what is bank secrecy

myths vs. facts

Nominee shareholderBank secrecy is a special legislation that allows and requires banks and financial institutions to protect and keep confidential customer information from third parties, even though these are government or tax authorities. Banking secrecy refers to all types of personal and financial data, including deposits, number of accounts or transactions.

We must avoid mistaking it for simple professional secrecy which, although it regulates discretion for banks and financial intermediaries, does not offer the same level of protection. Real bank secrecy is protected by law or even by the constitution, such as the legendary Swiss banking secrecy, and provides stiff fines or even imprisonment for any bank employee that discloses information about accounts or transactions. Not even Public Administrations or Tax Authorities have direct access to such information, which remains solely in the hands of the banks themselves and their respective financial regulators or central banks. In this regard, the only way to get the lifting of bank secrecy is through a court order from a local judge, which even the authorities must get, if they want access to information. While it should be noted that with regard to the latter, there are a greater number of exceptions every time due to legislative changes and pressures from international agencies.

The introduction of bank secrecy was very positive in many respects as it ensured that the financial affairs of each person were adequately protected. However, it also opened doors for criminal or fraudulent activities, which were more difficult to fight due to the opacity of the accounts. This meant that countries with strong banking secrecy, especially the so- called tax havens, often became the perfect place to hide money derived from organized crime, corruption and drug trafficking. These territories often had no serious policy against money laundering and the origin of the funds deposited in bank accounts was not verified enough.

Faced with mounting international pressure, many of these offshore jurisdictions began, more or less voluntarily, to provide greater collaboration against crime. Specific legislation that allowed the lifting of bank secrecy in certain cases, particularly drug trafficking, terrorist financing or serious fraud was introduced. Mutual legal assistance treaties, known as MLAT were signed with certain countries, especially the United States or Great Britain and policies and rules against money laundering, popularly known as AML (Anti Money Laundering policies), were introduced after the September 11 attacks.

International orders related to such crimes began to be processed more often, as long as a local court had previously reviewed the evidence and endorsed the petition. For this to occur, the crime in question had to find its reflection in the local legislation of the jurisdiction in question. That is to say, the order could only flourish if the claimed offense, that had motivated the request for the lifting of bank secrecy, was also considered a crime under the local law of the country that housed the bank account. So generally for a request motivated by a drug trafficking crime or embezzlement of public funds the cooperation of the authorities could be expected, even when occurring in a tax haven.
However, in general terms, requests related to tax evasion were not dealt with, since this was not considered a crime in most offshore jurisdictions due to the fact that a type of territorial tax system was applied. That is, only economic activities performed in their own territory were taxed, there being no obligation to declare or pay tax on assets in the rest of the world.

Evolution of bank secrecy

From 2002, and with special emphasis on 2009, various international bodies like the OECD and the G-20 took various initiatives to try to force tax havens and offshore jurisdictions to relax their banking secrecy, also allowing its lifting for tax evasion crimes. Jurisdictions that supposedly applied “harmful tax practices” were identified and penalties for failing to cooperate in a greater fiscal transparency were proposed. The famous “grey list” of tax havens by the OECD was published among others. It was basically inherited from previous “black” lists that named the countries that did not fight against money laundering enough, but now this was given a tax dimension. The pressure worked, at least partially and from 2009 the vast majority of offshore jurisdictions enacted legislation giving the green light to the lifting of bank secrecy also in cases of tax evasion, provided that the requesting country had signed a TIEA (Tax Information Exchange Agreement), or an agreement to avoid double taxation with a tax information exchange clause. Therefore, in order to be able to lift bank secrecy two conditions have to occur:

  • That the laws of the country where the bank account is located consider this possibility in case of tax evasion crimes committed in another country.
  • A signed bilateral (or multilateral) agreement that includes the possibility of tax information exchange must exist.

If both conditions are not met, normally the information requests will not be dealt with, unless there are other elements that are being considered as a crime by local laws, such as fraud or embezzlement of public funds.

Also noteworthy is that even if both conditions are met, in the vast majority of cases this does not translate into an automatic data disclosure or a general lifting of banking secrecy that allows making massive requests for accounts of citizens of a certain country, which is known as “fishing expeditions“. On the contrary, most agreements require that in order to be able to make use of a clause of tax information exchange, generally the following conditions must be met:

  • The state applicant must indicate clearly the account number and name of the person they suspect it belongs to or that they estimate to be its beneficial owner (if nominees or trustees are used).
  • Evidence and proof of the commission of a tax felony have to be provided.
  • That the requested information cannot be obtained by other means has to be demonstrated.

As shown, the tax authorities of a certain country must make an important preliminary investigation to establish a direct relationship between an offshore account and its owner, an indispensable requisite for being able to use a tax information exchange agreement. If the tax evader has acted "prudently" by not making direct transactions between his domestic and offshore accounts, linking the two can be a very difficult, if not impossible task. That is to say, an information exchange agreement can be used to obtain the definite tax evasion evidence of which they already have substantial proof, but generally not for clues on possible evasive maneuvers of which there is no prior knowledge. In order to lift bank secrecy it is necessary to prove the existence of the crime beforehand and not vice versa.

Therefore, the authorities although for propaganda purposes, want the citizens to believe bank secrecy is over, they are far from victory. Tax fraud is happening and still will be, although no longer in broad daylight and with the brazenness with which it occurred some years ago.

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