By Johan van der Walt (DLA Cliffe Dekker Hofmeyr Tax Alert)
Bank secrecy (or the lack thereof?) has recently been in the news all over the world.
Global changes relating to bank secrecy will accelerate and could especially impact the High Net Worth Individual (HNWI) constituency. South Africans in that category should take note.
Unfortunately the theoretical (read statutory) foundation of banking secrecy and how things pan out in real life are often very different. HNWI's on both sides of the Atlantic can attest to that.
The South African legal position regarding bank secrecy was analysed in a case where a SA big-four bank took on Noseweek magazine inFirstRand Bank Ltd v Chaucer Publications (Pty) Ltd 2008(2) SA 592 (CPD). Traverso DJP pointed out that a banker's contractual obligation to preserve the confidentiality of its client's banking affairs had long been recognised in English law (Tournier v National Provincial & Union Bank of England  1 KB 461). It was a qualified legal right arisingex contractu. Locally, a banker's duty of confidentiality had been recognised as early as 1914 (referAbrahams v Burns 1914 CPD 452). Judge Traverso concluded: "It seems to me that for considerations of public policy the relationship between a bank and its client must be of a confidential nature. Equally – for considerations of public policy – this duty is subject to being overridden by a greater public interest". She also noted that, although the duty not to disclose rests with the bank, the privilege not to have the details of the dealings with the bank disclosed belonged to the client. It was therefore the client alone who could invoke this privilege and insist on the bank keeping its client's information confidential.
But often there is a disconnect between what the law says and what happens at the coal face.
The theft of confidential bank data and the on-selling of it to revenue authorities is big business these days. A 'gold mine' of data stolen from the LGT bank (owned by the Lichtenstein royal family) during 2008 found its way to the German tax authorities via a LGT employee. He received €4.2 million. The data was used, amongst other things, to convict the CEO of Deutsche Post of tax evasion. Germany's Constitutional Court expressly ruled that such stolen data could be used in further tax probes: "The constitution knows no rules saying that a legally flawed collection of evidence in any case bars the use of that evidence."
In February 2010, the German state of North Rhine-Westphalia bought stolen discs containing the names of approximately 1,500 German account holders with Swiss bank Credit Suisse. Despite criticism the UK Revenue and Customs authority immediately approached Berlin to purchase the stolen data in order to detect potential UK tax evaders with hidden Swiss accounts. The Dutch, Belgian and Austrian governments also showed strong buying interest. In October 2010, the man suspected of the Swiss data theft (and who allegedly got €2.5 million for it) was found dead in his Swiss prison cell – according to police it looked like suicide.
As recently as late August this year Swiss private bank Julius Baer confirmed that it had discovered a 'case of data misuse'. The bank said that a Zurich employee acted alone and had beenarrested. The thief had been paid 'an undisclosed sum' by the German tax authorities.
The amounts paid by revenue authorities to bank data thieves in Europe are paltry compared to what the IRS has on offer in the USA. Under the IRS whistleblower regime, an informant could potentially collect up to 30% of the proceeds in instances where the amount in dispute exceeds $2 million. On 11 September 2012, it was announced that the IRS had paid $104 million (approximately R820 million) to Bradley Birkenfeld who earlier supplied the IRS with in-depth information on how Swiss bank UBS had helped US clients to evade tax. According to Birkenfeld's lawyers it could be the largest pay-out ever to a single whistleblower. The award by the IRS followed Birkenfeld's exceptional cooperation and took into account the extensive information he gave on the UBS tax-fraud scheme. Birkenfeld's offering to the IRS was used during 2009 to strong-arm UBS into a $780 million settlement with the IRS. (Incidentally, as a UBS private banker, Birkenfeld once smuggled diamonds into the USA by concealing them in toothpaste. This was the exceptional service UBS high-value customers received. He served three years jail for his role in the UBS tax fraud scheme but indicated that he will seek a presidential pardon.)
Data theft by bank employees and the buying of data by revenue authorities has seemingly become a fast-growing international sport. Bradley Birkenfeld has shown that the prize money could be staggering. So expect the sport to attract new-comers and to make banks internationally shiver in their collective boots.
The OECD published a report on 26 October 2011. Its title is "The era of Bank Secrecy is Over". The first sentence of the Report reads: "In April 2009, G20 Leaders took action to end the era of bank secrecy". The OECD must be smiling at the support its efforts at destroying bank secrecy have been getting from banking insiders who have access to sensitive client data.
Of course the banks are not doing themselves any favours: HSBC's large-scale money laundering on behalf of cocaine cartels was documented in a mid-July US Senate report. That will mean more pressure on banks everywhere. The chairman of the Senate Committee already said "Ultimately, the rest of us are forced to pay more on our tax bills to make up for those who shirk their taxpaying responsibilities".
It seems that bank data (however obtained) will increasingly inform and direct revenue authorities' compliance actions.
Locally, information provided by SA banks to SARS as "third-party data", features as an important cog in SARS's compliance plan. The SARS Annual Report says: "The use of third party data to verify self-assessments by taxpayers and to perform risk-profiling is a growing trend in international tax administration. Third party data has several uses, including the pre-population of tax returns, as inputs into a risk-profiling engine, and even at border posts to profile incoming andoutgoing travellers. Sources of third party data range from financial institutions, employers, credit bureaus to other government agencies (eg the Department of Home Affairs)".
Going forward revenue authorities will increase their attacks on bank secrecy. Banks will see ever-widening and invasive information requests.
The treasure troves of bank data have been prised open with help from bank employees eyeing lucrative whistleblower pay-outs. Legal precedent telling HNWI bank clients that bank secrecy is alive and well, and should be respected (also by revenue authorities), is unfortunately only part of the story.