As the world’s premier private banking center, Switzerland holds an estimated one-fourth of the world’s private wealth. And much of that money is there because of Switzerland’s famous secrecy laws.
These laws originated in 1713, when the canton of Geneva enacted an ordinance prohibiting bankers from divulging any information about their clients’ transactions except with the agreement of the cantonal council. The Swiss federal bank secrecy law, enacted in 1934, punishes violations of bank secrecy with fines of up to $55,000 and six months in prison.
But this centuries-old tradition of tight-lipped banking security is coming to a close… especially when it comes to taxes.
Changes Forced by FATCA
I just paid a short visit to Zurich, the country’s financial hub, and a lot has changed since my last visit, 18 months ago.
The world’s tax authorities have forced Switzerland to reinvent itself. Switzerland has now signed comprehensive tax information exchange agreements with the United States. It has also joined 44 other countries in promising “automatic” exchange of financial information for tax purposes.
This is unprecedented.
You can blame initiatives such as the U.S. Foreign Account Tax Compliance Act (FATCA) for this new system of “full disclosure.” Banks in Switzerland—and everywhere else—must now provide transaction details on the accounts of their U.S. clients to the U.S. Treasury. If they fail to do so, they’re subject to a 30 percent withholding tax on many types of outgoing payments from the United States.
The big surprise is how quickly Switzerland has adapted to this new reality. Swiss financial professionals are inherently conservative. They don’t like change, especially rapid change.
Many Swiss banks have simply cut off account services for U.S. clients. Other banks offer only basic financial services—but not securities trading services—to Americans. The restriction on securities trading is a consequence of new rules enforced by the U.S. Securities and Exchange Commission, not FATCA.
More Serving U.S. Clients
However, a significant and rapidly increasing number of Swiss banks and asset managers continue to work with U.S. clients. I saw two different models at work during my visit.
Some banks operate only as “custodians” for U.S. clients. These banks serve U.S. clients through a network of SEC-registered asset managers in Switzerland and elsewhere. You open your account at the bank through the asset manager. If you have a question about your account or want to place a trade, you don’t contact the bank; you contact the asset manager. The bank also sends account statements through the asset manager.
Of course, in this age of full disclosure, there is no bank secrecy with respect to taxes. U.S. clients must complete a Form W9, giving the bank permission to share their account information with the U.S. Treasury. They must also sign a formal waiver of bank secrecy.
Other, mainly larger banks have formed their own SEC-registered subsidiaries to work with U.S. clients. I met with one of them in Zurich. This is an expensive solution, because it forces a bank to set up duplicate services for its U.S. and non-U.S. clients. But the United States remains the largest source of private wealth in the world. The opportunity is obvious: Negotiate the Treasury and SEC regulatory maze to set yourself up to deal with U.S. clients. If you do, U.S. investors will beat a path to your door.
Some American clients have asked me what the point is of having a bank account in Switzerland—or anywhere else outside the United States—if they can’t keep it a secret from the IRS. I think these people are missing the real purpose of international diversification.
Guarding Against Confiscation
One of the most important reasons to set up a “nest egg” outside the country you live in is to protect yourself from outright confiscation of wealth. Think of what Hitler did to Jewish-owned property in 1930s Germany. In addition, governments engage in “indirect confiscations,” such as the infamous “bail-ins” Cyprus conducted just last year. Depositors in some Cyprus banks saw 50 percent or more of their account balances vanish overnight!
Keeping some of your wealth in a strong and well-capitalized bank in a safe haven such as Switzerland also gives you access to investments not available in the United States, provides much more privacy (although no longer from the taxman), and with the right setup, gives you much greater asset protection.
Switzerland understands this logic. In just a few years, its financial industry has adapted to a world in which bank secrecy is no longer absolute. True, minimum investments are now much larger than they once were. One million dollars is typical, although some asset managers will accept mandates as small as $300,000.
This is good news for U.S. citizens and residents looking for an offshore asset haven. If your offshore bank has closed your account or has restricted your ability to trade securities, you have dozens of choices in Switzerland to redeploy your assets.
Yes, you’ll have to pay tax on your offshore earnings and disclose to the U.S. Treasury and IRS the details of your account. But that’s a small price to pay for the peace of mind of knowing your wealth is secure in the world’s oldest and most established asset haven.
Mark Nestmann ([email protected]) is president of the Nestmann Group, an investment advisory group based in Phoenix, Arizona. Reprinted with permission of Nestmann’s Notes, http://www.nestmann.com.