Confidentiality and the fight against money laundering and terrorist financing

What is Due Diligence (DD)?

The domestic laws of any country require that all banks, when opening an account, take measures to duly check the clients (conduct DD), which includes verification of identity. These measures comprise identification of the client and verification of his or her identity using reliable and independent source documents, data and information.

This primarily concerns the ascertainment of a true owner (beneficiary) of the company: who owns the assets? Who controls the company and how? Then bankers ask for information about the business of the company and proposed nature of its business relationships.

More often than not, banks collect such client information as family status and whether or not the client has children. These data are relevant for long-term relations with the bank: the bank tries to determine in advance the perspective recipient of the title to the money deposited in the account. Sometimes, these details are used as an additional coding key to identify the client.

Following on from this, the bank must constantly conduct careful analysis of the transactions entered into by the client and check if these transactions match the initially declared nature of business, the risks etc.

Nowadays no foreign bank will open an account if the so called declaration of beneficial owner (for example, in Switzerland it is ‘Form A’ – Identification of Beneficial Owner) has not been properly completed. Completion of this form is stipulated by local law.

Banks vary in their approach to the conduct of Due Diligence. There are banks that offer clients the opportunity to give information about activities informally (even in the form of a corporate brochure). At the same time, some Swiss banks carry out client’s checks through independent bodies — detective agencies (of which the clients are informed in advance). Clearly, the banks prefer to work with transparent clients only.

What is bank secrecy?

In general terms, the concept of bank secrecy covers information that becomes known to a credit institution in the course of its business. This includes information about the bank deposit and transactions in the account, as well as details of the signatory and actual owner of the account.

The persons connected with bank secrecy can be divided into two groups:

At present, as a result of the fight against terrorism and money laundering, the concept of bank secrecy has lost its former meaning. The laws of all developed counties provide for the possibility and procedure of access to bank information for fiscal, tax and law-enforcement authorities. The laws of various countries normally set out an exhaustive list of persons who may request information constituting bank secrecy from a credit institution, as well as ways in which the information may be obtained.

We now live in a global information space and information is rather often the key commodity of great value. In this respect, bank secrecy and the guarantee of confidentiality is surrounded by plenty of gossip. And when a bank is said to ‘leak’ information, one should understand that it is certainly an echo of illegal actions.

A bank is first and foremost a commercial organisation whose main objective is to make profit, which is why it would not ruin its reputation by disclosing information here and there and thus scaring off its clients. A bank will in every way try to avoid disclosure. This is why the law has a well-defined legal procedure in place whereby information may only be made available to particular people.

Nevertheless, it is an obvious conclusion that anti-terror and anti-money laundering practices have given the tax, law-enforcement and other authorities easier access to information. Under the circumstances, it is best to agree with the existing situation, accept it and learn to work in such conditions.

What are FATF Recommendations?

International tax law seeks to harmonise the tax norms related to banking secrecy disclosure.
In 1990, the Financial Action Task Force (FATF), an inter-governmental body that combats money laundering and terrorist financing, developed a document known as ‘Forty Recommendations’, to which another nine recommendations were added later. The provisions of this document were integrated into bank laws of most economically developed countries and give guidance in relation to the development of the global banking sector.

How are suspicious transactions determined?

It is up to each bank to set its own criteria for suspiciousness, although this primarily depends on numbers (volume, amount and frequency of transactions and many more). This is why, when opening an account, you need to discuss with the bank officer in as much detail as possible the relevant criteria and should any change happen to your financial flows, be sure to inform the bank. This is the best way to structure relations and bankers will undoubtedly appreciate it.

If a bank suspects or has reasonable grounds to suspect that the money in the account is the proceeds of crime or connected with terrorist financing, it must immediately report its suspicion to the financial intelligence division.

When can a bank disclose information about its client?

A third-party access to the client information provided to the bank at the opening of an account is well regulated both by international and national banking laws. The algorithm of disclosure of client’s identity and assets at foreign banks stipulates that such information can only be obtained by order of а local court (public prosecutor sanction).

The local court orders information to be disclosed if an international investigation request is sent under criminal proceedings against the client in his home country. An order for disclosure can only be granted if the case is also regarded as criminal in the bank’s country of domicile. In Switzerland, tax avoidance (not to be confused with tax fraud) is not a criminal offence and therefore if the proceedings were initiated on a non-criminal offence, no information would be provided at such a request.