The Protection of Offshore Confidentiality: Policy Implications and Legal Trends

Publication Date01 March 1999
Date01 March 1999
DOIhttps://doi.org/10.1108/eb025916
Pages9-25
AuthorRose‐Marie B. Antoine
SubjectAccounting & finance
Journal of Financial Crime Vol. 7 No. 1 Analysis
ANALYSIS
The Protection of Offshore Confidentiality:
Policy Implications and Legal Trends
Rose-Marie B. Antoine
The principle of offshore financial confidentiality is a
controversial issue in offshore law. On the one hand,
offshore jurisdictions view confidentiality in financial
matters as an essential ingredient in the offshore
industry which deserves to be protected. On the
other, onshore states are increasingly hostile to con-
fidentiality and have been willing to take drastic mea-
sures to undermine it.
The offshore confidentiality legal principle has
provided the impetus for many of the questions sur-
rounding offshore activity and the catalyst for much
litigation. The paper examines the conflicting legal
issues of confidentiality and disclosure within the
context of regulation of the offshore industry as a
whole. It outlines the extent to which offshore inves-
tors can legitimately expect confidentiality. The need
to balance these competing interests is particularly
important in offshore law, given the competitiveness
of the offshore sector in the world of international
finance. At the same time, the paper explores what
can be described as the emerging law of confidential-
ity in offshore finance.
The paper will lay the foundation for further dis-
cussion on money laundering, financial crime, disclo-
sure initiatives and financial regulation and attempt to
provide a framework for policy makers. Bankers,
trustees, accountants, lawyers and everyone else asso-
ciated with offshore business are affected by offshore
confidentiality norms. Everyone is at risk if confiden-
tiality is breached. All stakeholders need to under-
stand the legal parameters of the duty of offshore
confidentiality in contemporary investment in the
offshore sector.
One factor to be considered in the discussion, and
one which is not to be underestimated, particularly
in relation to comity issues, is that offshore govern-
ments make no apologies for laws which establish
and uphold confidentiality. They pursue the preser-
vation of confidentiality as a legitimate objective in
itself.
Questioning offshore confidentiality laws is
more than a mere legalistic inquiry. To some extent
it is also questioning the right of sovereign govern-
ments to create laws in harmony with their own
nationalist and developmental perspectives.1
Off-
shore courts perceive the protection of confidentiality
as part of their wider duty in the public interest, albeit
in the exercise of jurisdiction conferred by law. It is
thus not simply a matter of questioning the validity,
efficacy and morality of contemporary domestic legal
norms on confidentiality derived from a common
law perspective.
The issue of confidentiality has also had implica-
tions for several other areas of law. These are men-
tioned with a view to forging some coherent legal
principles in the creation of an offshore jurisprudence.
They include the appropriate parameters of bank
regulation within the context of the prevention and
detection of certain undesirable or criminal activities,
such as money laundering and tax evasion, issues con-
cerning the comity (the extent to which one country
will respect the laws of another) and sovereignty of
nations in international law, business efficacy and eco-
nomic reality as measured against the potential for
abuse, and constitutional issues such as the right to
privacy, the privilege against self-incrimination and
arbitrary search and seizure. The list is not exhaustive.
The proposition that confidentiality is legitimate,
albeit in measured form, will be discussed against
the background of such notions.
THE PROBLEM POSED THE ABUSE
OF CONFIDENTIALITY
A major obstacle to the goal of financial regulation
and law enforcement is the ability of onshore govern-
ments, tax authorities and private individuals to over-
come the confidentiality laws or practices of offshore
regimes. Information relevant to taxation, banking
and other financial matters, even for the use of
criminal or civil investigations, is often not accessible.
Page 9
Journal
of
Financial Crime
Vol. 7 No. 1
Analysis
Confidentiality, while being
one
of the major tools
of the offshore industry,
is
also
its
greatest enemy.
It is
the Achilles heel
of the
industry
and is
perhaps
the
factor which
has
most often called into question
the
very existence
of the
offshore sector. There
is
little
doubt that while confidentiality
of
itself
may be a
desirable objective,
it has
been used
by
many persons
and even governments
to
conceal illegal activity.
It is
this capacity
of the
legal principle
of
confidentiality
to obstruct
the
collection
of
taxes
and
hinder
the
monitoring
and
detection
of
money laundering,
assets
due to
creditors, profits
of
crime
and
other
illegal
or
unethical activity, which
has
justified
the
efforts
to
undermine
it. In one
view:
'Offshore secrecy laws
in an
ever increasing
number
of
cases prevent
U.S. law
enforcement
officials from obtaining
the
evidence they need
to
convict
U.S.
criminals
and
recover illegal
funds
... the use of
offshore haven secrecy laws
is
the glue that holds many
U.S.
criminal operations
together.'2
If confidentiality laws
are
allowed systematically
to
obstruct
law
enforcement investigations, they could
lead
to an
erosion of the public's confidence
in
crim-
inal justice systems worldwide,
as
many criminal
activities, such
as
money laundering, which
may
thrive
on
offshore secrecy havens,
are
international
in scope.
It is
unsurprising that many onshore gov-
ernments, with
the US
being
the
primary initiator,
have sought
to
establish
a
link between international
crime
and
offshore secrecy havens.
Bank confidentiality
is the
cornerstone
of
offshore
confidentiality
and its
most controversial component.
Legal rules
and
customs
on
banking confidentiality,
where often both
the
identity
of
account holders
and
the
amounts held
in
their accounts
are
confiden-
tial,
are
serious obstacles
to
financial regulation
and
hinder
the
efficient investigation
and
interdiction
of
onshore criminal activity.3
The
entrenched principle
of bank confidentiality also makes
it
difficult
for
adequate bank supervision
to
take
place.4
Confidentiality laws
do not
only pose problems
for
those
who are
concerned with fighting international
crime.
Of
equal concern
to
many governments
is
the increasing
use of
secrecy havens
by
companies
and ordinary citizens, 'otherwise
law
abiding',5
to
avoid paying taxes
or to
shield assets from creditors.
Such functions
may or may not be
legal,
but are
often undesirable
to
governments.
It is
thus easy
to
see
why
confidentiality
is one of
the most controver-
sial subjects
in the
offshore industry.
Clearly, while strict laws
of
confidentiality
may
provide security
to
bona fide investors, they
may
also
be
used
to
camouflage
or
facilitate crime
and
undesirable activity. This point must
be
conceded
in
any
discussion
of
offshore confidentiality.
But
such potential abuses
do not
justify
the
destruction
of
the
confidentiality principle
itself.
WHAT
IS
OFFSHORE
CONFIDENTIALITY?
The model of offshore confidentiality familiar world-
wide today
was
conceptualised
by the
Swiss,
who are
also responsible
for the
birth
of the
offshore financial
sector
itself.6
Although Switzerland
is
more closely
identified with banking confidentiality laws,
the
duty of confidentiality
is not
confined
to the
banking
sphere. Rather,
it is but one
aspect
of
a general right
to financial privacy under
the
Swiss Civil
Code.7
Specifically,
the
obligation
of
banking confidenti-
ality arises from three legal principles:
(1) the
right
to personal privacy;
(2) the
contractual relationship
between customer
and
bank;8
and (3)
specific statu-
tory provisions governing banking confidentiality.9
In addition, penal
and
administrative sanctions
apply
to
breaches
of
banking confidentiality. Most
notably, Article
47 of the
Swiss Federal Banking
Law makes breach
of
banking confidentiality
a
crime.10
However, banking confidentiality
has
even older
origins than those
of the
Swiss.
It
appears
to
have
been developed before Roman times when temples
acted
as
banks.11
It
then made
its way
into
the
Civil
Codes
and the
customary
law of
merchants.12
In
1765,
King Frederick
the
Great
of
Prussia protected
bank confidentiality:
'We forbid,
at Our
Royal Disgrace,
all and
every-
body
to
search into what should stand
in the
folio
to
the
credit
of
another person,
and
none
of the
bank clerks shall dare
to
disclose such, whether
by words, signs,
or in
writing,
or
suffer loss
of
their employment
and the
penalty expecting
a
perjurer.'13
The Swiss concept
of
confidentiality
has
been
imported into offshore countries.
As in
Switzerland,
in
the
majority of offshore jurisdictions,
the
confiden-
tiality obligation
has
been codified.14
The
enactment
Page
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