Introduction
In Switzerland, no financial transaction is completely risk-free. It is always possible to come across unauthorized and fraudulent financial intermediaries in the financial market who deceive investors in order to enrich themselves at their expense.
The Swiss Financial Market Supervisory Authority (“FINMA”) is increasingly made aware of cases of sales in which aggressive methods are used to sell shares in alleged start-up companies[1].
Indeed, when investors lose money, it is usually because they have entrusted their capital to a company which is operating illegally. This usually takes the form of loans or the sale of worthless shares[2].
Potential investors can be contacted by telephone and put under massive pressure to buy. Impressive websites and expensive high-gloss prospectuses from the concerned companies are also used[3].
The purpose of this newsletter is to draw the attention of investors to these fraudulent investments and to explain the role of FINMA and the Swiss criminal authorities in this context.
In order to better understand the issues presented in this newsletter, we will begin by presenting below an example of an unfortunate situation in which unlucky investors may find themselves, if they are not sufficiently informed of the risks that certain investments may present.
Example situation[4]
X Ltd was an investor in projects relating to the construction of geothermal power stations in Germany. To attract predominantly German investors for these projects, the company employed a large number of intermediaries, staged costly promotional events and advertised extensively through an attractive website. Potential investors were promised very high returns.
From its base in Switzerland, X Ltd accepted funds totalling several million Swiss francs. However, the investments proved worthless and investors lost practically all the money invested.
In total, X Ltd raised over 50 million Swiss francs from more than 4,000 investors. Even though the company's investment strategy contained no such proposals, much of this money then was channelled to a subsidiary which then passed on ten million dollars to another company as an unsecured loan.
Following complex investigation procedures in Switzerland and abroad, FINMA had to liquidate several companies in Switzerland, including X Ltd, for accepting client funds without authorization.
In light of the above example, one of the methods that could be used by fraudsters to attract new investors is analysed below from the perspective of legality.
Cold calling
According to FINMA[5], “[p] otential buyers are frequently contacted by telephone and put under massive pressure to buy. The telephone salesmen sometimes operate from foreign call centres. In cold calling scams of this kind, a salesman will claim for example that the company is about to launch an IPO which will increase the value of the shares exponentially”.
As we saw in the example above, these methods are often used by entities that do not have the necessary authorizations from FINMA, to offer investments in securities or financial products, in order to obtain a transfer of assets which will usually be transferred abroad afterwards.
According to our experience, the modus operandi of these entities is generally as follows: once the amounts have been paid by the investors, they no longer show any sign of life and the totality of the sums invested is definitively lost.
In view of the above, the Swiss Federal Court pointed that contacting clients by telephone shortly after having sent them documentation describing the services offered was not in conformity with the principles of Article 11 of the Stock Exchanges and Securities Trading Act (repealed on 1 January 2020[6]), which provided that securities dealers owed a duty of care and loyalty to their clients.
Article 11 of the Stock Exchanges and Securities Trading Act has been replaced by Article 11 of the Federal Act on Financial Institutions, according to which the financial institutions and the persons entrusted with their administration and management must present all guarantees of irreproachable activity, which includes the duty of diligence and loyalty to their clients.
Still according to the Swiss Federal Court[7], called calling represents an unacceptable intrusion into people's private lives; the caller thus solicited is forced, given the insistence of the person who wants to sell him financial products, to behave with extreme rudeness to interrupt the conversation.
The Swiss High Court also considers[8] that cold calling creates a surprise effect, and that the potential client is not prepared, whereas the person who disturbs him has often been trained to face such situations.
Therefore, Swiss financial institutions are not permitted to carry out cold calling, as this would violate the principle of the guarantee of irreproachable business activity in accordance with Art. 11 of the Federal Act on Financial Institutions.
FINMA’s role in this context
According to the Act on the Swiss Financial Market Supervisory Authority, FINMA’s mandate is to protect creditors, investors and insured persons and to contribute to protecting the operational stability of the financial markets[9].
In order to fulfil this statutory mandate, FINMA monitors authorised institutions – banks, stock exchanges (financial market infrastructures), securities dealers, funds (collective investment schemes) and insurance companies. Supervision of other professional financial service providers (e.g. asset managers and companies offering credit or leasing arrangements) is limited to ensuring that they comply with the rules on money laundering[10].
FINMA is also responsible for enforcing the authorisation requirements and professional disqualifications set out in financial market legislation. In other words, FINMA takes action against individuals and companies, which operate without the required authorisation[11].
FINMA does not have sole responsibility for enforcing the authorisation requirements set out in financial market legislation. It is the job of the criminal prosecution authorities to prosecute those responsible for illegal financial intermediation, as briefly explained below.
Administrative criminal law
Violations of financial market laws are a matter of criminal law. More specifically, it is the administrative criminal procedure, which is applicable to these offences and not the Swiss code of criminal procedure (only applicable to violations of the offences contained in the Swiss Criminal Code)[12].
We note that in principle, violations of financial market laws are punishable, depending on the case, by a custodial sentence of up to three years, a monetary penalty or a fine.
As an example of offence and in connection with the example mentioned above, we can think of Article 44 of the Act on the Swiss Financial Market Supervisory Authority which provides that “anyone who intentionally carries out an activity that is subject to authorization […] under the financial market laws […] without authorization […] shall be punished with a custodial sentence of up to three years or a fine”.
Thus, if FINMA has a well-founded suspicion that such a criminal offence has been committed, it will file a criminal complaint with the legal department of the Swiss Federal Department of Finance (“FDF”)[13].
Indeed, the Legal Service of the FDF prosecutes and punishes violations of the criminal provisions contained in financial market laws[14].
The aim of administrative criminal proceedings is to establish whether criminal acts have been committed and, if so, to identify the perpetrators and to condemn them. To this end, the FDF's Legal Service conducts investigations and collects evidence, as a prosecutor would do in the case of offences under the Swiss Criminal Code.
Criminal law
Despite the above-mentioned elements, we point out that fraudulent schemes carried out by natural persons disguised as licensed financial institutions could also constitute the offence of breach of trust (Article 138 SCC) or fraud under the Swiss criminal code (Article 146 SCC)[15].
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Conclusion
In conclusion, potential investors must be particularly cautious when they are contacted by so-called financial institutions offering particularly profitable investments, especially when contacts with these entities are made via the cold calling method.
Our Experience
lecocqassociate provides a full range of financial regulatory, corporate and commercial advice in relation to the structuring and incorporation of entities. The group is gaining a reputation for outstanding service in the areas of data protection and online reputation management, as well as cyber security, blockchain and crypto asset regulation.
This newsletter is for information purposes only. It does not constitute professional advice or an opinion. Please contact us for any questions.
Footnote
[1] Report of FINMA of 1 August 2018 (“How investors can protect themselves against unauthorized financial market providers”), p. 8.
[2] For more details: https://www.finma.ch/en/finma-public/schutz-vor-anlagebetrug/kundenschutzbericht/.
[3] Report of FINMA of 1 August 2018 (“How investors can protect themselves against unauthorized financial market providers”), p. 8.
[4] Report of FINMA of 1 August 2018 (“How investors can protect themselves against unauthorized financial market providers”), pp. 6 and 7.
[5] Report of FINMA of 1 August 2018 (“How investors can protect themselves against unauthorized financial market providers”), p. 8.
[6] The Stock Exchanges and Securities Trading Act was repealed on 1 January 2020 and replaced by the Federal Act on Financial Institutions.
[7] Decision of the Swiss Federal Court of 19 November 1999, in: newsletter 40 of the Swiss Federal Banking Commission, p. 94.
[8] Decision of the Swiss Federal Court of 19 November 1999, in: newsletter 40 of the Swiss Federal Banking Commission, p. 94.
[9] Article 5 of the Act on the Swiss Financial Market Supervisory Authority (“FINMASA”).
[10] Article 1 FINMASA.
[11] Article 44 FINMASA.
[12] See in particular the Federal Act on Administrative Criminal Law.
[13] Article 50 para. 1 FINMASA.
[14] Article 50 para. 1 FINMASA.
[15] ATF 133 IV 21, para. 6.2; ATF 142 IV 153, para. 2.2.2.
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