Abstract

To many people in the international financial community, bank secrecy is not a new concept. Many countries, such as Switzerland and The Bahamas, have become attractive as international banking centers in part because of stringent bank-secrecy laws that protect the secrecy of financial information regarding bank customers. Since the 1930s, the number of countries that have adopted bank-secrecy laws has increased significantly. These laws have helped a number of countries to grow substantially in their international banking activities. For example, International Monetary Fund statistics indicate that from 1985 to 1986, international bank lending to offshore banking centers (as defined by the Fund staff) surged from approximately $39 billion to about $88 billion, while international bank deposit-taking from offshore banking centers increased from approximately $54 billion to almost $127 billion.1

I. Introduction

To many people in the international financial community, bank secrecy is not a new concept. Many countries, such as Switzerland and The Bahamas, have become attractive as international banking centers in part because of stringent bank-secrecy laws that protect the secrecy of financial information regarding bank customers. Since the 1930s, the number of countries that have adopted bank-secrecy laws has increased significantly. These laws have helped a number of countries to grow substantially in their international banking activities. For example, International Monetary Fund statistics indicate that from 1985 to 1986, international bank lending to offshore banking centers (as defined by the Fund staff) surged from approximately $39 billion to about $88 billion, while international bank deposit-taking from offshore banking centers increased from approximately $54 billion to almost $127 billion.1

Yet it must also be recognized that the existence of stringent bank-secrecy laws is not essential for the creation or development of international financial centers. Within the United States, for example, New York, Miami, Chicago, and Los Angeles all have come to play increasingly important roles in international finance without secrecy laws. Likewise, other financial centers outside the United States, such as London, do not possess stringent bank-secrecy laws.

In addition, countries that possess, and actively advertise the existence of, bank-secrecy laws are likely to attract not only legitimate investments but also moneys derived from large-scale and violent criminal enterprises. Since the 1960s, phenomenal increases in drug trafficking have generated billions of dollars. Drug traffickers throughout the world have sought to conceal their ill-gotten gains and thereby prevent their seizure by law-enforcement authorities. Countries with bank-secrecy laws have therefore become ideal havens for these illegal funds.

Organized-crime groups have also become more sophisticated in the use of tax havens and secrecy jurisdictions to conceal their profits from illegal gambling, extortion, and racketeering. Criminals who are involved in large-scale frauds frequently take advantage of financial institutions in bank-secrecy jurisdictions, to prevent the creation of an “audit trail” that would permit investigators to follow the movement of funds.

By the late 1960s, U.S. law-enforcement authorities generally recognized that bank-secrecy laws in foreign countries were proving to be a significant impediment to the effective investigation of organized crime and other criminal activities. At that time, the only effective means available to obtain information on financial transactions in foreign countries was the issuance of letters rogatory. While the use of letters rogatory is a time-honored technique, it was—and, to this day, remains—cumbersome. Sometimes, it takes up to two years to obtain records by this method, and even when they are obtained, if they relate to the bank account of a customer and are protected by secrecy laws, they may not be disclosed.

In response to this problem, in 1970 the U.S. Congress passed a law that has become popularly known as the Bank Secrecy Act.2 The United States’ Bank Secrecy Act (“BSA” or the Act) is really a misnomer. A better name would probably be the “Anti-Bank Secrecy Act,” since the law requires the disclosure of information regarding large currency transactions. The Act is specifically designed to aid in the attack against drug and other illegal activity by creating a “paper trail” to trace drug and other proceeds back to their illegal sources. The Act provides that the Secretary of the Treasury shall promulgate regulations requiring reports as well as record-keeping to assist the government in criminal, tax, and regulatory investigations or proceedings.3 The Act, and the implementing regulations that the Treasury Department has issued, require the routine filing of several types of reports:

(1) The Currency Transaction Report (CTR). A financial institution, other than a casino, must file a CTR (Internal Revenue Service (IRS) Form 4789) for “each deposit, withdrawal, exchange of currency, or other payment or transfer, by, through, or to such financial institution which involves a transaction in currency of more than $10,000.”4 The term “financial institution,” as used in the statute and regulations, includes not only banks but also securities brokers, currency exchange houses, check cashers, and even individuals who provide services traditionally conducted at financial institutions. A similar report, the Currency Transaction Report by Casinos, or CTRC, is required to be filed by casinos when they engage in transactions like those described above.5

(2) The Currency and Monetary Instrument Report (CMIR). A person must file a CMIR (U.S. Customs Service Form 4790) when he “physically transports, mails, or ships, or causes to be physically transported, mailed, or shipped … currency or other monetary instruments in an aggregate amount exceeding $10,000 on any one occasion,” whether that transportation is into or out of the United States;6 or when he receives, in the United States, currency or other monetary instruments in an aggregate amount exceeding $10,000 that have come from outside the United States and on which no CMIR has been filed.7

(3) The Report of Foreign Bank and Financial Accounts (FBAR). A person subject to the jurisdiction of the United States (including a U.S. citizen residing abroad) must file an FBAR (U.S. Treasury Form TD F 90–22.1) if that person had, at any time during the year, “a financial interest in, or signature or other authority over,” one or more bank accounts, securities accounts, or other financial accounts in foreign countries, the aggregate value of which exceeded $10,000.8

Finally, the Act and the accompanying regulations require financial institutions to maintain a variety of records (such as copies of signature cards, bank statements, and checks drawn for more than $100)9 for a five-year period.10 Records required to be kept under the Act, unlike the BSA reports themselves, generally may be examined by law-enforcement authorities only for the purpose of assuring compliance with the Act’s requirements; in other cases, the authorities must obtain subpoenas or comply with other legal provisions.11

In recent years, the Act has proved increasingly useful to law-enforcement authorities. In addition, during the last decade, the U.S. Government has used other methods for obtaining information about foreign banking or financial transactions. I would like now to concentrate on the most recent legal developments that affect foreign bank-secrecy laws and practices, and explore some of the ramifications of these developments. In some cases, such as the negotiation of Mutual Legal Assistance Treaties (MLATs), these developments and agreements are the culminations of many years of experience.

II. U.S. Legislation Affecting Bank Secrecy

I would first like to address specific legislation that the U.S. Congress has enacted that may affect bank secrecy in other nations. I believe that the logical starting point for discussion is the U.S. Bank Secrecy Act. As I stated earlier, the Act requires domestic financial institutions and other persons to file various types of reports pertaining to domestic-currency transactions, international transportation of currency or bearer monetary instruments, and the existence and location of foreign bank and other financial accounts.

Over time, these reports have proved highly useful for civil and criminal law-enforcement purposes. Particularly in recent years, these reports have provided law-enforcement authorities with investigative leads, information that has corroborated other information about criminal activities, and probative evidence in federal criminal cases. Perhaps the most prominent example of the reports’ utility can be found in United States v. Badala-menti12 (also known informally as the “Pizza Connection” case). That case involved the smuggling of substantial quantities of heroin into the United States by members of Italian and U.S. organized criminal groups. In the course of an investigation of heroin trafficking, federal authorities discovered a number of CTRs that reflected large cash transactions between a Swiss national and stockbrokers in New York. These reports eventually led to the discovery of an extensive money-laundering operation that involved the transfer of tens of millions of dollars through investment houses and banks in New York City to financial institutions in Switzerland and Italy.

Ultimately, 20 individuals involved in the heroin network and money-laundering enterprise were convicted in federal court on various charges, including heroin trafficking, conspiracy, racketeering, and Bank Secrecy Act violations. All received prison sentences, which ranged from 15 to 45 years. In addition, the Swiss national involved was convicted and imprisoned by the Swiss authorities for violations of Swiss law relating to his money-laundering activities.

The U.S. Government has also made substantial use of the Bank Secrecy Act to prosecute a number of leading money launderers in the United States and abroad. In recent years, for example, the Government has successfully prosecuted Isaac Kattan-Kassin, whose money-laundering organization handled gross proceeds estimated at $200 million to $250 million per year;13 Ramón Milian-Rodriguez, who transported approximately $146 million in cash from the United States to Panama over a nine-month period;14 Eduardo Orozco, whose organization laundered more than $150 million over a four-year period;15 and Barbara Mouzin, who masterminded and operated a large (U.S.) West Coast money-laundering business for cocaine traffickers.16

In some instances, even a single CTR can provide significant investigative leads for criminal investigators. In one case, the IRS analyzed a single CTR and determined that the individual listed on it had not filed a tax return. Subsequent investigation disclosed the existence of a massive heroin distribution and money-laundering organization in southern California, which had provided false information to the financial institutions that filed CTRs based on its transactions. Eventually, the IRS arrested more than a dozen persons associated with the organization, seized in excess of $2 million in currency at various domestic banks, and charged the organization with income tax evasion involving $27 million in income over a three-year period.17

Although many of the examples cited above involved large-scale money laundering for drug traffickers, Bank Secrecy Act reports are also highly useful in identifying or proving other types of financial crimes—for instance, bank fraud and embezzlement. In one recent case, for example, analysis of reports filed by a bank provided a number of leads as to the disposition of tens of millions of dollars that had been embezzled from the bank through such devices as illegal loans. In another recent case, federal investigators discovered that a husband and wife had failed to file a CMIR form for the $125,000 in cash that they had taken out of the United States. Further investigation determined that the wife had embezzled millions of dollars from the savings and loan association in Texas where she had been employed.

These examples amply demonstrate the substantial utility of Bank Secrecy Act reports. In addition, unlike grand jury subpoenas or court orders, the reports provide a constant stream of data on large domestic and international movements of cash and ensure that law-enforcement agents obtain valuable information on suspicious transactions in a timely fashion.

Recognition of the Act’s utility has helped to spur the federal government to enforce the requirements of the Act with increasing vigor. In the past five years, for example, the IRS Criminal Investigation Division has steadily increased the number of investigations18 and prosecutions for criminal violations of the Bank Secrecy Act. During that same period, the numbers of indictments and convictions for those violations have also increased.19 In the past three years, the U.S. Customs Service, which has authority under the Act to seize currency and monetary instruments transported without being reported on CMIR forms,20 has consistently increased its seizures of currency and monetary instruments under all applicable federal statutes (including the Bank Secrecy Act).21 In addition, since June 1985, the U.S. Treasury Department has imposed 38 civil monetary penalties, totaling approximately $16 million, against financial institutions for violations of the Act.22

This increased enforcement of the Bank Secrecy Act had one unanticipated effect: it gradually made clear to the Government that the Act had certain limitations. Although it obviously was intended to assist the Government in detecting and investigating money-laundering activities, the Act itself did not make money laundering a federal crime. As a result, a clever money launderer could devise methods for moving funds into, out of, or through the United States without violating the reporting provisions of the Act.

One of the more common techniques used to accomplish this is known as “smurfing,” or “structuring,” transactions. Structuring involves conducting multiple cash transactions (such as deposits or purchases of cashier’s checks or money orders) in amounts that total more than $10,000 but which individually do not exceed the $10,000 threshold that would require filing of a CTR.23 The conduct of structured transactions, at multiple branches of the same financial institution or at multiple institutions, often prevents the filing of CTRs on transactions that otherwise would be reportable, and therefore substantially reduces the likelihood of detection by law-enforcement authorities.

Since the federal statute requiring CTRs did not expressly prohibit structuring transactions to avoid its reporting requirements,24 prosecutors attacked the problem under a number of different provisions, including: mail fraud, wire fraud, “aiding and abetting” other criminal offenses, and conspiracy to defraud or conceal information from the federal government or its agencies. Federal courts had mixed reactions to these efforts; though some convictions under these provisions were upheld,25 others were reversed on the ground that these laws did not really address the problem of “structuring.”26

To remedy these and other deficiencies in federal law, the U.S. Congress passed the Money Laundering Control Act of 198627 as part of the Anti-Drug Abuse Act of 1986.28 In the Money Laundering Control Act, Congress created three new categories of federal money laundering-related offenses. The first two of these offenses have limited extraterritorial effect.

Section 1956 of Title 18 in the United States Code makes it a federal criminal offense for any person to conduct a financial transaction that involves the proceeds of specified crimes (such as drug trafficking) if that person knows that the property involved in the financial transaction represents the proceeds of some form of crime and that person has the intent to promote the carrying on of that specified crime or has knowledge that the transaction is designed to conceal or disguise the nature, location, source, ownership, or control of the proceeds.29 Section 1956 specifically states that there is extraterritorial jurisdiction over the conduct prohibited by Section 1956, if two conditions are met:

(1) The conduct is by a U.S. citizen or, if it is by a non-U.S. citizen, the conduct occurs in part in the United States; and

(2) the transaction or series of related transactions involves funds or monetary instruments of a value exceeding $10,000.30

It is important to note that Congress drafted this grant of extraterritorial jurisdiction to avoid excessive infringement upon the jurisdiction of other nations. The first condition or nationality principle is entirely consistent with international law. Under the principle of nationality, the United States has a right to enact legislation that governs the conduct of its citizens outside the United States. Under the second principle, that of territoriality, the United States has a right to enact legislation that prohibits conduct occurring in part within its borders. Moreover, the territorial limitation ensures that the United States will not seek to prosecute foreign persons located outside the United States because of their involvement in de minimis financial transactions. The $10,000 threshold is consistent with the $10,000 threshold for reports that the U.S. Bank Secrecy Act requires and reflects a concern that the United States only exercise its extraterritorial jurisdiction in money-laundering cases that involve substantial amounts of illegally obtained money.

The second statute, Section 1957 of Title 18 of the United States Code, makes it a federal criminal offense for any person knowingly to engage in a monetary transaction with a financial institution in criminally derived property that is of a value greater than $10,000 and is derived from specified crimes.31 Section 1957 also specifically states that there is extraterritorial jurisdiction over the conduct prohibited by that section, if the defendant is either a U.S. national; a U.S. permanent resident alien; any person within the United States; a sole proprietorship, partnership, company, or association composed principally of U.S. nationals or permanent resident aliens; or a corporation organized under U.S. law, and a foreign subsidiary of such corporation.32 Jurisdiction over these classes of defendants is generally consistent with international law principles of nationality and territoriality. The last class is potentially the most far-reaching extension of U.S. jurisdiction, as it extends its reach to any foreign subsidiary of any U.S. corporation.

The third money laundering-related offense is a new anti-structuring provision that is part of the U.S. Bank Secrecy Act. That provision, Section 5324 of Title 31 of the U.S. Code, specifically prohibits the structuring of transactions. It makes it both a civil and criminal violation of the Act for a person to commit any of the following acts for the purpose of evading the CTR reporting requirement:

(1) to cause, or attempt to cause, a domestic financial institution to fail to file a required CTR;

(2) to cause, or attempt to cause, a domestic financial institution to file a required CTR that contains a material omission or misstatement of fact; or

(3) to structure or to assist in structuring, or to attempt to structure or to assist in structuring, any transaction with one or more domestic financial institutions.33

This new anti-structuring provision has no language that gives it extraterritorial effect. By its terms, it prohibits only the structuring of transactions involving domestic financial institutions. However, it is possible for a person involved in international money-laundering activities to be prosecuted by the United States under Section 5324 for structuring activities within the United States.

These new commitments of resources and new enforcement tools will undoubtedly have an impact on all forms of money laundering. But it would be a serious mistake to assume that drug-money laundering can be effectively combated only by civil and criminal enforcement of statutes within the United States. Money laundering is an international problem which cannot be attacked effectively without substantial coordination and cooperation between the United States and foreign governments. As a result, the Treasury Department has taken the lead on several substantial projects concerning international money laundering.

First, Treasury has been instrumental in the creation of an INTERPOL Working Group to improve communication and cooperation between the law-enforcement community and the financial community at the international level. Treasury is also exploring with INTERPOL the feasibility of expanding or combining the current U.S. data-collection system with an international repository of information on money laundering by drug traffickers and organized crime.

Second, Treasury has participated in discussions with the federal bank regulatory agencies on securing the cooperation of foreign bank supervisory authorities. These discussions have taken place in the context of the continuing efforts of the Bank for International Settlements’ Committee for Bank Regulations and Supervisory Practices (also known as the Basle Committee or the Cooke Committee) to eliminate money laundering in the international payments system. Third, I served as moderator for a panel of international participants on the subject of money laundering at the White House Conference on a Drug-Free America that was held this past March. At the conclusion of the conference, several recommendations aimed at enhancing international efforts to combat money laundering were made. Treasury is actively following up on those recommendations.

Moreover, Treasury is initiating a series of meetings with leading representatives of foreign governments and banks in countries where substantial money laundering may be taking place. These meetings are intended to open new channels of communication with these countries and to explore additional methods of cooperation for combating money laundering, including more extensive exchanges of information on money-laundering activities, and the enactment of legislation by those countries that would make money laundering a crime.

The United Kingdom, for example, has already passed the Drug Trafficking Offenses Act,34 which gives British law-enforcement authorities new methods for dealing with money laundering and the profits from drug trafficking. Australia and Canada are now in the process of considering their own legislation for tracing unusual cash transactions and detecting money laundering.

In addition, the Treasury Department is planning to send letters to the chief executive officers of U.S.-based financial institutions with foreign branches. These letters call to the attention of the financial institutions the risks associated with international money laundering, identify certain patterns of activity that should be considered suspicious, and encourage the foreign branches of those institutions to report any suspicious transactions to overseas U.S. Treasury law-enforcement representatives in a manner consistent with the laws of the country where the branch operates. These initiatives may well provide U.S. law-enforcement authorities with additional leads in money laundering and Bank Secrecy Act cases, and should help to persuade U.S. financial institutions that expanded cooperation with federal law-enforcement authorities is in their interest and in the interest of their legitimate customers.

III. Intergovernmental Agreements Affecting Bank Secrecy

I would now like to turn to the subject of intergovernmental agreements that may affect bank secrecy. In the past, U.S. law-enforcement authorities traditionally were dependent upon the use of letters rogatory to obtain information that concerned banking transactions from foreign jurisdictions. However widely accepted letters rogatory have been in international practice, they have, more often than not, proved to be a time-consuming and unreliable means of obtaining financial information.

Prior to 1977, existing agreements between the United States and other nations provided no clear alternative to letters rogatory for obtaining information in criminal investigations and prosecutions, even where the information was not protected by bank-secrecy laws. Beginning in 1977, however, the United States negotiated with Switzerland the first of a series of treaties with foreign countries that permit a broader range of cooperation and information-sharing in criminal matters. These treaties, known generally as Mutual Legal Assistance Treaties, or MLATs, provide substantial assurance that prosecutors and investigators can have more timely and reliable access to evidence and investigative materials located overseas.

Since 1977, the United States has successfully concluded negotiations on 13 MLATs. Several of these MLATs have been ratified and have entered into force. Others have been negotiated and signed by the parties and are currently before the U.S. Senate awaiting its advice and consent. In addition, the United States continues to actively negotiate MLATs with a number of other countries.

One of the singular virtues of MLATs with countries that have bank-secrecy laws is that they provide mutually recognized legal frameworks for the disclosure of banking information. The experience of the United States with MLATs has shown that even nations with stringent bank-secrecy laws can provide law-enforcement authorities in the United States with much-needed information for a wide range of criminal investigations. The MLAT with Switzerland, for example, permits the United States to seek documents for use in numerous types of criminal matters, including investigations into tax or customs violations, if the person under investigation is involved in an organized criminal group.

The U.S. agreements with the Cayman Islands exemplify the process by which the United States and bank-secrecy jurisdictions can work out harmonious arrangements for information-sharing and other cooperation. Initially, the United States and the Cayman Islands had an informal, or gentlemen’s, agreement, under which the Cayman Islands agreed to review, on a case-by-case basis, requests by the United States for financial information. This informal agreement with the Cayman Islands worked very well, notwithstanding the continued existence of the Cayman Islands’ secrecy laws. Subsequently, in 1984, the United States entered into a more formal agreement for the exchange of financial information in narcotics-related cases. This agreement also worked well, and provided a further foundation for the MLAT that the United States and the Cayman Islands negotiated in 1986. This MLAT, which has been signed by the parties and is currently awaiting ratification by the U.S. Senate, broadens the scope for requests of financial information to include narcotics, fraud, and money-laundering cases.

IV. Judicial Decisions Affecting Bank Secrecy

I would now like to turn to the subject of some of the principal U.S. judicial decisions that have affected the Government’s efforts to obtain information from jurisdictions with bank-secrecy laws. Most of these cases arose before MLATs were negotiated with the countries in question. Today, the methods that were used in these cases to obtain records located abroad are used only in instances where there is no MLAT with the country where the records are located, or when every other effort has failed.

Prosecutors who have handled complex criminal investigations, such as organized crime, money laundering, drug trafficking, and fraud, recognize that because information in U.S. financial institutions about foreign transactions is usually limited, they are required to seek this information directly from foreign jurisdictions. To obtain this information from foreign jurisdictions when there has been no MLAT or other method of obtaining the information through cooperative efforts, prosecutors have developed and used two techniques that have received substantial scrutiny by U.S. courts.

Subpoenas for Information Located Abroad

The first technique involves the issuance of a federal grand jury subpoena to the U.S. branch of a foreign bank (or to the home office of a U.S. bank with a foreign branch) seeking records from a bank branch in the foreign jurisdiction. The authority of federal courts to compel persons under their jurisdiction to obtain bank records from foreign jurisdictions with bank-secrecy laws was first recognized by the U.S. Supreme Court in its 1958 decision, Société Internationale v. Rogers.35 In that case, a Swiss holding company brought a civil action against the U.S. Government to recover assets seized under the Trading with the Enemy Act. Pursuant to the Government’s request, a federal District Court ordered the holding company to produce certain of its Swiss bank-account records. The company refused to produce some of the records, after making good-faith efforts to comply, on the ground that their production would violate Swiss criminal laws. The District Court dismissed the holding company’s complaint with prejudice as a sanction for failing to produce the documents.

The case was then appealed to the Supreme Court, which held that, as a matter of international comity, the lower court was not precluded from issuing the order requiring production of the documents, even though compliance with the order would have required the holding company to violate Swiss criminal laws. Notwithstanding this rule, however, the Supreme Court further held that, on the particular facts of the case, the outright dismissal of the complaint with prejudice was not justified because the holding company had made “extensive” good-faith efforts to comply with the District Court’s order.36 These efforts included the obtaining of consent waivers from the customer and the Swiss Government which resulted in the production of over 190,000 documents.

Since the Supreme Court’s decision in Société Internationale, a number of lower federal courts have upheld the use of grand jury subpoenas to compel a U.S. bank or branch to obtain bank records from a foreign jurisdiction. The leading case in this area is United States v. Bank of Nova Scotia, more commonly referred to as Nova Scotia I.37 In that case, a federal grand jury conducting a tax and narcotics investigation issued a subpoena to the Miami, Florida branch of the Bank of Nova Scotia, a Canadian-chartered bank, calling for the production of bank-account records of a customer of its Bahamian branch. The bank resisted compliance, asserting that production of records without the customer’s consent or a Bahamian court order would violate Bahamian bank secrecy laws. The federal District Court held the bank in civil contempt for failure to comply with the grand jury subpoena.

In affirming the District Court’s finding of civil contempt, the U.S. Court of Appeals for the Eleventh Circuit held that enforcement of the subpoena was appropriate even though its enforcement could cause the bank to violate Bahamian criminal laws. The Court reached this decision, as a matter of international comity, after applying the balancing test set forth in Section 40 of the Restatement of Foreign Relations Law, Second.38 Under that test, a court is to consider five factors in determining whether to exercise its jurisdiction:

(1) the vital national interests of each of the states;

(2) the extent and the nature of the hardship that inconsistent enforcement actions would impose upon the person;

(3) the extent to which the required conduct is to take place in the territory of the other state;

(4) the nationality of the person; and

(5) the extent to which enforcement by action of either state can reasonably be expected to achieve compliance with the rule prescribed by that state.39

Applying this test, the Court concluded that “the United States’ interest in collecting revenues and insuring an unimpeded and efficacious grand jury process” outweighed The Bahamas’ interest in protecting the limited right of privacy incorporated into its bank-secrecy laws.40

Because under The Bahamas’ own laws, certain exceptions permitted the disclosure of customer information, including disclosure pursuant to a Bahamian court order, the Court found that there was no need to afford greater protection to the customer’s right of privacy than a Bahamian court would, simply because the court ordering production was a foreign tribunal. Although the Court found it “unfortunate [that] the Bank of Nova Scotia suffers from differing legal commands of separate sovereigns,” it also stated that “this court simply cannot acquiesce in the proposition that United States criminal investigations must be thwarted whenever there is conflict with the interest of other states.”41 In addition, the Court held that the bank had failed to bring itself within the holding of Société Internationale, since the bank had not made any good-faith efforts to comply with the subpoena.42 As a result of the decision, the Bank of Nova Scotia ultimately produced the records without any enforcement action being taken by the Bahamian Government.

Despite the Court of Appeals’ decision in Nova Scotia I, in a second case where the United States sought to enforce a federal grand jury subpoena for the production of financial records located in The Bahamas and the Cayman Islands, the same bank again made no effort to comply with the subpoena and “continuously disregarded” numerous federal court orders to do so.43 As a result, the federal District Court, in what has become known as Nova Scotia II, held the bank in contempt of court and imposed a fine of $25,000 per day against the bank for as long as it failed to comply. By the time of its appeal to the U.S. Court of Appeals for the Eleventh Circuit, the bank had accumulated a fine of $1,825,000.

On appeal, the bank again argued that compliance with the subpoena would require it to violate Bahamian and Cayman Islands secrecy laws. The Court of Appeals once again applied the balancing test set forth in the Restatement and concluded that enforcement of the subpoena was proper.44 The Court also rejected the bank’s assertion that the U.S. Government could proceed only via letters rogatory.

A number of courts have joined the Eleventh Circuit in adopting the use of the Restatement factors or similar factors in determining whether to enforce a subpoena for foreign bank records.45 Another factor, in addition to those stated in the Restatement, that some courts have emphasized in these cases is the extent to which the party resisting compliance with the subpoena has demonstrated good faith in trying to comply. Not only did the U.S. Supreme Court clearly attach significance to the good-faith efforts of the holding company in Société Internationale, but it is equally clear that the Eleventh Circuit was heavily influenced by the lack of demonstrable good-faith efforts by the bank in Nova Scotia I and II.46 Recently, at least one federal Court of Appeals ignored the balancing test set forth in the Restatement and devised its own standard for deciding whether to enforce a grand jury subpoena directed at obtaining testimony and documents involving banking transactions outside the United States. In that case, entitled In re: Sealed Case,47 the U.S. District Court for the District of Columbia held a bank (operating in the United States but owned by the government of “Country”) and a bank manager in civil contempt for failing to give testimony and for failing to produce documents concerning transactions in the bank’s branch located in “Country Y.” The manager’s testimony had been sought because he had been an assistant manager of the Country Y branch and was a personal friend and business associate of several targets of the grand jury investigation. Country Y had bank-secrecy laws that were criminally enforceable. Although there was some limited cooperation by the manager and the bank, both refused to testify or to produce documents, alleging that these disclosures would violate Country Y’s bank-secrecy laws, exposing them to criminal prosecution.48

On appeal, the U.S. Court of Appeals for the District of Columbiareversed that part of the District Court’s order that held the bank in contempt and affirmed that part which held the bank manager in contempt. In reaching its decision as to the bank, the Court took into consideration the fact that the bank was an entity owned by “Country X,” as opposed to a U.S. entity or a privately owned foreign entity, and that it had made substantial good-faith efforts to comply, including the obtaining of consent waivers from three of its customers who were targets of the grand jury.

The Court upheld the civil contempt order, which required incarceration of the bank manager until such time as he complied with the grand jury subpoena. The Court rejected the bank manager’s argument that his constitutional right to refuse to make self-incriminating statements49 would be violated if he were compelled to testify, holding that since he and his family were residing in the United States, prosecution in Country Y was unlikely. Citing the U.S. Supreme Court’s decision in Zicarelli v. NewJersey State Commission of Investigation, the Court stated that “[i]t is well established that the [Fifth Amendment] privilege protects against real dangers, not remote and speculative possibilities.”50

The international implications of the cases involving Nova Scotia-type subpoenas are difficult to discern, principally because there has not yet been a decision by the U.S. Supreme Court definitively resolving the issue. It is fair to state, however, that, in general, these cases support the view that a bank that receives a grand jury subpoena located abroad should make genuine and demonstrable good-faith efforts to comply with it. The Eleventh Circuit is not the only court in the United States that is likely to reject the arguments of a bank that makes no effort at all to comply with a lawfully issued subpoena. Although what constitutes “good faith” may vary with the circumstances of the particular case, banks should clearly consider doing the following: (1) seeking authority for disclosure from a court in the foreign jurisdiction, from the foreign government, or from the customer; (2) conducting thorough searches of possible repositories of such documents in the foreign jurisdiction and informing the U.S. court of the number and locations of documents that appear responsive to the subpoena; and (3) providing any documents that are not protected from disclosure by the foreign jurisdiction’s laws.

Waiver of Bank-Secrecy Protection

Another technique that the U.S. Government has used to obtain information on banking transactions from foreign jurisdictions was inspired by the delays prosecutors experienced in using Nova Scotia-type subpoenas. For this reason, prosecutors sought to obtain the consent of the bank’s customer. Where consent was not voluntarily given, prosecutors began seeking court orders compelling customers whose foreign bank records were being sought to sign consent-waiver forms for the disclosure of those records.

The leading case that upholds the use of these waivers is United States v. Ghidoni.51 In that case, the bank’s customer refused to comply with a federal court order compelling him to execute a waiver form consenting to disclosure of his bank-account records at the Bank of Nova Scotia in the Cayman Islands. The Court of Appeals affirmed the District Court’s holding that the individual’s Fifth Amendment privilege against self-incrimination was not implicated because the signing of the waiver form did not constitute a testimonial communication.52

Since the Eleventh Circuit’s decision in Ghidoni, courts have been almost equally divided on whether to follow the reasoning of Ghidoni and permit the use of what have become known as “Ghidoni waivers.” The Second and Fifth Circuits have joined the Eleventh Circuit in holding that an individual’s Fifth Amendment privilege is not affected by a court order directing him to execute a Ghidoni waiver.53 In addition, the Second Circuit has eliminated any possibility of self-incrimination by requiring the U.S. Government to include in the waiver form a specific provision “that the Government could not use the directive as an admission that the bank accounts existed, that [the individual] had control over them, or for any other purpose.”54

However, in 1987, federal courts in three circuits held that the use of Ghidoni waivers does implicate an individual’s Fifth Amendment privilege.55 In the leading case that rejected the reasoning of Ghidoni, the First Circuit held that although the waiver form did not admit the existence of, the authenticity of, or the individual’s control over, the records being sought, it did admit and assert the individual’s consent. The Court found that fact “potentially incriminating, for it could be used, before the grand jury or at trial, to prove the ultimate facts that accounts in [the individual’s] name existed or that [the individual] controlled those accounts.”56 In these circumstances, the Court concluded “that the Fifth Amendment prohibits the government from using [the individual’s] compelled admission of consent as evidence against him.”57 This issue is now before the U.S. Supreme Court, where an ultimate resolution is expected.58

The use of Ghidoni waivers has international implications that are clearly different from those created by Nova Scotia-type subpoenas. Ghidoni waivers do not compel an individual or a financial institution to violate the law of a foreign country, and therefore pose less risk of adversely affecting the interests of a foreign country.

V. Foreign Legal Developments Affecting Bank Secrecy

No discussion of legal developments affecting bank secrecy would be complete if it did not mention that other nations are developing their own domestic legislation to combat money laundering. Other nations have recognized that as drug trafficking increases throughout the world, money laundering also increases. As I mentioned before, the United Kingdom passed the Drug Trafficking Offenses Act,59 which includes specific provisions that criminalize money laundering and allow for seizure and forfeiture of assets related to illegal activity.

Other countries are also considering whether to adopt similar legislation. In 1986, the Swiss Ministry of Justice received a report it had commissioned on money laundering under Swiss law; that report made several specific proposals for anti-money laundering legislation, and these are under consideration. Likewise, the Australian and Canadian parliaments are now considering legislation that would criminalize money laundering and establish reporting and record-keeping systems similar to those contained in the U.S. Bank Secrecy Act.

VI. Conclusion

Although the legal developments concerning bank secrecy that I have discussed here today are quite different in form, there are several themes common to all of them. First, the United States is committed to the investigation and prosecution of major criminal enterprises that seek to use other nations’ bank-secrecy laws to hide the proceeds of their illegal activities. To ensure the success of these investigations and prosecutions, the United States will continue to seek access to financial information in bank-secrecy jurisdictions.

Second, because the United States is sensitive to the national interests of foreign countries, it is committed to pursuing international agreements with foreign governments that will allow timely access to financial information without the need to resort to Nova Scotia-type subpoenas.

Third, U.S. law-enforcement authorities generally regard most of these legal developments—particularly the creation of new anti-money laundering measures and the expanding network of international agreements—as significant and salutary. Law-enforcement agencies now have more authority than ever before to combat money laundering and the illegal activities that it helps to sustain.

It is also clear, however, that the United States must continue to explore additional measures with other nations to assure genuine and continuing international cooperation in attacking money laundering by drug-trafficking networks and other organized crime groups. To that end, the U.S. Treasury stands ready to work with other nations to devise cooperative measures to assist law enforcement while affording due respect to the sovereignty of other nations. Only through the continued expansion of international negotiations and cooperative endeavors can the United States have a lasting effect on criminal activities that are of common concern to all nations.

COMMENT

MICHAEL ZELDIN

You might not know it, but you have witnessed a rare event today: the U.S. Department of Justice and the U.S. Department of the Treasury are in complete agreement on the subject of international narcotics and money laundering.

Echoing Mr. Hilsher’s comments, I want to say that we in the Justice Department view the problem of money laundering as something which is attendant to international narcotics trafficking. We have had a huge amount of experience in this field—not because we are so bright, but because we have made more mistakes, I think, than anybody else.

I think that I can offer some points on our experiences that are worthy of consideration and discussion. I should say, by way of establishing my credentials, that I am a federal narcotics prosecutor. I have spent my life prosecuting narcotics organizations, and, during the last four years, I have largely prosecuted banks, bankers, and money launderers. I should say, by way of revealing my personal prejudice, that I do not, in certain circumstances, distinguish between those people who deal in illegal narcotics and those who are willing to deal with them. Those who hold their hands out to drug traffickers should be in the same legal predicament as narcotics traffickers, for they do the same harm to the world.

Mr. Hilsher discussed the use of subpoenas by U.S. prosecutors to obtain documents in the Bank of Nova Scotia1 cases. We in the Department of Justice have had similar problems obtaining documents from other countries.

In 1982, we had two prosecutors in one case with a target who had documents abroad, to which they needed access. We could not obtain the documents through international assistance treaties, since there was no mechanism in place that could accomplish this. The prosecutors were faced with the choice of either dismissing the charges or being creative.

One prosecutor suggested that we subpoena the bank or its branch in the United States. The reasoning was that if a bank chooses to do business in the United States, it subjects itself to our laws. When our laws present potential conflicts with other jurisdictions’ bank-secrecy laws, the bank must make a choice—either stop doing business in the United States or obey our disclosure laws. The second prosecutor’s view was: “Well, you know, it is onerous, it is not right, for us to do that. Let us force the individual, rather than the bank or branch, to hand over these documents.” This view seemed to hark back to the old days of cops and robbers, where we tied a person up and tortured him until he confessed, and then said: “Aha! We have a confession!” This approach did not seem right.

The Justice Department has generally accepted the first prosecutor’s approach, arguing that if a bank does business in the United States, it subjects itself to the laws of the United States. If these laws are in conflict with the laws of other jurisdictions in which the bank does business, we try to balance the competing interests. The courts have been receptive to this approach, holding, with only one exception, that the national interests of a grand jury in pursuing drug traffickers should prevail over traditional secrecy laws. Even jurisdictions like Switzerland that have a strong bank-secrecy tradition are now willing to turn over documents to the United States pursuant to an agreement if we can establish that the money in a bank account is of illegal origin. We have pursued that approach to obtaining documents and will continue to do so to the fullest extent that we are able.

The waiver process, which is similar to the second prosecutor’s perspective, was used a few years later because of problems we had with other jurisdictions under the first approach. For example, Greece’s secrecy law is so onerous that every time U.S. courts have attached records from a Greek bank, we have lost because of the certainty of punishment for disclosure of these records in Greece. Accordingly, U.S. prosecutors reasoned that they would have to force their targets to sign consent forms. These consents have been largely successful, although, as Mr. Hilsher has pointed out, there are a few jurisdictions that have gone against the tide in rejecting them. Today, we believe that the nature of the consent form itself probably resolves these problems, since the form expressly states that it may not be used as evidence in U.S. courts.

The validity of these consents is at issue in United States v. John Doe,2 which was argued this term in the U.S. Supreme Court. We plan to continue using these forced consents unless the Supreme Court tells us that we cannot. One of the problems we have with these forms—one of the reasons that prosecutors do not like them—is that courts abroad have sometimes held that they violate their notions of public order and, consequently, have refused to enforce the forced consents. When a foreign court does this, the only way available to get documents is to subpoena the domestic branch of the foreign bank. You have conflict when a court refuses to enforce a foreign consent decree because it violates its notion of what it would do in its own jurisdiction. By doing that, the foreign court only forces U.S. prosecutors to serve the domestic branch with a request for foreign documents. Prosecutors vigorously pursue these documents from abroad, and the favored practice of most prosecutors is service on the domestic branch, because this is somewhat easier for the prosecutor.

Now, our preference is for mutual cooperation and understanding in this area. And in this respect we are pursuing mutual legal assistance and executive agreements with other nations, so that no foreign laws need be violated by the enforcement of our own law. What is going on in Strasbourg, France, and in Vienna, Austria, complements these efforts. In Vienna, work is progressing on the draft United Nations Convention on Narcotics, Drugs, and Psychotropic Substances. Members of the United Nations are attempting to draft a new convention dealing specifically with the matter of illicit narcotics transportation. The object of this is to have world cooperation in this matter. Article 2 of the draft convention provides that each party shall adopt such measures as may be necessary to establish offenses under the law of its own jurisdiction, when they are committed intentionally. One of these offenses is the concealment, the disguise, or the conversion of the nature, source, disposition, movement, or ownership of property, knowing that such property is derived from illicit traffic. At the moment, in Vienna, there is substantial agreement that the activities of concealing, disguising, or converting proceeds of illicit trafficking will be an offense in every jurisdiction that is a party to the convention; that there shall be international information sharing with respect to these things; and that there shall be international enforcement of final judgments. If Article 2 is ultimately adopted, then money laundering will be recognized as illegal internationally and cooperation will exist among all signatories for the acquisition of related documents pursuant to the convention.

There would be, as well, forfeiture of assets pursuant to the convention. Forfeiture of assets means not only the proceeds of the crime but also all instrumentalities used to facilitate the crime. In a broad context, if a bank knowingly allows itself to be used by drug traffickers for transactions in narcotics money, then that bank itself can become an instrumentality of the crime—subject to forfeiture. Under U.S. forfeiture laws, there are already many instances where persons must forfeit ongoing businesses. The United States has acquired not only the tangible cars, boats, and planes that transport illegal drugs but the ongoing businesses into which these proceeds have been deposited: golf courses, record studios, and airplane landing strips. The same process is being considered in Vienna, and I think there is broad agreement on the need for this. So banks should beware of this development and be mindful of the implications it has for turning a blind eye to the acceptance of proceeds of international narcotics traffic.

Second, in the Council of Europe in Strasbourg, France, there is what is known as the Committee of Experts on Search, Seizure, and Forfeiture of Assets. There have been two meetings of this body. The principal thrust of the Strasbourg meetings has been to establish a draft convention among European nations for international forfeiture, the sharing of information, and the enforcement of judgments. Its second objective is the creation of a common offense of laundering the proceeds of illegal activity, and the forfeiture of money pursuant to that.

Like the United Nations, the Strasbourg group defines the proceeds of trafficking (in the money-laundering context) as not only being simply the money itself (the profit that the money launderer derives from the proceeds) but also the instrumentalities: those persons, places, or things which facilitate the drug trafficking. Work on the proposed Strasbourg convention will take another two years to complete.

There is a rising tide of international recognition of problems that illegal money flows pose to the world community—destabilizing governments and traditional trade relationships. The consequence is that prosecutors all over the world are beginning to focus their attention on banks and bank officers who are willing to be implicit coconspirators with the people who generate this illegal money. The mechanisms that banks establish to avoid the deposit of this money, to avoid being used as way stations for this money, will help them avoid potential forfeiture of assets and prosecution for conspiracy to distribute or to launder the proceeds.

*

Portions of this article were based on an article written by Jonathan J. Rusch, who served with Mr. Hilsher as the Director of the U.S. Treasury’s Office of Financial E n forcement, and published by Catholic University Law Review,37 Cath. U.L. Rev. 465 (1988).