What is bank secrecy? (Part I.)

When you hear about bank secrecy, most people think right away of Hollywood films, spies or tax frauds, even though this could not be further from the truth.

Nowadays, bank secrecy only exists in a handful of countries. The essence of the concept in brief is that financial institutions are legally not allowed to provide to authorities personal and account information about their customers unless a court subpoena obliges them to do so in connection with a crime.

Many people, acting like good citizens, immediately think ‘why would there be a need for bank secrecy when decent people have nothing to hide?’ Why would we need to hide what we have?

It might be simplest to demonstrate the necessity of bank confidentiality if we recall how it was born, in Switzerland, of course. The first bank secrecy act was passed in Switzerland in 1934 to protect the German customers of Swiss banks from the Nazi regime. Few people know that the penalty for citizens of the German Reich for keeping their money in a Swiss bank was death. Later, bank secrecy became necessary again in the post-war period when many countries, especially those recently turned Communist, were planning to get their hands on the private property of people they considered pernicious.  In practice, the way Swiss bank secrecy worked (and still aspires to work) was by handling the bank account of each customer confidentially until it turned out they had done something wrong. If it reaches that point, in keeping with strict Swiss laws, the bank will of course share all data with the investigating authorities, be those Swiss or foreign. But until the customer is proven guilty, there is no point in trying to obtain information. It is no coincidence that the secret services of various countries are paying discontented bank employees for information, and in one case they have even recruited the help of the feared Mafia in order to catch tax evaders, although their efforts proved to be in vain as they bought a CD with useless data on it for a very large amount of money.

The laws in Switzerland, and in a number of other countries with developed financial markets, are unlike those seen in most other countries in that they do not assume that citizens are criminals. It is up to the police to prove otherwise, and the piggy bank can only be broken subsequent to a court ruling. In contrast, many countries force their citizens into total cooperation, which at the very least is a reason for suspicion in light of historic facts. In the 20th century, all people’s savings were taken from banks about once a generation, at least east of the Oder. This is a very simple thing to do when the government knows everything and is fully aware of who has how much money where. Oh, but that is something that can no longer happen, one might think. However, when discussing the importance of bank secrecy in international professional literature, two recent cases are often brought up. The first one is the Cypriot bank rescue, when all savings in excess of €100,000 were taken from each account. This could only happen because the state, which found itself in financial difficulties solely due to its own fault, had a database that made it possible to take money from its citizens.  To elaborate: if financial institutions (banks, insurance companies, pension funds, etc.) had not been forced to automatically report the amount of money each of their customers had, these funds could not have been removed from the accounts.

Apart from the state, bank secrecy also has other opponents. These are hard to even list, but most often include former spouses, journalists and criminals (from blackmailers to kidnappers). Where there is no bank secrecy, practically nothing protects information on the financial standing of individual account holders. In effect, a few phone calls can garner information on deposits in any bank. There is no need to even go through the refuse of the person in question to obtain a bank statement which can then be used to request account information – in most cases, a confident voice on the phone is all it takes to uncover everything.