FIDLEG SOLUTION - News 1/2019

The show goes on - the criminal side of retrocessions

In issues 11/2018 and 12/2019 we have discussed the regulatory aspects of retrocessions according to MiFID II / MIFIR (here) and FinSA (here). In addition, we also took a look at the civil law aspects. However, this does not mean that the story of retrocessions is over, quite the opposite. Rather, at the end of 2018 it was extended by a significant chapter. In a new, groundbreaking decision, the Swiss Federal Supreme Court also looked at retrocessions from a criminal law point of view – very much to the detriment of the recipients of retrocessions.

WHAT ARE RETROCESSIONS IN CRIMINAL LAW?

As under MiFID II / MIFIR and FinSA and the draft FinSO, the term "retrocession" is not used in the Swiss Criminal Code (SCC). Thus, there is no provision in the entire Chapter 2 of the Swiss Criminal Code on Offences against property (art. 137 - 172ter SCC) which explicitly applies to retrocessions.

The question to be answered is, therefore, whether paying or receiving retrocessions is covered by any of the existing criminal offences. Retrocessions - as under MiFID II/MIFIR, FIDLEG and the Swiss Code of Obligations - are any monetary and non-monetary benefits received by a person because he or she provides a financial service to a third party, such as managing the latter's assets, offering him/her a financial product or advising him/her on financial matters. This includes in particular brokerage fees, commissions, commissions, discounts or other asset benefits. So, the understanding is very broad.

Possible offences are above all misappropriation (art. 138 SCC), fraud (art. 146 SCC) and Criminal mismanagement (art. 158 SCC).

WHAT EXACTLY DID THE SWISS FEDERAL SUPREME COURT SAY?

The landmark decision in question is BGE 144 IV 294 (6B_689/2016) of 14 august 2018 (here). The Federal Supreme Court stated that an asset manager who does not inform his client of retrocessions (and thus does not release them) is guilty of criminal mismanagement pursuant to art. 158 para. 1 SCC.

Criminal mismanagement is defined as:

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  • Any person who by law, an official order, a legal transaction or authorisation granted to him, has been entrusted with the management of the property of another or the supervision of such management, and in the course of and in breach of his duties causes or permits that other person to sustain financial loss is liable to a custodial sentence not exceeding three years or to a monetary penalty.
  • Any person who acts in the same manner in his capacity as the manager of a business but without specific instructions is liable to the same penalty.
  • If the offender acts with a view to securing an unlawful financial gain for himself or another, a custodial sentence of from one to five years may be imposed.

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WHAT HAS EXACTLY HAPPENED?

The judgment in BGE 144 IV 294 is based on the following facts:

X was the sole shareholder and managing director of Y SA, an asset management company based in Switzerland. Y SA managed, among other things, the assets of A and his family. Moreover, X himself was A's guardian.

A had his assets in accounts and deposits with a custodian bank. Y SA had a power of attorney over these accounts and deposits. Neither X nor Y SA informed A or its family members of these payments and Y SA consequently did not issue them to A or its family members.

Since Y SA carried out the asset management for A on the basis of a mandate, the Federal Supreme Court neither questioned nor discussed the obligation of Y SA to account to A for any payments received by third parties pursuant to art. 400 of the Swiss Code of Obligations (CO) - this against the background of the repeatedly confirmed case law (BGE 143 III 348; 138 III 755; 137 III 393). The questions that had to be answered were therefore only

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  • whether X, as a body of Y SA, can be prosecuted under criminal law for Y SA’s failure to account;
  • whether the failure to account constitutes an offence under art. 158 (1) of the Criminal Code.

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The doctrine was divided on this issue, with the majority apparently in favour of criminal liability. The Supreme Court of the Canton of Berne had confirmed the criminal liability according to art. 158 para. 1 SCC in 2013 (decision SK 2012 2018 of 4 July 2013).

So far, the Federal Supreme Court had only decided that bodies of asset management companies have a guarantor status vis-à-vis the company's customers and that the concealment of information in violation of the duty of loyalty can qualify as fraud by omission (6S.23/2002 of 8 April 2002).

From this, the Swiss Federal Supreme Court concluded that the duty to render account constitutes a qualified duty to act, the breach of which may constitute an act of criminal mismanagement pursuant to art. 158 (1) SCC. Thus, in this latest decision, BGE 144 IV 294 (here), the Swiss Federal Supreme Court clearly concluded that the concealment of retrocessions constitutes an act of criminal mismanagement pursuant to art. 158 (1) SCC. The fact that X also acted as guardian and thus probably held an increased guarantor position was not even decisive. And X's argument that he had acted in good faith, since A had waived the release of retrocessions in his asset management contract (as a lump sum, i.e. in ignorance of the actual figures or their parameters), was also not taken into account by the Federal Supreme Court in view of the clear case-law.

So the bottom line is:

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  • Receiving retrocessions without information and releasing them over to the customer constitutes an act of criminal mismanagement.
  • The Swiss Federal Supreme Court has left open whether the bank paying the retrocessions or its representatives are guilty of some form of participation, in particular aiding and abetting according to art. 25 SCC or complicity.

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SO WHAT NEEDS TO BE DONE?

The impact of this judgment should not be underestimated. While one or the other has probably accepted the risk of giving up the retrocessions in the worst case, which he had to give up anyway, due to purely civil law consequences, this behaviour takes on a completely different dimension with this judgement. If the retained retrocessions come to light, not only the retained amounts (and any interest) must be surrendered. Rather, the offender can also be prosecuted under criminal law with a prison sentence of up to three years or with a fine, even if only conditionally (art. 42 et seq. SCC). And if the penalty is imposed, the question still arises as to whether the person in question still fulfils the fit and proper test for a managerial function with a financial institution. This might be questionable, since property offences in particular are fundamentally contrary to the guarantee.

This raises the question of what every financial institution and every representative of a financial institution should do not to be condemned for criminal mismanagement:

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  • Every financial institution is advised to disclose all retrocessions correctly and fully.
  • Based on this, the financial institution is advised to ensure that all retrocessions that have not been legally waived are released in full.
  • Every employee of a financial institution must be advised to ensure that he or she has taken care of the disclosure and issuance should he or she be in contact with retrocessions. Finally, the criminal consequences do not affect the financial institution directly, but the natural person working for this institution.
  • Banks paying retrocessions are advised to ensure that they are not guilty of participation. As far as possible, they shall take precautions to ensure that the recipient of the retrocessions knows that he must disclose them and, if necessary, surrender them.

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THERE IS MORE TO COME…

The next issue of FIDLEG SOLUTION – News will be devoted to the offer of financial services and financial instruments according to FinSA.

Your FIDLEG SOLUTION Team
www.fidlegsolution.ch


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