The importance of bank secrecy 29. Bank secrecy has deep historical and cultural roots in some countries. Bank secrecy is also a fundamental requirement of any sound banking system. Customers would be unlikely to entrust their money and financial affairs to banks if the confidentiality of their dealings with banks could not be ensured. Unauthorised disclosure of such information to, for example, the persons with whom they do business (e.g., creditors, customers) could jeopardise the financial welfare of the clients of a bank. Similarly, unauthorised disclosure of matters of personal finance could also pose a threat. Thus, banks must guarantee a high degree of confidentiality in order to do business. As a consequence, bank secrecy initially arose out of the contractual relationship between the bank and its customer. This protection later was reinforced in many countries by legislation protecting the customer’s right to financial privacy. 30. Bank secrecy and the confidence which it brings to a country’s banking system can also stimulate the development of an active financial services industry. The banking and financial services sector is lucrative and growing. Bank secrecy is, however, but one factor in the growth of such services. The efficiency of the banking system, prevailing rates of interest and the general political and economic climate also affect decisions about where to seek financial services. 31. Because of the importance of bank secrecy to the stability of a country’s banking system, access to bank information by tax authorities should not be unfettered. Lifting of bank secrecy for tax administration purposes should always be coupled with stringent safeguards to ensure that the information is used only for the purposes specified in the law. Such safeguards in OECD Member countries include requiring senior level officials to approve requests to banks for information about a specific accountholder, a judicial or other formal process for obtaining the information, the imposition of severe monetary and /or criminal penalties on officials who misuse or disclose the information, or a combination of these measures. In many countries, the accountholder is notified when the tax administration seeks to obtain information about the accountholder’s account. In 20 addition, OECD Member countries have established stringent procedures to protect the information from unauthorised disclosure once the information has been provided to the tax administration. The adequate protection of taxpayers’ rights and the confidentiality of their banking information is particularly important for economies in transition that are attempting to establish sound banking and taxation systems. Protection of the information from unauthorised disclosure is essential to obtaining and maintaining confidence in the banking and taxation systems. The effects of bank secrecy on tax administration and law enforcement 32. Experience has shown over the last 50 years that inadequate access to bank information has been an impediment to tax administration and law enforcement. The scope of non-compliance with the tax laws that is facilitated by lack of access to bank information is difficult to measure precisely because there is insufficient access to the necessary information. The same problem exists in attempting to measure the extent of money laundering. Nevertheless, the FATF estimates that the size of that problem amounts to hundreds of billions of dollars annually8. Since many jurisdictions impose tax on both legal and illegal income and the proceeds of criminal activity usually are not reported as income by criminals, it is reasonable to assume that a large portion of laundered funds have escaped taxation in one or more jurisdictions.9 33. Another indication of the risk of non-compliance with the tax laws is the substantial growth of foreign assets and liabilities held by banks in OECD Member countries. Virtually all OECD Member countries showed substantial growth in the foreign liabilities held by deposit money banks, as reflected in the following chart, which is based on data compiled by the International Monetary Fund 10(see Annex I for complete data).