Bank client confidentiality

What does bank client confidentiality mean?

Bank client confidentiality means that the banks have a duty to keep confidential all facts that involve their customers. At the same time, it is a right of the customer, for it is the customers not the banks who are entitled to the protected data. Bank client confidentiality protects the clients’ privacy and is thus comparable to the discretion exercised by lawyers or doctors. The right to privacy is a mainstay of the Swiss legal system, and it is laid down in the Federal Constitution (section 13).

Does bank customer confidentiality shield criminals?

No. Bank customer confidentiality has never been absolute. Swiss banks are obliged, for example, to disclose information in criminal proceedings against their clients. This is an absolute obligation, regardless of whether the offence was committed in Switzerland or abroad. Compared with other countries Switzerland has always been very successful at combating organized crime and money laundering. Switzerland is one of the cleanest financial centers in the world.

Can accounts be opened anonymously in Switzerland?

No, that is not possible. Banks follow so-called "know-your-customer" rules which require staff to identify the person opening an account and, where necessary, to establish the identity of the beneficial owner. Incidentally it was the banks themselves who drew up the extremely strict, internationally recognized rules for verifying the identity of their clients as a deterrent to money of criminal origin.

But numbered accounts are anonymous, aren’t they?
 

No. Contrary to what one might gather from thrillers and the media, there is no such thing as an anonymous account in Switzerland. The name of the holder of a numbered account is known, though only to a small group of people inside the bank. As far as bank customer confidentiality is concerned there is no difference between numbered accounts and any other sort of account.

 

Bank client confidentiality

Bank-client confidentiality protects privacy in accordance with the constitution and laws of Switzerland. Article 13 of the Swiss Federal Constitution confers on every person "the right to receive respect for his/her private and family life". This includes privacy in relation to financial income and assets. However, this does not cover abuses, particularly of a criminal nature. Bank-client confidentiality has always been waived for criminal investigators, to whom banks are required to pass client information. The addition of new crimes to the statute books has led to the creation of new duties of disclosure, for example regarding insider trading (1988) and money laundering (1990). This also applies to foreign prosecuting authorities, through the medium of international administrative and judicial assistance. The double taxation agreement between Switzerland and the US extended administrative assistance, which had been restricted to tax fraud, to "tax fraud and the like" (1997). On 13 March 2009, the Swiss Federal Government announced that it was to adopt the standards of the OECD (Organisation for Economic Cooperation and Development) and in future would also offer administrative assistance in respect of tax evasion in new negotiations with major financial centres (Article 26 of the OECD Model Tax Convention). This does not, however, imply the automatic exchange of information, as there are strict conditions on administrative assistance (e.g. well-founded suspicion of a tax offence). Otherwise, bank-client confidentiality remains in place.

Legal basis
The Swiss banker's professional duty of client confidentiality is codified in Article 47 of the Federal Act on Banks and Savings Banks (available in German, French and Italian only), which came into force on 8 November 1934. The article stipulates that anyone acting in his/her capacity as member of a banking body, as a bank employee, agent or liquidator, or as a member of a body or an employee belonging to an accredited auditing institution, is not permitted to divulge information entrusted to him/her or of which he/she has been apprised because of his/her position. The same is true for stock exchanges and securities dealers pursuant to Article 43 of the Federal Act on Stock Exchanges and Securities Trading of 24 March 1995 (available in German, French and Italian only).
Although people traditionally speak of "banking secrecy", it is important to note that this duty of discretion is not intended to protect the bank but the client. In that sense, the term "bank-client confidentiality" is much more appropriate.
Swiss legislation also guarantees respect for privacy in other areas of professional activity, e.g. for doctors and lawyers. This is a question of protecting personal privacy, a basic right established under Article 13 of the Federal Constitution.
Although a desire for privacy can play an important part in an investor's decision to deposit his/her assets in a Swiss bank, it is not the sole or most important factor in the decision. One should not forget that Switzerland's political and monetary stability, its excellent banking infrastructure and the professional know-how and experience of its bankers are also attractive factors.

Limits of Swiss bank-client confidentiality
A banker's obligation to respect his/her clients' privacy is not absolute, and no protection is afforded to criminals. In particular, there is a duty for banks to provide information under the following circumstances:
•civil proceedings (inheritance or divorce, for example);
•debt recovery and bankruptcy proceedings;
•criminal proceedings (money laundering, association with a criminal organisation, theft, tax fraud, blackmail, etc.). If circumstantial evidence gives rise to a suspicion that the financial assets are the proceeds of a crime, then financial institutions may inform the authorities without thereby breaching bank-client confidentiality; if the suspicion is well-founded, they must inform the Money Laundering Reporting Office;
•international administrative and judicial assistance proceedings (see below).
Bank-client confidentiality and tax law
The Swiss tax system is based on the principle of self-declaration by the taxpayer. Information and documents that a client requires from a bank for the tax authorities may only be passed from the bank to the client, not directly from the bank to the tax authorities. It is not the responsibility of the bank to oversee their clients' tax affairs. However, they may not assist in tax evasion by issuing misleading or incomplete attestations, as is expressly stated in the Due Diligence Agreement.
Withholding tax is an effective means of fighting tax evasion. Most income (interest and dividends) from Swiss capital investments is subject to this 35% tax, deducted at source. The existence of a withholding tax is a strong incentive to declare taxable gains honestly, as investors (bank clients) can only demand a refund of the tax on making the corresponding declaration. This also applies to taxpayers resident or domiciled abroad, where a double taxation agreement makes provisions for partial or total reimbursement of withholding tax.
A comparable solution exists with the European Union through the agreement on the taxation of savings income (tax withheld by banks in favour of the European Union).
Where tax fraud is involved, offences are dealt with by the competent authorities, towards which banks have a duty of cooperation, information and disclosure. Tax fraud occurs when a taxpayer deliberately uses forged or falsified documents in order to deceive the tax authorities and obtain undue tax advantages.
In such cases Switzerland extends international administrative assistance on the basis of its double taxation agreements or the second package of bilateral treaties with the European Union; it also extends international judicial assistance in criminal matters.
In the case of the US, the Swiss Federal Administrative Court ruled on 5 March 2009 that fraud could also exist where the US tax authorities did not intend to conduct an investigation due to the situation and that the taxpayer had anticipated this. In the specific case in question, a company controlled by the taxpayer (rather than the taxpayer himself) was the client of the bank, and the tax authorities were given inaccurate information about the control arrangements.
On 13 March 2009, the Federal Council finally announced that administrative assistance would in future also be offered in individual cases of well-founded suspicion of tax evasion, bringing the country into line with international standards (Article 26 of OECD Model Tax Convention).

International judicial assistance in criminal matters
Switzerland assists the authorities of foreign states in criminal matters in accordance with the Federal Act on International Mutual Assistance in Criminal Matters of 20 March 1981. The arrangements allow assets to be frozen and if necessary handed over to the foreign authorities concerned.
International mutual assistance in criminal matters is based on the principles of dual criminality, specificity and proportionality. Under the dual criminality rule, Swiss courts do not use coercive measures – lifting the requirement of bank-client confidentiality for example – unless the act being investigated is punishable under the law of both the requesting state and Switzerland. Under the specificity rule, information obtained through the mutual assistance arrangement can only be used for the purposes of the criminal proceedings for which the assistance is provided. According to the proportionality rule, coercive measures such as waiving bank-client confidentiality are not granted in the case of minor offences or where there is a risk that the proceedings may adversely affect the interests of persons not directly involved.

International administrative assistance between supervisory authorities
FINMA may communicate information not available to the public to the supervisory authorities in foreign countries. However, the communication of such information is subject to three statutory conditions:

•The information given by Switzerland may not be used for a purpose other than the direct supervision of banks or other financial intermediaries who are subject to official authorisation. No information may be passed on to tax authorities.
•The requesting foreign authority must itself be bound by official or professional confidentiality and be the intended recipient of the information. In administrative assistance of stock exchange supervisors, provisions on the public nature of the foreign proceedings take precedence.
•The requesting foreign authority may not pass the information received from Switzerland to other supervisory authorities without the prior agreement of FINMA or the general authorisation of an international treaty. Such information cannot be passed to criminal investigation authorities in foreign countries if mutual judicial assistance in criminal matters between the states involved would be excluded. This policy is designed to prevent states from bypassing the rules governing mutual judicial assistance in criminal matters. It applies only to administrative assistance between bank supervisory authorities, and not stock exchange supervisory authorities.
If the information to be communicated to a foreign supervisory authority concerns specific clients, any decision of FINMA can be appealed against before the Swiss Federal Administrative Court. Both FINMA and the Federal Administrative Court must guarantee the client's right to be heard and to examine the case file.

Consequences of violating bank-client confidentiality
Any violation of bank-client confidentiality, whether through negligence or intentionally, is punishable by a prison sentence of up to three years or by a fine (up to CHF 250,000 in the case of negligence). Violation of bank-client confidentiality remains a punishable offence even after the relationship with the client has come to an end or the banker has ceased his/her professional activity. The same applies to stock exchanges and securities dealers.

Source: www.swissbanking.org

Bank secrecy

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 instrument 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.


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.

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 [citation needed]. 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.

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.

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.