As the world’s premier private banking center, Switzerland holds an estimated one-fourth of the world’s private wealth. And much of the 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 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.
I’ve 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 US. It has also joined 44 other countries in promising “automatic” exchange of tax information for tax purposes.
This is unprecedented.
You can blame initiatives like the US 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 US clients to the US Treasury. If they fail to do so, they’re subject to a 30% withholding tax on many types of outgoing payments from the US.
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.
It’s true that many Swiss banks have cut off account services for US 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 US Securities and Exchange Commission, not FATCA.)
Yet a significant – and rapidly increasing – number of Swiss banks and asset managers continue to work with US clients. I saw two different models at work during my visit. Some banks operate only as “custodians” with respect to the US clients. These banks service US clients through a network of SEC-registered asset managers, in Switzerland and elsewhere. You open your account at the bank through the asset manager. And 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 tax. US clients must complete a Form W9, giving the bank permission to share their account information with the US 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 US 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 US and non-US clients. But the US 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 US clients. If you do, US 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 US – if they can’t keep it a secret from the IRS. I think these people are missing the real purpose of international diversification.
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. Not to mention “indirect confiscations,” like the infamous “bail-ins” Cyprus conducted just last year. Depositors in some Cyprus banks saw 50% or more of their account balances vanish overnight!
Keeping some of your wealth in a strong and well-capitalized bank in a safe haven like Switzerland also gives you access to investments not available in the US, 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 where bank secrecy is no longer absolute. True, minimum investments are now much larger than they once were. $1 million is typical, although some asset managers will accept mandates as small as $300,000.
This is good news for US 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 US 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
Nestmann.com
Are Swiss Banks Safe?
Switzerland is one of the most popular places for our private consulting clients to set up an offshore bank account. That’s not because we’re biased in favor of Switzerland, or against other countries. It’s just that, for wealthier US clients, Switzerland continues to roll out the red carpet. That’s just not true of many other places unless you have a local residency permit.
Given how much we talk about how to protect yourself against bank bail-ins, the main concern for many of our clients is to find a bank that is safe.
How did Swiss banks got their reputation as a place for safe and secure banking options? And do they still live up to it in today’s ever-changing financial landscape with ever more regulations and rules?
You can find more information here: Are Swiss Banks Safe?
