Switzerland: seizure and forfeiture of Russian assets as legal basis called into question

In summary

Following the war initiated by Russia against Ukraine in 2022, the Swiss government decided to adopt the EU sanctions against Russia to strengthen their impact. This article explores the development in Switzerland of the freezing and forfeiture of assets and economic resources of sanctioned persons, companies and organisations. The legal basis of such forfeiture is in question, especially since the European Union adopted several Directives on this specific issue.

Discussion points

• Freezing of assets and economic resources amounts to 7.1 billion Swiss francs, plus 17 properties, sports and luxury cars, works of art, furniture and instruments
• Such freezing does not remove property rights from the sanctioned persons, companies and organisations
• The Embargo Act is not a sufficient legal basis for forfeiting assets
• The Swiss government considers that Swiss law does not have a legal basis to forfeit Russian assets to compensate Ukraine
• Switzerland is not legally bound by the EU Directive on violation of EU restrictive measures
• The forfeiture of assets will raise different legal issues, and the owner of such assets will have the right to have their case heard by a judicial authority

Referenced in this article

• Embargo Act of 2002
• Ordinance on measures in relation to the situation in Ukraine
• State Secretariat for Economic Affairs
• Swiss Criminal Code
• Decision of the Swiss Supreme Court regarding Abacha
• Swiss Parliament
• Directive (EU) 2024/1260 on asset recovery and confiscation
• Directive (EU) 2024/1226 on the definition of criminal offences and penalties for violation of EU restrictive measures

Brief introduction

The notions of asset freezing and asset forfeiture are often confusing. However, it is essential to understand these two concepts, which have completely different legal consequences. Freezing is a provisory measure, preventing the owner of the assets from accessing, transferring or converting them. Freezing also covers the revenues of assets. Forfeiture or confiscation implies a change of ownership. The right of the person or company to the assets is lost without any compensation.

Freezing of assets and economic resources

According to the Federal Act on the Implementation of International sanctions (the Embargo Act of 2002),^[1] the Swiss Confederation may enact compulsory measures to implement sanctions that have been ordered by the United Nations, by the Organization for Security and Co-operation in Europe or by Switzerland’s most significant trading partners, and that serve to secure compliance with international law and, in particular, the respect of human rights. Article 2 of the Embargo Act gives the Swiss government the authority to enact compulsory measures in the form of ordinances.

Following the war in Ukraine, the Swiss government decided on 28 February 2022 to adopt the European Union’s sanctions against Russia to strengthen their impact. This decision concerns only the restrictive measures per se but not the EU Directive on restrictive measures and the EU Directive on asset recovery. The ordinance of 2 March 2022 on measures in relation to the situation in Ukraine contains the Swiss measures and is legally binding. This text includes several types of measures, in particular the freezing of assets and economic resources, a reporting obligation concerning the freezing of assets and economic resources, and prohibitions concerning securities and money market instruments.

Assets and economic resources include values of any kind, whether tangible or intangible, movable or immovable. For example, real estate, luxury goods and works of art are also considered economic resources and are therefore subject to freezing. Valuables stored in free ports are also subject to this regime.^[2]

Article 15, paragraph 1 of the ordinance provides, in particular, that assets and economic resources owned or controlled, directly or indirectly, (1) by natural persons, companies and organisations listed in appendix 8; (2) by natural persons, companies and organisations acting on behalf of or at the direction of natural persons, companies and organisations referred to in point 1; (3) by companies and organisations owned or controlled by natural persons, companies and organisations referred to in point 1 or point 2, can be frozen.

Switzerland is free to decide the extent to which it adopts EU sanctions and does not do so automatically. As a member of the United Nations, Switzerland is legally bound to apply the sanctions decided by the United Nations Security Council. On the other hand, the Swiss government decides on a case-by-case basis whether or not to adopt (in full or in part) the sanctions decided by the European Union. It weighs up the interests involved, taking into account legal considerations, foreign policy and foreign economic policy criteria.^[3]

Article 16 of the ordinance contains a mandatory declaration concerning the freezing of assets and economic resources. Persons and institutions that hold or manage assets or have knowledge of economic resources that are deemed to fall within the scope of the assets to be frozen, provided for in article 15, paragraph 1 of the ordinance, must report this to the State Secretariat for Economic Affairs without delay. Persons and institutions holding or managing assets or with knowledge of economic resources belonging to or controlled by natural persons, companies and organisations listed in appendix 8 must report to the State Secretariat for Economic Affairs without delay all transactions carried out in the two weeks preceding the inclusion of such persons, companies and organisations listed in appendix 8.

As at 13 August 2024, the financial assets frozen in Switzerland amounted to 7.1 billion Swiss francs, plus 17 real estate assets in Switzerland. The total amount of reserves and assets of the Central Bank of Russia held in Switzerland is approximately 7.4 billion Swiss francs.^[4] The website of the State Secretariat for Economic Affairs has a page (which does not work very well) that allows persons, companies and organisations subject to sanctions to be searched for.^[5] However, appendix 8 (which contains the list of persons, companies and organisations subject to sanctions) is not published in the official or systemic collection of federal laws.

Unlike forfeiture, the freezing of assets and economic resources does not remove property rights from the sanctioned person, company or organisation (rule of law). The real estate, automobiles or other similar assets of a person or company on a sanctions list are also frozen, but they are not taken away. In practice, this means a ban on trading them. For example, a sanctioned person may continue to live in a house he or she owns but is not allowed to sell or rent it.^[6]

Forfeiture of assets under the Embargo Act and its ordinance

As far as international sanctions are concerned, if the legal basis for freezing is quite clear, the question of the forfeiture of Russian assets is not, as far as Swiss law is concerned.

The situation is different in the European Union. On 4 April 2024, the European Union adopted Directive 2024/1260 on asset recovery and confiscation and Directive 2024/1226 on the definition of criminal offences and penalties for violation of EU restrictive measures. These two texts are linked as they specify that the forfeiture of assets derived from the violation of EU sanctions is carried out in accordance with the provisions of the asset recovery Directive.

Article 10 paragraph 2 states that:

Member States shall take the necessary measures to enable the freezing and confiscation of funds or economic resources subject to Union restrictive measures in respect of which the designated natural person, or the representative of a designated entity or body, commits, or participates in, an offence covered by Article 3(1), point (h)(i) or (ii). Member States shall take those necessary measures in accordance with Directive 2014/42/EU.

These Directives have been presented in the context of Russia’s military aggression against Ukraine as a means of combating the circumvention of restrictive measures and facilitating the forfeiture of Russian assets. The purpose of the Directives is to create a minimum, uniform legal standard within the European Union that member states cannot evade, but that they can nevertheless surpass.

In Switzerland, the Embargo Act has a provision regarding forfeiture of property and assets. Article 13, paragraph 1 of the Embargo Act states that property and assets that are subject to compulsory measures shall be forfeited irrespective of the criminal liability of any particular person in the event that their continued lawful use is not guaranteed. According to the State Secretariat for Economic Affairs, this provision does not provide a sufficient legal basis for confiscating the assets of sanctioned persons, companies and organisations. As long as assets are seized by sanctions, they are used in accordance with the law. A criminal offence is therefore missing. For this reason, the conditions for forfeiture within the meaning of article 13 of the Embargo Act are not met in the case of frozen assets. In his report on the EU Directive on the definition of criminal offences and penalties for the violation of EU restrictive measures and the difference with Swiss law dated 27 November 2024, the Swiss government mentioned that there is no legal basis for forfeiture in the case of restrictive measures, as the assets or economic resources have not been obtained through an offence and are therefore, until proven otherwise, not considered illicit.^[7]

The forfeiture of assets is not even foreseen in the ordinance on measures in relation to the situation in Ukraine. Therefore, currently, there is no legal basis for the forfeiture of Russian assets under Swiss sanctions law.

Three years ago, the question of forfeiture of assets of a sanctioned person was not even one for the Swiss government.

On 11 May 2022, a member of the Swiss Parliament called for the creation of a legal basis for using frozen assets to rebuild Ukraine. The aim was that the frozen assets of oligarchs close to President Putin could be used for international efforts to rebuild Ukraine.^[8] The Swiss government responded to the Swiss Parliament member as follows:

No state has yet confiscated assets solely because a natural or legal person was on a sanctions list. Confiscating assets solely on the basis of the presence of a natural or legal person on a sanctions list or deemed to be close to the Russian state, and then using them for the reconstruction of Ukraine, as envisaged in the motion, is not currently an option.

The three main reasons are, first, that the forfeiture of assets, in comparison with their freezing, represents a massive infringement of the constitutionally guaranteed property rights and the fundamental rights of the individuals concerned. Forfeiture of assets presupposes a criminal offence confirmed by a court of law, which is not the case with the freezing of assets. The freezing of assets does not imply that they have been acquired illicitly. Second, the question of immunities in the case of a state’s financial assets also arises. Indeed, 7.4 billion Swiss francs belonging to the Central Bank of Russia are currently frozen. They are protected by the immunity from execution of the state’s assets. It is therefore not certain that the forfeiture of such assets would be compatible with the state’s immunity from jurisdiction and execution under international law. Third, the confiscation of assets would produce the opposite effect from that intended by sanctions, which are, above all, temporary coercive measures designated to induce a state to return to behaviour that complies with international law.^[9]

To date, the elaboration of a legal basis to allow the forfeiture of assets to compensate Ukraine for damages is not in the Swiss government’s agenda.

Forfeiture of assets under Swiss criminal law

As forfeiture of assets in Swiss sanctions is not possible, the only alternative is to look at the possibilities existing in Swiss criminal law.

The forfeiture of assets is in the Swiss Criminal Code. Article 70, paragraph 1 states that the judge orders the confiscation of assets that are the result of a crime or that were intended to decide or reward the perpetrator of a crime, if they are not to be returned to the injured party in restoration of his or her rights. The confiscation is not a sanction but a measure that must be ordered when the legal conditions are met. It presupposes the existence of an unlawful act combining both the objective and the subjective elements of an offence. Assets derived from an objectively legal act are not able to be confiscated. There must be a connection between the criminal offence committed, on the one hand, and the seized assets, on the other hand. Therefore, without a criminal offence, forfeiture per se is not possible. Moreover, the forfeiture supposes that a criminal investigation is opened. As a result, the mere fact that a person is sanctioned under the Embargo Act and its ordinance is not sufficient to consider the application of the forfeiture based on the Criminal Code. The conditions of forfeiture are strict because forfeiture is a serious infringement of the guarantee of private property mentioned in article 26 of the Swiss Constitution. The forfeiture must be pronounced in accordance with the procedural guarantees provided by the Swiss Constitution and the European Convention of Human Rights. Therefore, there needs to be a criminal offence and, subsequently, a confiscation can be ordered. However, in international sanctions, the reason for forfeiture is not the offence but the violation of international law as mentioned in article 1 of the Embargo Act.

As those violations do not constitute criminal offences, it is not possible to forfeit Russian assets of sanctioned persons, companies and organisations based on article 70 of the Swiss Criminal Code.

Another possibility is the forfeiture of Russian assets based on article 72 of the Swiss Criminal Code, which provides for the forfeiture of assets of criminal or terrorist organisations. This provision states that in the case of assets of a person who participates in or supports such an organisation (article 260-ter of the Swiss Criminal Code), it is presumed that the assets are subject to the power of disposal of the organisation until the contrary is proven. The legal presumption arising from this provision assumes that the owner of the assets to be confiscated is punishable under article 260-ter. This sentence contains a reversal of the burden of proof. Such forfeiture presupposes that the person whose assets are forfeited belongs to a criminal or terrorist organisation. The central element of this provision is the existence of a criminal or terrorist organisation within the meaning of article 260-ter of the Swiss Criminal Code. To determine whether an organisation is considered to be terrorist or criminal, the courts that have jurisdiction in the matter must proceed on a case-by-case basis. The case law of the Swiss Supreme Court suggests that classifying a government as a criminal organisation within the meaning of article 260-ter of the Swiss Criminal Code would inevitably give rise to difficulties, particularly with regard to defining the objectives of this organisation or, in this case, this government and the administration of evidence.^[10] Consequently, it seems unlikely that the Swiss courts would qualify President Putin’s government as a terrorist or criminal organisation.

However, the Swiss Supreme Court used article 72 of the Swiss Criminal Code to confiscate the money stolen from Nigeria by the former head of state Sani Abacha, who was accused of setting up a criminal organisation in order to loot the country. Abacha had indeed established a criminal regime. This provision was also used to freeze assets belonging to relatives of former President of Egypt Hosni Mubarak, considering that it was plausible that the relatives were linked to the Mubarak regime, that the system set up by this regime could be described as a criminal organisation and, consequently, that the frozen funds could have been used to support this organisation.^[11] The Mubarak decision was used by the Swiss Federal Criminal Court to freeze assets belonging to relatives of former President of Libya Mouammar Gaddafi.^[12]

According to the criminal law Professor Mark Pieth, it is conceivable to classify President Putin and his inner circle as a criminal organisation, and the oligarchs who are filling the war chest could be accomplices in a similar way to the henchmen of mafia.^[13]

Even if the possibility of using article 72 of the Swiss Criminal Code was recognised, no criminal prosecution has been initiated against President Putin and his inner circle in Switzerland. Most probably, this provision will not be used as long as President Putin remains the head of the Russian state.

Forfeiture of assets: what next?

As explained, there is no legal basis in Switzerland for confiscation on the basis of a restrictive measure, and assets or economic resources that have not been obtained through an offence are therefore not considered illicit until proven otherwise. Forfeiting assets of a person not convicted for a criminal offence but only because they are mentioned on a list seems doubtful. The purpose of the Embargo Act is clearly not to foresee such an option. On 15 February 2023, the working group led by the Federal Office of Justice of the Swiss government concluded that the confiscation of private Russian assets would undermine the Federal Constitution and the prevailing legal order.^[14] Therefore, the expropriation of private assets of lawful origin without compensation is not permissible under Swiss law. The right of private property is indeed a fundamental right. Moreover, the general rules of procedure have to be respected, as must the right to be heard and the right to have a case determined by a judicial authority. As the forfeiture has an impact on the civil rights of the owner, the guarantees of the European Convention on Human rights are also applicable.

We also consider that the principle of non-retroactivity of the law is at stake. The Swiss Constitution guarantees the principle of legality and the principle of predictability and legal certainty of the law. Passing a law that allows the forfeiture of assets for facts that happened before the law’s entry into force will also raise many legal issues.

The forfeiture of Central Bank of Russia assets raised additional concerns, in particular a state’s immunity from jurisdiction and execution under international law.

Endnotes