BANK SECRECY – FACT OR FICTION? 1 MARTIN HARTY Most jurisdictions recognise the obligation of banks not to divulge confidential client information save in the case of certain clearly defined statutory exceptions. This obligation will arise as a matter of private law from the express or implied terms of the banker – client relationship. Some jurisdictions re-inforce the private law position by passing bank secrecy or confidentiality statutes. These will typically provide for civil and criminal penalties, including imprisonment, in the event of unauthorised disclosure by a person subject to the relevant statute. We will call such statutory provisions "bank secrecy" and the jurisdictions which have them "secrecy jurisdictions." Bank secrecy is a hot topic. The discussions tend to concentrate on whether it is a good thing or a bad thing. But the starting point for any debate on the merits or demerits of bank secrecy should be an examination of its scope and whether there are exceptions or other ways around the protection it is said to afford. Any given case will turn on its facts and the specific legislation which is applicable. With that qualification, it will be argued that there are very significant exceptions and ways around bank secrecy and that claims (or complaints) concerning bank secrecy need to be qualified accordingly. BANK SECRECY LEGISLATION 2 Such legislation is a common feature of offshore financial centres. That of Liechtenstein has been much in the news of late and that of Switzerland rarely out of it. In the interests of variety we will therefore look at the Cayman Islands provisions. These are in the Confidential Relationships 3 (Preservation) Law which dates back to 1976. The structure of the law is similar to its analogues in other jurisdictions. There is a covered sector of what would nowadays be called financial institutions (including trust companies) and (ancillary) professionals (very broadly defined to include estate agents and public or government officials). Section 3 (1) provides that: "…this Law has application to all confidential information with respect to business of a professional nature which arises in or is brought into the Islands and to all persons coming into possession of such information at any time thereafter whether they be within the jurisdiction or thereout." Penalties include fines, imprisonment and, in appropriate cases, disgorgement of profits or 4 5 rewards. Interestingly, the consent of the Attorney General is required for a prosecution. This bank secrecy provision ("the secrecy provision") appears to be very broad and backed up by suitably deterrent civil and criminal penalties. However, there are exceptions to these provisions within the Law itself and overrides in other enactments. EXCEPTIONS WITHIN BANK SECRECY LEGISLATION 1 Group Compliance Director. Walkers Global. Views expressed in this paper are those of the author and not necessarily to be attributed to Walkers Global. Please send any comments or corrections to firstname.lastname@example.org 2 But not all – eg Jersey does not have statutory provisions. 3 Law 16 of 1976 (1995 Revision). 4 Ibid Section 5 5 Ibid Section 7 – at least in theory this indicates that there may be prima facie cases where prosecutions would not be brought for policy reasons. Section 3 (2) disapplies the secrecy provision in certain circumstances. These include the obvious case of client consent, express or implied (an example might be the Terms of Engagement letter of a professional by which a client consents to or acknowledges the professional's reporting obligations under Anti Money Laundering legislation). More significantly, the secrecy provision does not apply to "…the seeking, divulging or obtaining of confidential information…" in connection with a police investigation (by an Inspector or more senior officer) in connection with an offence committed or alleged to have been committed on the Islands or, if outside the Islands would have been an offence if committed in the Islands." This double criminality requirement relating to conduct outside the jurisdiction is a common feature of such legislation and (usually) has the effect of excluding tax evasion where there is no corresponding criminal offence within the secrecy jurisdiction. The Governor, Financial Secretary or Inspector are authorised in certain circumstances to seek information. Banks can disclose information when, and to the extent necessary, in litigation with customers or third parties. Any person intending to give evidence (whether voluntarily or under compulsion) in any court, whether within or outside the Islands, is required to seek court directions to the extent that this would involve divulging confidential information within the meaning of the Law. The court can then give directions concerning whether, and if so, in what 6 form, any such evidence should be given. Finally, the secrecy provision does not apply to disclosures "... in accordance with this or any 7 other Law…" OVERRIDING ENACTMENTS There are a number of these. They arise mainly out of Mutual Assistance arrangements and domestic Anti Money Laundering legislation which complies with the international standards set by the Financial Action Test Force. Mutual Assistance is a feature of double tax treaties. Since most (but not all) offshore centres do not have relevant domestic taxes on corporate or individual income or estates, it is easy to overlook the Mutual Assistance arrangements that exist in other areas. (The Cayman Islands 8 does have a Tax Information Exchange Agreement with the United States and the EU Savings Tax Directive should also be noted). In the Cayman Islands, the Criminal Justice (International Co-operation) Law (2004 Revision), originally enacted in 1997 enables the authorities in specified countries to request the Attorney General of the Cayman Islands to provide assistance for the investigation and prosecution of matters which involve offences under Cayman law or double criminality (offence committed overseas which would be an offence if committed in the Cayman Islands). The assistance which may be provided includes the taking of statements, looking at records, execution of searches and seizures identifying or tracing proceeds and property, and various related measures. These measures are actually invoked. This is clearly a highly significant qualification to bank secrecy. So too are the powers exercised by the Cayman Islands Monetary Authority ("CIMA") in support of its Cooperation Agreements with other jurisdictions. A recent example is that referred to in an announcement of 11 March 9 2008. This is with the UK Financial Services Authority and is described as "…The memorandum of understanding (MOU) for the exchange of information and investigative assistance between 6 Ibid Section 4. 7 ibid Section 3 (2) (c) 8 For a useful summary see http://www.lowtax.net/lowtax/html/jca2tax.html 9 Available at the CIMA website www.cimoney.com.ky in the Regulatory Framework / International Agreements section. CIMA and the FSA…" As at that date there were 12 such MOUs, including ones with the USA, Canada, Brazil and Panama. The assistance covered includes "...providing or confirming or verifying information, obtaining specified information from other parties…questioning or taking testimony of persons…" These are significant powers which are exercised. There are therefore various entry points for overseas authorities seeking information from 10 jurisdictions such as the Cayman Islands. ANTI MONEY LAUNDERING ("AML") REGULATION Financial institutions in most jurisdictions will be subject to specific "gatekeeper" requirements in relation to AML and Terrorist Financing. These include obligations to have internal reporting processes for cases where there is a suspicion of possible money laundering or terrorist financing, and, where appropriate, for such internal reports to be reported to an agency nominated for the purpose. These agencies will usually publish annual reports giving details of the number of reports received and which sector they came from. It is thought that jurisdictions with low suspicious activity reporting levels may come under pressure to achieve more effective reporting. Again in most jurisdictions, financial institutions will be subject to customer due diligence requirements, increasingly incorporating a risk based approach. This results in greater focus on transactions and clients with certain characteristics. Products or services which provide anonymity, transactions which appear to lack any lawful economic purpose or are more complex than would ordinarily be expected, and clients from jurisdictions with known AML weaknesses are all likely to be required to give more information about themselves and the purpose of a proposed transaction or reason for using an offshore service provider. Information so provided, is then capable of being required to be disclosed to the authorities, and via them to authorities in other countries. PRIVATE LAW REMEDIES Issues requiring or involving disclosure of confidential information may arise in the course of litigation. In common law jurisdictions following English principles, financial institutions not party to litigation and not alleged to have been involved in any wrongdoing may nonetheless find themselves subject to orders for discovery of confidential client information. 11 In the Brazil case, the Federal Republic of Brazil and the Municipality of São Paulo sought and obtained orders from the Royal Court in Jersey against innocent banks requiring them to provide information and documents concerning the Jersey bank accounts of certain companies. These were allegedly connected with the former Mayor of the Municipality who had been subject to allegations of corruption, embezzlement of public funds and money laundering during his time as Mayor. 12 Applying the principle established in the well known Norwich Pharmacal case, the court granted the orders sought. These were upheld by the Court of Appeal and the Privy Council subsequently refused leave to appeal. It is therefore reasonable to assume that this decision would be followed 10 For the Cayman Islands see the International Cooperation Regime section an www.caymanfinace.gov.ky For some interesting material on the network of US provisions and asset recovery programs with other countries see: http://www.state.gov/p/inl/rls/nrcrpt/2007/vol2/html/80881.htm 11 [2007 JLR 201] – I am grateful to Advocate Paul Nicholls partner in the Jersey Walkers partnership for drawing this case to my attention. 12  AC 133 in other common law jurisdictions applying English legal principles. So a bank which holds, albeit innocently, funds where there is a reasonable suspicion that these are tainted, may find itself compelled to disclose confidential client information and documents in those jurisdictions. THE RELATIONSHIP WITH NON SECRECY JURISDICTIONS So far, the discussion has looked at the position from the point of view of a bank in a jurisdiction. However, there are important issues for banks and other professionals, located outside the secrecy jurisdiction, and covered by AML obligations in their own jurisdiction. If such an institution is the parent or head office of the secrecy jurisdiction entity it will have to apply to the secrecy jurisdiction entity AML regulation at least as rigorous as that which applies at home. If secrecy jurisdiction law prevents this, it must notify its regulator. Banks in the major jurisdictions, particularly the USA, are required to examine and monitor their correspondent banking relationships, particularly those with banks in secrecy type jurisdictions. The enhanced due diligence and suspicious activity reporting requirements are much more likely to be triggered where a secrecy jurisdiction is involved. Why is the client making use of the secrecy jurisdiction bank? In English common law jurisdictions, the threshold for a "suspicion" which must be reported is 13 relatively low. In K Ltd v National Westminster Bank Plc & anor ,( England & Wales Court of Appeal (Civil Division)), the bank made a suspicious activity report based on no more than the fact that the case concerned a Swiss purchaser, mobile phones and payment from an account in the Netherlands Antilles. The court rejected a challenge from the bank's client to the making of the report. 14 In Da Silva the Criminal Division of the same court defined "suspicion" in these terms: "..a possibility, which is more than fanciful that the relevant facts exist. A vague feeling of unease would not suffice. But the statute does not require the suspicion to be "clear" or "firmly grounded and targeted on specific facts" or based upon "reasonable grounds." "…a possibility, which was more than fanciful, that the other person was or had been engaged in 15 or had benefited from criminal conduct." It is perhaps not surprising that there were over 220,000 Suspicious Activity Reports in the UK in 16 the year 01 10 06 – 30 09 07. The routing of payments through jurisdictions associated with lax AML controls, particularly where there is no obvious legitimate reason for this, is increasingly likely to trigger a report by professionals in onshore jurisdictions. The importance of these points is clear. Banks in secrecy jurisdictions must transact business with banks in other jurisdictions. Requirements imposed by the laws of those jurisdictions on domestic banks transacting cross border business, particularly with banks in secrecy jurisdictions, can lead to the reporting and disclosure of information which directly or indirectly undermines the effect of secrecy provisions in secrecy jurisdictions. This is not simply limited to AML/ Terrorist Financing issues. Possibly the most dramatic illustration of this is the UK recent amendment of the Taxes Managements Act 1970. A new provision, section 20 (8A) was inserted into the Act. This enables 13  EWCA Civ 1039 14  EWCA Crim 1654 15 Ibid at paragraphs 16 and 17. 16 http://www.soca.gov.uk/assessPublications/index.html the revenue authorities (HMRC) to require banks (and others) to make available for inspection by HMRC such documents in their possession or power as may in the reasonable opinion of HMRC contain information which may be relevant to determining the existence or extent of the tax liability of any taxpayer. HMRC successfully used this power to obtain details of thousands of accounts. It offered an amnesty of sorts and it is reported that the holders of about 45,000 accounts owned up and paid 17 a total of around 400 million pounds to HMRC in unpaid taxes and interest. INCREASED INFORMATION AVAILABLE TO THE AUTHORITIES Post 9/11 there has been a dramatic rise in the amount of surveillance in the international financial system. One of the most interesting and controversial has been the handover of SWIFT 18 private data of customers of European banks to the US authorities. In any event, the authorities have far more information and can "follow the money" very effectively in many cases. The notion that, in a sensitive case involving money laundering or terrorism, having followed the money to the borders of a secrecy jurisdiction, the US authorities in particular would meekly back off in the face of local bank secrecy provisions seems simply fanciful. This is graphically illustrated by an anecdote in a speech give some years ago by John E Harris, Director in the Office of International Affairs in the Criminal Division of the US Department of 19 Justice. It concerns a foreign woman who studies a Japanese art which involves using sand to create miniature landscapes. Unsurprisingly, the sand had a habit of falling out of the perfect wave and ripple patterns required. Unsuccessful after many years of industrious and diligent study, she bows at the feet of the master to discover the secret. Leaning forward, he whispers "Use glue." It is worth quoting the whole of what follows: "I thought of this story about six months ago, when British and French prosecutors came to Washington to discuss mutual legal assistance. The American, French, and British prosecutors had worked together on a big multinational investigation, and the European prosecutors wanted to know why the U.S. had been more successful in obtaining evidence in Asia, Latin America, the Caribbean and Africa than the British and the French. Attorney General Reno ordered me to tell them the secret of our success, and I told them the same secret that I will share with you today. When we really want to obtain bank records or other evidence from, say, the Bahamas, or Panama, we learned that we must talk to the officials in those countries, just as you would with the officials in Switzerland or Canada. We try to deal with each nation, one by one, on the basis of mutual respect, the sincere desire to learn the requirements of their law, and the goal of constructing a fair and mutually advantageous bilateral relationship. This mutual respect is the glue that holds bilateral relationships together, and it nurtures international cooperation than mere words on paper or ancient legal principles with fancy Latin names. When countries have achieved that kind of understanding, they find it logical, desirable, and easy to cement the relationship with a mutual legal assistance treaty. The benefits of such a relationship are enormous, and if you 20 want lasting cooperation, there is no more effective approach" AS A LAST REPORT THERE IS ALWAYS MONEY Unable to lay their hands on glue, the German authorities have in the recent LGT Liechtenstein case, reportedly, paid out substantial sums of money to obtain confidential bank details of their 17 For a short note see www.taxresearch.org.uk 18 See eg http://www.privacyinternational.org/article.shtml?cmd%5B347%5D=x-347-542162 19 http://www.acpf.org/Activities/public%20lecture2000/lectureHarriss(E).html 20 Ibid page 13. nationals who were allegedly using that jurisdiction to evade tax. In this case, it was the authorities that paid the money, but there is no reason why criminals should not also try to infiltrate banks in secrecy jurisdictions as they have tried to do, sometimes successfully, in mainstream jurisdictions. OTHER SECRECY JURISDICTIONS The Cayman Islands has been used as an example. The secrecy laws in other will generally be broadly similar even if they differ in scope and exceptions. But no discussion of this subject would be complete without some reference to Switzerland. What follows is based on a paper entitled 21 "Policy and Fiscal Effects of Swiss Bank Secrecy" by Dr. David Chaikin. Chaikin notes that Swiss bank secrecy is not absolute and that disclosure is permitted (1) with the consent (real and voluntary) of the customer, or (2) in accordance with Swiss law – such as the requirement to file suspicious activity reports with the authorities, or (3) under the terms of an 22 order from a competent Swiss court. Secrecy provisions will not apply in criminal matters – either domestic or overseas conduct which would be criminal under Swiss law. But Swiss law has criminalized areas such as insider dealing, market manipulation, money laundering and bribery of public officials and therefore expanded the scope of the exceptions to secrecy laws. As Dr Chaikin points out, the introduction of such changes is often accompanied by claims that they do not change the position on secrecy. "The statements of the Swiss government are technically correct because the new crimes do not create exceptions to Swiss bank secrecy, but rather give greater content to the exceptions. The practical reality is different because the new crimes dilute bank secrecy in respect of conduct 23 which previously was not criminal under Swiss law." (Dr Chaikin's paper contains very interesting discussions of the Swiss approach to tax evasion and tax fraud and also flight capital and fiduciary deposits.) CONCLUSION "Offshore Bank Secrecy a Relic of the Past" proclaims the announcement of a recent conference on the subject. That may be rather exaggerated as the exceptions to bank secrecy outlined above largely affect those customers who are, or are suspected to be, involved in unlawful activity of some kind. It is acknowledged that there are reasonable and lawful reasons for non residents to have accounts in secrecy jurisdictions. But it would be a greater exaggeration to claim that bank secrecy is a complete barrier to the disclosure of confidential client information. Anyone who thinks this may care to reflect on the fate of the Maginot line. This impressive defensive system of fortifications and other defensive measures was built painstakingly by the French after the World War I to protect the borders with (mainly) Germany. In May 1940 the German attack on France simply bypassed it. The moral of course is that too great a focus on the strength of any particular defensive measures can distract attention from the other options open to those interested in attack. POSTSCRIPT 21 www.austlii.edu.au/au/journals/RevenueLJ/2005/5.pdf (2005) 15 Revenue LJ 22 Ibid page 99 23 Ibid. On 10 04 08, the Administrative Division of the High Court of England and Wales gave its judgment in the BAE / Al-Yamamah case. This involved a challenge to the decision to discontinue an investigation into corruption allegations. Consideration of this fascinating and important case is out of scope, but it is worth noting that what triggered the relevant Saudi threat was the fact that 24 25 "…in July 2006 the SFO was about to obtain access to Swiss bank accounts…" Given the context, this is surely as clear an example as there could be of the limitations of bank secrecy provisions. MJH 18 04 08 24 Serious Fraud Office 25  EWHC 714 (Admin) at paragraph 4.