Common Law Bank Secrecy and its Implications for US Securities Laws
| Pages | 331-351 |
| Date | 01 February 1999 |
| DOI | https://doi.org/10.1108/eb027200 |
| Published date | 01 February 1999 |
| Author | Bonita Erbstein |
Journal of Money Laundering Control — Vol. 2 No. 4
Common Law Bank Secrecy and its Implications for
US Securities Laws
Bonita Erbstein
INTRODUCTION
The year 1986 did not bode well for investment
banker Dennis Levine. In a civil injunctive action1
the US Securities and Exchange Commission (SEC
or the Commission) alleged that Levine, through an
insider dealing scheme, violated several anti-fraud
provisions of the Securities Exchange Act of 1934.2
Without admitting or denying that he obtained
over $12m in illicit profits from secretly trading in
the securities of 54 companies, Levine settled the
SEC action and was ordered to disgorge over $10m
to the court.3
Ostensibly, this judgment is a footnote to 1980s'
avarice. A more critical look, however, reveals
legally sanctioned instruments that threaten the
integrity of securities markets everywhere. Levine
executed his unlawful trades through two Panama-
nian shell companies and a Bahamian bank
account.4
For some time, these nondisclosure instruments
provided Levine with access to US securities markets
and anonymity from US securities regulators.5
More disturbing is the fact that if the offshore bank-
ers had not destroyed various documents in their
attempt to scuttle the initial SEC inquiry, Levine
might never have been incarcerated.6 By destroying
documents, the bank made itself vulnerable to US
prosecution for obstruction of justice. The destruction
of evidence placed the bankers in a legal cul-de-sac.
Had the bankers avoided this cloak and dagger
episode, they would have done nothing illegal and
at the very least the SEC would have been tied up
for years in the Bahamian courts trying to force
disclosure of Levine's name. Levine was apprehended
because a variety of circumstances fermented and not
through any comprehensive regulation of
haven7
jurisdictions. Serendipity was a prominent element
in Levine's ultimate apprehension.
This anecdote represents the potential bottleneck
that US securities regulators face when investigating
insider dealing violations commenced in haven juris-
dictions. When an alleged securities law violation is
being investigated, the SEC typically requests trading
information from the broker involved and its custo-
mer. Yet, where the customer is a bank located in a
foreign country — that is, where the bank trades
on behalf of an investor for whom it acts as custodian
— the request is often denied on the ground that
disclosure would violate bank secrecy
laws.8
The purpose of this paper is to analyse bank secrecy
and regulatory disclosure, two conflicting objectives
that arise in the situation where voluntary compliance
with an SEC request for customer information is
refused by reason of bank secrecy law. Part II,
through an analysis of the relevant case law, illustrates
how offshore courts actively resist US attempts to
undermine their sovereignty on the issue of bank
secrecy. Given this reluctance to release information,
Part III critically evaluates litigation, one of the
principal methods US authorities have used to extract
information. In light of the internationalisation of
markets, Part IV concludes by initiating discussion
on how the competing objectives of preserving
customer confidentiality and disclosing offshore
trading information should be resolved.
BARRIERS TO REGULATION
Overview
US case law generously supports the assertion that
bank secrecy laws inhibit the supervision of securities
markets.9 The preponderance of academic literature
examines the offshore problem from the view of
the frustrated regulator. When the literature does
examine the problem from the perspective of the
haven jurisdiction, it often entails an analysis of civil
law
provisions.10
The purpose of this section, how-
ever, is to illustrate, using the Bahamas as a case
study, how a common law secrecy haven justifies
the primacy of the banker's duty of secrecy over a
foreign subpoena to produce documents in a foreign
court. For the sake of clarity, this section divides its
discussion into six substantive subsections. Subpart
Β examines the common problem faced by haven
banks that execute transactions on US securities
markets, namely an exposure to US court orders
and liability to civil and criminal penalties in the
haven. Subpart C identifies the institutional rationales
Page 331
Common
Law
Bank
Secrecy
and its
Implications
for US
Securities
Laws
for bank secrecy. Against this backdrop, subparts D
through G offer a clinical analysis of common law
bank secrecy in the Bahamas, specifically demonstrat-
ing how offshore courts negatively respond to the
thinly veiled attempts of US authorities to undermine
their sovereignty on the issue of bank secrecy with
investigative subpoenas.
The
problem:
jurisdictional conflict
The international marketplace dictates that multi-
national enterprises must necessarily function in at
least two sovereign states to remain competitive.
When the laws of those two or more states conflict,
the enterprise's legal responsibilities become more
onerous.11 This conflict is apparent in bank secrecy
laws,
insofar as many banks maintain offices in coun-
tries around the world. Frequently, issues involving
the affairs of a customer arise in state A concerning
his transactions in the offshore jurisdiction of state
B.
For example, the New York office of a US bank
may be asked by a US court to supply customer infor-
mation kept at its Nassau office. This information,
however, enjoys privileged status under Bahamian
secrecy laws. Operating under two jurisdictions —
the US jurisdiction, under which the bank maintains
its headquarters and the Bahamian jurisdiction,
where the requested information is kept — the bank
is in a most unenviable position. In short, the bank is
caught between Scylla and Charybdis.
Hence, jurisdictional questions, coupled with issues
of sovereignty, vex multinational banking enter-
prises. It is worthwhile, therefore, to begin by consid-
ering some of the theoretical aspects of jurisdiction
and sovereignty before an analysis is undertaken of
their practical implications.
It is said that sovereignty constitutes the supreme
authority in an independent political society.12
The related concept of jurisdiction can be defined as
the capacity of a state under international law to
govern people and property by its municipal
law.13
It includes both the power to make laws (prescriptive
jurisdiction) and the power to ensure compliance
with them (enforcement
jurisdiction).14
The question
of jurisdiction was addressed by the Permanent Court
of International Justice in the Lotus case.15 There, the
court determined that 'the first and foremost restric-
tion imposed by international law upon a state is
that . . . it may not exercise its power in any form in
the territory of another state'.16
Orthodox positions on jurisdiction and sover-
eignty have, to some extent, been realigned in light
of more recent concepts such as the effects doctrine.
This doctrine is characterised by the approach that,
irrespective of where the conduct in question
occurs, if it sufficiently affects a state's trading
markets, jurisdictional assertion is
justified.17
The
US has aggressively employed this doctrine. The
classic statement of the American doctrine is found
in United States ν Aluminum Company of
America,18
in which the court claimed that 'any state may
impose liabilities, even upon persons not within its
allegiance, for conduct outside its borders that has
consequences within its borders which the state
reprehends'.19 While other grounds for claiming
jurisdiction can be advanced, the effects doctrine
remains the most prevalent basis used by the US to
justify the extraterritorial application of its
laws.20
Critics argue that 'once the courts step outside gener-
ally accepted bounds of enforcement jurisdiction,
they are led inexorably to irreconcilable conflict at
both the private and public international law level
—
the very antithesis of the purpose of the conflict
of
laws'.21
Notwithstanding any theoretical objections that
could be advanced against the effects doctrine, the
practical implications are that it largely ignores the
concerns of other jurisdictions. A cursory examina-
tion of the definition of extraterritoriality emphasises
the point. Extraterritoriality may be defined as '[a]
legal fiction by which certain persons and things are
deemed for the purpose of jurisdiction and control
to be outside the territory of the State in which
they really are and within that of some other
State'.22 It should come as no surprise, then, that
extraterritorial reach is often viewed as an assault on
the other state's sovereignty. As implied above,
inherent in the definition of enforcement jurisdiction
is that a state's judicial reach is limited by its territorial
boundaries. The effects doctrine operates as an
exception to this principle. In matters of economic
significance, however, states are simply unwilling to
concede elements of their sovereignty to another
state.
The issue of Bahamian sovereignty in the financial
services sphere, for example, has been jealously
guarded by the Bahamian judiciary. The most
recent decision of the Bahamian Supreme Court,
Re Bank of
America,23
illustrates the commitment of
the judiciary to bank secrecy laws. Here, the court
embraced the principles of economic sovereignty
attested to by James Smith, Governor of the Central
Bank of the Bahamas.24 Smith argued that the
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332
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