Nov 18, 2009

The Rationale for Banking Secrecy

When I read articles like the one below, I can't help feeling that the financial crisis has caused many people to seriously misunderstand the concept of banking secrecy:
ST Nov 17, 2009
Stamp out bank secrecy

BERLIN - GRAFT watchdog Transparency International hit out at rich countries over shady banking practices on Tuesday as it published its annual rankings naming and shaming the world's most corrupt countries.

'Corrupt money must not find safe haven. It is time to put an end to excuses,' said the Berlin-based group's head Ms Huguette Labelle.

In the wake of the financial crisis, the Group of 20 (G-20) industrialised countries turned up the heat on tax havens, targeting rich countries with long-held banking secrecy laws like Liechtenstein and Switzerland. But Ms Labelle said extra efforts were imperative, calling for more bilateral treaties on information exchange in order to 'fully end the secrecy regime'.

Overall, the 2009 corruption list is 'of great concern', the organisation said, with the majority of countries scoring under five in the ranking, which ranges from zero, highly corrupt and 10, which is very clean.

The bottom five nations - Somalia, Afghanistan, Myanmar, Sudan and Iraq - show that 'countries which are perceived as the most corrupt are also those plagued by long-standing conflicts, which have torn apart their governance infrastructure,' TI said.

The five countries seen as least afflicted by corruption were New Zealand, Denmark, Singapore, Sweden - and Switzerland. New Zealand scored 9.4 points whereas Somalia scored 1.0 points.

The score is based on perceptions of the degree of corruption as seen by business people and country analysts.
So what do we see here? Transparency International publishes its rankings of corruption levels in different countries around the world. At the same time, TI also says that it's time to put an end to banking secrecy. The way TI puts it, it sounds as if banking secrecy and corruption go hand in hand.

On the other hand, TI's actual research leads to the opposite conclusion. Both Singapore and Switzerland have an extensive banking secrecy regime (Singapore's statutory banking secrecy laws are in fact modelled on Switzerland's). Yet both countries are in the list of world's top five least-corrupt countries.

So it's very simplistic to suggest that banking secrecy leads to corruption (or creates a conducive environment for it).

It's important to go back to basics and remember why banking secrecy exists in the first place. Banks hold a lot of information about their customers. If your company is planning an IPO, your bank knows about it. If your business is losing money, your bank knows about it. If you pay your suppliers through your bank account, the bank knows who they are.

In fact, just by looking at your credit card statements and bank statements and GIRO arrangements, your bank knows where you shop; what you buy; where you've travelled to; what's your salary; how much you got for your bonus; whether you use Starhub or Singtel; and what's the name and address of that other woman who's not your wife but with whom you share a joint account. Etc etc.

That's all private information. It's not anything illegal, but it's private. Banking secrecy evolved as a legal regime, precisely because the law needs to stop banks from blabbering your private information to people who have no business knowing it.

Now of course banking secrecy, as a legal regime, has its own built-in exceptions and qualifications. For example, a bank may legally disclose your information to the police, if you've become a suspect in a criminal case and the police need to know about your money matters. A bank may legally disclose your information to its own professional advisers (eg its own lawyers and auditors). And a bank may legally disclose your information to the tax authorities, if there's a tax-related investigation.

But to say that the world needs to "stamp out bank secrecy" and "fully end the secrecy regime" - that's ridiculous. Newspapers will have a fun time reporting Britney Spears' latest credit card purchases. Your nosey-parker kaypoh auntie might call up your bank to find out how much you really have in your savings account. Banks might sell your telephone number, email address and personal profile to telemarketers selling anything from insurance to club memberships to massage chairs - see how many nuisance calls you get then.


Anonymous said...

Wow, I'm surprised TI can't differentiate between banking secrecy and corruption.

You made them sound incredibly stupid.

Anon said...

Here we go again, Mr Wang making inaccurate statements just to prove a point.

KAM said...

You are right, as usual, succinct and concise!

Banking secrecy is not bad, banking in illegal money is also not bad, unless persecuted. Not paying tax could be bad.

Eradicating banking secrecy is just jealous act by the "helpless" governments, starting with USA.

Anonymous said...

An interesting and useful discussion exists here :

The main issue here is offshore tax havens .US and other tax authorities are now focusing their attention on citizens who deposit funds in offshore tax havens which have impenetrable banking secrecy laws.

"Opacity, the hiding of the origin of the money and non-disclosure of ownership structures" makes it almost impossible for the IRS to seek successful prosecution of those who avoid paying taxes etc

Just yesterday, the IRS revealed that more than 14700 Americans admit using tax havens with high financial secrecy structures and this may just be the tip of the iceberg.( )

No one is interested in Ah Kow and Ali who deposit their hard earned money in their local banks. The banks don't care that Ah Kow has a mistress and that Ali buys flowers for his girlfriend in Bali .The banking secrecy laws protect the rights of these 2 gentlemen.

So Mr Wang - you need to articulate your case more clearly !

Anonymous said...

"Banking secrecy is not bad, banking in illegal money is also not bad, unless persecuted. Not paying tax could be bad."

Wow. Banking in illegal money is -not- bad? Not paying tax -could- be bad?

Gilbert Koh aka Mr Wang said...

"So Mr Wang - you need to articulate your case more clearly!"

I think that it's TI that needs to articulate its case more clearly. See, so many of its equations are wrong (and actually, many of the equations in your comment are wrong too).

Firstly, tax evasion is not corruption. These are two very different kinds of offences. Tax evasion is about finding ways to under-declare your taxable income. Whereas corruption is giving and taking bribes.

Secondly, tax havens do not mean "a country where banks are secretive". Tax havens simply mean a country with very low taxes . Many tax havens do not even have much of a banking system to begin with (eg Sri Lanka, Andorra, Bahrain).

Thirdly, "tax haven" does not equate illegal activities , even though some politicians might have reason for trying to make you believe this. Singapore is regarded as a tax haven by many, primarily because its income tax rates are low compared to many Western countries. This is precisely why many expats are happy to relocate here. But this doesn't mean that DBS, Singtel, SPH, SembCorp, SIA or other major S'pore companies are engaged in illegal activities.

I could go on, but maybe you see the point. "Stamp out bank secrecy" is not a solution to "tax evasion".

Effective tax laws and effective implementation of those laws ARE the solution to tax evasion.

The problem with the current approach is that the US is trying to foist the job of collecting its own taxes and monitoring its own citizens, onto the governments in OTHER countries.

chengguan said...

eh... this is not new, right?

Anonymous said...

The USA like to point finger at other countries whereas the biggest culprits are themselves. Take a look at this video where it was reported that Delaware(US) is a better tax haven than Switzerland.

Onlooker said...

Banking secret is a double edge sword.While it benefit the people who do not want their inherent asset value to be known to the others there are others who would use this secrecy to their advantage.
The condition for a Tax haven is low income tax and maintenance type of tax.

And GST is to help the poor.

Anonymous said...

Mr Wang - if I am not wrong, the US is trying to enforce the rule that their citizens can deposit their funds anywhere in the world ( as it is the case now ) BUT the foreign bank has to inform the US ( is this a new requirement ? )
Is this one of the main reasons why you say " US is trying to foist the job of collecting its own taxes and monitoring its own citizens, onto the governments in OTHER countries ? "

So what is wrong about such a requirement ?It's good for US and other countries who may want to follow suit - isn't it ?

So countries know where their citizens have deposited their funds .Off course, its doesn't mean that just because they have deposited funds in offshore centres or tax havens, they are involved in tax evasion, corruption or anything illegal

But at least the tax authorities have a useful mailing list - they could send ecards to these citizens every now and then :)

7-8 said...

I feel that I can trust Mr Wang on issues relating to the government, but not on issues relating to the banking sector.

Governments everywhere - not just the US - have a problem collecting taxes because of a lot of rich people using bank secrecy to hide their money away. When that happens, you have to cut away social services to the poor, and tax poor people more.

Corruption in your own country does not have anything to do with bank secrecy laws in that country, since we are talking about people hiding their money in OFFSHORE banks.

Corruption and tax evasion are different things but there is a substantial overlap. Both affect the ability of honest public servants to carry out their work effectively.

The newspaper column does not call for a unilateral action on the side of either the banks or the government, but for bilateral treaties.

Anonymous said...

Mr Wang you are bashing TI wrongly. TI is making it clear that it is blasting 2 different groups 1) corrupt countries and 2) countries with banking secrecy that allow those in 1) to hide their corrupt money. TI never said that 1) equals 2). And neither is TI saying that all the money deposited in 2) is illegal.

Anonymous said...

The Reuters article that Anonymous( Nov 18th ) refers to ie has an interesting quote :
"One IRS official said that at the end of the amnesty program, there was a "significant influx in accounts with holdings in the Far East."

So is the IRS referring to Singapore and Hong Kong?

Is Mr Wang or any of his lawyer colleagues working for any of these banks in Singapore or Hong Kong ( assuming that these are the offshore tax havens the chappie is referring to )

Oh dear ...lets hope not as we want Mr Wang to keep his job AND maintain his blog :)

Anonymous said...

Your article is about banking secrecy.

A lot of media attention these days is about tax evasion, UBS, offshore tax havens etc

The US IRS has managed to get UBS to agree to criminal wrongdoing ,pay US$780 million in fines and hand over list of up to 4450 customers who may have evaded taxes.

So what has this all to do with Mr Wang's article?


Unless of course if many or most of those who finally get prosecuted ( by the IRS ) come from countries with a high reputation for banking secrecy.

Some of those who fear prosecution may start a whistle blowing effort that leads to a vicious circle of new prosecutions - which may again lead to countries with high banking secrecy.

But off course all this prosecutions may not prove that countries with high banking secrecy are guilty of any wrong doing.

But bad international publicity and an angry public may lead to interesting outcomes and hopefully a lot more interesting postings from Mr Wang !


LazyPaintbrush said...

The reason for all the tax evading/avoiding is because of the necessary conflict between taxing a person territorially or trans-territorially.

The US tax system taxes a citizen/green-card holder/wotnot on ALL his(her) income.

Some countries (including Singapore) do it on a territorial level, that is, on Singapore soil (or Singapore ships, airplanes, whatnots).

And since nobody wants to give a cent more to their governments than they need to, or want to, thus, the US and other countries taxing worldwide income want to know every last cent of income a individual entity(person/business) has made in the tax period.

So the less secrecy, the easier for their tax hunters to find stuff to tax.

Can societies ever solve the inherent conflict between private/public in taxation? Perhaps when we truly believe our tax monies are well spent towards improving society. And still then, there will be individuals that don't want to share.


Gilbert Koh aka Mr Wang said...

""One IRS official said that at the end of the amnesty program, there was a "significant influx in accounts with holdings in the Far East."

Well, of course. Asia is where the smart money goes. Folks like Jim Rogers have been saying for years that you should be buying Chinese equities, while folks like Warren Buffett have said things like you should dump your USD.

Gilbert Koh aka Mr Wang said...

"Is Mr Wang or any of his lawyer colleagues working for any of these banks in Singapore or Hong Kong"

My own work has nothing to do with customers who are high net-worth individuals. The kind of clients I see are large corporates, financial institutions and government bodies.

Gilbert Koh aka Mr Wang said...

The real impact on taxpayers' money is that our IRAS will have to use Singapore taxpayers' money to train up departments of civil servants to be acquainted with US laws; to design and implement policies, procedures and IT infrastructure; all for the purpose of helping the US collect its own taxes more effectively.

Anonymous said...

There's an interesting and famous anecdote provided by Dr Goh Keng Swee on this topic:

"It is more useful that I relate a discussion I had during my last stint in the Finance Ministry, with a banker. This episode supports the point I am making about low standards of money management. I asked him why banks ran secret numbered accounts.

“Money,” the banker said, “is one of the great institutions of human civilisation. It must therefore be treated with proper respect. Where money is mistreated, such as through government expropriation, or inflation caused by deficit financing, a safe refuge should be provided.”

I have always been bemused that the banker essentially tagged a moral slant to Switzerland's role in facilitating tax avoidance (i.e. avoiding government expropriation).

Personally i don't think it's anyone's problem that Americans try to minimise their tax burden
elsewhere - the US is just leveraging on their status to get other countries to "share" in the problem.

Anonymous said...

Hi Mr Wang

Will all these efforts by the US IRS lead to loss of business for private wealth centers like Singapore ?

7-8 said...

A lot of how you see this depends on your political philosophy, whether you feel that everybody should be paying their fair share of taxes, or whether you feel that certain people belonging to a privileged stratum of society should be allowed to get away with paying lesser taxes (in spite of having the means to pay more taxes) simply because they can squirrel their stuff away in offshore banks.

The tax collection system was designed for a bygone era, where there was fewer international capital flows.

If you allow that anybody who can keep an offshore numbered account can get away with paying less than their due in taxes then you might as well forget about collecting taxes from the rich, just keep on screwing the poor.

You can draw a line between the inability of the Singaporean government to effectively tax the rich, and how the middle class gets screwed by the government because they have to shell out $300+K for a piece of shit HDB flat these days.

What's the big deal about the cost of enforcing tax collection internationally? Once you find a rich enough motherfucker evading taxation it will more than pay itself back.

Gilbert Koh aka Mr Wang said...

"What's the big deal about the cost of enforcing tax collection internationally?"

What do you think is the cost of IRAS helping 100 countries around the world to collect their own taxes?

7-8 said...

Singapore will only have to help 100 other countries tax their own people properly if all other tax havens are helping every other country tax their own people properly. And when that happens, the IRAS will be able to extend their tax jurisdiction overseas. (In effect, all tax havens disappear).

What do you think is the cost of IRAS not being able to collect the taxes of its own citizens because they're hiding it away? Remember, that right now Singaporeans and residents can hide their stuff overseas.

Actually we already know that cost because we are paying it right now, so we have to imagine what life in Singapore - and the world - will be like if the Singapore government has the ability to tax everybody, and every corporation properly. A bit hard to imagine now because Singaporeans are notoriously bad at visualising these "too good to be true" scenarios.

That being said, I can see the Singapore finance sector losing some of its competitive edge - which is really the issue here isn't it?

The current situation is: there are little or no barriers to capital flows but for tax legislation there are barriers everywhere. No wonder governments everywhere are struggling to do their work properly!

Anonymous said...

"What's the big deal about the cost of enforcing tax collection internationally?

Set up a standard system using IT and it should do the trick - as long as all other countries ( who want to follow the steps of the US IRS ) request the same information .

The work is more for the banks rather than the authorities to do .A Yankee depositor starts an account with a bank in Singapore and this triggers certain information to be collated and sent to the Singapore authorities - who in turn make it accessible to the UR IRS .

After the system has been setup, the focus will be on audits and compliance issues .

Anonymous said...

So will all this affect Singapore ?

Anonymous said...

November 21, 2009 7:56 AM:

The awesomely rich can simply bribe off the compliance, audit, programmers...

Unknown said...

By pointing out that countries like Switzerland have low corruption and bank secrecy, Mr Wang is mocking a strawman argument of his own conjuring, and not TI.

TI is correct in saying that bank secrecy in rich countries helps corrupt officials in poorer countries stash their ill-gotten gains.

Here's the excerpt from TI's own press release:

Even industrialised countries cannot be complacent: the supply of bribery and the facilitation of corruption often involve businesses based in their countries. Financial secrecy jurisdictions, linked to many countries that top the CPI, severely undermine efforts to tackle corruption and recover stolen assets.

“Corrupt money must not find safe haven. It is time to put an end to excuses,” said Labelle. “The OECD’s work in this area is welcome, but there must be more bilateral treaties on information exchange to fully end the secrecy regime. At the same time, companies must cease operating in renegade financial centres.”

Gilbert Koh aka Mr Wang said...

You mixed up a couple of things. Your assumption is that just because a country has bank secrecy, it will be a magnet for corrupt money.

Sorry, it doesn't work that way. For example, the banking secrecy regime in Singapore exists alongside with:

1. an extensive "Know Your Customer" regime

as well as something known as

2. the Corruption, Drug Trafficking and Other Serious Offences (Confiscation of Benefits) Act

Briefly the KYC regime requires banks to conduct investigations into its clients' sources of funds. You can see this for yourself, when you go about doing your own banking transactions. Eg the bank will ask you what's your occupation, what's your salary, can you prove it by showing your salary statement etc. It's all part of the KYC process.

The said...

/// "Opacity, the hiding of the origin of the money and non-disclosure of ownership structures" makes it almost impossible for the IRS to seek successful prosecution of those who avoid paying taxes etc
November 18, 2009 9:14 PM ///

Mr Wang, as a lawyer, I am surprised that you missed out on Anon@9:14PM's blooper.

Tax avoidance is perfectly legal - why pay more tax than you are legally obliged to?

Tax evasion, on the other hand, is illegal.

Anon mentioned avoidance, but you discussed evasion.