Duty of truthfulness in regulatory administrative proceedings and criminal liability – pitfalls in connection with Art. 45 FINMASA
Art. 45 of the Federal Act on the Swiss Financial Market Supervisory Authority of 22 June 2007 (FINMASA) penalises the provision of false information to the Swiss Financial Market Supervisory Authority, self-regulatory organisations, and other organisations and persons entrusted with financial market supervision under FINMASA. Both the intentional and negligent provision of false information is punishable under Art. 45 FINMASA.
Since regulated entities have a duty to provide information as part of financial market supervision, the risk of criminal liability is not merely theoretical. Consequently, lawyers advising clients and in-house counsel in the financial sector should be aware of how to mitigate the risk of criminal liability through the provision of false information. For more details, follow this link to the main article.
Understanding the Impact of Art. 45 FINMASA
Art. 45 of the Federal Act on the Swiss Financial Market Supervisory Authority of 22 June 2007 (FINMASA) penalises the provision of false information to the Swiss Financial Market Supervisory Authority (FINMA), self-regulatory organisations (SROs), and other organisations and persons entrusted with financial market supervision under FINMASA. Even the provision of false information through negligence is punishable.
Art. 45 FINMASA may not be familiar to all lawyers working in financial market law. However, anyone who advises banks, insurance companies, and other financial intermediaries and represents them in proceedings before FINMA or an SRO should be aware of this criminal provision. In any case, Art. 45 FINMASA becomes relevant for lawyers and their clients when FINMA, an SRO, or another person entrusted with supervision requests information from the institution.
This article provides a brief overview of Art. 45 FINMASA, how the criminal authorities apply it and what should be considered vis-à-vis Art. 45 FINMASA when providing information in the context of financial market supervision.
Obligation to provide information in financial market law
The background to the penalisation of false information under Art. 45 FINMASA is the statutory obligation of supervised individuals and entities, according to Art. 3 FINMASA to provide information and documents upon request to FINMA and other supervisory bodies under FINMASA. The obligation to provide information and documents is a central pillar of financial-market supervision as the following provisions highlight:
- According to Art. 29 para. 1 FINMASA, persons and entities supervised by FINMA, their audit firms and auditors, as well as persons and companies qualified or significantly involved in the supervised entities, must provide FINMA with all information and documents it requires to fulfil its tasks. This obligation to provide information relates to all documents available within the sphere of control of the obligated organisation.
- Corresponding obligations to provide information and documents by supervised persons and entities can also be found in Art. 25 para. 1 FINMASA regarding audit firms and auditors appointed by FINMA, as well as in Art. 36 para. 3 FINMASA regarding investigating agents appointed by FINMA.
- Finally, according to Art. 24 para. 1 lit. b of the Federal Anti-Money Laundering Act (AMLA), SROs have a duty to supervise financial intermediaries. The duty of SROs to supervise financial intermediaries creates an obligation of the supervised financial intermediaries to provide information and documents to SROs. This obligation of financial intermediaries is usually explicitly formulated in the regulation of the SROs.
Subject matter and purpose of Art. 45 FINMASA
Art. 45 para. 1 FINMASA carries a punishment of a monetary penalty or imprisonment of up to three years for anyone who intentionally provides false information to FINMA, an audit firm, a supervisory organisation, an SRO, or an agent appointed by the FINMA. Paragraph 2 of the provision carries a fine of up to CHF 250,000 for negligent conduct.
The purpose of Art. 45 FINMASA is to protect the functioning of the financial market. Authorities, in particular FINMA or SROs, should be protected from an inability to perform their duties correctly because supervised institutions fail to comply with obligation to provide comprehensive information and documents.
It must be noted that violating Art.45 FINMASA is an abstract endangerment offence. To contravene Art. 45 FINMASA, companies need not deceive FINMA employees nor impair or specifically endanger the functioning of the financial market. The threshold for criminal liability is low because any information deemed false can be punishable even though there may be no repercussions on the supervision of the financial market.
Offenders
Art. 45 FINMASA is a specific-status offence. Eligible offenders are the persons obligated to provide information under financial market laws. If a legal entity is obligated to provide information, the natural persons acting for it are liable.
Thus, liability primarily falls on the individuals who, in the course of business activities, provide information on behalf of the legal entity (Art. 6 para. 1 of the Federal Administrative Criminal Law Act). Under the concept of criminal liability of organs and executive criminal liability in administrative criminal law, however, individuals acting as organs of the legal entity may also be held liable if they fail to prevent the false statement due to a breach of their duty as guarantors, even if they did not provide the false information themselves (Art. 6 para. 3 of the Federal Administrative Criminal Law Act).
Theoretically, the financial institution can be subsidiarily liable under Art. 102 para. 1 of the Swiss Criminal Code. This would be the case if false information is provided but it is not possible to attribute this act to any specific natural person due to the inadequate organisation of the financial institution. It is unlikely, however, that the false provision of information to FINMA, an audit firm, a supervisory organisation or an SRO cannot be attributed to a specific natural person.
Finally, the lawyers who advise the supervised entity on providing information can also be liable. Although they are not eligible offenders, they may be aiders and abettors or instigators of intentionally providing false information and therefore criminally liable (Art. 45 para. 1 FINMASA in conjunction with Art. 24 et seq. of the Swiss Criminal Code).
False information under Art. 45 FINMASA
The criminally prohibited act appears simple. It concerns the provision of false information to one of the addressees mentioned in Art. 45 FINMASA, in particular FINMA. What is considered "false" or "not corresponding to reality" by the prosecuting authorities, however, can be complex.
According to case-law of the Swiss Federal Criminal Court and the Swiss Federal Supreme Court, the following course of action fulfils the objective elements of Art. 45 para. 1 FINMASA:
- The individual statements made are correct but incomplete.
- The information is complete, but due to its distorted presentation creates a false overall impression.
- The information refers to documents that were not submitted with the information given.
The Federal Department of Finance (FDF), as the prosecuting authority, lists the following additional criteria in its practice:
- Indications that the information is provisional or that the investigation of the facts has not yet been completed do not, in principle, relieve the individuals obligated to provide information from their criminal liability. This applies regardless of the deadline set for providing the information.
With this practice, the FDF wants to prevent the obligation to provide information and documents from being circumvented by references to the provisional nature of the information. Hence, individuals obliged to provide information may not refer to the provisional nature of the information and at the same time omit information that is already known to them or that should be known to them through appropriate inquiries in fulfilment of the duty to provide information.
- A request for information that relates to a specific situation may not be reinterpreted as a request for information relating to the knowledge of the individuals providing information about a specific situation.
The FDF considers the objective elements of Art. 45 para. 1 FINMASA to be fulfilled if the supervised institution only carries out a superficial clarification of a matter and then states that this is the current knowledge of the supervised institution, respectively the individuals providing information and documents for it. Also, FDF's understanding of Art. 45 para. 1 FINMASA is intended to prevent the obligation to provide information from being circumvented by individuals acting for the supervised institution hiding behind their own knowledge and not making further clarifications that might be detrimental to the supervised institution or themselves.
The FDF may examine every sentence of a piece of information for its informational content. The individuals in charge of providing the information must therefore examine not only all the information but also the individual sentences for their completeness and truthfulness. In addition, the FDF assesses the information provided ex post. This retrospective approach is reinforced by the fact that the FDF usually only opens an investigation after FINMA has concluded enforcement proceedings. After FINMA has conducted a comprehensive investigation of the facts, information provided several years earlier may appear in a different light. Therefore, there is a risk that the FDF will assess the provision of information as incomplete or take the view that it gives a distorted picture of reality because the circumstances and the state of knowledge regarding the facts have changed over time.
Intent and negligence
The provision of false information is primarily designed as an intentional offence and, in this respect, a misdemeanour (Art. 45 para. 1 FINMASA). As an intentional offence, the penalty is imprisonment for up to three years or a monetary penalty.
Intent also includes conditional intent (Art. 12 para. 2 of the Swiss Criminal Code). Therefore, anyone who considers it possible that the information creates an overall impression that distorts reality and accepts this consciously is acting intentionally. Intent also exists if the perpetrator consciously chooses to be ignorant of the relevant facts, but provides an answer to FINMA or an SRO.
Negligently providing false information is also punishable (Art. 45 para. 2 FINMASA). Under Swiss criminal law, in this context negligence is defined as failing to recognise the possibility of providing false information in breach of duty or recognising the possibility but trusting, also in breach of duty, that it will be correct (see Art. 12 para. 3 of the Swiss Criminal Code).
If information proves not to correspond to reality, the assumption of providing false information through carelessness in breach of duty is already close at hand. Hence, criminal authorities may quickly raise the accusation of a breach of duty of care against the individuals responsible for providing the information. The fact that negligence is punishable by law significantly extends criminal liability.
The penalty for negligence can be considerable. While fines are generally limited to a maximum of CHF 10,000 (Art. 106 para. 1 of the Swiss Criminal Code), the criminal authority may impose a fine of up to CHF 250,000 under Art. 45 para. 2 FINMASA.
Implications and outlook
As described above, information provided to FINMA or to an SRO must be complete and not create a distorted overall impression. References to the provisional nature of the information provided without clarifying why it is provisional or the reinterpretation of questions about facts into questions about the knowledge of the individuals providing the information are to be avoided.
There is no patent solution for how the risk of criminal liability under Art. 45 FINMASA can be averted. Principles, however, can be derived from the practice of criminal authorities relating to Art. 45 FINMASA that may reduce the risk of providing false information.
- Compliance with duty to keep records under Art. 7 AMLA:
The duty of the financial intermediary to keep records requires complete recording of all transactions relevant under AMLA. Art. 7 para. 1 and para. 1bis AMLA stipulate that the financial intermediary must keep records of transactions carried out and of clarifications required under the AMLA in such a manner that other specially qualified persons are able to make a reliable assessment of the transactions and business relationships and of compliance with the provisions of the AMLA. In addition, the financial intermediary must periodically check the required records to ensure that they are up to date and update them if need be. The frequency, scope, and type of checking and updating are based on the risk posed by the customer.
Compliance with the duty to keep records under Art. 7 AMLA inevitably reduces the risk of false information being provided to FINMA, an SRO, or persons commissioned by FINMA for supervisory activities by ensuring complete and rapid provision of information.
FINMA usually sets short deadlines for the provision of information. Thus, if a supervised entity only complies with the duty to keep records within the short period for providing information to FINMA by subsequently investigating all the relevant facts under high pressure, the risk of providing false information under Art. 45 FINMASA is high.
It cannot be emphasised enough that individuals and financial institutions supervised by FINMA should take all necessary measures to fulfil their duty to keep records. A client should be made aware during consultation that the duty to keep records is not only relevant regarding AMLA but also regarding Art. 45 FINMASA.
- Review each piece of information before providing it to FINMA:
Art. 45 FINMASA must be considered for every piece of information provided to FINMA, SRO and other organisations and persons entrusted with financial market supervision under FINMASA. In particular, FINMA may request information on an informal basis (i.e. in preliminary clarification proceedings and without formal opening of a procedure). False information provided to FINMA in the context of preliminary clarification proceedings, however, is also punishable under Art. 45 FINMASA.
- If necessary, request clarification of questions or the subject matter of the requested information:
The information that FINMA wants must be carefully examined. FINMA's questions can be unclear. Unclear questions from FINMA (or an SRO or a person commissioned by FINMA with an investigation), however, can increase the risk of unclear, irrelevant or even misleading information being provided.
Consequently, unclear questions also increase the risk of providing information that, in the opinion of the FDF (but not necessarily of FINMA's), could be punishable as false information under Art. 45 FINMASA. If a request for information is ambiguous, the supervised person or financial institution should request clarification. Such a request may be justified by reference to the FDF's strict practice regarding Art. 45 FINMASA.
- Request an extension of the deadline to submit the information:
If it is uncertain whether information can be provided that is complete and complies with the duty of truthfulness within the set deadline, an extension of the deadline should be requested.
Once provided, information cannot be remedied by subsequent completion or correction. The given information remains false under Art. 45 FINMASA, even if it is corrected shortly afterwards. Hence, the request to extend the deadline may be justified by reference to the FDF's strict practice regarding Art. 45 FINMASA
- Avoidance of excessive and unnecessary disclosures:
Information provided can be excessive or unnecessary. Reasons for unnecessary information may be that it is drafted out of a misled concern to cover all potentially relevant facts or out of anticipatory obedience.
Such unnecessary information entails a considerable risk. It can give the impression that the supervised institution wants to minimise the relevance of certain facts by making additional, unnecessary statements. This may already be sufficient for the FDF to come to the assessment that the information provided creates a distorted picture of reality. Information, however, that does not relate to the facts to be clarified according to the request is also subject to the duty of truthfulness and thus to Art. 45 FINMASA. Incomplete or distorted information can therefore be punishable under Art. 45 FINMASA even if it is not attributable to the subject of the investigation and is therefore irrelevant to the supervisory organisation requesting information.
- Refusal to provide Information as a last resort:
Art. 45 FINMASA prohibits the provision of false information. It does not, however, penalise the refusal to provide information (Nevertheless, the violation of reporting obligations may be punishable under other provisions. This is particularly true for banks, according to Art. 49 para. 1 lit. b of the Federal Banking Act).
If the supervised person or entity can assume that FINMA will open enforcement proceedings, it may refuse to give information as an alternative strategy, especially if the relevant facts can only be insufficiently collected in an internal investigation and there is a high risk of providing incomplete information. From a regulatory point of view, however, such a step represents the ultima ratio.
In this context, the interests of the supervised organisation and the individuals who could be liable for providing false information do not necessarily coincide. Moreover, due to their contractual duty of loyalty (Art. 321a para. 1 of the Swiss Code of Obligations), the individuals are generally obliged to provide information on behalf of the supervised organisation to the supervisory authority.
For more information on Art. 45 FINMASA and criminal proceedings in Switzerland, contact your CMS client partner or your local CMS experts.
