Guernsey: Transparent yet Confidential in a Brave New World

 One of the things I remember vividly about my first day in banking was the ‘talking to’ I had from my new branch manager on the need for the utmost confidentiality when it came to customer information – that was in Lloyds Bank back in 1975. And how right he was to lecture me on the need to ensure customer confidentiality. But of course what he was telling me was nothing new.

Confidentiality is not a recent phenomenon.

Banking has traded on the concept of confidentiality since the joint-stock banks were born out of the coffee houses of the City of London and before that even, in the banking houses of Renaissance Italy.

So it remains to this day, and Guernsey is no exception to the rule.

Indeed, it is true to say that all players in the wider financial services marketplace adhere to this concept. For trust companies, for example, this duty of confidentiality is no less real, though in their case it arises through their fiduciary relationship with their clients.

Confidentiality is not, however, enshrined in law – not in Guernsey nor, indeed, in the UK. It is case law that gives us our marker, and the Tournier Case of 1924 in particular is the reliably held English Court precedent. This case decided that a bank owes all its customers a duty to keep their affairs confidential. But importantly, it also provides four occasions when this duty can be over-ridden.

These are:

• where the law compels it;
• where there is a duty to the public to disclose the information;
• where the bank’s own interests require it; and
• where the customer permits it.

This principle is also enshrined in the BBA^[i] Code of Banking Practice, to which most of the banks in Guernsey subscribe. And I believe it is here that the distinction between confidentiality and ‘secrecy’ lies.

Again, Guernsey, like the UK, does not have a banking secrecy law and, unlike Switzerland for example, sees no reason to introduce one. But how many times have we heard the newspapers and the media in general allude to cultures of secrecy in so-called ‘tax havens’. It is emotive language designed to catch the public’s eye. Yet these blanket statements do not represent a truthful picture, even if there are territories, like Switzerland or Litchenstein, to which they might reasonably be applied.

Unfortunately the truth, and certainly as it applies to Guernsey, is far less exciting! Guernsey, unlike those jurisdictions mentioned, has never passed any specific law relating to banking secrecy and, furthermore, has no intention of doing so.

I believe that beyond those over-riding contingincies provided for in the Tournier case, we must ensure that confidentiality is real – and is seen to be real – for the vast majority of clients. So, given the increasing amount of information which is stored electronically and which can be transmitted at the touch of a button, there have to be comprehensive safeguards to maintain a proper respect for a client’s right to privacy. And Guernsey has comprehensive data protection laws which will do just that.

A comprehensive series of laws is also available to ensure that the island mitigates, as far as it possibly can, the potential for abuse of the international finance system, of which the island is a part. Such abuses may include funding of the drugs trade, of terrorist activities, or hiding proceeds of crime through money laundering. Whilst these abuses of law are big news stories wherever they occur, they represent a small percentage of the number of transactions that pass through the international financial system on a daily basis. Equally, they represent a very small number of the total customer base.

That said, in Guernsey we hold that there is no place for illegal business practices anywhere, and we play our part in seeking to chase out any such practices. We must be prepared to divulge any information that under law we have a duty to disclose for the betterment of the wider, legitimate financial and business community.

At the same time as accepting the need for confidentiality, the new watchword in the international financial community is transparency. Tax transparency, in particular, has been highlighted by the OECD in its Harmful Tax Practices initiative^[ii]. This project, launched over 10 years ago, saw 32^[iii] international finance centres, including Guernsey, agree to participate and enter into Tax Information Exchange Agreements (TIEAs) with OECD members and non-OECD members alike. The initiative took a long time to gather momentum, largely due to the absence of the promised ‘level playing field’, which proposed that no economic harm would befall the smaller jurisdictions. This proved a bridge too far for many, and with very few TIEA’s signed by December 2005, the OECD revised the way in which transparency would be measured. By threatening ‘blacklisting’ if the prescribed number of TIEA’s were not signed within a certain timescale, the OECD has ensured a flurry of activity on this front in recent times. Guernsey in particular has signed fourteen in all, including agreements with the US and the UK, and it is likely that this momentum will be maintained for 2009 and beyond.

But what price confidentiality?

Well, to be quite honest, I believe these agreements come at no cost to confidentiality for those who are undertaking legitimate business. Only those with something to hide will have something to fear.

There have been many scare-mongering stories about ‘leaky buckets’, and of confidential information being made available to all and sundry, but in each case such stories have proven alarmist and untrue. Each TIEA contains a very specific procedure for accessing information which ensures that there is a bona fide reason underlaying any information request, meaning that fishing expeditions will not be allowed. There have been cries that these agreements will be the end of private client business for those who sign up. Well, if it means that those clients who have been sailing close to the wind decide to move to more accommodating jurisdictions, then we say ‘so be it’. Guernesy simply does not need any of that business; there is far too much good business out there to risk having our reputation tarnished by unsound practitioners.

Transparency also covers an understanding of the underlying ownership of corporate vehicles, and the requirement to maintain details of beneficial owners of companies. Guernsey has, since 2006, had a TIEA in place with the US, meaning matters of both a criminal or a civil nature can be dealt with under existing legislation and the TIEA. We have also enacted a new companies law which requires details of beneficial ownership of Guernsey companies to be available through their directors or the corporate service provider. This is to ensure that the authorities on the island can access them if necessary, under the appropriate law or agreement.

It is salient to note that Delaware, the new US Vice President’s home state, could be classed as a ‘tax haven’ according to the US Senate’s own definition. Many of the 600,000 companies listed are shell companies lacking any transparency, with no requirement for the disclosure of beneficial owners. Such companies are left liable to abuse by unsound business practitioners, who potentially could use them as vehicles for tax evasion and money laundering. And Delaware is not alone in the US.

As we emerge from the recent economic crisis, the calls for ever greater transparency grow, as was illustrated in the rhetoric on display in the run-up to the US election. But with greater transparency must come a level playing field that requires standards to be maintained across the entire international finance system. Let’s have agreed standards to which we all adhere without fear or favour.

I believe that such an approach can only be beneficial for those clients who are engaged in good, legitimate business, clients who have nothing to fear from initiatives which will enhance transparency in the world’s financial centres. Client confidentiality still has a pivotal role to play in our day-to-day business.

1. i) British Bankers’ Association. For the full code see http://www.bba.org.uk/bba/jsp/polopoly.jsp?d=347&a=13086
2. ii) The OECD Harmful Tax Practices initiative was launched in 1998. The original report sought to establish the criteria for identifying ‘tax havens’ and focussd on 2 main areas: a tax regime with no or minimal taxes and a lack of transparency or insufficient channels of information exchange to tax authorities in OECD member countries. See http://www.oecd.org/dataoecd/1/17/37446434.pdf for a 2006 update on the project
3. ii) From the original list of 35 ‘Tax havens’ that were identified by the OECD under their criteria, 32 agreed to participate fully in the initiative leaving Liechtenstein, Andorra and Monaco on the list