Bank secrecy (or bank privacy) is a legal principle under which banks are allowed to protect personal information about their customers, through the use of numbered bank accounts or otherwise. Effective bank secrecy is better achieved in certain countries, such as Switzerland or in tax havens, where offshore banks adhere to voluntary or statutory levels of privacy.
Created by the Swiss Banking Act of 1934, which led to the famous Swiss bank, the principle of bank secrecy is sometimes 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 September 11, 2001.
Advances in financial cryptography (e.g. public-key cryptography) make it possible to use anonymous electronic money and anonymous digital bearer certificates to achieve financial privacy and anonymous internet banking.
1 – Reasons to use bank secrecy
There are a number of reasons to use banking privacy:
- To hide it from friends, spouse or other family members.
- To hide it from the employer. (Many employers restrict the ability of their staff to trade shares to prevent conflicts of interest).
- To store embezzled money.
- To launder money.
- To prevent confiscation of money, e.g. in the case of potential bankruptcy.
- Tax evasion (banking secrecy extends to tax agencies being refused permission to examine accounts).
- Tax resistance (by libertarians, or others, who oppose the institution collecting the tax).
- Protection from over-bearing or corrupt local government agencies.
- For any other reason which requires no-one being able to identify the amount of money you have or have earned/acquired.
- Privacy from press or publicity. Many newspapers annually publish “rich lists”, which are list of the richest people in a country or an area. Many factors including the size of an individual’s bank balance can be taken into account in drawing conclusîons as to the size of his wealth.
- Protection from criminals. In some countries, criminal gangs can access information on bank customers. This might interest criminals, such as kidnappers, extortionists, or identity thieves.
- Protection from spongers. This might include charities, venture capitalists seeking seed money, family members, beggars, or investment salesmen.
- Simply for privacy. The possession of liquid wealth attracts publicity, which is not always welcome.
2 – Swiss Banking Act of 1934
Bank secrecy was invented by the 1934 Swiss Banking Act following a public scandal in France, when MP Fabien Alberty denounced tax evasion by eminent French personalities, including politicans, 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 world-wide celebrity due to their anonymous numbered bank accounts, which critics such as ATTAC NGO alleged only help legalized tax evasion, money laundering and more generally the underground economy.
Under the 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 anonymous banking is not strictly true as a term as all Swiss bank accounts, including numbered bank accounts, are linked to an identified individual under Swiss banking law. 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 . Any bank employee violating a client’s privacy is punished quite severely by law. Many offshore banks, located in tax havens such as in the Cayman Islands and Panama, also have strict privacy laws.
3 – U.S. Bank Secrecy Act of 1970
- The 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.
4 – Criticisms
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 a 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 to Komisar:
- “You ask why, if there’s an important role for a regulated banking system, do you allow a non-regulated banking system to continue? It’s in the interest of some of the moneyed interests to allow this to occur. It’s not an accident; it could have been shut down at any time. If you said the US, the UK, the major G7 banks will not deal with offshore bank centers that don’t comply with G7 banks regulations, these banks could not exist. They only exist because they engage in transactions with standard banks.”
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”.
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 scandal.
The 2001 USA Patriot Act has created many new rules for US Banks in an attempt to defeat bank secrecy. A list of such banks or shell banks are given to the US banks who are not allowed to wire money to them. All new customers to US banks must now be asked if they are US citizens. If not, they must state their occupation and whether they expect to be wired foreign moneys.