Switzerland is a country with a strong reputation for its banks and its commodity trading sector. Many international commodity traders have presence in Switzerland, among them Ukrainian, Chinese, Russian, Kazakh and others. Prior to the start of Russia’s war against Ukraine in 2022, every sixth barrel of oil in the world was traded via Switzerland, mainly Geneva. 50-60% of Russian oil was traded via Geneva.
While there are giants like Vitol and Trafigura, there are many smaller traders who seek to exploit the prestige of being in Switzerland and yet play their local game: disappearing after unfavourable market movements simply to avoid paying what is due to their counterparties.
Assuming that the debt cannot be recovered from your counterparty, a Swiss company, what mechanisms are available under Swiss law to achieve recovery from other sources? This article explores three such mechanisms: (i) criminal proceedings for fraud; (ii) proceedings for mismanagement (criminal action against directors, or civil action against directors to make them contribute to company assets so the company can pay its creditors; and (iii) criminal action for money laundering.
Fraud
If someone defrauds you, you can seek recourse against that person regardless of whether or not the fraud is committed via a company. This is an almost universal rule, and Switzerland is no exception. We have seen the following scenarios in our practice:
- A director of a company organises the theft of an oil cargo. The director is subsequently convicted of fraud in Switzerland.
- A Swiss company takes delivery of a coal cargo. The owner and director of the company then organises for his company to buy millions of dollars’ worth of bonds of several companies from a Cypriot financial service provider. The bonds are issued by very suspicious companies, one of them apparently a shoe repair shop in Singapore which does not have any substantial assets. The director is subject to criminal charges in Switzerland. As part of this exercise, the prosecutor obtains disclosure of the director’s personal and his company’s bank statements to see where the money went.
- A director of a Swiss company concludes a deal for the purchase of commodities. He convinces his counterparty that they would interpose an offshore company into the trading chain between the seller and the Swiss company. The offshore company receives the cargo from the seller, delivers it to the Swiss company and then disappears. No contractual recourse is possible against the off-shore company because it no longer exists, and against the Swiss company because the seller has no contract with it. The seller sues for fraud and alleges that the Swiss company and the people behind it never had the intention to pay for the commodity cargo. The seller manages to obtain a conviction against an owner and director of the Swiss company.
- A group of people, one of whom resides in Switzerland, launch a cryptocurrency project. They collect money into a company created for this purpose. All the money disappears, without the project even having started work to achieve its stated objectives. The Swiss organiser is pursued in criminal proceedings with his assets frozen by a prosecutor’s order to avoid dissipation pending criminal trial.
It is not easy to prove fraud. However if your case fulfils the relevant criteria, criminal proceedings for fraud is a very effective means to obtain payment from your debtors. As part of those proceedings, the prosecution can obtain disclosure of documents from the alleged fraudsters (it can raid their homes and business premises and seize their paper documents and IT equipment), it can obtain disclosure from third parties (e.g. bank statements and any documents submitted to banks), and it can freeze assets of the alleged fraudsters (e.g. houses, cars, money in bank accounts, portfolios of securities) to avoid their dissipation pending trial. If you win criminal proceedings, then apart from getting a conviction/prison sentence against your opponents, you may be able to obtain a civil compensation order, compelling them to repay you what they have stolen, or compensate you for other losses you may suffer as a result of their criminal behaviour, possible even your legal costs of the criminal proceedings.
Mismanagement/failure to notify the Court of the company’s financial difficulties
Swiss law imposes certain obligations on company managers. Failure to fulfil those obligations can result in criminal liability for mismanagement and also in civil liability for directors to contribute to company assets such that the company can pay its unpaid creditors.
Here are some examples from our practice of where this has proven relevant:
- A Swiss lawyer provides fiduciary services to a Swiss-based trading company: he is declared as one of the company’s directors on the corporate registry and he has individual signature rights to bind the company. The company suffers serious losses which turn its balance sheet negative. The owner of the company (another director) keeps running it in the hope that he will make a profit later and save the company. The company incurs even more debts and in the end, is unable to pay its creditors. The Swiss fiduciary is liable to contribute to the assets of the company so it can pay its creditors because he has not notified the court when the company effectively became insolvent. If the company has failed to pay social contributions on its employees’ salaries, then all directors potentially bear criminal liability for failing to make the contributions.
- A director of a Swiss commodity trading company makes a bad deal and ends up owing a lot of money to his trading counterparty. He decides not to pay and instead invest in foreign securities. The prosecution cannot prove that the investment in foreign securities was a fraud. However, it can prove that anyone acting reasonably, and having done proper due diligence, would not have invested substantially all of the company’s assets in those securities. The director is charged with the criminal offence of mismanagement.
Associated offences of money laundering
Concealing proceeds of crime may amount to money laundering in Switzerland, which is a separate criminal offence. Money launderers and those who assist them may be liable to custodial sentences of up to three (and, in serious cases, five) years in prison in Switzerland. For this purpose, any “felony” works. Felony includes offences of fraud, bribery, and tax evasion above a certain limit in Switzerland. Importantly, the relevant criminal offence can be committed abroad – the Swiss authorities will still have jurisdiction to pursue offenders if the money laundering takes place in or via Switzerland.
For example, A and B are shareholders in a company. A wants to dilute B, and for this purpose forges certain documents and organises for company assets to be sold to A’s nominees at undervalue. The nominees are A’s employees who assist him in the management of the company, and are fully aware of the plan. They proceed with the transactions. The nominees then pretend that they sold the assets to third parties in good faith who were not aware of the dispute between A and B, and A’s intention to defraud B. Provided there is a sufficient link to Switzerland, both A and his employees involved in asset dissipation may receive prison sentences for money laundering in Switzerland.
Fortior Law is an international dispute resolution law firm. If you have a claim against a Swiss company which disappeared or whose directors are asset stripping it, please reach out to us at [email protected] to consider your options. To learn more about our Swiss litigation capabilities generally, get in touch with Xavier-Romain Rahm at [email protected].
