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           Information Technology - Switzerland

Data Retention Requirements Pose Problems for IT
Departments
Contributed by Homburger

September 2 2003

Background
Data Retention on Rewritable Media
Beware of Electronic Invoices


Background

Electronic data retention is nothing new to Swiss law. However, while two
new regulations on the subject have been in force for over a year now, it
has become apparent that many companies in Switzerland are not yet in
compliance, and some businesses are not even aware of the existence of
these new laws.

Companies which rely solely on paper and telephone-based
communication will not encounter any major problems as a result of the
new rules. However, most companies today have begun conducting large
parts of their business by email and other means of electronic
communication. While companies are not required (and often not allowed)
to record telephone calls they make or receive, they are required to retain
written communications for at least 10 years (Articles 957 and following of
the Swiss Code of Obligations).

This legal obligation, which applies to every company listed in the
Commercial Register, also covers email communications. Those who
breach the obligation can be fined or imprisoned, may face damages
claims and are likely to find themselves at a disadvantage in court
proceedings. In addition, other special laws - such as various tax codes -
contain additional data retention obligations. While Swiss law in general
does not demand that every internal and external email be archived, it
normally requires the retention of all emails which allow a third party
(particularly a court) to determine the financial situation, obligations and
acquired rights of a company. This notwithstanding, the retention for 10
years of emails and similar electronic records would be an enormous
task, given the vast amount of such data.

However, with the entry into force of the Ordinance on Business Records
last year, it became clear that simply leaving emails on the mail server or
retaining them on back-up tapes is not sufficient. The ordinance
specifically provides that any data must be retained in a medium which
ensures that the data cannot be modified unnoticed.

The easiest way to comply with this demand is to print out all relevant
emails. However, for many businesses this is not an option: printing out
emails is time-consuming and often requires a lot of storage space, and
some information (eg, the formulas on a spreadsheet) is typically lost in a
hard-copy print-out. Another option is to use 'write once only' electronic
media. The ordinance treats these media in the same way as hard-copy
print-outs. The most common example is the CD-R (compact disk
recordable). Again, however, the use of CD-Rs for electronic data
retention is not very efficient. Moreover, it is not clear whether CD-Rs will
retain the data for the required amount of time (retained emails and other
documents must be reasonably accessible for at least 10 years).

Data Retention on Rewritable Media

There is, however, an alternative. The new ordinance allows business
records to be retained on modifiable data media, provided that the
integrity of the stored data and the time of storage are ensured by
technical means. The most obvious technologies for fulfilling these
prerequisites are digital signatures and time-stamps. While the ordinance
mentions both techniques explicitly, it stops short of defining the quality
requirements of the digital signatures. Neither are there any rulings yet on
the issue. However, as digital signatures are used in this instance not to
establish contractual obligations or otherwise to replace handwritten
signatures, but rather to prevent unnoticed data manipulations, the
minimum standard should not be very high.

Nevertheless, it is clear that full compliance with the new ordinance may
require a substantial effort in the way that companies retain their business
records. In larger organizations the IT department will usually have to
take the lead in establishing the required infrastructure. One likely way is
to adapt existing systems to comply with the regulations; some email
systems, for example, can automatically attach a digital signature to every
email and at the same time preserve reliable information about the time of
its creation (which is necessary in order to verify the validity of the digital
signature) and the relevant log-files. These emails can then be stored on
magnetic tapes and locked away in a safe place. Another way to ensure
compliance is to purchase a special software solution for archiving emails
on dedicated additional databases. Some of these products are already
on the market. They can usually be integrated with existing email
systems.

Beware of Electronic Invoices

The new Ordinance on Business Records is not the only piece of
legislation which must be observed in connection with the retention of
data under Swiss law. The Federal Tax Administration, for instance,
recently defined a set of rules that must be considered whenever invoices
including value added tax (VAT) are transmitted and stored electronically.
These rules are even stricter and more specific than those found in the
Ordinance on Business Records. Among other things, they require the
use of digital signatures based on digital certificates issued by accredited
certification authorities. In addition, they do not allow the retention of
electronically submitted invoices in hard-copy format.

If these rules are not observed, a VAT-taxable company receiving an
invoice may not be allowed to deduct the VAT it paid to its subcontractor
on its own VAT return. Depending on the circumstances, this can ruin a
business. Nevertheless, many companies will find that compliance with
the new rules on electronic invoices set forth by the VAT administration is
not worthwhile. In such cases paper-based invoices will have to be used,
even if the underlying transactions take place electronically. Businesses
should not accept invoices which are provided by electronic means only,
such as by email or as webpages. Companies that offer services or
goods to businesses in Switzerland (and other countries with similar
regulations) should be aware of these restrictions, too.


For further information on this topic please contact David Rosenthal at
Homburger by telephone (+41 43 222 1000) or by fax (+41 43 222 1500)
or by email (david.rosenthal@homburger.ch). The Homburger website
can be accessed at www.homburger.ch.


The materials contained on this website are for general information
purposes only and are subject to the disclaimer.

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