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Bank Secrecy: Does Privacy Trump Transparency?

Bank secrecy first came to the fore with the Swiss Banking Act of 1934, a series of regulations that purportedly sought to safeguard the assets of the Jewish population fleeing Nazi Germany.

The Act was codified on that year following a massive tax evasion scandal in France involving celebrities, media personalities and other high-end public figures who, unbeknownst to French tax authorities, had stashed their millions in Swiss banks.

From its outset, the 1934 Act enforced bank secrecy, protecting account holders’ personal details and setting limits on what information could be passed on to third parties such as local authorities and foreign governments.

Numbered bank accounts, which hid the account number’s owner behind a code only known to few bank employees, also made an appearance as a means of protecting client privacy.

As part of this newfound setup, only in cases involving serious crimes or with a judge’s subpoena could personal information be released.

This setup, though, has also allowed Switzerland to accrue 2.4 trillion dollars in offshore wealth (as of 2014 per Boston Consulting Group) or nearly 25 percent of the offshore market.

Historically speaking, according to a 2012 The Economist article, “Swiss bankers and regulators have long dodged and blunted outsiders' efforts to erode banking secrecy: out of a principled deference for their respectable and prudent customers' privacy, they insist; because of the fat fees paid by crooks, tax-dodgers and dictators, say critics.”

Bank Secrecy: Does Privacy Trump Transparency

FATCA, CRS & Dismantling Bank Secrecy

These days, however, with the advent of the US’s Foreign Account Tax Compliance Act (FATCA) and the OECD’s Common Reporting Standards (CRS) under its Automatic Exchange of Information initiative, bank secrecy throughout the world has taken a big hit as a greater number of financial institutions are being pressured into releasing their bank account holders’ personal details.

Even before FATCA and CRS, pressure had already been mounting.

In 2009, Swiss bank UBS reached a Deferred Prosecution Agreement with the US government for assisting US citizens in evading taxes, a move that cost them 780 million dollars in fines and a long drawn-out battle with US authorities over the release of the names of US citizens suspected of tax evasion.

Furthermore, in 2013, Switzerland’s oldest bank Wegelin & Co. pleaded guilty to assisting US clients to evade taxes on more than 1.2 billion dollars in assets between 2002 and 2010, act which led to the bank’s foreclosure and a hefty fine of close to 60 million dollars.

These two cases, among others, set a negative precedent for misbehaving banks.

Then, in February 2013, Switzerland signed an intergovernmental agreement (IGA) with the US implementing FATCA. Under this model (Model II), the Swiss government agreed to allow its financial institutions to hand over information on US account holders (with certain exemptions) directly to the US’s Internal Revenue Service (IRS).

However, under this agreement with the US, Switzerland stood somewhat firmly behind its bank secrecy laws.

Switzerland stood somewhat firmly behind its bank secrecy laws

According to Professor William Byrnes and Robert Munro’s LexisNexis Guide to FATCA Compliance, under the US-Switzerland IGA, the Swiss “financial institution is to obtain prior consent from the accountholder regarding the reporting of bank information to the IRS. In particular, there is a duty to proceed actively. Where the accountholder declines consent, the financial institution may not deliver information to the IRS. Without prior consent it would violate Swiss banking secrecy rules, which are still in effect. What is reported, however, are "nameless aggregates" and the number of accounts that, in FATCA terms, belong to the ‘Recalcitrant Accountholders.’”

Additionally, in the analysis performed by Byrnes and Munro, “Switzerland, in particular, did not insist on a reciprocal mechanism, as this would have stood in perfect contradiction to its official stance on automatic information exchange. Therefore, it would have been detrimental to its credibility to introduce information exchange for Swiss taxpayers having bank accounts in the United States.”

Then, in 2014, Switzerland, alongside other OECD members and thirteen non-OECD jurisdictions, agreed on a CRS to automatically and systematically hand over information on their residents’ bank accounts and assets abroad.

Per the OECD, this initiative, which is part of an overall effort to curtail tax evasion, “calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis.”

So far, sixty-one countries have signed the CRS initiative with the first exchange occurring in 2017.

Adding to this move towards transparency, in September 2015, in a case involving a French couple with Swiss residency but suspected of retaining French tax residence, the Swiss Supreme Court reversed a decision by a lower court and decided that Swiss tax authorities have to turn over to French authorities information on the account holders’ beneficial owners.

On its decision, the high court said, "banking secrecy does not prevent administrative assistance," and there’s no rule that prevents France from acquiring those details as long as they are “foreseeably relevant.”

Plenty of Work Left to Do on Bank Secrecy

Plenty of Work Left to Do on Bank Secrecy

Despite these efforts, the Swiss are still miles away from transparency.

Case in point, Switzerland ranked first in Tax Justice Network’s (TJN) 2015 Financial Secrecy Index, a ranking of countries based on their levels of secrecy and the size of their offshore operations.

Per TJN, "the concessions [Switzerland] has made so far – usually in response to pressure against Swiss banks, rather than against Switzerland itself – can to some degree be summarised as what civil society groups Alliance Sud and Berne Declaration call a “Zebra strategy”: white money for rich and powerful countries; black money for vulnerable and developing countries. These and other factors, along with ongoing aggressive pursuit of financial sector whistleblowers (resorting at times to what appear to be non-legal methods) are reminders why Switzerland remains the world’s single most important secrecy jurisdiction today.”

Many Swiss, however, believe they are not alone and shouldn’t be the primary focus of the US, the UK and other jurisdictions.

Per the aforementioned 2012 The Economist article, “a common (and reasonable) complaint is that many of the countries pressing them are also tax havens in their own right. The United States houses money from Latin America in its Florida banks, and under Delaware and Nevada law it is easy to set up a tax-friendly shell company. Britain has the Channel Islands. ‘They have no moral right to push Switzerland on this, because they haven't cleaned up their own mess,’ harrumphs a Swiss proponent of secrecy.”

Regardless of this sentiment, some Swiss bankers believe the days of secrecy are coming to an end.

In a 2015 conference in Lebanon, another of the few countries with tight bank secrecy laws, Jacques de Saussure, the Chairman of Geneva-based Banque Pictet & Cie, told his Lebanese banking counterparts that “the banks which attracted tax evaders can no longer continue in this pattern because the era of banking secrecy is over and an era of transparency has begun.”

Only time will tell.

Question markQuestions: Is there a future for bank secrecy laws? Should privacy trump transparency?