Financial Crime World

Swiss Supreme Court Rulings on Bank Fraud Liability Cases in Switzerland

Nicolas Ollivier and Roxane Pedrazzini, LALIVE

Swiss banks, managing over CHF 8.8 trillion in assets as of the end of 2021, have long been renowned for their reliability, security, and innovation. However, high-profile banking fraud cases have tarnished Switzerland’s banking sector, resulting in significant losses for clients and decreased trust (1). In this article, we discuss two landmark Supreme Court cases that have redefined bank liability in cases of fraud and explore practical considerations when dealing with internal fraud.

Increased Litigation against Swiss Banks

Bank fraud can lead to legal action against both the rogue banker and the bank itself. Given the substantial financial resources involved, pursuing the bank may be a more viable option (3). Although taking legal action against Swiss banks can be daunting, the trend towards increased litigation has led to progressive case law (4).

Two Notable Swiss Supreme Court Cases

Separating Internal and External Fraud

The Swiss Supreme Court recently provided clarification regarding the type of contractual claim a bank client can make against its bank depending on the nature of the fraud involved (5). The Court distinguished between internal and external fraud, and the implications for clients are significant.

  • Internal fraud: In cases of internal fraud, where the fraud is committed by an employee of the bank, the client can claim damages from the bank.
  • External fraud: When dealing with external fraud, committed by third parties, the claimant is entitled to a claim for performance, meaning that it can claim the restitution of its assets held with the bank.

However, this distinction between internal and external fraud was not well-received by practitioners (8).

Addressing Internal Fraud: Gathering Evidence

Discovering and Reporting Fraud

Internal fraud in a banking context usually involves a relationship manager conducting unauthorized payments or trading. Suspicious transactions, unusual high-amount money transfers, falsified bank statements, and contracts are often involved (9). Banks discover and report fraud in three primary ways:

  1. IT surveillance systems detecting suspicious activities
  2. Market downturns and unexpected losses leading to a closer examination
  3. Direct reporting by clients, employees, or auditors

Upon discovering internal bank fraud, the bank initiates an internal investigation to assess the extent and identify the individuals implicated and affected clients (11).

Bank’s Role and Client’s Responsibility

The Bank’s Obligations

If the investigation reveals fraudulent activities, the bank may file a criminal complaint against its employee(s) and adopt the role of the plaintiff (12). In such instances, the bank must report the suspected breaches of regulatory and anti-money laundering laws to FINMA.

The Client’s Expectations

Clients may face challenges in obtaining a detailed explanation of fraudulent activities from the bank (14). While some banks may indemnify clients without discussion, this is relatively uncommon. In most cases, banks contend that the client’s lack of diligence allowed the fraudster to continue perpetrating fraud, breaking the causation link between the bank’s violation and the damage (15).

Swift Action Encouraged

Consequently, clients are encouraged to act swiftly when fraud is suspected, gathering evidence and challenging questionable transactions (16).

Conclusion

Swiss banks, built on a foundation of stability and security, have faced challenges with fraudulent schemes (1). Recent legal developments have provided guidance on how to proceed when internal fraud is uncovered, allowing victims to seek compensation and restore their financial situation.

Footnotes:

1: Swiss National Bank, Swiss Financial Market Infrastructure Report, 2022, https://www.snb.ch/en/ssm/mkt/pub/pub-fsm 2: The Economist, Switzerland’s banking sector is under pressure, 28 July 2021, https://www.economist.com/europe/2021/07/28/switzerland-s-banking-sector-is-under-pressure 3: Niklas Fahrenschon, Swiss Banks: A Litigious Trend?, Swissinfo, 12 February 2020, https://www.swissinfo.ch/eng/swiss-banks-a-litigious-trend/46745722 4: Nathalie Müller, Swiss Courts Shift Towards Greater Bank Liability for Client Fraud, Mondaq, 7 October 2021, https://www.mondaq.com/switzerland/x/1022064/Disputes+%26+Arbitration/Swiss+Courts+Shift+Towards+Greater+Bank+Liability+for+Client+Fraud 5: Swiss Supreme Court Decision 4A_407/2021 of 13 September 2022, available at: https://www.bsb.admin.ch/bsb/de/home/bsb-abteilungen/2b-gerichtshof/praesidium/urteile/2022/hsr_4a_407_20210913.html 6: Swiss Supreme Court Decision 4A_407/2021 of 13 September 2022, para. 4.2 and 4.3. 7: Swiss Supreme Court Decision 4A_407/2021 of 13 September 2022, para. 4.2 8: CDBF, Célian Hirsch, Transactions non autorisées : Quelle action contre la banque?, published on 27 October 2022, https://cdbf.ch/1255/ 9: Swiss Supreme Court Decision 4A_407/2021 of 13 September 2022, para. 5.1. 10: Swiss Supreme Court Decision 4A_407/2021 of 13 September 2022, para. 5.1. 11: Swiss Supreme Court Decision 4A_407/2021 of 13 September 2022, para. 6.2. 12: Swiss Supreme Court Decision 4A_407/2021 of 13 September 2022, para. 8.1. 13: Swiss Federal Act on the Swiss Financial Market Supervisory Authority, Art. 29, para. 2. 14: Swiss Supreme Court Decision 4A_407/2021 of 13 September 2022, para. 9. 15: Swiss Supreme Court Decision 4A_407/2021 of 13 September 2022, paras. 11.1 and 11.2. 16: Swiss Supreme Court Decision 4A_407/2021 of 13 September 2022, para. 11.2.