Montana's Foreign Capital Depository Act: a financial pie in the Rocky Mountain sky or a sensible new assets attraction approach?

• Author: Aronofsky, David
• Position: The Rise of the International Trust

1. INTRODUCTION

   In 1997, Montana attracted national and world financial attention when Montana Governor Mark Racicot signed into law Senate Bill 83, the Foreign Capital Depository Act (Act), creating the first U.S. state-chartered financial entity designed solely for attracting non-U.S. capital.(1) Depicted by skeptics as an unworkable "Panama without the Canal," "Switzerland of the Rockies" and "Rocky Mountain High," Montana is nonetheless pursuing a creative approach to increased state revenues that capitalizes on the state's unique privacy laws as well as innovative statutory drafting. The Act warrants attention from offshore assets owners and managers who seek U.S. stability in a state committed to full financial privacy protections.(2)

   This Article first describes the Act's history, key provisions and implementing regulations. It then briefly assesses several legal issues affecting the Act's likely future. These include: (1) Montana's constitutional privacy rights applicable to foreign capital depositories and their customers; (2) the Act's relationship to federal money laundering laws; (3) the Act's express statutory bar against recognizing and enforcing most non-U.S. court judgments adverse to depositories and their customers; and (4) the implications of newly emerging federalism jurisprudence that suggests that sovereign state activities, including those related to international financial services, may fall outside the scope of international treaty and federal regulatory statutes traditionally deemed applicable to such activity. Finally, the Article draws some preliminary conclusions about the Act's future.

2. ACT SUMMARY AND OVERVIEW

   The Act enables the creation of new foreign capital depository institutions (depositories) available solely for non-resident alien customer liquid assets and precious metals accounts.(3) It amends more than one hundred Montana statutes, and creates two new statutory chapter parts. These changes exempt depositories and their customers from Montana taxes, treat depositories as other state-chartered financial entities for most regulatory purposes,(4) and create a detailed new legal scheme to govern depository charter and customer accounts activities, including accounts comprised of precious metals.(5)

   Depositories receive non-bank charters from the Montana Banking Board (Board), and depository activities are regulated by the Montana Commerce Department Division of Banking and Financial Institutions (Division).(6) The Division Commissioner (Commissioner) is the principal state official who oversees depository activity.(7) The Board and the Division have adopted regulations to carry out these functions.(8)

   The Act imposes severe civil and criminal penalties for breaching depository customer confidentiality, subjecting state officials who breach confidentiality to removal from office.(9) It bars depository disclosure of customer records to state or local officials except for suspected or actual legal violations.(10) It also bars disclosure except pursuant to subpoenas based on probable cause of wrongdoing, giving both depositories and customers fights to quash them.(11) The Act strictly limits foreign civil judgment enforcement by: (1) declaring most such judgments repugnant to Montana public policy; (2) requiring those seeking enforcement to prove their validity and compatibility with U.S. law; and (3) allowing for damage awards in the event of enforcement activity adverse to customer privacy fights.(12)

3. A BRIEF ACT HISTORY(13)

   In 1995 the Montana Legislature adopted Senate Joint Resolution 19, and began to study the depository as a financial institution that could produce new state revenue through a state-owned or a state-chartered foreign investment non-bank depository for non-U.S. capital.(14) Because the Legislature meets biennially, legislators vote at each session's end on issues to be studied between sessions by bipartisan committees. SJR 19 created a Foreign Investment Depository Subcommittee of eight legislators--two Senate and two House Republicans, plus two Senate and two House Democrats--chaired by Billings Republican Senator Mike Sprague.(15) Senator Sprague had received suggestions for revising Montana banking laws to attract overseas capital from Montana native and California developer Robert Svoboda, as well as Swiss visitors to Montana during the 1995 legislative session.(16)

   After thirteen months of meetings, the Subcommittee voted in late 1996 to introduce Senate Bill 83, which subsequently became the Act.(17) In Subcommittee hearings around the state, the legislators took testimony and comments from federal and state regulators, law enforcement agencies, banks and other financial institutions, law firms, academic experts from inside and outside Montana, and financial consultants.(18) Although these hearings began with uncertainty and skepticism from Subcommittee Members and witnesses alike, the Subcommittee concluded its work shortly before the 1997 legislative session by unanimously introducing Senate Bill 83 with enthusiastic optimism.(19)

   The Subcommittee received input from U.S. federal regulators, including U.S. Treasury Department Financial Crimes Enforcement Network staff, who queried whether Montana planned to "secede" from the United States as a means of shielding depository assets from federal oversight.(20) This input focused Subcommittee attention on the extent to which U.S. states can legally ensure confidentiality of U.S.-based financial transactions from federal and state law enforcement agencies. U.S. Treasury officials cautioned that federal agencies would not treat Montana "like the Cayman Islands" for deposit secrecy purposes, and they noted how Montana depository secrecy laws could clash with U.S. treaty obligations to cooperate with other countries in disclosing asset owner identities.(21) The Subcommittee incorporated these federal concerns into Senate Bill 83.(22)

   The Subcommittee premised Senate Bill 83 on five key goals: (1) maximum customer privacy allowed by law; (2) depository profitability; (3) enhancing state revenues at no cost to Montana taxpayers; (4) stimulating state economic development; and (5) making depositories "Snow White clean" in all legal respects and not money laundries.(23) The Bill also reflected some core assumptions about what would help depositories succeed, including:

   1. limiting depository customer and services competition with Montana banks, and allowing the latter to own depositories; 2. protecting depository assets against liens, seizure and the political instability outside the United States, while ensuring reasonable confidentiality; 3. a viable non-U.S. customer base for depositories; 4. U.S. bank, non-U.S. bank subsidiary and private company interest in acquiring depository charters; 5. depository non-competition with other off-shore banking havens, whose users would diversify capital deposit sites; and 6. maintaining customer confidentiality while still providing mechanisms to allow depositories to screen out unsavory customers and money sources, in addition to the state's regulatory ability to oversee.(24) How the Act addresses its goals and assumptions is discussed below.

4. THE ACT'S PROVISIONS

   1. The Express Act Purpose

      The Act reflects a concern rare in Montana's lawmaking process--a concern about non-U.S. world problems. It cites "political instability, economic insecurity, and financial risk" outside the United States as "incentives for the transfer and investment of foreign capital derived from legitimate estates and business activities to relatively safe places such as Montana."(25) The Act also cites "political conditions in some countries ... contrary to the fundamental freedoms and individual liberties codified in international human rights law and contained in the Montana constitution" as another incentive for creating the state-chartered financial entity.(26) It states an intent to attract "legally derived foreign capital for investment, revenue enhancement, and other economic development purposes as well as to facilitate tax abatement" for Montana residents and businesses.(27) The Act also asserts authority to "treat foreign persons differently than it does, Montana citizens" as a way to improve state economic conditions,(28) and it cites Montana's "compelled and rationally motivated" reasons to offer "specialized private financial services exclusively to foreign customers" seeking stable U.S. economic and political conditions.(29) Because Montana courts must construe all statutes to achieve the social purpose for which they are enacted and to effect their objectives, this Act language will guide all Act statutory construction.(30)

   2. Act Definitions

      The Act has sixteen definitions. The key definitions are list below:

      1. "Controlling person," defined as "a person who holds 5% or more of the equity in a depository" or who otherwise controls operations and management decisions.(31) 2. "Customer," defined as "a person who is using or has used the services of a foreign capital depository or for whom a foreign capital depository has acted as a fiduciary.(32) 3. "Foreign capital depository" or "depository," defined as a "financial institution incorporated in Montana and chartered by the Board to conduct business as a foreign capital depository."(33) 4. "Money laundering," defined as the process through which the "existence, illegal source, true ownership, or unlawful application of illicitly derived funds is concealed or disguised to make the funds appear legitimate, thereby helping to evade detection, prosecution, seizure or taxation.(34) 5. "Nonresident alien" is defined as "a person who is not a citizen or a resident of the United States."(35) 6. "Person" is defined as "an individual, partnership, corporation, limited liability company, association, trust, or other legal entity."(36) 7. "Supervisory agency" is defined to include (a) the Montana Attorney General and Justice...