When is a scam a fraud under Swiss criminal law?

Monday 15 April 2024

Natalia Hidalgo
Monfrini Bitton Klein, Geneva

In financial matters, there are numerous cases of scammers promising investors a high return in a short period of time. To target potential victims, scammers show boundless imagination and use all kinds of manoeuvres. They present themselves as providers of cutting-edge financial services, relying in particular on attractive subjects such as cryptocurrency.

For Swiss criminal courts, however, there is an important and sometimes difficult distinction between a scam where the investor is the victim of a fraud and a high-risk investment based on aggressive promotional strategies.

In a judgment dated 21 March 2023 (ACPR/206/2023), the Court of Justice of Geneva (the ‘Court of Justice’ or the ‘Court’) denied the appeals of several investors against a no-proceedings order issued by the Public Prosecutor's Office of the Canton of Geneva. The Public Prosecutor's Office had refused to open a criminal investigation in connection with their complaints against a group of companies (and its representatives) based in Switzerland.

In their complaints, the investors claimed to have been deceived by the group and alleged a series of offences, including fraud (Article 146 of the Swiss Penal Code (PC)). According to the judgment, the complaints were related to three types of investments:

  1. Firstly, the group had developed a payment system to be used through a loyalty card (or an app), with small businesses affiliated to the network. Business owners offered their clients the loyalty card: for every purchase made with this card, both the business and the client received a small cashback. The clients could then use the accumulated credits at other businesses affiliated to the network.

The group had offered ‘packs’ for anyone wishing to invest in the system at prices ranging from CHF 750 to CHF 5,000 each. These packs notably included batches of loyalty cards. The purpose of these packs was to promote the programme and sponsor new members, in exchange for commissions. According to the investors, they had been fraudulently led to invest in a pyramid distribution system.

  1. Secondly, the group had provided members of its network with the opportunity to invest in the group’s shares. According to these investors, the group had deceptively promoted a ‘large-scale’ initial public offering, which never materialised.
  1. Thirdly, members of the network were presented the opportunity to acquire a virtual currency created by the group. According to the investors, they were enticed with the prospect of price gains as appealing as those offered in the bitcoin market. They claimed that, in reality, the Swiss Financial Market Supervisory Authority (FINMA) did not categorise these tokens as cryptocurrencies but rather as shares, bonds or derivative financial instruments.

When reviewing the Court of Justice’s judgment, it becomes apparent that the investors’ arguments were primarily based on their limited knowledge of financial and new technologies matters. In this regard, they criticised the group’s extensive advertising campaign (including a website, commercial leaflets, videos, promotion through professional associations and sponsorship of a soccer club) which induced them to invest.

As indicated, the Court of Justice’s analysis is essentially based on Article 146 of the PC.

According to Article 146 of the PC, any person who with the objective of unlawfully enriching themselves or another wilfully induces an erroneous belief in another person by false pretences or concealment of the truth, or wilfully reinforces an erroneous belief, and thus causes that person to act to the prejudice of theirs or another’s financial interests, commits fraud and is criminally liable.

A mere deception is not enough to commit fraud: the defendant must act maliciously.

According to case law, malicious conduct occurs when the author uses a scheme of lies, fraudulent manoeuvres or a staging, but also when he simply gives false information, if verification is not possible, is only with difficulty or cannot reasonably be demanded, as well as if the author dissuades the victim from verifying or foresees, depending on the circumstances, that the victim will refrain from doing so due to a particular relationship of trust.

In the Court’s view, the conditions for fraud under Article 146 of the PC were not met for the following reasons.

Regarding the loyalty programme, the Court of Justice pointed out that it had been used in Geneva by various businesses and their clients in recent years, establishing its existence and functionality. Additionally, the group had committed significant resources, demonstrating a genuine intent to develop it.

While the Court acknowledged that the program had not achieved the anticipated success, it considered that, based on the evidence, the success of the loyalty programme depended essentially on the size of the network. Thus, there was a parameter of uncertainty and risk.

In particular, the Court found that investors ‘could not objectively ignore that the acquisition of a new product, developed by a start-up, implied a risk, inherent in any investment in a commercial promotion solution’.

The same reasoning applies to the shares and tokens offered by the group:

‘[The investors] could not ignore the fact that investing in the shares of a small entity, recently introduced on the stock market, was a risky investment, offering no guarantees. Indeed, share prices can fluctuate and fall sharply, and a shareholder can lose his entire investment in the event of the company’s bankruptcy, which could not have escaped the [investors’] attention, despite their inexperience in the financial sector. This is all the more true in the present case, since the [investors] knew that the success of the product marketed by the group, and consequently its financial results, depended on the extent of development of the partner network, which, as already pointed out, was a definite factor of uncertainty and risk […] The risk of [investing in cryptocurrency] is considered particularly high, given the highly volatile and speculative nature of the “token”.’

The Court’s reasoning is severe. According to the Court, even if the group’s representatives exploited the investors’ lack of business experience to encourage their investment in their products (packs, shares and virtual currency), there was no evidence to suggest the existence of a structure of lies, fraudulent manoeuvres or false information.

In this regard, the Court highlighted that the group’s positive portrayal of their commercial offerings and depiction of the development of various projects as prosperous were matters of marketing and communication.

From the Court’s perspective, the investors were driven by a desire to generate income ‘without the slightest effort’ and had not exercised the elementary caution that might have been expected of them.

The Court specifically criticised the investors for failing to verify the information provided with third parties and for neglecting to assess the risks involved with the help of professional advice, despite their lack of experience and knowledge of the financial sector and new financial technologies.

For these reasons, the Court upheld the Public Prosecutor’s decision.

This judgment highlights the challenges associated with pursuing the criminal route to recover damages resulting from fraud in Switzerland. The Geneva Court explicitly stated that criminal law is not intended to shield individuals engaging in naïve behaviour; rather it assumes that investors should exercise elementary caution.

The facts outlined in the Court’s decision do not provide a clear understanding of the investors’ situation in terms of civil avenues for seeking compensation. Nevertheless, this remains a crucial consideration, given that Swiss law offers diverse legal grounds to address a civil fraud case. Naturally, the civil route also comes with certain constraints, such as short limitation periods or the absence of pre-trial discovery in Swiss civil procedure.

In all cases in Switzerland, seeking support from the criminal authorities remains a crucial tool for establishing facts and gathering evidence. This, in turn, facilitates the implementation of an asset recovery strategy through alternative means, including the pursuit of civil claims for restitution.