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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.

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.  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.

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.

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 . . ."

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.

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.

"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.

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.

"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. 

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." 

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.

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.  "These waivers could ultimately pose a risk to legitimate offshore financial activities such as asset protection and tax deferral," says Cornez. 

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.

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.  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. 
 

Paul Zaleski is a reporter and staff researcher for Offshore Finance USA magazine. [Copyright 2000 O.F.C. Publications Inc.  This article was published in the March/April 2000 issue of Offshore Finance U.S.A. magazine]

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