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| Bank Secrecy
Waiver Agreements: The Confidentiality Exception |
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| With new
money laundering legislation and strategies, increasingly onerous reporting
requirements and a global push for greater information-sharing, the United
States is building up its arsenal against international crime. |
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| One
area where law enforcement officials could not have expected much assistance
from is the offshore industry. Perhaps intimidated by legal precedent
or astute managers of financial risk, the offshore private banking industry
appears to have accepted the controversial bank secrecy waiver agreement
as a cost of doing business both offshore and in the US. The waiver
agreement releases the bank from liability for breach of confidentiality
in the event the bank is forced by a foreign government or financial authority
to disclose confidential client records. "These waiver agreements
seem to be popping up all over the place," says Peter Fletcher, a lawyer
with Bahamas law firm Jerome E. Pyfrom & Company. |
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| The
waiver agreement is not new, however. Pete Donnelly, general manager
of the Royal Bank of Scotland (Nassau) Limited in the Bahamas, says his
bank has been using the agreement for over a decade. |
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| So
have most of the larger, established financial institutions, which generally
have no desire to impede legitimate foreign government investigations into
criminal money laundering activities. |
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| The
current difference is in scope. The waiver is now mandatory,
no matter what the client's home country, at virtually every major bank
or trust company which has a US presence. You can find them at Citibank,
Barclays, CIBC and others. It is also mandatory for US citizens.
Smaller banks without a US presence, like Ansbacher in the Bahamas for
example, do not usually require a waiver. |
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| Waivers
like the one used by CIBC are fairly strict in their demands from clients.
The CIBC waiver requires the customer to acknowledge that "the Governments
of other jurisdictions may have valid powers under their laws to require
the Bank under certain circumstances . . . to produce information and records
of the Bank to the specified Government and judicial authorities of those
jurisdictions." The waiver also allows the bank to produce information
and records ". . . where and to the extent the Bank is of the opinion that
the Law of those other jurisdictions requires the Bank to do so . . ." |
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| The Bank of
Scotland waiver states that the bank ". . . without any further consent
from me and without reference to me may make disclosure of information
required by any regulatory authority of the United States Government regarding
my account with the Bank . . ." The circumstances include an order
by any competent US court or if failure to disclose would render the bank
or any of its affiliates, personnel, assets or operations liable to any
sanction in the US or its territories. |
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| Waivers
first gained prominence about 10 years ago following a number of high-profile
US court cases involving offshore money laundering. One involved
the Bank of Nova Scotia, the other involved Barclays Bank. In these
cases, law enforcement agencies wanted to obtain certain confidential financial
records held by the offshore bank. Citing their legal obligations
under offshore bank secrecy legislation, the banks refused to disclose
the records. The US courts simply ordered the US branches of these
offshore banks to hand over the relevant documents or face massive fines
for contempt of court if they failed to cooperate. The Bank of Nova
Scotia, due to its substantial presence in the US, decided it had no choice
but to comply. Barclays Bank, which had a negligible US presence,
refused to comply and closed down its US operations. |
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| "The banks
just don't want to get caught in the squeeze," says Hywel Jones, a former
business development manager with the CIBC Trust Company (Bahamas) Limited
and now president of Britannia Consulting Group in the Bahamas. The
squeeze comes from US authorities on one side, and local bank secrecy laws
on the other. For example, the Bahamian Banks and Trust Companies
Regulation Act 1965 stipulates stiff penalties: up to two years in jail
and a fine equivalent to $15,000 for any employee who discloses confidential
client information. |
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| Some financial
institutions consider the waiver a preventive tool and part of their due
diligence procedures. If clients agree to waive their rights in cases
where law enforcement authorities are conducting an investigation, it is
an additional indication that the client has nothing to hide. "It's
a risk management issue for the banks," says Jones. |
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| "With the
waiver we protect our position. If the client doesn't sign, there is no
relationship," says Donnelly. The waiver of the Royal Bank of Scotland
applies only to US citizens, but Donnelly says there isn't usually any
objection. In fact, he says he knows of only one applicant in the
last six months who refused to sign. "We don't usually deal with
walk-in business, and we don't deal with cash," says Donnelly. |
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| Jones says
the prevalence of bank secrecy waivers may also be indicative of the changes
taking place in the offshore industry. "I think true confidentiality
is a thing of the past," he says. "Tax harmonization is inevitable
and eventually Bahamas will go the same way." |
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| There are
also certain trends in the flow of offshore capital that can be observed
as international financial centers evolve. Big banks will lose some
of their business to small banks, which will in turn lose some of their
business to banks in less regulated jurisdictions. "The hot money
is slowly being driven out to the periphery of the offshore world, but
that's business you probably don't want anyway," says Jones. |
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| Not everyone
is happy with the increased use of bank secrecy waiver agreements, however.
"People don't appreciate the magnitude of what they're signing," says Arnold
Cornez, an international business and estate planning consultant for The
Global Group and author of The Offshore Money Book. |
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| "These waivers
could ultimately pose a risk to legitimate offshore financial activities
such as asset protection and tax deferral," says Cornez. |
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| He wonders
if all the hard work put in by clients and their financial advisors to
create asset protection structures isn't inadvertently being signed away.
"If you're being asked to sign a waiver, perhaps it's time to move your
account to a smaller bank, one without a US presence," says Cornez. |
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| Raynard Rigby,
a lawyer with the firm Gwendolyn House in the Bahamas says the waiver agreements
have never been tested in the Bahamian courts. He is uncertain whether
a bank could legally insulate itself from criminal sanctions imposed by
the Bahamian Government by signing a waiver agreement with a third party
client. |
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| Until a bank
is prosecuted for a violation of the bank secrecy legislation, waiver agreements
are likely to continue to be an important part of the private banking industry. |
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