Private banks: Leaks present physical and semantic challenges

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By:
Helen Avery
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Majority of banks say focus on tax evasion to blame; ‘Secrecy’ now ‘confidentiality’, tax ‘avoidance’ now ‘evasion’?

The latest in a line of leaks of client data from private banks has thrown the question of privacy and secrecy into the limelight again.

In January, Rudolf Elmer, former chief operating officer of Julius Baer, handed over information on 2,000 cross-border accounts held at his previous employer to whistleblower website WikiLeaks. Elmer said he wanted to reveal how the cross-border system facilitated tax evasion and the damage this was doing to society.

Last year two former employees of HSBC Holdings leaked files of thousands of wealthy clients at the firm’s Swiss private banking arm to several European governments to help them clamp down on tax evasion. In 2008, Germany paid €4.2 million to a bank employee for stolen data on clients from Liechtenstein bank LGT.

Such leaks are a cause of growing concern for private clients, who often use private banks and offshore centres to book their money for reasons of security.

"Perhaps not in the US, but in many countries, high-net-worth individuals require privacy because they are concerned about the political risk in their domestic countries. They want to be able to protect against having their assets seized," says Daniel Senn, head of audit financial services at KPMG in Switzerland. The leaking of client information is therefore a worry, and Senn says banks are increasingly trying to reduce the risk of client data ending up in the public domain. "There are controls in place to screen for employees that are downloading client files. Some banks prevent the use of memory sticks," he says.

Tax focus increases client confidentiality breaches

Reasons cited by private banks for risks to confidentiality

Source: KPMG


In a survey of Swiss banks in November 2010, four out of five said they had initiated specific projects to review their strategy on client data security, and 60% expected to increase expenditure addressing the issue over the next two years. Large global private banks say they have tight controls on data protection. Credit Suisse was ranked as the best private bank globally for privacy and security in Euromoney’s 2011 private banking survey and UBS ranked second. But almost a third of small and medium-sized banks said they needed to improve their use of data leakage technology. However, Senn points out that "if an employee wants to take client information and copy it, it is very hard to avoid".

"You can protect against memory sticks but emails and attachments happen all the time. It is a bit out of the banks’ control"

Bruce Weatherill

Wealth management consultant Bruce Weatherill agrees. "You can protect against memory sticks but emails and attachments happen all the time," he says. "It is a bit out of the banks’ control."

It is no coincidence that leaks and a government focus on tax evasion since the financial crisis have grown in parallel. Governments need to increase their tax revenues and clamping down on evasion is one method. Leakers invariably get paid for the data – although if they break Swiss banking secrecy law they will also be prosecuted. Elmer has been arrested for passing information to WikiLeaks. More than 80% of Swiss banks surveyed by KPMG listed increased focus on tax evasion as the greatest risk to data security. The second most risky threat to data security was theft by IT staff.

Private banks are in a difficult situation. They need to encourage greater transparency from their own clients to ensure they are not evading taxes and they themselves have to be more transparent for regulators without upsetting clients.

Almost two-thirds of those surveyed by KPMG said it would be difficult to communicate a tax-transparent strategy to clients given the sensitivity surrounding the issue. The term "secrecy", say private bankers, is a thing of the past. Rather, "client confidentiality" is preferred in the current political and economic environment.

Tax evasion as a term is also being debated. While most people will agree that tax evasion should be stopped, the line between tax evasion and tax avoidance, and to some extent even tax efficiency, is becoming blurred.

"Is buying duty-free goods at airports a form of tax avoidance?" ponders Weatherill. "There is a growing acceptance that there should be greater transparency around those who benefit from and participate in global financial transactions and systems, but there will be a push-back by clients and their lawyers and accountants if they are being singled out or attacked if they are not doing anything illegal."

Threat

He says governments need to tread carefully or they will end up losing their high-net-worth citizens. "Governments seem blind to the fact that business is global, travel is cheap and many countries openly seek high-net-worth individuals to live in their jurisdictions to benefit from their presence and the spending and employment it brings. They fund businesses, their bonuses are taxed heavily and provide a source of income, and they get involved in philanthropy. They don’t have to stay in one place. They can change their domicile and renounce their country of birth. Politicians should bear this in mind."