the client. The objection to a summons to pay issued by a bank was removed and the proceedings under the Federal Act on Debt Enforcement and Bankruptcy are ongoing.

Thomas Béguin
Attorney, LL.M Tax

Geneva, January 15th 2016

8 February 2016