Bank secrecy (also known as bank privacy) is a legal principle that allows banks to protect the personal information of their customers, either through the use of numbered bank accounts or other methods. Some countries, like Switzerland or tax havens, are more effective at maintaining bank secrecy due to voluntary or statutory levels of privacy.

The principle of bank secrecy originated from the Swiss Banking Act of 1934, which led to the establishment of renowned Swiss banks. Bank secrecy is often considered a key aspect of private banking. However, it has also faced criticism from NGOs and governments, who argue that it facilitates underground economy and organized crime. Examples include the Class action suit against the Vatican Bank in the 1990s, the Clearstream scandal, and the events following September 11, 2001.

Advancements in financial cryptography, such as public-key cryptography, have made it possible to achieve financial privacy and anonymous internet banking through the use of anonymous electronic money and digital bearer certificates.

Contents 1 Reasons to use bank secrecy 2 Swiss Banking Act of 1934 3 U.S. Bank Secrecy Act of 1970 4 Criticisms

 

Reasons to use bank secrecy

There are several reasons why individuals may choose to prioritize banking privacy:

• To keep financial information hidden from friends, spouses, or other family members.
• To prevent employers from accessing financial details. Many employers restrict staff from trading shares to avoid conflicts of interest.
• To hide embezzled money.
• To facilitate money laundering.
• To safeguard funds from potential confiscation, especially in the event of bankruptcy.
• To evade taxes (banking secrecy prevents tax agencies from examining accounts).
• As a form of tax resistance by individuals who oppose the institution collecting the tax.
• To protect against overbearing or corrupt local government agencies.
• For any other reason where the individual prefers their wealth and financial activities to remain unidentified.
• To maintain privacy from the press or public scrutiny. Annual “rich lists” published by newspapers often draw conclusions about an individual’s wealth based on factors such as bank balance.
• Protection against criminals. In some countries, criminal organizations can access bank customer information, which may be of interest to kidnappers, extortionists, or identity thieves.
• Protection against individuals seeking financial support, such as charities, venture capitalists, family members, beggars, or investment salesmen.
• Simply for the sake of privacy. The possession of liquid wealth often attracts unwanted attention and publicity.

Swiss Banking Act of 1934

The concept of bank secrecy was introduced through the Swiss Banking Act of 1934. This legislation was a response to a public scandal in France when MP Fabien Alberty exposed tax evasion by prominent French figures, including politicians, judges, industrialists, church dignitaries, and newspaper directors, who were concealing their money in Switzerland. Alberty referred to these individuals as having “a particularly ticklish patriotism” and highlighted that the money they deposited abroad was being lent by Switzerland to Germany. Notable individuals on his list included the Peugeot brothers and members of the Coty perfume family. Since then, Swiss banks have gained worldwide recognition for their anonymous numbered bank accounts, although critics such as the ATTAC NGO argue that these accounts facilitate legalized tax evasion, money laundering, and the underground economy.

Bank secrecy in Switzerland is strictly enforced by law, ensuring privacy by limiting the sharing of information with third parties, including tax authorities, foreign governments, and even Swiss authorities, unless requested through a Swiss judge’s subpoena. It is important to note that all Swiss bank accounts, including numbered bank accounts, are linked to identified individuals under Swiss banking law. Only in cases of severe criminal activity, such as identifying a terrorist’s bank account, can a bank share information with others. Any violation of a client’s privacy by a bank employee is subject to severe legal penalties. Many offshore banks in tax havens, like the Cayman Islands and Panama, also have stringent privacy laws.

U.S. Bank Secrecy Act of 1970

The Bank Secrecy Act (BSA) requires financial institutions to assist government agencies in detecting and preventing money laundering. This act mandates that financial institutions keep records of cash purchases of negotiable instruments, report cash transactions exceeding $10,000 (daily aggregate amount), and disclose suspicious activity that may indicate money laundering, tax evasion, or other illicit activities.

Criticisms

Numbered bank accounts used by Swiss banks and offshore banks in tax havens have faced criticism from NGOs like ATTAC for their role in facilitating the underground economy, enabling tax evasion, and aiding money laundering. After Al Capone’s 1931 conviction for tax evasion, mobster Meyer Lansky relied on Swiss secrecy laws to protect his finances. Lansky purchased a Swiss bank and deposited funds from his Havana casino in Miami accounts, which were then wired to Switzerland through a network of shell companies, holding companies, and offshore accounts, according to journalist Lucy Komisar. Joseph Stiglitz, the 2001 Nobel laureate in economics, stated 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 raised concerns about Switzerland’s role during World War II. Developing countries’ governments accused Swiss banks of holding most of the money stolen by corrupt dictators, estimated by Oxfam International to be around $50 billion annually deposited in offshore tax havens, nearly equivalent to the $57 billion global annual aid budget.

In the same year, banks successfully orchestrated an email campaign to Congress aimed at sinking a “know your customer” regulation proposed by the Federal Deposit Insurance Corporation.

In 2001, it was revealed that Swiss banks had protected the bank handling finances for Osama Bin Laden. One of these banks, the Bahrain International Bank, had funds passing through non-publicized accounts of Clearstream, a “bank of banks” involved in a major financial scandal in Luxembourg.

The 2001 USA Patriot Act introduced numerous rules for US banks in an effort to combat bank secrecy. US banks receive a list of banks or shell banks they are prohibited from wiring money to. Additionally, all new customers of US banks are now required to disclose if they are US citizens, state their occupation, and indicate whether they expect foreign funds to be wired.