A Black Market of Bank Information

As a result of cash-strapped governments intesified hunt on tax evaders a black market for private client data hes emerged, according to a reasearch note by Moody’s. The latest information has revealed bank employes aelling stolen data to foreign governments.

“In cases like these, consequences often go beyond the mere loss of the clients directly involved. In the most extreme cases, nervousness from depositors can lead to significant money outflows, which might force the banks’ to rethink their business model.”

Javier Rodrigues Martin

Foreign governments caution Switzerland that client data theft cases could increase, Moody’s says in a research note.  The most important challenge for banks is the reputational damage caused by data theft or fraud by their own employees, the analyst points out.

The latest client data theft affecting a Geneva-based private bank and involving French tax authorities shows how far cash-strapped foreign governments are ready to go to get tax evaders’ money back. The threat of further breaches of bank secrecy due to client data theft (tacitly encouraged by foreign governments) is likely to increase customer insecurity at private banks, which may ultimately lead to money outflow (both cash deposits and securities) and challenge these banks’ core funding base.

Since Switzerland agreed to relax its banking secrecy rules in March of this year, more than 12 double taxation treaties (DTT) have been drafted between the country and foreign governments, allowing it to be taken off the OECD grey list of un-cooperative countries in September 2009. The DTTs allow for bilateral cooperation in case of tax evasion or fraud from their citizens. However, so-called “fishing expeditions” are not allowed under such agreements and foreign governments need to provide the name and details of tax evaders as well as solid suspicions to Swiss authorities if they are to get assistance. Since this information is typically difficult to obtain, some governments have resorted to client data stolen by private banks’ former employees. This was the case with LGT Bank in Liechtenstein in 2002, where a former employee sold data to the German tax authorities, and more recently with HSBC Private Bank in Geneva.

While HSBC Private Bank has declared that data on fewer than 10 accounts between 2006 and 2007 were taken, the French government claims to be in possession of the names of about 3000 tax evaders relating to other Swiss banks. It also cautions that data theft cases could increase if Switzerland does not show more cooperation.
On one side, the lack of certainty about the names owned by the French authorities is meant to encourage clients to voluntarily disclose their assets to the tax authorities. However, the most important challenge for banks is the reputational damage caused by data theft or fraud by their own employees. In cases like these, consequences often go beyond the mere loss of the clients directly involved. In the most extreme cases, nervousness from depositors can lead to significant money outflows, which might force the banks’ to rethink their business model.

In order to protect against this increasing threat, private banks need to invest more in protecting client data. This burden occurs at a time when compliance costs are also increasing – due to the more complex legal environment- while the earning side is constrained by lower market valuations. In the longer-term, Switzerland will need to come up with further-reaching cooperation agreements if it wants to preserve client confidentiality while removing doubts about their tax-compliance.

Copy of the original research note.


Reblog this post [with Zemanta]
Advertisements

Comments Off on A Black Market of Bank Information

Filed under International Econnomic Politics, National Economic Politics

Comments are closed.