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Is Financial Privacy A Basic Human Right?

Note: This article was published in the January 16, 2017 issue of Tax Notes International

Someone tried to make the argument that it was, but lost.

Early in 2016, the European Court on Human Rights issued a ruling that disclosure of account information from UBS, a Swiss bank, to the IRS did not violate Article 8 or Article 14 of the European Convention on Human Rights that “protects the right to respect for private and family life”. It also ruled that there was no discrimination based simply upon a person’s nationality.

The case centered around a joint Saudi-US national’s argument that disclosure of his bank details was a violation of his right to respect for his private life and that he was discriminated against due to his US citizenship. In the pursuit of tax evaders and pursuant to the 2008 agreement between UBS and the IRS providing criminal immunity to UBS, UBS handed over account information of its US taxpayers to the IRS. After failing to gain success with the legal argument that the Swiss authorities had no legal standing to force UBS to disclose account holder information, the joint national logged the human rights violation and discrimination claim.

This is the first human rights violation claim that has been brought and adjudicated in the new era of vanishing bank secrecy. Many cases arguing privacy concerns have come and gone; however, this is the first to make the argument that privacy is a basic human right, on par with other human rights like the right to be free from slavery and the right to freedom of thought. The European Court ruling is binding on all 47 countries of the Council of Europe that have ratified the European Convention on Human Rights.

Will we see similar legal challenges in the US?

The US has the Right to Financial Privacy Act of 1978 (hereinafter “RFPA”) which was passed after the US Supreme Court in 1976 in United States v. Miller ruled that bank customers had no legal right to privacy in financial information held by financial institutions. Reacting to this court ruling, Congress enacted RFPA that essentially:

  1. Requires all customer be notified before disclosure to the government of their account details,

  2. Gives customers standing to challenge release of their account details to the government, and

  3. Requires the government to produce a trail of evidence on what information was disclosed and to whom the information was provided.

There have been amendments and changes to RFPA to allow for disclosure of customer account details without notice when terrorism, drug trafficking, or other money laundering activity is suspected. It is worth noting that RFPA applies only to the federal government. It does not include state and local governments or private parties.

Fast forward 30+ years and the Foreign Account Tax Compliance Act (hereinafter “FATCA”) enters the information disclosure room. FATCA was birthed out the hunt for tax evaders and, more likely, the successful bounty of information obtained from the UBS/IRS agreement. FATCA requires foreign financial institutions disclose, either directly or indirectly, the names and certain account details of all accounts held by US taxpayers. If a bank fails to disclose information, they are subject to a 30% withholding tax on US sourced receipts. The pros and cons of FATCA are a topic for another day.

We have already begun to see some litigation related to FATCA, most notably from Senator Rand Paul. Senator Paul, along with a handful of others, filed suit in US District Court against the Treasury arguing they suffered harm or damage and an invasion of privacy by the implementation of FATCA. Some specific claims of harm exerted by the Plaintiffs are:

  • A dual Swiss-US citizen left with no alternative but to renounce his US citizenship due to the inability to access banks in foreign jurisdictions due to his US citizenship.

  • A US citizen residing in the Czech Republic separating joint assets from a non-US citizen spouse. The US citizen no longer has any ownership interest in his home, rental properties, or companies jointly operated with spouse.

  • A dual Canadian-US citizen’s fear of unconstitutionally excessive fines for willful failure to file an FBAR.

  • A dual Israeli-US citizen attorney lost clients because his clients had to fill out IRS withholding forms even though they were not US citizens.

  • Senator Rand Paul lost his constitutional right to vote as a Senator on the approval of IGAs (the legal treaty-like agreements between the Treasury and foreign countries that effectively implement FATCA) because the Treasury and IRS have refused to abide by the constitutional framework for concluding international agreements. Since these IGAs are being treated as congressional-executive tax information exchange agreements and not treaties, there is no requirement that they be approved by Congress.

The US District Court held that none of the plaintiffs had standing to bring the suit. Standing is legalese for having sufficient stake in the game such that you have or will sustain harm or injury directly caused by the Defendant’s actions. Generally, the Court stated that none of the Plaintiffs had sustained damage or harm directly from the Treasury’s actions. Instead, the perceived harm was caused from 3rd parties (i.e. banks and financial institutions in foreign jurisdictions) that elected to not do business with the Plaintiffs or required Plaintiffs to do things they didn’t want to do (i.e. separate joint assets or renounce citizenship). Additionally, none of the Plaintiffs claimed to have incurred any 30% withholding tax or FBAR penalties. They simply stated they feared such tax or penalties would happen in the future. FBAR is an acronym for Report of Foreign Bank and Financial Accounts and must be filed annually. Willful failure to file an FBAR results in significant penalties.

What is interesting is that all the Plaintiffs stated in their suit that:

[Plaintiff] does not want the financial details of his accounts, including the account numbers, the account balances, and the gross receipts and withdrawals from the accounts disclosed to the United States government, the IRS, or the Treasury. [Plaintiff] would not disclose or permit others, including his bank, to disclose his private account information to the United States government, the IRS, or the Treasury but for the fact that FATCA and the FBAR require disclosure.

This is the heart of the privacy argument. The District Court reasserted the Miller case in which the US Supreme Court held that depositors have no reasonable expectation of privacy in information kept in bank records because information provided to the bank was done so voluntarily. Although providing documents to the bank voluntarily is necessary to open a bank account, do Courts recognize that many people view accessing financial records as more instructive than a physical act of restraint performed by law enforcement? “A 2003 study conducted by Christopher Slobogin and Joseph E. Schumacher found that the 217 subjects considered ‘perusing bank records” as more intrusive than a patdown or even an arrest for 48 hours.” Samantha Arrington, Expansion of the Katz Reasonable Expectation of Privacy Test Is Necessary to Perpetuate A Majoritarian View of the Reasonable Expectation of Privacy in Electronic Communications to Third Parties, 90 U. Det. Mercy L. Rev. 179, 180 (2013).

Sharing personal information and details of financial affairs is something Americans cherish. Exposing your financial matters cuts deep to the bone and can tell a lot about who you are as a human being. Are you frugal or a spendthrift? Are you wealthy or poor? Did you inherit wealth or are you self-made? Under the Fair Credit Reporting Act, for 3rd parties to access your credit history, you must give express written consent. This implies that there is some degree of privacy regarding your financial affairs. I recognize there is a difference between what a credit report discloses and what FATCA discloses. However, there is also a difference whereby one requires your express consent, while the other requires no consent. The mere fact that you have an interest in a foreign bank account constitutes implied consent to allow the government access to your foreign financial details.

The public interest and safety argument is likely to prevent the privacy argument from gaining any noteworthy traction. The reality is FATCA and the FBAR were enacted to detect and hopefully provide a deterrent to prevent tax evasion and to a lesser degree weaken tax avoidance. Tax evasion is a hot topic these days thanks to the Panama Paper disclosures and tax avoidance is equally hot thanks to the current political climate in the US focusing on companies moving jobs and profits overseas. With the US government saddled with nearly $19 trillion in debt, it is on the hunt for more money. The low hanging fruit today is tax evaders and tax avoiders who now have been reminded they have no privacy relative to their foreign financial accounts.