Bern, 4 October 2017
Today marks the last day of my 10 day visit to Switzerland. I would like to take this opportunity to share some of the preliminary finding and recommendations. Before going any further, I would like to thank the Government of Switzerland for its full cooperation before and during the visit and wish to express my gratitude for the open dialogue and all valuable exchanges I had with a broad range of stakeholders including exchanges with private financial institutions on the integration of human rights in their policies. I am grateful for all the information that was shared with me and for the numerous insights I received from various interlocutors.
The purpose of my visit to Switzerland was to collect information and examine issues falling within the scope of my mandate and, more especially, to identify good practices, challenges and gaps that could potentially be addressed. In March 2017 the Human Rights Council requested me to pay particular attention to the issue of illicit financial flows and human rights1, therefore a key focus of my mission was to study the policies and efforts deployed by Switzerland with the view to curbing the phenomenon. In this context, I had a closer look at taxation policies and tax evasion through a human rights lens, observing their specific impacts on the enjoyment of human rights. The second focus area of this visit was to examine the integration of human rights policies and human rights due diligence in public and private financial institutions.
Illicit financial flows as an international human rights issue
What are illicit financial flows and how do they undermine the enjoyment of human rights? Illicit financial flows are financial transfers of an unlawful nature: These can be for example funds deposited offshore in order to evade taxes, which deprive states from needed resources to ensure the realization of rights such as to education, food, housing and health care. The assets can also steam from other criminal activity, such as corruption, misappropriation of public funds, trafficking of persons, drug trafficking or illegal arms trade. It is obvious that such activities undermine the rule of law, good governance and a wide range of human rights.
As the so-called Panama Papers scandal has underlined, more prone to siphon money abroad are the rich, corporate and political elites and their entourage. Among them there are also human rights abusing rulers, the Abacha’s, Marco’s, Duvalier’s and Ben Ali’s of today. It is obvious that States have to make concerted efforts to make sure that criminal conduct and robing people of public resources does not pay off and that stolen assets are returned to their legitimate owners.
It has been estimated that the total volume of illicit financial flows leaving developing countries amounts to over 1 trillion per year2.This is more than ten times the development assistance provided to these countries. While illicit financial flows affect all countries, including European countries that struggle to fund their public health and social security systems, their impact on the enjoyment of human rights is in particular severe in low income countries, which are struggling to fund essential public services.
Illicit financial flows are a global problem affecting developed countries as developing countries, countries of origin and of destination. They are facilitated by weak institutions and lack of good governance in countries of origin and financial opacity and weak systems to detect them in countries of destination. Reducing illicit financial flows is a matter of shared responsibility. Therefore one has to study the phenomenon from different angles. This is why I have undertaken this year as well visits to Tunisia and to Panama to be able to have a broad based understanding of the different challenges countries face in reducing them.
Switzerland’s policies to curb illicit financial flows
The Swiss financial centre is a leading global location for cross-border management of private assets, with a market share of 25 percent. Its financial sector contributes 9.1 per cent to the GDP and assets held in Swiss banks by non-resident custody account holders amount to 2.92 trillion CHF3. Switzerland is also a hub for commodity trading, with an estimated global market share of 35 per cent for trade of crude oil, 50 per cent for sugar and about 60 percent for coffee and metals such as zinc, copper and aluminium4.The commodity trading industry closely depends on the services of local banks which provide financing.
With leadership comes responsibility. It is my view that Switzerland can play a key role in curbing illicit financial flows and can also become a frontrunner in integrating human rights in the public and private financial sector. Switzerland’s official human rights strategy stresses that its reputation rests on the credibility of its commitment to human rights, which depends on the coherence of the country’s domestic and foreign policies5. This applies of course as well to its policies relating to illicit financial flows, taxation and its financial sector.
Curbing tax evasion of individuals
My general impression is that official policies in relation to illicit financial flows have seen a positive change over the years. In the 2030 Agenda for Sustainable Development all States have pledged to reduce significantly illicit financial flows by 2030. Since 2008, many initiatives have been undertaken in Switzerland to restore the reputation of its banking sector, which has suffered under revelations that banks domiciled in the country assisted foreigners in tax evasion or lacked adequate due diligence procedures to prevent that politically exposed persons can use its jurisdiction to hide stolen assets.
Before 2009 there was widespread cross-border tax evasion by foreign nationals from various jurisdictions facilitated by banks operating in Switzerland. The data relating to tax evasion by US tax payers is revealing in itself. In 2009 UBS reached a 770 million USD settlement for facilitating tax evasion of US tax payers and by August 2013 US authorities had started investigations against 12 additional Swiss financial institutions. By the end of January 2016, 76 further banks operating in Switzerland had entered into non-prosecution agreements because they had reason to believe that they had committed tax-related criminal offences under the law of the United States in connection with undeclared accounts of US residents. The list of banks includes Swiss branches of many well-known international commercial banks. These non-prosecution agreements include statement of facts providing details about how the respective banks or client relationship managers working for them had organised tax evasion schemes for their clients. Under the so-called “Swiss bank programme” respective financial institutions would receive a penalty, based on the value of the assets held in undisclosed accounts. In total penalties have amounted to more than 5.5 billion USD6.
Yet as the Chief Executive Officer of the Swiss Financial Market Supervisory Authority (FINMA) has pointed out in April 2016, despite significant efforts in adopting legislation and improving procedures to detect suspicious transactions, the risks that the Swiss financial market continues to be abused for the purpose of money laundering is not fully over. This is in particular highlighted by the involvement of several Swiss banks in the Petrobas corruption scandal and in the suspicious cash flows linked to the Malaysian sovereign fund 1MDB. Particularly troubling is the fact that these events are not from years ago – the money was still accepted until quite recently, that evidence points to very obvious cases of corruption and that the sums are vast with individual transactions running into hundreds of millions, which should have triggered red flags in concerned financial institutions7. At the same time, I would like to highlight that the investigation of the case was triggered by a report of a suspicious transaction by a Swiss financial institution to its financial intelligence unit. For developing economies like Brazil and Malaysia where people earn a monthly average income below USD 1.000, these amounts that were lost are very significant.
Media reports about Swiss financial institutions suspected to be involved in facilitating tax evasion or being used for money laundering have continued to appear in 20178. Both, effectiveness and speed with which stolen assets can be returned are of paramount importance. In addition it is important that sanctions to those financial institutions that have failed to exercise due diligence are imposed in a timely, transparent and proportional manner in order to make sure that neither robbing funds, nor hiding them pays off.
I welcome that Switzerland and its financial institutions will be participating as of 1 January 2018 with 38 states and territories in the Automatic Exchange of Information for Tax Purposes (AEOI). The agreement requires Switzerland to provide to the concerned States once a year the balance of accounts with Swiss banks held by foreign nationals. In reciprocity Switzerland receives information about accounts held by Swiss residents from participating States. On 27 September 2017 the National Council endorsed bilateral agreements with 39 countries. Switzerland also ratified in 2016 the Convention on Mutual Legal Assistance in Tax Matters of the Council of Europe and the OECD that allows for spontaneous exchange of tax information.
The introduction of automatic exchange of tax information is an important step to combat tax evasion, and in the future it will make it difficult for foreign nationals living in participating countries to hide undeclared assets in Swiss bank accounts. My main concern is that the new system could remain an ineffective tool for curbing tax evasion in certain developing countries that lack the technical requirements to participate in the new system. Switzerland should consider expand the number of developing countries participating in the new global standard by providing technical assistance and allow low income countries to implement gradually the provision of taxation information. The participation of developed and developing countries is crucial in order to enhance transparency and international tax cooperation at a global level in line with Switzerland’s commitments and international agenda such as the SDGs and the 2015 Addis Ababa Action Agenda.
Since AEOI can either be achieved by ratifying a multilateral instrument, the Multilateral Competent Authority Agreement, or by concluding bilateral agreements this international standard can be implemented at different speeds, depending on the selected avenue, the first one being the quickest. The high requirements set by the OECD in terms of confidentiality and data management from their counterparts remain an important difficulty for certain countries especially those facing challenges in terms of governance and the rule of law. Regrettably it cannot be fully ruled out that in certain cases information provided to foreign tax authorities is used for other purposes than investigating tax offences.
By requesting full reciprocity from its counterparts when entering in data exchange agreements - which implies the availability of a certain level of administrative and technical capacities and structures – Switzerland makes it challenging for developing countries to cope with this new standard, although it is unlikely that many Swiss nationals will have strong incentives to hide assets in least developed countries to evade taxes.
Measures to avoid illegal money entering the country are central to an effective money laundering strategy. The Swiss Anti-Money Laundering framework includes additional due diligence requirements when dealing with politically exposed persons in order to prevent dirty money to be deposited in Swiss accounts. As bank secrecy does not apply in the context of a criminal offense, financial intermediaries have the duty to report presumably illicit activities to the authorities.
In 2016 Switzerland underwent a peer review to analyse the level of compliance of its money laundering system and policies with the 40 recommendations of the Financial Action Task Force. FATF concluded that the country was compliant with 11 recommendations, largely compliant with 21, partly compliant with 13, and non-compliant with three recommendations.
The Money Laundering Reporting Office of Switzerland (MROS) received 2,909 suspicious transaction reports in 2016 relating financial transactions of a value of 5.32 billion Swiss Francs. After investigating the notices received 71, 3 % cases were forwarded to judicial authorities. MROS is not in a position to conduct any kind of investigations without a report from a financial intermediary. Therefore, its investigating powers are directly linked to the reporting by financial intermediaries, which limits its actions. Yet, currently the overwhelming number of suspicious transaction reports are received from banks, however only very few fiduciaries report suspicious transaction to MROS. I support ongoing efforts of the Swiss authorities to encourage all financial intermediaries to systematically submit suspicious transaction reports to MROS.
In all cases reported to MROS 48% of financial intermediaries’ clients are domiciled outside Switzerland, therefore mutual legal assistance and effective international cooperation is essential to combat illicit financial flows. Requests for legal assistance by foreign countries are as well the most important source of judicial prosecutions, followed by cases forwarded to prosecution authorities by MROS.
Repatriation of stolen assets
The commitment of the Swiss Government to curb illicit financial flows is underlined by its efforts to freeze and return illicit assets deposited in its jurisdiction belonging to authoritarian rulers. Over the last 30 years, Switzerland has returned two billion dollars of illicit assets pertaining to politically exposed persons and frozen suspicious assets valued at hundreds of millions of dollars.
In 1986 the Federal Council decided to freeze several millions of assets that had been deposited by the former Philippine ruler Ferdinand Marcos when he was forced into exile. Since then Switzerland has refined its policies, and adopted in December 2015 the Federal Act of Freezing and Restitution of Illicit Assets Held by Politically Exposed Persons providing a robust legal basis for the Federal Council to freeze, confiscate and return stolen assets. The law allows as well the freeze of assets when the country of origin is unable to satisfy the requirements for mutual legal assistance owing to the total or substantial collapse, or the impairment, of its judicial system. The law also foresees that the restitution of assets is to improve the living conditions of the inhabitants of the country of origin.
I would however like to note a limitation of the Federal Act related to the freezing of stolen assets. According to its Article 3 (2) a) assets can under this law only be frozen if “the government or certain members of the government of the country of origin have lost power, or a change in power appears inexorable.” In other words the Swiss state cannot freeze assets of foreign politically exposed persons under this law while they are still in power, except if such freezes are made on the basis of an international sanction regime or on the basis of a request for mutual legal assistance in criminal matters from the country of origin, which is rather unlikely to be received in such situations. There is a risk that doing business with authoritarian rulers may still pay off as long as they are firmly in power, and that exit strategies by banks are only implemented when it is likely that their regime will collapse. Such incentive structures do not only exist for financial institutions in Switzerland, but as well in other countries.
I have been informed during my visit that Switzerland is often faced by challenges to prove that assets suspected to have been misappropriated are of an illicit nature, in particular, if evidence from the countries of origin is not forthcoming or criminal proceedings against politically exposed persons accused of corruption or misappropriation of public funds are stopped abroad. In addition due process standards in Switzerland which allow account holders of stolen assets to challenge freezing and expropriation decisions result partly in time consuming legal procedures before Swiss courts. The Swiss authorities face occasionally also difficulties to guarantee that assets returned are used for the benefit of the population in line with the human rights obligation of States to ensure that maximum available resources are devoted to the realization of economic, social and cultural rights. It is important that the people from whom the funds have been stolen receive them back in a timely manner, that they have a say about their final use, and that there is full transparency about their final use after their return. Taken together these challenges make the return of stolen assets often a lengthy process.
It is my impression that there is a clear political will in Switzerland to return stolen assets to the legitimate owners. This is also demonstrated by technical assistance that Switzerland has offered to countries that have requested the return of stolen assets. Indeed, I would encourage other countries that have received stolen assets to follow the Swiss example and adopt similar policies and legal regulations to facilitate their freeze and return and report annually in public about the amounts frozen and returned.
Many countries from which assets have been stolen are going through transitional periods, dealing with past atrocities. When the regulatory authorities or criminal courts find that financial intermediaries have failed to exercise the required due diligence when receiving or managing those funds, human rights victims of the country concerned need and deserve an explicit public apology from the respective financial institutions. This would be an important step in rebuilding trust in the context of transitional justice and may often be similar important as the actual return of the stolen assets. Official policies towards this end are, in my view, desirable and necessary.
Ensuring accountability, transparency and fairness in the financial sector
A balanced and nuanced role of the state is of paramount importance to ensure accountability, transparency and fairness in the financial sector when dealing with human rights abuses and illicit financial flows. The supervision of Swiss banks through self-regulatory norms set by the Swiss Banking Association and regulation by the Swiss Financial Market Supervisory Authority (FINMA) is therefore crucial. Supervision and regulation is at the core of FINMA’s activity, while enforcement is rather envisaged “as last the last resort” by the institution9. Financial institutions need to receive strong external incentives in terms of what they can and cannot do.
Investigations of recent cases show that the majority of banks fulfil their duties under the Anti Money Laundering Act of Switzerland, but a minority do not. In the Petrobras case for instance, FINMA has revealed that 75% of Swiss banks involved were in conformity with Swiss legal prescriptions in applying their money-laundering rules. However, it noted that for the remaining percentage of banks “there (were) concrete indications that the measures those banks had in place to combat money laundering were inadequate”10. FINMA has dissolved a bank, withdrawn the fiduciary licences of companies and ordered the disgorgement of illegally generated profits in the context of enforcement.
It is my view that the staffing, resources and powers of FINMA need to be proportional to the size of the Swiss financial market and the volume of assets managed by its financial institutions. FINMA should have sufficient capacities to supervise all banks and financial intermediaries adequately irrespectively of their size.
I welcome that FINMA published in 2011 an investigation on the due diligence obligations of Swiss banks handling assets of politically exposed persons, indicating that the banking supervisory authority initiated administrative proceedings against four of the audited 20 banks where serious gaps on the exercise of due diligence were found. However, the public wonders which banks had serious flaws in their due diligence procedures and in which cases “clarifications were carried out solely with a view to the bank’s own reputation, with little consideration being given to the risk of money laundering,” as this information was not made public11.
I also commend FINMA for publishing since 2014 annual enforcement reports and welcome that FINMA has started to publish as well the names of concerned financial institutions in press statements related to the most egregious cases of non-compliance. Yet, I regret that its enforcement reports do not yet specify the names of the financial institutions that have been subjected to enforcement action. In my opinion, the purpose of enforcement is to avoid that infringements are repeated and ensure individual corporate accountability for non-compliance with banking regulations. Transparency is essential to prevent that the reputational costs of non-compliance of some few financial institutions are unfairly absorbed by the entire financial market of Switzerland.
Prosecution of money laundering
The Office of the Attorney General of Switzerland and cantonal state prosecutors have specialised units to prosecute financial crimes and crimes related to money laundering. Complex, large-scale investigations have been conducted at both federal and cantonal levels, including cases involving predicate offences committed outside Switzerland. Prosecutors need to be equipped with adequate technologies and staffing to be able to analyse effectively complex and huge amounts of data.
In 2016, prosecution authorities and courts received 766 suspicious transaction reports from the Money laundering Reporting Office of Switzerland (MROS). Nearly half of all cases proceedings were dismissed by prosecution authorities. Among the dismissed cases are also international cases for which prosecutions had already been initiated in foreign jurisdictions, 108 cases reached judgment by a court, only few of them (3 per cent) resulted in the acquittal of the offender12. In addition criminal investigations in money laundering cases can be opened by the federal and cantonal prosecution authorities in response to requests for mutual legal assistance, police reports, complaints filed by members of the public and reports from other federal and cantonal authorities. In total every year between 200 and 300 cases have resulted in convictions13.
The Swiss authorities successfully identified and dismantled sophisticated money laundering networks. In the 1MBD and Petrobras cases, the Office of the attorney General initiated dozens of proceedings in which the alleged offence was large-scale corruption resulting in losses amounting to the equivalent of hundreds of millions, if not billions of Swiss francs for Malaysia and Brazil, respectively14.
In the 1MDB case assets intended for the economic and social development of Malaysia estimated to be as high as several billion US dollars had been transferred to Swiss accounts held by former Malaysian and United Arab Emirates officials. Investigations into this case have been hampered by lack of mutual legal assistance by the concerned country, as the Office of the Attorney General received end of 2016 notification that his request would not be accommodated15.
Another investigation concerns Uzbekistan nationals suspected of money laundering in connection with corruption charges. In this case, the Swiss authorities opened their own proceedings, froze the equivalent of USD 810 million and collaborated, through mutual legal assistance, with 19 other countries.
In some instances national efforts to bring accountability for economic crimes committed in multiple jurisdictions can be seriously undermined if a mechanism for genuine international cooperation is not in place. Swiss authorities can also face difficulties to ensure accountability of financial intermediaries based in Switzerland, if starting a successful prosecution at home depends on the political will in foreign jurisdictions to prosecute the underlying criminal acts committed abroad.
Tax abuse and criminal law
Criminal sanctions in Switzerland for assisting foreigners to evade taxes are weak. While individuals can be fined for tax evasion according to Article 175 of the Law on Direct Federal Taxation and its article 177 makes incitation or assistance to tax evasion an offence, this law is only applicable for evading taxes against Swiss tax authorities. The same offence would not be punished if the individual would assist a foreigner to commit a tax offence in a foreign state. The offender would only be at risk of having committed a crime under the criminal law of the respective foreign state.
Switzerland’s criminal code was amended in 2014 in order to subject persons to criminal responsibility if they “carry out an act aimed at frustrating the identification of the origin, the tracing or the forfeiture of assets which he knows or must assume originate from a felony or aggravated tax misdemeanour” (Article 305 bis). However criminal liability only arises if the tax evaded in any tax period exceeds 300.000 CHF. While assisting a foreigner to steal some few hundreds CHF is a crime in Switzerland, assisting a foreigner to “steal” from a foreign treasury a quarter of a million within one year, is not punishable within Switzerland. This raises questions about the proportionality of sanctions and merits rethinking whether criminal sanctions for white-collar crimes are sufficient.
In addition, legal experts have pointed out to me, that it will be very difficult to calculate the tax evasion that foreigners may have committed in a foreign jurisdiction. This poses serious difficulties to the prosecution of individuals assisting foreigners in large scale tax evasion. The consequence is that the effectiveness of the law as a tool to prevent trans-border tax evasion may be limited. One indication is that to my knowledge no individual has yet been prosecuted under this new provision in the criminal code.
Switzerland has passed legislation protecting whistle-blowers in Federal Government institutions. However, I would like to encourage the Swiss Government to ensure that whistle-blower protection in the private sector meets international standards. It is also necessary to set consistent criteria about when information provided by whistle-blowers can be validly used as evidence in judicial proceedings.
Reducing corporate tax abuse; addressing harmful tax competition
The Government presented to the Swiss electorate a comprehensive corporate tax reform package in 2016 (USR III) which included measures to bring Swiss corporate tax regimes in line with OECD standards to combat base erosion and profit shifting (BEPS) of multinational companies. The new law would have outlawed certain tax reduction regimes that are no longer accepted internationally, replacing them with patent-box regimes and other avenues for tax reduction.
In February 2017 the Government proposal failed to reach a majority during a public referendum. A few weeks ago the Federal Council published a revised tax proposal 17 for public consultation with the aim of ensuring that Swiss corporate tax regimes will become compliant to OECD standards.
I continue to be concerned about the potential human rights impact of the revised tax reform proposal 17 in other countries. Essentially the tax reform proposal 17 aims to keep taxation of multinational corporations in Switzerland at low levels to make placing headquarters in Switzerland attractive. While this brings undoubtedly benefits in form of tax receipts for the country and employment opportunities, it should not be forgotten that harmful tax competition between countries has resulted over the last decades in a dramatic reduction of corporate tax burdens of large corporations worldwide and contributed to the increase of unsustainable public debt in the developing world.
Low tax regimes provide incentives to profit shifting and result in reduced tax revenues in those countries where most of the real business takes place, thus shrinking the fiscal space of states to fulfil their human rights obligations. Therefore I would like to call upon the Swiss authorities to carry out a social and human rights impact assessment of the tax reform package, which should include an assessment of how the reform will impact on tax revenues available for the realisation of economic and social rights within Switzerland and for individuals living abroad, in particular in developing countries. In this context I would like to recall that Article 141 a) and g) of the Swiss Parliamentary Law requires the Government to submit assessments on the impacts of draft laws on the economy, society, environment and future generations and assess their compliance with fundamental rights and international law binding on Switzerland. A recent report of the Swiss Federal Audit Office indicates however that only one third of all Federal Council dispatches meet the minimum requirements of assessing the impact on the society and the environment16.
Unfortunately the explanation of the tax proposal 17 does not include any detailed assessment whether the reform is expected to contribute to harmful tax competition and whether the proposed package may have positive or adverse impact on the enjoyment of economic, social and cultural rights within Switzerland and abroad.
Integration of human rights due diligence in private and public financial institutions
Switzerland has been a strong supporter of the process that resulted in the adoption of the United Nations Guiding Principles on Business and Human Rights. In December last year the Government adopted a National Action Plan for implementing the Guiding Principles in Switzerland after a consultative process with the private sector and non-governmental organizations; an important step that I salute. The National Action plan explicitly covers all business enterprises in Switzerland and states that “the Federal Council of Switzerland expects business enterprises to fulfil their human rights responsibility in Switzerland and everywhere else they operate.” This includes all financial institutions and resource trading companies operating or headquartered in Switzerland, including State owned enterprises, such as the Swiss Export Risk Insurance (SERV) or public-private institutions such as the Swiss National Bank. In addition, the Federal Council has adopted in 2015 an Action Plan on corporate social and environmental responsibility, covering many human rights issues.
The National Action Plan endorses the concept of a smart mix of mandatory and voluntary commitments, however only few of its action points refer to any regulatory measures to improve business respect for human rights17. An alliance of 66 civil society organisations has therefore launched a responsible business initiative, a popular initiative aimed at embedding business due diligence in the Swiss constitution and in a federal law, including regulations relating to the civil liability of business enterprises to ensure a better protection of victims of corporate human rights abuses18. I would welcome if the Swiss Federal Council would present its own views on possible measures to regulate business respect for human rights in its legal order in response to this initiative.
While the National Action Plan is rather comprehensive, it regrettably does not include particular action points in relation to the financial sector of Switzerland, except mentioning the important role played by the Thun Group of Banks, an informal network of eleven major banks aimed at exchanging good practices in implementing the UN Guiding principles on business and human rights in the financial sector of large corporate banks.
I welcome the leading role of UBS and Credit Suisse in setting up the Thun Group of Banks with the aim to engage with peer international banks in a discussion and exchange of information on human rights due diligence19. However, I share concerns voiced by the UN Working Group on Business and human rights and other stakeholders that one of its recent discussion papers would unduly limit the responsibilities of banks for preventing and mitigating human right impacts to which there are directly linked in the context of their client relationship20. I therefore welcome that the Thun Group has recently invited human rights experts and non-governmental organizations to their annual meeting and I hope that concerns expressed by human rights experts will be taken into account. I further recommend to the Thun Group to study in the future the issue of lending in contexts marked by gross violations of human rights, with the aim of developing adequate strategies to reduce the risk of financial complicity with repressive regimes responsible for gross human rights violations21.
Furthermore I would like to encourage the Government, Swiss Banking, the Association of Swiss Private Banks and other professional associations to consider developing in dialogue with non-governmental organizations and human rights experts a banking sector agreement on responsible business conduct in Switzerland. The Dutch Banking Sector Agreement may be a source of inspiration in this context22. In my view there is a need to develop a common understanding and more consistency in what it means to include human rights due diligence in the financial sector.
The agreement should also take into account other relevant human rights standards, such as the Guiding Principles on foreign debt and human rights, that has so far been absent in discussions on human rights due diligence of financial intermediaries in Switzerland.
In my view the secret loan scandal in Mozambique pushing the country close to bankruptcy underlines the real need to incorporate the Guiding principles of foreign debt and human rights and UNCTAD’s principles for responsible borrowing and lending in such sector agreements. I look forward to receiving a response to my letter sent jointly with the UN Working Group on Business and Human Rights to the Swiss bank (and the Russian bank) that have allegedly assisted in the issuing of the secret bonds for the Mozambican State owned corporations linked to figures of its security services23.
The Swiss National Bank (SNB) revised in 2015 its Investment Policy Guidelines. Its guidelines state now that the bank “avoids shares in companies which produce internationally banned weapons, seriously violate fundamental human rights or systematically cause severe environmental damage.” Concerns have however been expressed that the Bank, which is investing more than 1.2 billion USD, continues to be have instruments in its portfolio replicating stock markets that include shares of corporations that should potentially be excluded on the basis of the above mentioned criteria24. The bank has not published how it ensures that it avoids investments in equities of companies that are responsible for human rights abuses. I would therefore like to encourage the SNB to disclose its assessment methodology and regularly inform the public about corporations that have been excluded from its investments portfolio due to any of the above mentioned concerns, following the example of the Norwegian Pension fund.
According to its own policy statement the Swiss Export Credit Agency (SERV) gives high priority to human rights, social issues and the environment when assessing insurance applications. This is a crucial measure that in my view deserves to be underlined. As a public institution, its policies are informed by Article 54. 2 of the Swiss Constitution which specifies that the Confederation assists in the alleviation of need and poverty in the world and promotes respect for human rights and democracy, the peaceful co-existence of peoples as well as the conservation of natural resources. However it should be noted that given the diversity of the principles, assessing transactions often involves a complex trade-off between commercial interests and public concerns.
According to Art. 18 a) of the SERV Act insurance cover can be excluded, suspended or reduced if a coverage has been concluded on the basis of false information provided by the applicant. This may include according to the views expressed by its legal department as well the withholding information in relation to social, environmental or human rights risks related to the business for which risk insurance had been requested. The SERV Guidelines for reviewing environmental, social and human rights- issues are largely based on the OECD Common Approaches for Export Credit Agencies.
In order to bring its policies more fully in line with the UN Guiding Principles on Business and Human Rights I would like to encourage SERV to provide public information about its own grievance mechanism that would allow affected individuals or communities covered by its risk insurance to bring concerns to the direct attention of SERV. This would be of importance in particular if local grievance procedures by its insured clients fail. A first step would be indicating on its website an e-mail or hotline to which such concerns could be sent and how they would be processed. Consideration should be given to establish an independent complaints mechanism. In order to allow external stakeholders to identify whether a particular investment is covered by SERVs export insurance, it would be important to cover on a country-by-country basis information about export businesses covered by SERV.
I welcome that an increasing number of pension funds in Switzerland have adopted investment policies that include some human rights criteria, including the public pension funds of the cantons of Geneva and Vaud. In December 2015 seven public pension funds managing investment assets totalling over CHF 150 billion founded the Swiss Association for Responsible Investments (SVVK-ASIR). The pension funds include the BVK (Zurich canton’s civil service pension fund), compenswiss (AHV/IV/EO compensation fund), comPlan, the Swiss Post Office pension fund, the Swiss Federal Railways pension fund, the federal pension fund PUBLICA and Suva. They now jointly plan to exercise their environmental, social and economic responsibilities in a holistic and structured way. Their investment processes are therefore to be updated to include environmental, social, governance-related criteria25.
In total the volume of assets managed in Switzerland following sustainability criteria has significantly increased during the last years. A market study covering 41 Swiss institutional investors indicates that sustainable investments have reached 266 Million USD in 2016. Violation of human rights was the most important exclusion criteria of asset managers, followed by violation of labour rights, corruption and bribery and disrespect for the environment26.
Private Banks that have specialised in wealth management can similarly integrate human rights approaches in their asset management strategies and in financial products offered to their clients. For example the private Bank Lombard Odier excludes as a general policy at group level any investments involved in the production or distribution of controversial weapons, including biological, chemical weapons, anti-personal mines, cluster weapons, depleted uranium and white phosphorus. It is in particular noteworthy that it has also banned investments in financial instruments such as futures, options, swaps, indices, exchange-traded funds directly linked to ‘essential food commodities’ such as wheat, rice, corn and soybeans. Its SRI policy states: “As we are concerned about the potential impact of commodities investments on the volatility of essential food prices, Lombard Odier has decided to permanently exclude all financial instruments that invest in essential foods. It is therefore essential for financial agents to avoid participating in speculation on these markets especially with derivative instruments.”27
The bank undertakes afterwards norm based negative and positive screening of companies following a best-in-class approach, which includes an assessment of their respect for human rights and their impact on communities. A third pillar assesses carbon emission issues, and finally the bank offers to clients a reporting on environmental social and governance performance of their portfolio.
In various discussions I had during my visit, the need for being able to rely on external information on the social performance and human rights issues to assess companies was underlined, as in particular large corporations tend to publish shiny corporate responsibility reports that often do not reflect the full picture, in particular on social and human rights issues. Initiatives such as the corporate human rights benchmark assessing the human rights performance of the 89 largest publicly traded companies could partly fill this gap28.
Switzerland has adopted a human rights policy aiming for coherence and for the protection of human rights at home and abroad. Its Government expects that private financial institutions headquartered in Switzerland respect human rights wherever they operate and that they exercise human rights due diligence throughout their business and client relationships.
In recent years, the Federal Government has undertaken several efforts and achieved progress in curbing illicit financial flows which undermine the rule of law and the enjoyment of human rights in Switzerland and in foreign countries.
I believe, however, that it is necessary to integrate more systematically human rights considerations into financial policies of public and private institutions based in Switzerland. First of all, there is a legal obligation to do so. Second, further embedding human rights in financial policy would enhance the reputation of the Swiss financial market. It would also give further credibility to its human rights policies and to the aim of making Switzerland’s financial market a leader in sustainable finance. Finally, and this is in my view the most important aspect, it would improve the protection and enjoyment of human rights in Switzerland and abroad.
As outlined above, I have identified several areas in which there is room for improvements in the fields of accountability, regulation and supervision of the Swiss financial market and hope that my recommendations will be duly considered.
Making further efforts to implement human rights in the financial field should be considered an evolving duty as asymmetric power relations undermining human rights operating underneath financial markets need to be continuously recomposed.
Human Rights Council resolution 34/3.
2. Global Financial Integrity, Illicit Financial Flows from Developing Countries 2004-2013, Washington DC, December 2015.
3. Federal Department of Finance, State Secretariat for International Financial Matters SIF, Swiss financial centre: Key figures October 2017,Tables 1 and 8.; SNB, Banks in Switzerland 2016, p. 22-23.
4. Swiss academies of arts and sciences, Switzerland and the Commodities Trade, fact sheets Vol, 11 (2016) No.1., p.2.
5. Federal Department of Foreign Affairs, Human Rights Strategy 2016-2019.
6. See United States Department of Justice, Swiss bank programme, available at : https://www.justice.gov/tax/swiss-bank-program and http://www.ustaxprogram.com/penalty-statistics/. The details how Swiss banks could enter in non-prosecution agreements and how penalities were calculated are available at : https://www.justice.gov/tax/file/631356/download.
7. See Mark Branson, Chief Executive Officer of FINMA, «
Combating money laundering is a duty of every banker », Annual Media Conference, 7 April 2016.
8. « Credit Suisse faces tax probes in multiple countries », Financial Times, 31 March 2017 and Verdacht auf Steuerhinterziehung: Steuerrazzia bei deutschen UBS Kunden, Handelsblatt, 27 September 2017.
9. FINMA, FINMA - A portrait, July 2017, p. 17.
10. FINMA, Mark Branson, Chief Executive Officer, Annual press conference statement, 7 April 2016.
11. FINMA, Due diligence obligations of Swiss banks when handling assets of “politically exposed persons., p. 9
12. Annual Report of the Money Laundering Reporting Office Switzerland (MROS) 2016, April 2017, p. 14.
13. FATF, Anti-money laundering and counter-terrorist financing measures Switzerland. Mutual Evaluation Report, December 2016, p. 63.
14. Ibid. p. 62.
15. Federal Office of Justice, Annual Activity Report 2016, Mutual Legal Assistance, p.14.
16. Swiss Federal Audit Office, Prognosen in den Botschaften des Bundesrates, Evaluation der prospektiven Folgenabschätzungen von Gesetzentwürfen. 24 october 2016, available at: https://biblio.parlament.ch/e-docs/389085.pdf,
17. Those mentioned include largely acts already passed, such as the 2013 Federal Act of Private Security Services and the revision of the War Materials Act and new regulation aimed at prohibiting the export of technologies for internet and mobile communications surveillance technologies and goods if there is reason to believe that the goods will be used by the final receipient as a means of repression.
19. The two discussion papers are available at http://www.menschenrechte.uzh.ch/en/publikationen/thun-group-of-banks.html.
20. See letter of the UN Working Group on Business and Human Rights to the Thun Group of Banks, available at : http://www.ohchr.org/Documents/Issues/TransCorporations/WG_BHR_letter_Thun_Group.pdf and OHCHR response to request from BankTrack for advice regarding the application of the UN Guiding Principles on Business and Human Rights in the context of the banking sector available at http://www.ohchr.org/Documents/Issues/Business/InterpretationGuidingPrinciples.pdf
21. 2015 Report to the HRC on financial complicity, A/HRC/28/59, available at http://www.ohchr.org/EN/Issues/Development/IEDebt/Pages/FinancialComplicity.aspx
22. Sociaal-Economische Raad, Dutch Banking Sector Agreement on international responsible business conduct regarding human rights, available at https://www.ser.nl/en/~/media/files/internet/publicaties/overige/2010_2019/2016/dutch-banking-sector-agreement.ashx
23. See the letters sent on 25 August 2016 to Crédit Suisse (AL/OTH/25/2016) and VTB Bank (AL/OTH/ 24/2016), the International Monetary Fund (AL/OTH/23/2016) and the Government of Mozambique (AL/MOZ/2/2016) submitted to the 34th session of the Human Rights Council, available at : https://spcommreports.ohchr.org/Tmsearch/SearchSessionNumber?number=34
25. See SVVK-ASIR, normative basis, http://www.svvk-asir.ch/fileadmin/user_upload/Dokumente/SVVK-ASIR_NormativeBasis.pdf
26. Swiss Sustainable Finance, Sustainable Investment in Switzerland, Sustainable Finance Market report 2017.
27. Lombard Odier, SRI Policy, 1 June 2017, https://www.lombardodier.com/files/live/sites/loportail/files/Documents/AssetManagement/RegulatoryDisclosures/2017/September/Lombard%20Odier%20SRI%20policy%202017_format.pdf