By: Prapanna Lahiri
The concept: When a person opens an account with a bank he/ she is entitled to a reasonable degree of assurance from the banker that information regarding the account remains a matter of knowledge only between the banker and the account holder. This is one of the conditions of the relationship between the banker and the customer whereby the customer’s dealings and financial affairs are held confidential by the banker. This duty and obligation of a banker to maintain complete secrecy continue even after the relationship ceases upon closure of the account. This confidentiality, however, does not prohibit sharing of credit information among lending institutions. Certain other national and international laws such as anti-terrorist and anti drug-trade legislations along with tax treaties between nations make it obligatory for banks to divulge specific information in the interest of prevention of tax evasion and money laundering.
History of banking secrecy in Switzerland: No discussion about secrecy of banking information is complete without a mention of the reputation of Swiss bankers for the practice of total banking secrecy for hundreds of years. At the end of Renaissance, Banking in Switzerland began flourishing. Profits of Swiss banking houses started growing quickly in the backdrop of stability and secrecy offered to the wealthy who looked to safeguard their assets in an otherwise unstable continent. Thus finance became one of the recognisable aspects of Swiss identity along with its world renowned chocolates, watches and professed political neutrality. The origin of the concept of secrecy of Swiss banks can be traced back to the 18th century, when a group called ‘The Great Council of Geneva’ passed a law in 1713, preventing banks from sharing information about their clients. This law lured wealthy individuals, aristocrats and royalties to stash their cash in Swiss banking vaults. Some historians suggest that this culture of total secrecy was prompted by the French royalty seeking to park the royal funds with Swiss financial institutions without the knowledge of the public and its rivals. Louis XIV was one of the first kings who used loans from these institutions to help finance wars and build the Palace of Versailles. The modern Swiss banking system started in 1934 during the depression era when France and Germany, trying to prevent capital flight, pressed Switzerland to divulge depositor information. Switzerland, in trying to maintain sovereignty, passed a law making disclosure of account information a crime. Later in 1984, 73% of Swiss citizens voted to retain bank secrecy.
Modern day Swiss bankers reject the popular belief that corrupt politicians worldwide hide vast sums of money, drug lords launder ill gotten gains or filthy rich American citizens stash money to avoid paying taxes. They argue that it is no easy job to open Swiss bank accounts as the banks would verify depositors’ identities and not accept any business that they think was illegal. They say a sizable number of applications are turned down every year suspecting possible fraud.
Tax Havens and secrecy about financial transactions: Switzerland is not the only country where the financial services industry practises this kind of financial secrecy that facilitates shady financial transactions. These countries have been known as the secret offshore tax havens. A tax haven offers foreign individuals and businesses a minimal tax liability in a politically and economically stable environment with near complete immunity from sharing of financial information with foreign tax authorities. This is a win-win for the host country as well as the companies and individuals maintaining accounts there. Tax haven countries benefit by attracting capital to their banks and financial institutions, thus forming the foundation of a thriving financial sector in these countries. Individuals and corporations parking substantial quantum of funds benefit through tax savings resulting from low tax rates ranging from zero to single digits as against relatively high tax rates in their countries of citizenship or domicile. Thus, these tax havens make it easiest to hide money and avoid paying taxes. Large US corporations including Apple, Microsoft, Alphabet, Cisco and Oracle maintain billions of dollars in bank accounts in tax havens with low single digit tax rates.
Popular belief is that tax havens are mostly little known tiny and small countries such as Bahrain, Lebanon, Hong Kong, Bahamas, Panama, Luxembourg, Mauritius and few others spread across various continents. However, the irony is that some of the world’s most important providers of financial secrecy harbouring looted assets from around the globe are not just small, palm-fringed islands but some of the world’s biggest and wealthiest countries like USA, Germany and Japan besides Switzerland. This is indeed serious since a tiny country with a small number of shady financial transactions is hardly as much of an overall problem as is a large country with millions of secret foreign transactions per day.
The nature of secrecy of Bank Accounts: As outlined in the introduction above, banks are mandated to maintain confidentiality about information relating to bank accounts. The confidentiality is not just confined to account transactions – it extends to all information that the bank holds about the customer. However, it is to be understood that the banker’s duty and obligation of confidentiality is not absolute. This obligation of confidentiality is qualified in so far as some circumstances make it incumbent upon the banker to make necessary disclosure of details about a customer’s account with the bank. Historically, the 1924 English case of Tournier Vs National Provincial and Union Bank of England laid down four broad principles whereby a bank can legally disclose information about a customer’s account and its transactions. These principles which hold good to this day are:
- Where the bank is compelled by law to disclose information
- Where the bank has a public duty to make disclosure of information
- Where the bank’s own interests requires disclosure
- Where the customer has agreed to or has mandated disclosure of information
Liability: If the bank discloses information about a customer’s account in breach of principles described above the bank, normally, is to be held liable for having acted wrongfully. The banker, then, becomes liable to compensate the customer.
The Indian Context: It is well-known that banking is governed as much by laws as it is by practices or usages. Accordingly in India, banking customs as well as statutes stipulate and follow standardised, recognised obligation of secrecy. Relevant sections of banking related acts like the SBI Act, 1955, Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, Credit Information Companies Act, 2005 and the Public Financial Institutions Act, 1983 mention obligations as to fidelity and secrecy relating to the affairs of constituents of banks except in circumstances in which it can divulge information —
- Exceptions in accordance with the law or practice/ usage customary among bankers: These exceptions are disclosures of information under sections of Income Tax Act 1961, Companies Act 1956, Bankers’ Books Evidence Act, 1891, Reserve Bank of India Act, 1937, Foreign Exchange Management Act, 1973 and Gift Tax Act, 1958.
- Exceptions where a higher duty (in cases of danger to the State) supersedes private duty (of the agent to the principal)
- Exceptions where disclosures are made under express or implied consent of the customerg. to a guarantor.
- Exceptions where information is disclosed as an act of common courtesy among bankers as per practices/ usages in the banking system e.g. about proposed sureties.
- Exceptions when information is disclosed by banker to a guarantor/ solicitor to protect its own interest in case of loan default by customer.
The Payment and Settlement Systems Act, 2007 imposes privacy obligations on those who manage online payment and settlement systems such as RTGS/NEFT etc. The Act enjoins upon the “system provider” not to disclose the existence or contents of any document or any part information given to it by a system participant with similar exceptions mentioned above.
Banks are also governed by the provisions of Information Technology Act, 2000 as amended in 2008. Some amended provisions urge banks to adopt reasonable security practices with respect to their databases. Customers of banks can, under the IT Act, claim compensatory relief for losses arising out of data leakages as well as unauthorised disclosure of information by the banks for gain.
As discussed above Banking is one of the most risky sectors as far as privacy is concerned due to the highly sensitive and personal nature of information which is often exchanged, recorded and retained. Commensurate with the secrecy obligation of banks, their constituents must also trust banks with their personal identifying information, their financial records, their credit history and also allow the bank access to their accounts for a two way confidential relationship.
In today’s globalised context in pursuit of measures to check flight of black money to tax havens, India had forcefully articulated its views at the sixth session of the Conference of the State Parties to the UN Convention against Corruption in St. Petersburg, urging all state parties to ensure cooperation in dissemination of information to the requesting country without any impediment of bank secrecy laws.