Bank secrecy (or bank privacy) is a legal principle in some jurisdictions under which banks are not allowed to provide to authorities personal and account information about their customers unless certain conditions apply (for example, a criminal complaint has been filed[1]). In some cases, additional privacy is provided to beneficial owners through the use of numbered bank accounts or otherwise. Bank secrecy is prevalent in certain countries such as Switzerland, Singapore, Lebanon and Luxembourg, as well as offshore banks and other tax havens under voluntary or statutory privacy provisions.
Created by the Swiss Banking Act of 1934, which led to the famous Swiss bank, the principle of bank secrecy is always considered one of the main aspects of private banking. It has also been accused by NGOs and governments of being one of the main instruments of underground economy and organized crime, in particular following the class action suit against the Vatican Bank in the 1990s, the Clearstream scandal and the terrorist attacks of September 11, 2001. Former bank employees from banks in Switzerland (UBS, Julius Baer) and Liechtenstein (LGT Group) have testified that their former institutions helped clients evade billions of dollars in taxes by routing money through offshore havens in the Caribbean and Switzerland. One of these, Rudolf M. Elmer, wrote, "It is a global problem...Offshore tax evasion is the biggest theft among societies and neighbor states in this world."[2] The Swiss Parliament ratified on June 17, 2010 an agreement between the Swiss and the United States governments allowing UBS to transmit to the US authorities information concerning 4,450 American clients of UBS suspected of tax evasion.[3][4]
Advances in financial cryptography (e.g. public-key cryptography) could make it possible to use anonymous electronic money and anonymous digital bearer certificates for financial privacy and anonymous Internet banking, given enabling institutions (e.g. issuers of such certificates and digital cash) and secure computer systems.
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Bank secrecy was codified by the 1934 Swiss Banking Act following a public scandal in France, when MP Fabien Alberty denounced tax evasion by eminent French personalities, including politicians, judges, industrialists, church dignitaries and directors of newspapers, who were hiding their money in Switzerland. He called these men of "a particularly ticklish patriotism", who "probably are unaware that the money they deposit abroad is lent by Switzerland to Germany". The Peugeot brothers and François Coty, of the famous perfume family, were on his list. Since then, Swiss banks have acquired worldwide celebrity due to their numbered bank accounts, which critics such as ATTAC NGO alleged only help legalized tax evasion, money laundering and more generally the underground economy.[5]
Under the Swiss principle of bank secrecy, privacy is statutorily enforced, with Swiss law strictly limiting any information shared with third parties, including tax authorities, foreign governments or even Swiss authorities, except when requested by a Swiss judge's subpoena . However banking is not strictly anonymous since under its banking law all Swiss bank accounts, including numbered bank accounts, are linked to an identified individual. This law only permits a bank to share information with others in cases of severe criminal acts, such as identifying a terrorist's bank account or tax fraud, but not simple non-reporting of taxable income (called tax evasion in Switzerland). Under pressure from the G20 and the OECD, the Swiss government announced in March 2009 that it will abolish the distinction between tax fraud and tax evasion in dealings with foreign clients.[6] The distinction remains valid for domestic clients. Any bank employee violating a client's privacy could be punished quite severely by law. After signing 12 new double taxation treaties in accordance with the international standard set by the OECD, Switzerland was removed from the grey list of non-compliant tax jurisdictions.[7]
UBS was caught red-handed by the United States government offering tax evasion strategies, sending undercover bankers with encrypted computers to the United States. After it was caught, UBS paid a $780 million penalty and handed over hundreds of client files to American authorities.[8][9] In 2010, the Swiss and the United States governments negotiated an agreement allowing Swiss bank UBS to transmit to the US authorities information concerning 4,450 American clients of UBS suspected of tax evasion.[3][10]
In the aftermath of the UBS and Julius Baer banking cases, some wealthy clients who continue to use offshore accounts are turning to private banks in Singapore and Hong Kong. In addition to the local Singapore or Hong Kong banks, offices have been opened in those localities by a number of Swiss private banks. [11] The move to Singapore and Hong Kong is an alternative to the banking secrecy that Swiss banks have come under attack for. Singapore has bank secrecy provisions comparable to those in Switerland. Although Hong Kong does not have the same bank privacy laws, it offers flexibility in the creation of opaque companies that can serve as tax conduits. [12]
Many offshore banks, located in tax havens such as in the Cayman Islands and Panama, also have strict privacy laws.
The United States' Bank Secrecy Act (or BSA) requires financial institutions to assist government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, file reports of cash transactions exceeding $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities.
The 2001 USA PATRIOT Act created many new rules for American banks in an attempt to defeat bank secrecy. A list of such banks or shell banks are given to the U.S. banks who are not allowed to wire money to them. All new customers to American banks must now be asked if they are U.S. citizens. If not, they must state their occupation and whether they expect to be wired foreign monies.
European countries had long complained that banking secrecy provisions in countries such as Austria, Liechtenstein, Luxembourg, and Switzerland favored tax evasion by their citizens, particularly the citizens of countries such as Belgium, France, Germany and Italy which border one or more of those countries. In 2009 tensions reached a height and concerned countries (supported to some extent by other countries) raised the issue at the OECD and the G20. As a result, essentially all countries agreed to implement tax treaties that would facilitate the exchange of banking information in case of suspected tax evasion.[13][14]
Jurisdiction with what other countries view are excessive protections benefitting dubious parties are sometimes known as secrecy havens, by analogy with tax havens.
Numbered bank accounts, used by Swiss banks and other offshore banks located in tax havens, have been accused by NGOs such as ATTAC of being a major instrument of the underground economy, facilitating tax evasion and money laundering. After Al Capone's 1931 condemnation for tax evasion, "mobster Meyer Lansky took money from New Orleans slot machines and shifted it to accounts overseas. The Swiss secrecy law two years later assured him of G-man-proof-banking. Later, he bought a Swiss bank and for years deposited his Havana casino take in Miami accounts, then wired the funds to Switzerland via a network of shell and holding companies and offshore accounts", according to journalist Lucy Komisar. Joseph Stiglitz, 2001 Nobel laureate for economics, told Komisar:
In 1999, a class action suit against the Vatican Bank criticized the role of Switzerland during World War II. Governments of developing countries accused Swiss banks of detaining most of the money stolen by corrupt dictators, which Oxfam International estimate to about $50 billion a year deposited in offshore tax havens, nearly the size of the $57 billion annual global aid budget.
Also in 1999, according to Lucy Komisar, banks "orchestrated a successful e-mail campaign to Congress" to "sink a 'know your customer' regulation proposed by the Federal Deposit Insurance Corporation".[5]
In 2001, the United States learned that the Swiss had protected the bank that handled finances for Osama Bin Laden. One of them, the Bahrain International Bank, had funds transiting through non-published accounts of Clearstream, which has been qualified as a "bank of banks" and was involved in one of Luxembourg's major financial scandals.
A series of articles published on June 23, 2006, by The New York Times, The Wall Street Journal and the Los Angeles Times revealed that the United States government, specifically the US Treasury Department and the Central Intelligence Agency, had a program to access the SWIFT transaction database after the September 11th attacks rendering bank privacy severely compromised.
According to a book published in 2010 by an investigative journalist, the successful campaign to limit bank secrecy will likely lead to an increase use of trusts, mostly based in the UK or the USA.[15] Such trusts can be used for tax evasion and money laundering.[16]
The notion of Swiss banks and secret numbered accounts has been widely used in post-war literature and cinema. Whether quite realistically in James Bond novels/movies or more speculatively in The DaVinci Code novel/movie, the instrument is often used by writers for villains to hide assets.