Bank secrecy

Banking secrecy,^[1]^[2] alternatively known as financial privacy, banking discretion, or bank safety,^[3]^[4] is a conditional agreement between a bank and its clients that all foregoing activities remain secure, confidential, and private.^[5]^[6] Most often associated with banking in Switzerland, banking secrecy is prevalent in Luxembourg, Monaco, Hong Kong, Singapore, Ireland, and Lebanon, among other off-shore banking institutions.

Otherwise known as bank–client confidentiality or banker–client privilege,^[7]^[8] the practice was started by Italian merchants during the 1600s near Northern Italy (a region that would become the Italian-speaking region of Switzerland).^[9] Geneva bankers established secrecy socially and through civil law in the French-speaking region during the 1700s. Swiss banking secrecy was first codified with the Banking Act of 1934, thus making it a crime to disclose client information to third parties without a client's consent. The law, coupled with a stable Swiss currency and international neutrality, prompted large capital flight to private Swiss accounts. During the 1940s, numbered bank accounts were introduced creating an enduring principle of bank secrecy that continues to be considered one of the main aspects of private banking globally. Advances in financial cryptography (via 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 and secure computer systems.^[10]

While some banking institutions voluntarily impose banking secrecy institutionally, others operate in regions where the practice is legally mandated and protected (e.g. off-shore financial centers). Almost all banking secrecy standards prohibit the disclosure of client information to third parties without consent or an accepted criminal complaint. Additional privacy is provided to select clients via numbered bank accounts or underground bank vaults.

Recent research has indicated that the use of offshore financial centers has been of concern because criminals get involved with them. It is argued that these financial centers enable the actions of criminals. However, there have been attempts by global institutions to regulate money laundering and illegal activities.^[11]

Switzerland

United States

Europe

Overseas territories

Links to financial crime

Numbered bank accounts, used by Swiss banks and other offshore banks located in tax havens, have been accused by the international community of being a major instrument of the underground economy, facilitating tax evasion and money laundering.^[12] After Al Capone's 1931 condemnation for tax evasion, according to journalist Lucy Komisar:

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.^[12] 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.^[12]

Economist and Nobel Prize laureate Joseph Stiglitz, told 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.^[12]

Future Research

Further research in politics is needed to gain a better understanding of banking secrecy.^[13] For instance, the role of economic interests, competition between financial centers, and the influence of political power on international organizations like the OECD are great places to start.

References

^ O'Donnell, John (January 30, 2018). "Global study names Switzerland as capital of bank secrecy". Reuters. Retrieved June 4, 2016.
^ Gibson, Stuart (April 5, 2017). "Swiss Bank Secrecy—Their Lips Say Yes, But Their Eyes Say No". Forbes. Retrieved June 1, 2018.
^ Guex (2000), p. 240
^ Bloomberg Surveillance (January 24, 2018). "Tidjane Thiam Says Markets and Volatility Are Going Up". Bloomberg News. Retrieved January 24, 2018.
^ "Black's Law Dictionary: Bank Secrecy". The Law Dictionary. December 12, 2012. Retrieved June 1, 2018. The bank's promise to keep financial affairs and dealings of the customer confidential. This doesn't apply to credit information that is shared freely. Certain information must also be made available due to antiterrorist legislation.
^ "Financial Privacy". Investopedia. November 17, 2008. Archived from the original on June 18, 2018. Retrieved June 16, 2018. It also prohibits the sharing of client information to affiliates of the institution as well. For example: A customer holds a checking account at a bank. The bank has an investment division as well as an insurance division. The bank may give information to the client about the other needs served by their external divisions, but not vice versa.
^ Thomasson, Emma (April 18, 2013). "Special Report: The battle for the Swiss soul". Reuters. Retrieved May 19, 2018.
^ Schütz, Dirk (2000). The Fall of UBS: The Forces that Brought Down Switzerland's Biggest Bank. Pyramid Media Group. ISBN 9780944188200.
^ Guex (2000), p. 237
^ Enzmann, Matthias; Fischlin, Marc; Schneider, Markus (2004). "A Privacy-Friendly Loyalty System Based on Discrete Logarithms over Elliptic Curves". In Juels, Ari (ed.). Financial Cryptography. Lecture Notes in Computer Science. Vol. 3110. Berlin, Heidelberg: Springer. pp. 24–38. doi:10.1007/978-3-540-27809-2_4. ISBN 978-3-540-27809-2.
^ Young, Mary Alice (2013-07-05). "The exploitation of offshore financial centres: Banking confidentiality and money laundering". Journal of Money Laundering Control. 16 (3): 198–208. doi:10.1108/JMLC-01-2013-0004. ISSN 1368-5201.
^ ^a ^b ^c ^d Komisar, Lucy (April 4, 2003). "Offshore Banking: The Secret Threat to America". The Komisar Scoop. Retrieved May 18, 2018.
^ Emmenegger, Patrick (March 2014). "The Politics of Financial Intransparency: The Case of Swiss Banking Secrecy". Swiss Political Science Review. 20 (1): 146–164. doi:10.1111/spsr.12092. ISSN 1424-7755.