The Unacknowledged Implications of Obama's "War on Offshore"

Although the war of words between the United States and Switzerland has calmed down in recent days, the U.S. criminal case against Swiss banking giant UBS is still very much alive. 

As matters now stand, the IRS is demanding that UBS turn over banking records on more than 52,000 U.S. depositors.  It's waiting for the U.S. District Court in Miami to issue an order to UBS requiring compliance with its demand. On the other side, the Swiss Ministry of Justice has stated that it will block UBS from handing over the information, no matter what the court decides.

The latest news is that Micheline Calmy-Rey, Switzerland's Foreign Minister, will meet with U.S. Secretary of State Hillary Clinton on July 31 to discuss a settlement.  I expect that Calmy-Rey and Clinton will both want avoid a showdown between the United States and Switzerland.  The most likely outcome will be that UBS pays a hefty fine, releases a few thousand account records (but far fewer than 52,000), and then retreats to lick its wounds. 

However, the implications of this high-stakes financial drama go beyond UBS and indeed, beyond Switzerland. Looking at the bigger picture, it's obvious that the Obama administration wants to discourage Americans from investing outside the United States.  In recent months, the Obama administration and the IRS have launched a series of initiatives that if fully implemented will make it much more difficult for Americans to deal offshore. 

This isn't the place to discuss these plans in depth, but in addition to the criminal action against UBS, they include:

• A bill now before Congress establishing a presumption that any U.S. person with offshore dealings is guilty of tax evasion.  The taxpayer could rebut this presumption by presenting sufficient evidence to the IRS that he or she is in full compliance with U.S. law.
• An expansion of the IRS "qualified intermediary" requirements that would make it much more cumbersome for foreign banks and investors to invest money in U.S. securities.
• A dramatically expanded role for the SEC in policing investments of U.S. residents in non-U.S. securities, even for unsolicited purchases.

These initiatives aren't only designed to frustrate U.S. persons from investing abroad.  They're also designed so that foreign banks and brokerages will refuse to do business with them.  Indeed, a Deferred Prosecution Agreement that UBS signed in February 2009 to end an earlier lawsuit by the IRS requires the bank to terminate all cross-border business with U.S. clients and close their accounts.   

But it's not just UBS that's closing the door to U.S. clients.  In the last few weeks, I've received dozens of e-mails and phone calls from U.S. clients with bank accounts in Switzerland, Liechtenstein, Singapore, England, and other countries.  All have been informed that their accounts are being unilaterally closed or severely restricted. 

The situation is particularly serious for U.S. citizens living abroad.  In one case, a woman who's lived in Switzerland for 40 years had her Swiss account closed when her bank decided it would no longer service U.S. citizen clients.  This woman then contacted a U.S. bank to open an account.  The bank informed her that new due diligence rules from the U.S. Treasury no longer permitted it to provide banking services outside the United States. 

But the true implications are even broader, and affect the entire country, not just Americans who wish to invest internationally, or live abroad.  The U.S. government is now running multi-trillion-dollar annual deficits.  A large portion of this deficit is financed through foreign investments.  Given the protectionist barriers the U.S. government is erecting, it seems likely that at least some foreign investors will grow frustrated at being presumed to be criminals when dealing with U.S. financial institutions. 

In the short term, the U.S. actions may generate a modest amount of tax revenue—although far short of the US$100 billion in annual revenue postulated by IRS apologists.  But in the longer term, these protectionist measures are bound to make it more difficult for the United States to finance its gargantuan debts.  And this in turn could lead to a rise in interest rates and even greater erosion in the value of the U.S. dollar.

(The Nestmann Group, Ltd. can assist individuals whose offshore banks have severed account relationships in setting up alternative accounts.  Contact us at info@nestmann.com for more information.)

Copyright © 2009 by Mark Nestmann