May a bank refuse to execute its client’s transfer instructions for reasons of tax compliance?

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I. Introduction

Recently, the appellate court of the Canton of Geneva has rendered three decisions ordering a bank (apparently the same bank in all cases) to execute the clients’ transfer/payment instructions. A first decision was rendered in summary proceedings on 21 October 2016 while the other two, which are very similar, were rendered in proceedings on the merits on 2 December 2016. This article summarises one of the latter decisions which was published on 16 December 2016.

II. Facts

A Dutch citizen opened a bank account with a bank in Geneva in 1997. At that time he was living in France; he has not changed domicile since then. In June 2013, the bank informed the client that it was obliged to draw his attention to the necessity for him to declare his assets to the relevant tax authorities. A “declaration of tax conformity” was enclosed with the letter. The bank imparted the client a deadline to return the filled out declaration, which the client never did.

Later on, the client instructed the bank to transfer his assets to a bank in Dubaï and close his account. Failing the completed “declaration of tax conformity”, the bank refused to execute the instructions. The client seized the first instance tribunal in January 2015 and requested it to order the bank to execute his instructions. The tribunal admitted the client’s claim and ordered the bank to execute the transfer. The bank challenged the tribunal’s decision before the appellate court.

III. Nature of the legal relationship

The relationship between the client and the bank is one of mandate and of bailment.
The agent in a mandate agreement has the obligation to comply with the principal’s instructions and is liable to the principal for the diligent and faithful performance of his duties whereas the bailor may reclaim the bailed chattel at any time, even where a fixed term was agreed for the bailment. In this respect, the appellate court referred to two summary decisions in so called “clear cases” in 2015 in which the Federal tribunal held that the client of a bank in Switzerland was entitled as per the applicable civil law rules to retrieve his assets in cash without having to justify his tax compliance.

IV. The bank’s arguments to oppose the client’s instructions

A. General Conditions

The bank’s general conditions provided that the bank was notably entitled, at any time and without motivating its decision to refuse “operations”, to restrict such operations or to impose particular conditions on such operations.

The bank relied on this clause to argue that it was entitled to refuse to wire the client’s assets elsewhere than on an account in the client’s name with a bank in France or upon presentation of documents evidencing that said assets had been declared to the French tax authorities.

The appellate court rejected this argument for the general conditions did not explicitly address the restitution of assets which could not objectively be encompassed within the term “operations”. Besides, assuming the restitution of the client’s assets was explicitly addressed, the validity of such a clause would be doubtful in light of the mandatory rule governing the restitution of assets with regard to the bailment agreement.

B. Subsequent impossibility to perform

The bank further argued that it could not execute the client’s instructions as such execution would make it an accomplice of criminal misdemeanours as per French law as a result of which it would be in breach of its duty to act irreproachably as per Swiss legal and regulatory provisions.

In its decision, the appellate court examined the content of provisions enshrined in the anti- money laundering legislation as well as regulatory provisions (ordinances and circulars) issued by the Swiss Financial Market Supervisory Authority (“FINMA”) by virtue of the delegation clause contained in the Financial Market Supervision Act.

The court first noted that FINMA ordinances were part of Swiss law insofar as they were published in the classified compilation of Swiss laws (“Registre systématique”).
It went on to examine a press release of 22 October 2010 called “FINMA position paper on risks in cross-border financial services” and a draft amended circular 2008/21 dated 1 March 2016 entitled “Risques opérationnels – banques”.

According to the former, “[t]he Swiss Financial Market Supervision Act does not contain any provision that supervised institutions must observe foreign law. However, breaches of foreign regulations may still be of relevance under the various acts of supervisory legislation. For instance, violating foreign rules may breach the requirement that business be conducted in a proper manner. In addition, supervisory rules regarding organisational structure require institutions to identify, mitigate and monitor all risks in an appropriate manner, including legal and reputational risks, and establish an effective system of internal control. Naturally, this also applies to cross-border business”.

Pursuant to the latter, which was due to come into force on 1 August 2016 but which had not (yet), when banks or their subsidiaries provide cross border services or distribute financial products within the frame of cross border operations, the risks deriving from foreign (tax, criminal, anti-money laundering etc.) laws ought to be “taken into account, limited and controlled” appropriately. Furthermore, the FINMA “expects banks to abide by foreign supervisory laws”¹. The appellate court pointed out that the consultation report relating to this draft circular had not been published on the FINMA’s website and that the version of the circular actually published was a previous one. It also raised the absence of indications of the FINMA as to how banks are to control the risk of taking part in a criminal offence.
The appellate court expressed the view that both the press release and the draft circular were to be placed in the context of awareness that Swiss banks are not immune from criminal proceedings abroad as a result of banking relationships they opened or maintained if the assets deposited in the frame of such relationships were not known by the relevant tax authorities. The appellate court opined that this did not amount to a change in Swiss legislation.

Besides, it referred to scholars who opine that the principle of the irreproachable activity cannot justify the bank’s refusal to execute the client’s instructions to close an account by way of withdrawal of the funds in cash or transfer to another bank in another jurisdiction for which tax compliance is not a concern.

The court then examined the applicable French legislation regarding tax fraud and pointed out that the relevant provision already existed at the time when the client had opened the bank account in 1997 even though the penalties were then less severe. The appellate court denied the alleged subsequent impossibility due to the fact that French law and its implementation had become more stringent. No important amendment had occurred either in Swiss law (there is in particular no provision prohibiting Swiss banks from transferring assets the tax conformity of which would not be ascertained) or French criminal law since 1997. It also referred to a French anti-money laundering provision which it pointed out was effective since 1996 (the penalties had nonetheless been amended in 2002).
According to the court, the bank could already be held as criminally liable for accepting the client’s funds at the time of opening the account and for managing them, such that the subsequent impossibility argument could not be admitted.

C. Illegal instructions

The appellate court further rejected the alleged illegality of the client’s transfer instructions. With reference to scholars, the appellate court held that the fact that instructions lead to understand that the client is not willing to regularise his tax situation does not make such instructions illegal.

D. Taking into account of foreign law

The Swiss International Private Law Act (the “SPILA”) provides that when legitimate and manifestly prevailing interests with regard to the conception of Swiss law so require, a mandatory provision of a law other than that designated by the SPILA may be taken into account provided however that there is a close connection with that law.

While the bank relied on this provision to argue that French laws prohibiting tax fraud ought to be taken into consideration, the court found that it had not been ascertained that French laws aimed at fighting tax fraud were so fundamental in the French legal system that they ought to be considered as “public order” rules. It further expressed the view that should such laws be considered as rules of the French “public order”, it remained that taking foreign laws into account while applying Swiss law was exceptional, thereby referring to the very restrictive federal jurisprudence. It referred to scholars according to whom it was doubtful that the SPILA allowed to take into account foreign legal provisions which only pursue economic or tax purposes. It also pointed out that three proposals made by Federal Council with a view to increasing the due diligence obligations of financial intermediaries had encountered strong opposition and that until very recently tax fraud was not enough to lift the banking secrecy. As a result, the court refused to take into account French law provisions while applying Swiss law.

E. Breach of good faith

a. “Clausula rebus sic stantibus”

“Clausula rebus sic stantibus” is an exception to the principle of “pacta sunt servanda”: it allows to adapt a long term contract when the circumstances have changed to such a degree that the respective obligations of each party have become so unbalanced that a party demanding performance from the other manifestly abuses his right.

The bank claimed that the nature, the extent and the consequences of the legislative evolution (which itself could be anticipated) could not be anticipated and that it could not be expected to execute instructions which would considerably increase its risk of being punished.

The court denied the applicability of the “clausula rebus sic stantibus” exception and stressed again that both Swiss and French legislations had not been fundamentally amended since the beginning of the banking relationship. The court also stressed that since then the bank had never invoked the effects of French laws as against its client.

b. Abuse of right

Lastly, the court denied the alleged abuse of right by the client who instructed the bank to transfer his funds: an abuse of right ought to be admitted with utmost restraint and the client’s interest to retrieve his funds was legitimate and could therefore not be regarded as abusive.

V. Take aways

The decision of the appellate court is not final and the bank may file a (last) recourse before the Federal tribunal. This is however no reason not to draw initial conclusions, particularly given that the appellate court motivated thoroughly the reasons leading to its decision.

In an environment where banks show extreme caution to preserve their own interests in an everlasting difficult economic context and where fighting tax fraud is very fashionable, one should not lose sight of the basic principles of the agency and bailment contracts and thus the clients’ interests.

Banks’ general conditions may not protect the bank against all risks and should they do, their validity may be challenged in the light of compulsory rules of law. Any change in the regulatory framework in Switzerland (particularly FINMA ordinances) should be looked at closely as so should its interaction with civil law provisions.

Unless overturned, this decision leaves the door open for banks to argue that the legislation of the State where taxes ought to be paid on the assets held for the foreign client’s account have changed and that, as a result, they now incur a risk of facing criminal charges which would prevail over their obligation to execute their clients’ payment/transfer instructions.
In any event, this decision will most likely not put an end to the need for clients seeking execution of their payment/transfer instructions to sue their bank as the latter will be desirous to show foreign authorities that they acted on the basis of judgments and that they had accordingly no choice but to pay out/wire their clients’ funds.

¹A slightly amended wording of this draft circular is included in the new version of the circular which will be effective as from 1 January 2017.

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