Bank secrecy

Banking secrecy,[1][2] alternately 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] 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. Most often associated with banking in Switzerland, banking secrecy is prevalent in Luxembourg, Monaco, Hong Kong, Singapore, Ireland, Lebanon and the Cayman Islands, 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 their 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.

Gornergrat in Wallis, Switzerland, 2012 August
Switzerland is known for its bank secrecy and strict bank–client confidentiality. Pictured: the Swiss Alps, the location of many underground storage bunkers for gold.

Links to financial crime

Al Capone in 1930
Mobster Al Capone was charged with and prosecuted for income tax evasion in the 1930s.

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.[10] 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. 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.[10]

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.[10]

See also

References

  1. ^ O'Donnell, John (January 30, 2018). "Global study names Switzerland as capital of bank secrecy". Reuters. Retrieved June 4, 2016.
  2. ^ Gibson, Stuart (April 5, 2017). "Swiss Bank Secrecy---Their Lips Say Yes, But Their Eyes Say No". Forbes. Retrieved June 1, 2018.
  3. ^ Guex (2000), p. 240
  4. ^ Bloomberg Surveillance (January 24, 2018). "Tidjane Thiam Says Markets and Volatility Are Going Up". Retrieved January 24, 2018.
  5. ^ "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 mst also be made available due to antiterrorist legislation.
  6. ^ Staff, Investopedia (November 17, 2008). "Financial Privacy". Investopedia. 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.
  7. ^ Thomasson, Emma (April 18, 2013). "Special Report: The battle for the Swiss soul". Reuters. Retrieved May 19, 2018.
  8. ^ Schütz, Dirk (2000). The Fall of UBS: The Forces that Brought Down Switzerland's Biggest Bank. Pyramid Media Group. ISBN 9780944188200.
  9. ^ Guex (2000), p. 237
  10. ^ a b c Komisar, Lucy (April 4, 2003). "Offshore Banking: The Secret Threat to America". www.thekomisarscoop.com. Retrieved May 18, 2018.

Bibliography

Bank Secrecy Act

The Bank Secrecy Act of 1970 (BSA), also known as the Currency and Foreign Transactions Reporting Act, is a U.S. law requiring financial institutions in the United States to assist U.S. government agencies in detecting and preventing money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, file reports if the daily aggregate exceeds $10,000, and report suspicious activity that may signify money laundering, tax evasion, or other criminal activities.The BSA is sometimes referred to as an anti-money laundering law (AML) or jointly as BSA/AML.

Bank account

A bank account is a financial account maintained by a bank for a customer. A bank account can be a deposit account, a credit card account, a current account, or any other type of account offered by a financial institution, and represents the funds that a customer has entrusted to the financial institution and from which the customer can make withdrawals. Alternatively, accounts may be loan accounts in which case the customer owes money to the financial institution.

The financial transactions which have occurred within a given period of time on a bank account are reported to the customer on a bank statement and the balance of the accounts at any point in time is the financial position of the customer with the institution.

The laws of each and every country specify the manner in which accounts may be opened and operated. They may specify,for example, who may open an account, how the signatories can identify themselves, deposit and withdrawal limits and many other matters.but for opening an bank account the minimum age is 18years in most countries but some it is 16years

Banking in Switzerland

Banking in Switzerland began in the early 18th century through Switzerland's merchant trade and has, over the centuries, grown into a complex, regulated, and international industry. Along with the Swiss Alps, Swiss chocolate, watchmaking and mountaineering, banking is seen as emblematic of Switzerland. Switzerland has a long, kindred history of banking secrecy and client confidentiality reaching back to the early 1700s. Started as a way to protect wealthy European banking interests, Swiss banking secrecy was codified in 1934 with the passage of the landmark federal law, the Federal Act on Banks and Savings Banks.

Controversial protection of foreign accounts and assets during World War II sparked a series of proposed financial regulations seeking to temper bank secrecy to little success. Switzerland, considered the "grandfather of bank secrecy", has been one of the largest offshore financial centers and tax havens in the world since the mid-20th century. Despite an international push to meaningfully roll back banking secrecy laws in the country, Swiss social and political forces have minimized and reverted much of proposed roll backs. Although disclosing criminal activities by banks, who do not enjoy a good reputation even in Switzerland, is generally well seen by the Swiss public, disclosing client information has been considered a criminal offence since the early 1900s. Employees working in Switzerland and abroad at Swiss banks "have long adhered to an unwritten code similar to that observed by doctors or priests". Since 1934, banking secrecy laws have been violated by four people: Christoph Meili (1997), Bradley Birkenfeld (2007), Rudolf Elmer (2011), and Hervé Falciani (2014).

The Swiss Bankers Association (SBA) estimated in 2018 that Swiss banks held US$6.5 trillion in assets or 25% of all global cross-border assets. Switzerland's main lingual hubs, Geneva (for French), Lugano (for Italian), and Zürich (for German) service the different geographical markets. It consistently ranks in the top three states on the Financial Secrecy Index and was named first many times, most recently in 2018. The three largest banks–UBS, Credit Suisse, Julius Bär–are all regulated by the Swiss Financial Market Supervisory Authority (FINMA), and the Swiss National Bank (NSB) which derives its authority from a series of federal statutes. Banking in Switzerland has historically played, and still continues to play, a dominant role in the Swiss economy and society. According to the Organization for Economic Cooperation and Development (OECD), total banking assets amount to 467% of total gross domestic product. Banking in Switzerland has been portrayed, to varying degrees of accuracy, in overall popular culture, books, movies, and television shows.

California Bankers Assn. v. Shultz

California Bankers Assn. v. Shultz, 416 U.S. 21 (1974), was a United States Supreme Court case in which the Court held that the Bank Secrecy Act passed by Congress in 1970, requiring banks to record all transactions and report certain domestic and foreign transactions of high dollar amounts to the United States Treasury, did not violate the First, Fourth and Fifth Amendment of the Constitution.

Casino regulations under the Bank Secrecy Act

Casinos in the United States which generate more than $1,000,000 in annual gaming revenues are required to report certain currency transactions to assist the Financial Crimes Enforcement Network (FinCEN) of the Internal Revenue Service (IRS) in uncovering money laundering activities and other financial crimes (including terrorist financing).

Although Title 31, also known as the Bank Secrecy Act, was originally focused on financial institutions, criminal use of banking services located within casinos created a need for additional regulations that were specific to casinos. Because large sums of currency are transacted through slot machines, gaming tables, automatic change machines, retail operations and the cage (banks), and with high frequency, the regulations were targeted at transactions in excess of $10,000. Casino regulation has been a topic of debate, prompting the United States Senate to have a hearing before the United States Congress in which Title 31 topics were discussed through testimony by industry experts such as Grant Eve, CPA and partner at Joseph Eve, Certified Public Accountants and Ernest Stevens Jr., Chairman of the National Indian Gaming Association.

Currency transaction report

A currency transaction report (CTR) is a report that U.S. financial institutions are required to file with FinCEN for each deposit, withdrawal, exchange of currency, or other payment or transfer, by, through, or to the financial institution which involves a transaction in currency of more than $10,000. Used in this context, currency means the coin and/or paper money of any country that is designated as legal tender by the country of issuance. Currency also includes U.S. silver certificates, U.S. notes, Federal Reserve notes, and official foreign bank notes.

European Union withholding tax

The European Union withholding tax is the common name for a withholding tax which is deducted from interest earned by European Union residents on their investments made in another member state, by the state in which the investment is held. The European Union itself has no taxation powers, so the name is strictly a misnomer. The aim of the tax is to ensure that citizens of one member state do not evade taxation by depositing funds outside the jurisdiction of residence and so distort the single market. The tax is withheld at source and passed on to the EU Country of residence. All but three member states disclose the recipient of the interest concerned. Most EU states already apply a withholding tax to savings and investment income earned by their nationals on deposits and investments in their own states. The Directive seeks to bring inter-state income into the same arrangement, under the Single Market policy.

Financial Crimes Enforcement Network

The Financial Crimes Enforcement Network (FinCEN) is a bureau of the United States Department of the Treasury that collects and analyzes information about financial transactions in order to combat domestic and international money laundering, terrorist financing, and other financial crimes.

Geographic targeting order

A Geographic targeting order (or GTO) is an order issued by the United States Secretary of Treasury requiring any United States domestic financial institutions that exist within a geographic area to report on transactions any greater than a specified value. GTOs are defined in the Bank Secrecy Act in 31 U.S.C. § 5326(a). They only last for a limited period of time — originally each order lasted 60 days however section 353 of the USA PATRIOT Act extended such orders to 180 days.

IRS Criminal Investigation Division

Internal Revenue Service, Criminal Investigation (IRS-CI) investigates potential criminal violations of the U.S. Internal Revenue Code and related financial crimes in a manner intended to foster confidence in the tax system and deter violations of tax law. While other federal agencies also have investigative jurisdiction for money laundering and some bank secrecy act violations, the Internal Revenue Service (IRS) is the only federal agency that can investigate potential criminal violations of the Internal Revenue Code.

Chief Don Fort oversees a worldwide staff of approximately 3,124 CI employees as of June 13, 2017, including approximately 2,217 special agents who investigate and assist in the prosecution of criminal tax, money laundering, and Bank Secrecy Act related crime cases.According to the 2016 Annual Report, Criminal Investigation initiated 3,395 investigations in fiscal year 2016. In addition, the IRS-CI conviction rate (which is the percentage of convictions compared to the total number of convictions, acquittals, and dismissals) was 91.7% in fiscal year 2018.

Liberian companies

Companies in the Republic of Liberia are regulated by a variety of laws. The corporate laws of Liberia were promulgated over 50 years ago to provide an offshore jurisdiction for ship owners and the international financial community. LISCR (Liberian International Ship & Corporate Registry) has been appointed by the Government of Liberia as its agent, to manage the corporate registry, and to act as the sole registered agent for corporations registered in Liberia, but having their place of business elsewhere. The corporate registry is managed by LISCR located in Dulles, Virginia in the US and an office in Zurich, Switzerland.

There are two income tax treaties with Sweden and Germany in force.

Additionally, Liberia as a corporate jurisdiction is on OECD’s white-list of countries that have substantially implemented tax transparency and meet the internationally agreed tax standard.

Offshore bank

An offshore bank is a bank regulated under international banking license (often called offshore license), which usually prohibits the bank from establishing any business activities in the jurisdiction of establishment. Due to less regulation and transparency, accounts with offshore banks were often used to hide undeclared income. Since the 1980s, jurisdictions that provide financial services to nonresidents on a big scale, can be referred to as offshore financial centres. Since OFCs often also levy little or no tax corporate and/or personal income and offer, they are often referred to as tax havens.

With worldwide increasing measures on CFT (combatting the financing of terrorism) and AML (anti-money laundering) compliance, the offshore banking sector in most jurisdictions was subject to changing regulations. Since 2000 the Financial Action Task Force issues the so-called FATF blacklist of "Non-Cooperative Countries or Territories" (NCCTs), which it perceived to be non-cooperative in the global fight against money laundering and terrorist financing.

An account held in a foreign offshore bank, is often described as an offshore account. Typically, an individual or company will maintain an offshore account for the financial and legal advantages it provides, including:

Greater privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking Act)

Little or no taxation (i.e., tax havens)

Easy access to deposits (at least in terms of regulation)

Protection against local, political, or financial instability.While the term originates from the Channel Islands being "offshore" from the United Kingdom, and while most offshore banks are located in island nations to this day, the term is used figuratively to refer to any bank used for these advantages, regardless of location. Thus, some banks in landlocked Andorra, Luxembourg, and Switzerland may be described as "offshore banks".

Offshore banking has often been associated with the underground economy and organized crime, tax evasion and money laundering; however, legally, offshore banking does not prevent assets from being subject to personal income tax on interest. Except for certain people who meet fairly complex requirements (such as perpetual travelers), the personal income tax laws of many countries (e.g., France, Malaysia, and the United States) make no distinction between interest earned in local banks and that earned abroad. Persons subject to US income tax, for example, are required to declare, on penalty of perjury, any foreign bank accounts—which may or may not be numbered bank accounts—they may have. Although offshore banks may decide not to report income to other tax authorities and have no legal obligation to do so, as they are protected by bank secrecy, this does not make the non-declaration of the income by the taxpayer or the evasion of the tax on that income legal. Following the 9/11 attacks, there have been many calls to increase regulation on international finance, in particular concerning offshore banks, tax havens, and clearing houses such as Clearstream, based in Luxembourg, which are possible crossroads for major illegal money flows.

Patriot Act, Title III

The USA PATRIOT Act was passed by the United States Congress in 2001 as a response to the September 11, 2001 attacks. It has ten titles, each containing numerous sections. Title III: International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 is actually an act of Congress in its own right as well as being a title of the USA PATRIOT Act, and is intended to facilitate the prevention, detection and prosecution of international money laundering and the financing of terrorism. The title's sections primarily amend portions of the Money Laundering Control Act of 1986 and the Bank Secrecy Act of 1970.

The provisions of Title III are divided into three subtitles. The first deals primarily with strengthening banking rules specifically against money laundering, especially on the international stage. Communication between law enforcement agencies and financial institutions, as well as among institutions, is expanded by the second subtitle, which also increases record keeping and reporting requirements. The final portion of the title deals with currency smuggling and counterfeiting, including quadrupling the maximum penalty for counterfeiting foreign currency.

Patriot Act, Title III, Subtitle B

The USA PATRIOT Act was passed by the United States Congress in 2001 as a response to the September 11 attacks in 2001. It has ten titles, with the third title ("Title III: International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001") written to prevent, detect, and prosecute international money laundering and the financing of terrorism.

Title III is itself divided into three subtitles. The second subtitle, entitled Subtitle B: Bank Secrecy Act Amendments and Related Improvements, largely modifies the Bank Secrecy Act (BSA) to make it harder for money launderers to operate, and to make it easier for law enforcement and regulatory agencies to police money laundering operations. The BSA was amended to allow the designated officer or agency who receives suspicious transaction reports to notify U.S. intelligence agencies. It also addresses issues of record keeping and reporting by making it easier to undertake the reporting of suspicious transactions; by making it a requirement that financial institutions report suspicious transactions; through the creation of anti-money laundering programs and by better defining anti-money laundering strategy; and by making it a requirement that anyone who does business file a report for any coin and foreign currency receipts that are over US$10,000. The subtitle increases civil and criminal penalties for money laundering and introduces penalties for violations of geographic targeting orders and certain recordkeeping requirements.

Subtitle B legislated for the creation of a secure network which can be used by financial institutions to report suspicious transactions and which can also give them alerts of relevant suspicious activities. Subtitle B also makes FinCEN a bureau of the United States Department of Treasury. The subtitle allows the Board of Governors of the Federal Reserve System to authorize personnel to act as law enforcement officers to protect the premises, grounds, property and personnel of any U.S. Federal reserve bank, and allows them to delegate this authority to U.S. Federal Reserve Banks. It instructs any United States Executive Directors of international financial institutions to use their voice and vote to support any country that has taken action to support the U.S.'s War on Terrorism, and to require such Executive Directors to provide ongoing auditing of disbursements made from their institutions to ensure that no funds are paid to persons who commit, threaten to commit, or support terrorism.

Private bank

Private banks are the banks owned by either the individual or a general partner(s) with limited partner(s). Private banks are not incorporated. In any such case, the creditors can look to both the "entirety of the bank's assets" as well as the entirety of the sole-proprietor's/general-partners' assets.

These banks have a long tradition in Switzerland, dating back to at least the Revocation of the Edict of Nantes (1685). Private banks also have a long tradition in the UK where C. Hoare & Co. has been in business since 1672.

Structuring

Structuring, also known as smurfing in banking jargon, is the practice of executing financial transactions such as making bank deposits in a specific pattern, calculated to avoid triggering financial institutions to file reports required by law, such as the United States' Bank Secrecy Act (BSA) and Internal Revenue Code section 6050I (relating to the requirement to file Form 8300). Structuring may be done in the context of money laundering, fraud, and other financial crimes. Legal restrictions on structuring are concerned with limiting the size of domestic transactions for individuals.

Suspicious activity report

In financial regulation, a Suspicious Activity Report (SAR) or Suspicious Transaction Report (STR) is a report made by a financial institution about suspicious or potentially suspicious activity. The criteria to decide when a report must be made varies from country to country, but generally is any financial transaction that does not make sense to the financial institution; is unusual for that particular client; or appears to be done only for the purpose of hiding or obfuscating another, separate transaction. The report is filed with that country's financial crime enforcement agency, which is typically a specialist agency designed to collect and analyse transactions and then report these to relevant law enforcement. Front line staff in the financial institution have the responsibility to identify transactions that may be suspicious and these are reported to a designated person that is responsible for reporting the suspicious transaction. The financial institution is not allowed to inform the client or parties involved in the transaction that a SAR has been lodged.

For example, in the United States, suspicious transaction reports must be reported to the Financial Crimes Enforcement Network (FinCEN), an agency of the United States Department of the Treasury. In Australia the SAR must be reported to Australian Transaction Reports and Analysis Centre (AUSTRAC), an Australian government agency. Most countries have laws that require financial institutions to report suspicious transactions and will have a designated agency to receive them. The agency to which a report is required to be filed for a given country is typically part of the law enforcement or financial regulatory department of that country.

TCF Bank

TCF Bank is the wholly owned banking subsidiary of TCF Financial Corporation, a bank holding company headquartered in Wayzata, Minnesota. As of November 2017, TCF Bank had nearly 321 branches in Minnesota, Illinois, Michigan, Colorado, Wisconsin, Arizona and South Dakota.

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See also

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