Banking secrecy is the official term used to refer to what is normally known to us as banking confidentiality. By banking secrecy, we refer to the professional discretion that banking institutions, bank employees, surveillance authorities, legal and accounting professionals and representatives linked to the bank must uphold with respect to the information and knowledge obtained about the bank’s customers or other persons or companies which may be involved in various bank transactions (third parties).
Through banking secrecy the objective is to provide safe and secure conditions for individuals and corporations to do banking business. As a matter of choice, a bank’s customer may ask that his information be revealed and thereby release the bank from its obligation to provide confidentiality at all times. A banker however, cannot take the decision to release the details of a customer on its own as this would be a breach of confidentiality or secrecy laws.
In civil law jurisdictions bank secrecy is governed by a contractual obligation signed by a banker in which a vow is taken to protect and maintain the details of a customer’s situation.
Secrecy, however, is not a feature which is peculiar to banking and can be found in many professional areas including the medical and legal professions, clergy, management, accounting and secretarial or administrative assistant duties. Banking secrecy is often treated as different from the discretion given to customers of the mentioned professional fields, but in reality functions on the very same basis of not disclosing any information about a customer’s personal situation. In the USA trading on the stock market is also entitled to confidentiality under Article 43 Federal Act on Stock Exchanges and Securities Trading; SR 954 1.
Banking secrecy was first introduced in Switzerland under the Swiss Banking Act 1934 and gave rise to what is commonly known today as Swiss banking which is heavily identified for its secrecy provisions.
Following the tragic incidents of September 11, legislations establishing due diligence measures to be made effective for the prevention and elimination of bank transactions linked with terrorist financing were passed by the Bush (Jr.) administration.
The Know Your Client or KYC rules passed called for a reduction and in some cases termination of certain banking secrecy practices. For example, anonymous banking whereby offshore accounts were opened without identifying the beneficial owner of an account and a number or code was assigned for performing transactions was brought to a halt. Currently, banks offering anonymous banking are very few and provide the service on a limited level whereby the customer’s details are kept with a specific officer or at the management level of the bank and is not given to the tellers and other employees who work with codes or numbers when working with anonymous customers. These types of accounts are referred to as ‘number accounts’ as the client’s name is replaced by a number and disclosed only with a particular person group of people within the bank. Hence, although banking secrecy is available in many countries including Belgium, Germany, USA, France and the UK, it exists in varying forms and extents according to the laws of the country. Due diligence also ought to be performed and a bank must at all times be able to identify its customers.
Banking secrecy is also carried out within limitations set by internationally accepted exceptions provided for under administrative law, bankruptcy law and criminal law, particularly where mutual assistance is required in legal matters. If a bank’s customer has been suspected of unacceptable dealings, banking secrecy can be lifted by the court’s order. In these circumstances, banking secrecy is not total and becomes non functional where prosecution by the court is concerned.
In the US, the Bank Secrecy Act of 1970 calls on financial institutions to facilitate government agencies with identifying and stopping money laundering. One of the requirements of the Act is that banks file reports whenever transfers over USD10,000 are made on a daily basis, report suspicious activities and maintain records of cash purchases of negotiable instruments. Terrorist finance tracking programs are also established to provide the employees and professionals of financial institutions with tools and guidelines to identify suspicious and irregular transactions.
The Banking Secrecy Act identifies five main types of reports to be made to the government. The reports include the FinCEN (Financial Crimes Enforcement Network) Form 104 Currency Transaction Report, which is required to be filed for every currency exchange, payment, deposit, withdrawal or transfer exceeding $10,000. If several transactions were done by or in the name of one particular person or transactions are above $10,000, they must be dealt with as one transaction; Department of the Treasury Form 90-22, which must be filed for a US citizen, national or bank with interest in, is a signatory to or the owner of securities, bank (s) or accounts abroad that are more than $5,000; Designation of Exempt Person FinCEN Form 110 which must be filed by banks to list its exempt customers; FinCEN Form 105 Report of International Transportation of Currency or Monetary Instruments, which must be files by every person and bank that physically transports, ships, receives or mails any form of instrument amounting to over $10,000; Suspicious Activity Report, which must be filed by banks if any transaction is in violation of law or considered to suspicious activity.
Businesses and individuals face the possibility of being charged if they do not adhere to these filing and reporting laws established by the Banking Secrecy Act.
Limitations placed on banking secrecy tend to defeat the whole idea of going offshore in the first place. But, certain rules and sanctions have been established to prevent and eliminate the incidence of terrorist financing and illegal money trafficking which affect us all as these activities are very closely linked to organized crime, drugs and terrorism. While we do not doubt and question the importance of banking secrecy in light of the multiple uses of offshore vehicles, certain practices need to be put in place to ensure that the financial system is a clean one, especially where offshore banking is concerned – that it remains a legitimate, safe and blameless way of doing business, protecting assets and reducing tax burdens.
(c) Caribbean Land and Property July 2009