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Exclusive: Swiss prosecutors seek widening of secrecy law to bankers abroad

[October 31, 2017] By Brenna Hughes Neghaiwi and Anjuli Davies

ZURICH/LONDON (Reuters) - Swiss prosecutors are seeking a court ruling that would make it easier to convict whistleblowers for breaking the country's bank secrecy law wherever they are in the world, legal documents show.

The Swiss Banking Act requires employees of Swiss-regulated banks to keep client information confidential, but a number of staff have leaked account details to foreign authorities in the past decade as Western governments crack down on tax evasion.

In the unpublished documents reviewed by Reuters, Zurich prosecutors have asked the country's highest court to interpret the law so that the secrecy obligation is widened to include people with looser working relationships to Swiss banks and their subsidiaries abroad.

The documents, dated Nov. 21 2016, form the basis for an appeal by the prosecutors to the Swiss Federal Supreme Court against the acquittal last year of former private banker Rudolf Elmer on charges brought under the secrecy law.

Elmer, who headed the Cayman Islands office of Swiss private bank Julius Baer BAER.S until he was dismissed in 2002, later sent documents revealing alleged tax evasion to the anti-secrecy group WikiLeaks and to tax authorities across the globe.

Zurich's upper court ruled last year that the bank secrecy law did not apply to him as an employee of the Caribbean subsidiary, rather than of the parent bank in Zurich.

In their appeal, the prosecutors argue that if they cannot apply the law to people connected to Swiss banks outside the country, this deprives banking secrecy of its substance "with far-reaching consequences that cannot be accepted".

Under Swiss law, no public hearing will be held but the documents show the Federal Supreme Court is considering the written appeal. On June 9, 2017, it invited Elmer's side to make a written response, which his lawyer has since submitted. The court is expected to issue a written judgment next year.

A spokeswoman for Zurich's senior prosecutors declined to comment beyond noting: "It's up to the supreme court to decide on open questions." Julius Baer also declined to comment.

"DEFAMED, CRIMINALIzED AND ISOLATED"

Elmer was arrested twice in Switzerland, in 2005 and in 2011, and spent over seven months in investigative custody.

"I was defamed, criminalized and isolated," he told Reuters, adding that the prosecutors were trying to set an example of what could happen to people who speak out and to their families. "The law in this case has been bent, stretched and, most importantly, abused by the judicial system of Zurich in order to protect its money-making machine."

Switzerland is the world's largest center for overseas wealth management and in recent years has responded to international pressure, especially from the European Union and United States, for greater transparency.

This includes participation in the Automatic Exchange of Information program, an agreement among developed economies which aims to ensure that offshore accounts are known to tax authorities in the account holders' country of residence.

If the appeal is successful, the ruling would have no legal basis in most countries as they have no bank secrecy rules, so Switzerland could not extradite people from the likes of Britain or the United States on such charges. However, accused people would be vulnerable to arrest if they entered Switzerland or could face the stigma of being charged with a crime in their absence.

JAIL TERM

Some lawmakers in the EU are worried that the prosecutors' move, if successful, may deter potential whistleblowers from supplying information on people accused of shifting their wealth to tax havens through accounts protected by secrecy laws.

In the appeal, prosecutors called for Elmer to receive a 36-month jail sentence, 24 of which would be suspended. Last year the Zurich upper court gave him a suspended sentence for forging documents and threatening Julius Baer following his dismissal. Elmer denies all charges.

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Attorney Ganden Tehtong is pictured at her office in Zurich, Switzerland October 26, 2017. Picture taken October 26, 2017. REUTERS/Arnd Wiegmann

One European lawmaker expressed concern over the lack of protection for whistleblowers in Switzerland, saying the aggressive prosecution of Elmer and others confirmed the country had not really changed its ways regarding tax crimes and money laundering.

"We're going to be paying very close attention to this case," said Ana Gomes, who co-chairs the European Parliament's Committee of Inquiry into money laundering, tax avoidance and tax evasion. "We'll be putting pressure on our authorities in the way they deal with Switzerland, and of course the way the Swiss deal with whistleblowers is extremely relevant for us."

Swiss banks employ large numbers of people in London, as well as New York, and a British lawmaker said employees of bodies under UK jurisdiction cannot be subject to an extraterritorial law.

"This would be unacceptable," John Mann, a Labour Party member of parliament's Treasury Select Committee, told Reuters. "We need a position whereby people feel confident to whistle blow wherever they are based. There's a danger this could have ramifications for the Swiss banks in Britain."

SENDING A MESSAGE

The prosecutors argued that a legal precedent is needed to send a message to disgruntled people laid off from Swiss banking groups across the globe. Referring to Elmer in the appeal, they said: "A former banker, disappointed and embittered by his career, perceived himself to be in lawless territory ... and caused great damage."

The law, they argued, does not require that "the contractual activity be exercised under Swiss law" for Swiss bank secrecy to apply. Even contractors, lawyers and consultants who perform work for a Swiss bank internationally should fall under the obligation, they added.

Anti-corruption expert Mark Pieth disputed this in documents submitted by Elmer's lawyer to the court. Should Switzerland extend the Banking Act beyond lenders regulated by the country's FINMA financial watchdog or expand the definition of staff covered, parliament would have to change the law, Pieth said in a legal opinion seen by Reuters.

EROSION OF BANK SECRECY

Bank secrecy has been eroded since Switzerland agreed, beginning in 2008, to transfer details of thousands of UBS UBSG.S clients to U.S. tax authorities. In return, the U.S. government dropped charges against the bank for helping wealthy Americans to dodge taxes.

The scandal was set off by former UBS employee Bradley Birkenfeld, who in 2007 gave U.S. authorities information exposing the methods Swiss bankers used to help clients conceal assets.

In the aftermath, Swiss laws and bilateral treaties were amended to allow greater information-sharing on tax matters. At the same time, however, prison sentences for breaching bank secrecy were increased from a maximum of six months to up to five years.

Whistleblowers and new disclosure standards have proven costly for Swiss banks, which have suffered hundreds of billions of dollars in outflows as a result and become the subject of tax inquiries in a number of countries. Over a third of Swiss private banks have permanently closed.

An attempt to apply bank secrecy to the thousands of people working for Swiss bank subsidiaries abroad would be "way too broad", said Luc Thevenoz, who heads the University of Geneva's Center for Banking and Financial Law.

But if Elmer were found on appeal to have been employed directly by Julius Baer rather than its Caribbean subsidiary, it would be admissible to convict him regardless of where he was based.

"They want to persuade the court that Elmer was an employee of the Swiss entity," Thevenoz said. "If they succeed, I have no problem with the conclusion that Elmer would have been bound by Swiss banking secrecy. If they fail, I don't see how the court can convict him."

(Additional reporting by Mark Hosenball, Oliver Hirt and Joshua Franklin; editing by Rachel Armstrong and David Stamp)

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