The Case for Financial Privacy

Finanzielle Privatsphäre ist kein Privileg für Wohlhabende – sie ist ein Fundament der Freiheit.

Richard W. Rahn

aus: Konrad Hummler und Gerhard Schwarz (Hrsg.): Das Recht auf sich selbst. Bedrohte Privatsphäre im Spannungsfeld zwischen Sicherheit und Freiheit. NZZ Verlag 2003. S. 167 -173.

«Experience should teach us to be most on our guard to protect liberty when the government’s purposes are beneficent […] the greatest dangers to liberty lurk in insidious encroachment by men of zeal, well-meaning but without understanding.»

— Justice Louis D. Brandeis

Financial privacy is about the ability, and what many consider the right, to keep confidential the facts concerning one’s income, expenditures, investments and wealth. Without financial privacy, many other fundamental freedoms, such as freedom of religion and speech, are endangered. Invasions of financial privacy are common characteristics of virtually all abusive governments.

Those who would limit or eliminate financial freedom often argue that, if you have nothing to hide and are only engaged in lawful activities, you should not object to full disclosure of your financial activities. Such an argument fails to understand the basic nature of man for without privacy there is no personal life, and the kind of civil society most people seek is probably not possible. Princess Diana had almost everything but privacy, and the lack of privacy clearly caused her misery. Chekhov expressed it more cynically in «Lady with the dog», writing: «The personal life of every individual is based on secrecy, and perhaps it is partly for that reason that civilized man is so nervously anxious that personal privacy should be respected.»

Even those who have only a modest acquaintance with world history should observe that the most civilized and tolerant societies have had a high regard for privacy of all sorts. The most brutish and intolerant societies have had no respect for privacy. Thoughtful people realize that this is no coincidence. Totalitarian regimes always target the privacy of their subjects.

Those who advocate financial disclosure also seem to have no understanding that people have the right, and all too often the need, to protect themselves from corrupt or abusive elements within governments, assorted criminals and potential wrongdoers, or just downright nasty or insensitive people. The right of self-defense is as basic a human right as there is. Those who would strip away financial privacy are also cutting away at the right of self-defense.

Financial privacy cannot be isolated and stripped from other forms of human privacy. In the modern world, man’s means of providing food, shelter, and self-esteem are mostly translated into financial concepts—money, earnings, spending, investing, and wealth. The details of a person’s financial life are telling indicators of his religious practices, sexual activities, and political preferences. Once all this is public knowledge, not much privacy is left. As Disraeli said, knowledge is power. If you know everything about a person’s finances, including the nature and sources of his income, you have power over that person.

The Historical Case for Privacy

«They that can give up essential liberty to obtain a little temporary safety deserve neither safety nor liberty.»

— Benjamin Franklin

Those who argue for free financial disclosure to our government, on the notion that the people who serve in the US government are only interested in protecting us from evil, are both naive and dangerous. That notion is totally contrary to the facts.

We are told that the information given to the government will remain confidential. The law requires that IRS and FBI files shall not be disclosed. Yet we know that sensitive files have been disclosed by a number of Administrations over the past fifty years, often for political reasons. Under the Clinton Administration, FBI files were given to unauthorized people for political purposes, and there have been extensive and well-reported abuses at the IRS. Only after an embarrassing Congressional investigation did the IRS apologize. The Deputy Treasury Secretary, Roger Altman, and the General Counsel of the Treasury, Jean Hanson, both had to resign in disgrace because they abused privacy. Do you really want people like this knowing the intimate details of your financial life? Nearly every Administration has been plagued by some officials who violated the public trust. Given that not everyone who serves government is a saint, it is only realistic to expect that despite laws and regulations, some government officials at some time will violate citizens‘ legal privacy if they have access to sensitive information.

Some might recall that when Judge Robert Bork went before the US Senate in his confirmation hearings, a Senate staffer had managed to obtain records of his video-tape rentals. If we get to the point where we know the intimate financial details of everyone who is up for elective office or high appointive office, will anyone pass muster, other than the most boring, bland, and unimaginative? Civilization has not progressed because of the activities of the bland and unimaginative.

The American Constitution is based on the idea of limited government. Until the passage of the Sixteenth Amendment in 1913, which gave us the income tax, there was no constitutional authority for any invasion of financial privacy. Alexis de Tocqueville, in his classic work of 1848,

«Democracy in America», observed: «The lot of the Americans is singular: they have derived from the aristocracy of England the notion of private rights and the taste for local freedom; and they have been able to retain both because they have no aristocracy to combat.»

Some legal scholars argue that the existing requirements, as well as new demands for financial disclosure, conflict with the Fourth Amendment to the Constitution, which states: «The right of the people to be secure in their persons, houses, paper, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but beyond probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.»

Quite obviously, the IRS could not exist in its present form if the Fourth Amendment were still literally interpreted as the law of the land, rather than the Sixteenth.

Why Financial Privacy Is Moral

«The right to possess private property is derived from nature, not from man; and the state has by no means the right to abolish it.»

— Pope Leo XIII

The Swiss, and others who have bank privacy laws, have been under attack for years by officials and critics in countries that do not have bank privacy laws. Nations that do not have bank privacy (such as the US) are at a competitive disadvantage to those countries that do offer bank privacy, and that attract deposits from around the world. Officials from countries that do not offer bank privacy often cloak self-interested attacks on their competitors in high-sounding moral rhetoric. For instance, they suggest that Swiss bank privacy only exists to protect drug dealers and international criminals. In fact, Swiss banking laws do not protect money from criminal sources. These laws were tightened in the 1980s and 1990s to meet the strictest international standards. Criminals who wish to disguise the origins of their wealth sometimes shelter behind the attorney-client privilege and use their lawyers to evade these laws, but this problem is being addressed by lawmakers in Switzerland and neighboring countries.

Critics of bank privacy cannot imagine, it seems, that anyone but a criminal would be interested in keeping his affairs to himself. Policymakers in the US have long argued against bank privacy on the basis that the IRS needed access to individuals‘ and business‘ banking records. Law enforcement authorities also have argued that they need access to bank records to find and document criminal wrongdoing. These arguments have a certain initial appeal—until you look closely at Switzerland. Is this government unable to collect taxes? Is Switzerland overrun with criminals? No; it is a peaceful, prosperous country.

The Swiss have been attacked because some of their banks did not make adequate efforts to find the heirs of victims of the Holocaust and return the assets that these victims deposited in Swiss banks. In part because of the Cold War, these bankers claimed that they had found it virtually impossible to trace the heirs of dormant accounts whose original owners had resided in Poland, Czechoslovakia, Romania, and other then Eastern-Bloc countries. Bankers were also too rigid in demanding the same proofs of ownership from Holocaust survivors as one would expect from ordinary claimants of dormant accounts. Thankfully, world opinion has awakened the conscience of the banking community, which is finally making vigorous efforts to locate the rightful heirs of these accounts.

Unfortunately, there also has been much hypocrisy in this attack on the Swiss. Many of these attacks have come from countries that did far less than the Swiss to protect both the assets and the lives of the Jewish refugees, particularly in relation to the size of their populations. Ironically, the Swiss bank privacy laws were established explicitly to protect individuals persecuted by their governments. The Swiss have a long tradition of sheltering refugees and their assets, dating back to the seventeenth century, when Geneva and Basel welcomed Protestants fleeing persecution in France. During the French revolution, aristocrats (along with their wealth) escaping the Jacobins found refuge in Switzerland.

So it was not surprising that Jews and other victims of Nazi persecution looked to Switzerland as a safe place to protect their assets from confiscation. The much-maligned Swiss bank privacy laws were enacted in 1934 to protect Germans and Jews who were trying to place their funds beyond Hitler’s grasp. Many German Jews had placed assets in Switzerland. It was widely assumed that Switzerland would eventually fall to Germany’s advance through Europe, and thus, many people were using Swiss accounts as a temporary measure and transit point to send their assets to more remote and presumably safer regions such as the United States, Great Britain, and Brazil. As Hitler was in the process of suppressing German civil liberties, he promulgated a law ordering all citizens to declare their foreign holdings, under penalty of death. Hitler sent agents of the Gestapo to Switzerland in an attempt to identify the German accounts.

Most Germans who had exported capital felt they had no choice but to put their trust in the Swiss not to reveal information on their personal finances, and a great many Germans did not report their accounts across the border […] (The Gestapo’s) methods and techniques are still described by the Swiss as «diabolical and clever.» They included not only bribes but efforts to deposit funds under suspected account names at various Swiss banks. If the funds were accepted by a bank, this was considered proof that the person named held an account at the bank.

Nevertheless, Swiss banking laws protected the assets, and in some cases the lives, of many innocent people. Power-hungry governments have always seen financial privacy as an obstacle to their attempts to control the lives of individuals. Unlike totalitarians, Americans believe in the sanctity and dignity of the person. As history shows, these qualities can only be protected if the financial privacy of the citizen is guaranteed. Thus financial privacy is profoundly compatible with Western values.

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