Bank Secrecy and the Implications for Your Offshore Bank Account
By: Patrick Winters
It may sound great to have an offshore bank account guarded by razor-sharp banking secrecy, but is it all that it seems? Here we explore what bank secrecy really is, and whether countries will actually enforce it to protect your privacy.
Bank Secrecy, also referred to as banking or financial secrecy refers to a legal principle which allows banks to keep their client information confidential. This is extremely important to protect against fiscal fraud and identity theft, but while in some countries like Switzerland or Panama breaking bank secrecy could land you in jail, in other countries it is routinely broken without penalty.
Why is this? There is great potential for fraud and/or money laundering if bank information is kept entirely confidential. Governments would be powerless to stop criminal elements porting ill-gotten money around at will. The US government was one of the first to introduce legislation to combat fraud with its 1970 bank secrecy act. This required banks to report suspicious transactions over 10,000USD.
After the 9/11 attacks it introduced further legislation within the Patriot Act that required even greater reporting requirements. The US government can now track every US dollar transaction in the world, since it must pass through a US correspondent bank.
The trouble is, governments worldwide have started to treat bank secrecy itself like a crime. Using the 'terror-tactics' of hype and exaggeration they have campaigned against bank secrecy as if its only purpose were to protect terrorists, drug lords and dictators. They really want it extinguished to find out about (and therefore tax) every cent of your income, whether derived domestically or abroad.
Bank secrecy is being slowly eroded, even the Swiss who can claim to have created banking secrecy with the 1934 Swiss Banking Act have agreed to certain concessions. The OECD, a Paris based think tank with no official authority has drawn up a model for international financial transparency and information sharing on tax issues. Many former tax havens have 'repented' and made concessions on their bank secrecy in order to avoid being put on an OECD blacklist of uncooperative tax havens. These include Liechtenstein, Andorra, Switzerland and Luxembourg. Monaco, Honk Kong and Singapore have said they will think about signing up.
While many tax havens will claim to have strong bank secrecy, not all will walk the walk. At the very least all countries will provide exceptions for matters relating to terrorism, money-laundering or other serious criminal offences.
Here's an overview of the more popular tax havens and the effectiveness of their bank secrecy laws:
Switzerland - Although it recently pledged to sign up to the OECD model it still has some of the strongest bank secrecy legislation in the world. It has agreed to share information in cases where there is concrete evidence of tax evasion, otherwise the law remains unchanged. Unless somebody knows you have an account at a particular bank and has strong evidence of wrongdoing, you are well protected.
Panama - Has very strong bank secrecy, breaking it could result in up to 2 years in jail. Panama does not respond to foreign requests for information involving tax evasion, which it does not view as a crime.
Honk Kong - Still has very strong bank secrecy because it has no tax information exchange agreements with other countries (this means that it has no legal requirement to respond to a request for tax related information from another country), except with China. It is thinking about joining the OECD model.
Cayman Islands - Although it has very strong bank secrecy laws on paper, these have been waived under US government requests for information. They are unlikely to stand up against foreign pressure if it is an individual's account at stake.
Although bank secrecy is important when thinking about your private offshore bank account, another important thing to keep in mind is visibility. If you park your money in Switzerland during a worldwide campaign against tax havens, it's clear that you funds will be in the spotlight. A better solution may be to keep your money in a smaller country not regarded as a tax haven, where your home government is less likely to go looking.
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Interested in opening an offshore bank account and want to know more about how to keep your privacy guaranteed? Don't waste time going to a jurisdiction that will not protect you, read this great resource on bank secrecy that will help you make the right choice.