Traditionally, bankers owed a duty of confidence or secrecy to their customers. In essence, a customer could expect that any dealings with a bank, and information provided to a bank, would be treated as confidential. But traditions can change.
Internet banking and outsourcing of data processing have increased the pressure on banks to keep information confidential, to prevent fraud or the wrongful use of sensitive information. This has let to a wide variety of confidentiality laws, regulations and codes of practice in many countries.
Conversely, globalisation of banks and their products has brought increasing commercial pressures against bank confidentiality. Banks want the freedom to transfer information within their networks of branches and affiliated companies or to outsource administrative function to third parties, often in different countries. The development of debt trading and securitisation means that information on customers has to be passed on to market counterparties and investors. Banks may also wish to share information with each other on defaulting customers. These pressures, too, have to be respected.
So do the increasing legal and regulatory requirements for disclosure of information. Greater transparency is being encouraged in market dealings. Regulators require more information, and the freedom to share it with counterparties. Tax authorities want information on tax-payers. International anti-money laundering initiatives have imposed positive obligations on bankers (and others) to give information on customers to governmental authorities where suspicions arise about their dealings.
There have been some further developments in England this year. Perhaps the most prominent has been the debate about the implementation of the EU Third Money Laundering Directive. This has resulted in the Money Laundering Regulations 2007 which will come into force on 15 December 2007. The JMSLG risk – based guidance will be amended as well.
Another development has been the ongoing use by HM Revenue & Customs (HMRC) of certain of its powers to investigate offshore bank accounts.
HMRC Probe into Offshore Bank Accounts
Under U.K. legislation, s.20 of the Taxes Management Act 1970 permits HMRC to require any person to make available to them "such documents as are in his possession and power and contain or may contain information relevant to any tax liability which the taxpayer is or may have been subject to". This is a very wide ranging power and can be used against persons other than the target taxpayer, for example, banks and financial institutions. With this is mind there are safeguards to ensure legitimate use. Firstly, a notice can only be given with the approval of the General or Special Commissioner and, secondly, the Commissioner should only consent if he is satisfied that the use of s.20 is justifiable taking into account the circumstances of the case.
Usually a notice will contain a taxpayer's name although a notice can be given to a class of taxpayers where there are reasonable grounds to believe that taxable income has not been disclosed and the requested information is not available from another source.
The European Union has also aided the HMRC’s ability to obtain information on offshore accounts by the introduction of the Savings Directive which came into force in 2003. This Directive requires Member States to exchange information on interest income paid on non-resident accounts. The usefulness of this Directive is debatable; some have argued that it has simply persuaded people to set up offshore accounts outside the geographical area of this Directive.
However, since the introduction of the Savings Directive the HMRC have taken a harder stance on offshore tax evasion and this seems evident from a number of cases where the HMRC have used their statutory power under s.20 (8A) to have notices issued.
In one, an investment bank acted as a broker in share transactions effected for a company incorporated in the British Virgin Islands. The s.20 notice to the bank was obtained on the grounds that the ultimate beneficiaries of the transaction were U.K. taxpayers and income from these transactions had not been declared.
Another case investigated credit cards that were registered with a UK address but linked to an offshore bank account. Under the s.20 notice, HMRC gained access to the offshore bank accounts and initially estimated that around £347 million would be collected on undeclared interest and untaxed profits and gains that funded these accounts. The financial institution was given 60 days to provide 6 years' information.
A further case held that a UK Bank had possession of its offshore subsidiaries banking records for U.K. based customers and was therefore obliged under the s.20 notice to provide those records to the HMRC. This case discussed two key issues: -
(i) Documents in "possession or power" of the Bank.
It was decided that information held on hard disk was in the possession of the bank. It also pointed out that if U.K. employees knew the passwords to access information on hard disk about the offshore accounts, this information was also in the possession of the bank and under the s.20 notice the HMRC had the power to gain access to it.
(ii) Duty of Confidentiality
The information sought under the s.20 notice will in most jurisdictions expose the bank, or its subsidiaries, to civil claims or criminal prosecution in other countries for breach of duty of confidentiality. As a result it was argued that the Special Commissioner could exercise his statutory power to cancel the s.20 notice on the grounds it would be onerous for the bank to comply with it. Although this argument was considered, the s.20 notice was still issued.
The fact that information becomes available to a U.K. bank does not exempt it from confidentiality laws in other jurisdictions. This case shows that although the bank’s disclosure was made under compulsion of UK tax laws, it will not assist overseas bank branches, or subsidiaries, which become involved in foreign proceedings relating to accounts outside of the U.K.
HMRC has now obtained a further ruling to gain access to computer-held details of non-U.K. accounts held by the U.K. customers of four more major Banks. Apparently HMRC presented evidence to support a claim that it will collect approximately £281m from thousands of people with hidden savings. It also presented evidence to show that in many cases the source of offshore accounts deposits is undeclared income and gains.
The HMRC offered a partial amnesty for people with undeclared offshore accounts, the offshore disclosure facility. This was available to people who disclosed information about their offshore accounts by 22 June 2007. It allowed them to settle all undisclosed liabilities for a 10% penalty. It was reported in September 2007 that the HMRC held meetings with various banks and declared their intention to widen their search to other banks, but that they would not require those banks to breach secrecy rules. Further, HMRC intended to liaise with banks, by issuing questionnaires to senior bank officials, as to how these investigations should be conducted. It is evident that this is a complex area where further litigation is likely, and would be helpful, to clarify the position for banks caught in this difficult situation.