Asset Protection BLOG - Mark Nestmann

Australia is Cracking Down on Expats, Too!

It's nice to know that you're not alone.  And courtesy of Australia, U.S. citizens living abroad no longer need to feel they're the only ones being discriminated against by their government. 

The United States is the only major country that imposes tax on its citizens regardless of where they live.  Even if you've never lived in the United States, or left decades ago, if you're a U.S. citizen, you're liable to pay the same income, capital gains, gift and estate taxes as someone who's lived here all their life.   (There's one major exception—the Foreign Earned Income Exclusion—but this program is far from perfect, and every year bills are introduced in Congress to end it.)

Now, Australia has made it more difficult for its citizens living there or anyone else "tax resident" in Australia to become a "foreign resident" for Australian tax purposes.  On June 23, the Australian Senate enacted legislation that imposes Australian income tax on most Australians working abroad for periods under two years.

Australian exapts can reduce this assessment if a tax treaty permits offset of any foreign taxes paid against Australian tax, or if they can otherwise prove they already paid tax on the same income in another country.  They may also be able to reduce it if they can demonstrate a "permanent abode" in another country.  But that may not be easy to do for an assignment of only two years, particularly if they leave family members behind and make regular visits to Australia. 

To add insult to injury, Australia also imposes an "exit tax" on the unrealized gains of any long-term resident who becomes permanently non-resident for tax purposes.  The only way to avoid paying the exit tax is to elect to treat all assets you own when you leave Australia, anywhere in the world, as remaining in the Australian tax net. 

I suspect many other high-tax countries will join in war on expats in the near future.  Germany already taxes former long-term residents living in low-tax countries who retain substantial contacts in Germany.  Canada imposes an exit tax on the unrealized capital gains of long-term residents when they leave.  And of course, the United States now has its own exit tax, courtesy of the "conservative" President George W. Bush.

None of these ideas are that new.  Nearly a decade ago, a committee appointed by the United Nations published a report that proposed that governments permanently tax the income of emigrants.  In other words, if an Australian businessman moved to Dubai permanently, Australia would have the right to tax his income for the rest of his life.  The U.N. report also helpfully proposed an "International Tax Organization" that would essentially function as a global tax collector.  Its job would be to continue collecting taxes from pesky emigrants seeking to avoid them by living in a low-tax or no-tax jurisdiction.

I suspect that as time progresses, U.S. citizens won't be alone in needing to give up their citizenship to avoid the global tax net.  Whether or not high-tax governments will create an International Tax Organization to pursue them remains to be seen.

The Nestmann Group, Ltd. can assist individuals seeking alternative citizenship and tax-advantaged residence. For more information, click here.

Copyright © 2009 by Mark Nestmann

Australia is Cracking Down on Expats, Too!

It's nice to know that you're not alone.  And courtesy of Australia, U.S. citizens living abroad no longer need to feel they're the only ones being discriminated against by their government. 

The United States is the only major country that imposes tax on its citizens regardless of where they live.  Even if you've never lived in the United States, or left decades ago, if you're a U.S. citizen, you're liable to pay the same income, capital gains, gift and estate taxes as someone who's lived here all their life.   (There's one major exception—the Foreign Earned Income Exclusion—but this program is far from perfect, and every year bills are introduced in Congress to end it.)

Now, Australia has made it more difficult for its citizens living there or anyone else "tax resident" in Australia to become a "foreign resident" for Australian tax purposes.  On June 23, the Australian Senate enacted legislation that imposes Australian income tax on most Australians working abroad for periods under two years.

Australian exapts can reduce this assessment if a tax treaty permits offset of any foreign taxes paid against Australian tax, or if they can otherwise prove they already paid tax on the same income in another country.  They may also be able to reduce it if they can demonstrate a "permanent abode" in another country.  But that may not be easy to do for an assignment of only two years, particularly if they leave family members behind and make regular visits to Australia. 

To add insult to injury, Australia also imposes an "exit tax" on the unrealized gains of any long-term resident who becomes permanently non-resident for tax purposes.  The only way to avoid paying the exit tax is to elect to treat all assets you own when you leave Australia, anywhere in the world, as remaining in the Australian tax net. 

I suspect many other high-tax countries will join in war on expats in the near future.  Germany already taxes former long-term residents living in low-tax countries who retain substantial contacts in Germany.  Canada imposes an exit tax on the unrealized capital gains of long-term residents when they leave.  And of course, the United States now has its own exit tax, courtesy of the "conservative" President George W. Bush.

None of these ideas are that new.  Nearly a decade ago, a committee appointed by the United Nations published a report that proposed that governments permanently tax the income of emigrants.  In other words, if an Australian businessman moved to Dubai permanently, Australia would have the right to tax his income for the rest of his life.  The U.N. report also helpfully proposed an "International Tax Organization" that would essentially function as a global tax collector.  Its job would be to continue collecting taxes from pesky emigrants seeking to avoid them by living in a low-tax or no-tax jurisdiction.

I suspect that as time progresses, U.S. citizens won't be alone in needing to give up their citizenship to avoid the global tax net.  Whether or not high-tax governments will create an International Tax Organization to pursue them remains to be seen.

The Nestmann Group, Ltd. can assist individuals seeking alternative citizenship and tax-advantaged residence. For more information, click here.

Copyright © 2009 by Mark Nestmann

Nothing Like Giving Us Plenty of Notice…

In case you haven't noticed, there has been an unprecedented amount of publicity in the financial media about tomorrow's date, June 30, 2009. Forbes, The Wall Street Journal, and many other financial publications have devoted a surprising amount of coverage of this date.

What's the fuss?  Well, it turns out that June 30 is the deadline for filing the Treasury's annual foreign bank account reporting form (FBAR), Form TD F 90-22.1.

The IRS has issued numerous warnings to taxpayers and their advisors letting them know it's "really serious" about enforcing this report filing obligation.  It's even announced a sort of "amnesty" to encourage people who haven't previously filed the FBAR to become compliant.  (The IRS calls this "voluntary disclosure," as if we really voluntarily bare our souls to the tax man).  But unfortunately, the IRS keeps changing its mind over who has to file the form, and when it's really due.

First, a little background: Back in the "good old days," i.e., before 2009, the IRS defined U.S. persons subject to filing the FBAR as:

1. A citizen or resident of the United States
2. A domestic partnership,
3. A domestic corporation, or
4. A domestic estate or trust.

Those of us fortunate enough to be "U.S. persons" must report the existence of all “foreign bank, securities or ‘other’ financial accounts” if the aggregate value of those accounts exceeded US$10,000 at any time during the preceding year.  Failing to do so may result in a fine up to US$250,000, imprisonment up to five years, or both.

Anyway, these were the filing requirements in the good old days.  Then, in October 2008, the Treasury Department unveiled a new FBAR form that significantly expanded the reporting requirements for foreign accounts.  It also helpfully extended the definition of a "U.S. person" to foreign persons "in and doing business in the United States." 

Not surprisingly, this change led to consternation among some foreigners.  They were, to put it mildly, nonplussed by the new requirement to reveal the name, address, account number, and highest value in the preceding year of each non-U.S. account over which they had signature or "other" authority. 

"We hear your pain," said the Treasury.  And so a few weeks ago, the IRS announced that it would revert back to the previous definition of "U.S. person."  You could almost hear an audible sigh from those foreigners "in or doing business" in the United States. 

Now, in its latest missive, the IRS has issued a new "frequently asked questions" explanation of its latest offshore voluntary disclosure initiative.  Among other changes, it extended the June 30 deadline to Sept. 23, 2009 for the FBAR form for "…taxpayers who reported and paid tax on all their 2008 taxable income but only recently learned of their FBAR filing obligation and have insufficient time to gather the necessary information to complete the FBAR." 

If you're in this situation, the IRS says you should file the delinquent FBAR report according to the instructions and attach a statement explaining why the report is filed late.  (How about, "I had no f___ing idea I needed to file it?"  But then again, that might not be the best choice of words.) 

Then you send a copy of the delinquent FBAR, together with a copy of your 2008 tax return, by September 23, 2009, to what the IRS calls its "Philadelphia Offshore Identification Unit."  Under these circumstances, says the IRS, you won't have to pay a penalty for failing to file the FBAR on time.

This story has more twists and turns than a mountain road in my home state of West Virginia.  And here's the last one: if you're not eligible for an extension of the June 30 deadline, make sure the Treasury office in Detroit designated in the FBAR instructions receives your FBAR by tomorrow.  Unlike most tax forms, you can be penalized if the Treasury doesn't receive your FBAR by the deadline.  It's not sufficient that it's postmarked June 30.

Copyright © 2009 by Mark Nestmann

The Justice Department Plan to Maximize Asset Forfeiture

I've written many times in this blog on the abominable practice of "civil forfeiture," a legal procedure in which prosecutors can seize your property without accusing you—much less convicting you—of any crime.

The civil forfeiture racket raises billions of dollars for federal, state, and local governments.  Most of the time, the seizing agency gets to keep the money it confiscates, creating a bounty hunter mentality throughout the law enforcement system.

But that's not enough, according to the U.S. Department of Justice.  The DOJ is now implementing its first-ever National Asset Forfeiture Strategic Plan, with the goal of ensuring that prosecutors recover every last dollar of potentially forfeitable assets.  That's a big job, because more than 300 federal laws authorize civil and/or criminal asset forfeiture.  Not to mention tens of thousands of state, local, and county asset forfeiture laws and ordinances.

According to former assistant Attorney General Alice S. Fisher:

"Today, there is legal authority to forfeit the proceeds of virtually all serious offenses including terrorism, drug trafficking, organized crime, child pornography, alien smuggling, human trafficking, white collar crime, and money laundering. The National Asset Forfeiture Strategic Plan seeks to develop and implement policies and procedures to ensure that asset forfeiture is an integral part of every investigation and prosecution."

In other words, the government wants to make absolutely sure that no forfeitable assets slip through the proverbial cracks.

How might this affect you?  Well to begin with, consider what might happen if you have undeclared monies outside the United States and have used a structure such as an offshore trust or international business company (IBC) to hold those funds. 

It would be difficult for prosecutors to claim that mere failure to disclose a foreign account constitutes money laundering.  However, what if prosecutors discover you've formed a bearer share IBC, and you've used it to operate a bank account that has generated hundreds of thousands of dollars in untaxed profits? 

Under that scenario, prosecutors could argue that you're using "sophisticated means" to defraud the government.  This elevates a relatively mundane reporting violation into a tax fraud case involving money laundering.  And in a money laundering prosecution, the government can confiscate not only the proceeds of a crime, but all assets "facilitating" that crime.

A jury might or might not agree that your domestic bank accounts, your home, your vehicle, and your business "facilitated" a money laundering violation, but that doesn't prevent a prosecutor hunting for scalps from alleging that they did.  And in many cases, prosecutors can freeze your assets pending trial.

There's no question that the Obama administration and is determined to go after tax evaders who move their money offshore.  Nor is there any question that the Department of Justice wants to maximize forfeiture revenues by any means necessary.  That makes it more important than ever to be 100% compliant in your offshore dealings—or face the consequences.

Copyright © 2009 by Mark Nestmann

What's Next for Caribbean Offshore Centers?

The global recession and the U.S. crackdown on offshore jurisdictions have seriously affected Caribbean economies.  One of my colleagues recently returned from a two-week visit to several Caribbean countries.  Here's his report:

Panama: Real Estate Boom Ending

A year ago, the real estate boom was in full swing.  About 17,500 units—mostly high-rise condos—were ready to come on the market.  In some cases, a condo would double in value during the time it was being built.  Some developers even sold the same unit twice.  For instance, a developer would sell a unit for US$500,000, and then sell it a second time for US$1 million.  If the first buyer complained, the developer would refund his or her deposit.

Fast forward 12 months…prices are in free-fall.  Many buyers who put down deposits are simply walking away from their units.  Numerous high-rise condo towers are empty.  Foreclosure is inevitable, and several complete towers are now up for auction.  You can buy a nice apartment or condo in Panama City for US$80,000 today that a year ago cost US$500,000. 

The cash fueling the boom was primarily Venezuelans fleeing with their money to Panama, but those with real money arrived years ago.  Venezuelan men often seek out Panamanian women to date, but these women joke among themselves that if a Venezuelan man arrived in the last three years, he probably has no money.  Local real estate developers hope for an influx of American expats—but it can't happen soon enough to unload the thousands of unsold condos on the market. 

On the political front, Ricardo Martinelli won the latest presidential election.  His election platform was essentially, "I own lots of grocery stores and since I'm already wealthy, I don't need to steal from the people or the government."  About as effective as a platform I have heard anywhere in the world.

Panama hopes to join the North American Free Trade Agreement in the next few years.  That could spell major benefits of Panama's economy, but the price may be relaxation of the country's famous bank secrecy laws.  Still, Panama has the canal, and that may give it enough leverage to push through NAFTA and keep bank secrecy intact.  The next few years should be very interesting!

Bahamas: Demise of the US$10 Million Yacht

It's spring and the US$100 million yachts are in the harbor of the Atlantis Hotel, but the US10 million ones are in foreclosure.  And so it goes: the mega-rich haven't been affected—yet—by the recession, but those who can only afford a small yacht have had to sell it to pay the bills. 

Nearly a decade ago, the Bahamas shot itself in the foot by enacting a series of laws and regulations that satisfied U.S. government demands, but also resulted in the loss of most of its offshore business.  Since then, the Bahamas has tried to reinvent itself by catering to Latin American and European clients.  Unfortunately, this effort hasn't been particularly successful.

In the meantime, violent crime is becoming an increasingly severe problem.  The murder of Hywell Jones, a longtime Bahamian offshore services provider is a recent example.  Late in April, Jones was shot in the back of the head execution-style as he exited his car at his office.  Before his murder, Jones told friends he feared for his safety after being badly beaten and left severely injured in an attack at his home.  Perhaps coincidentally—or not—Jones was engaged in ongoing litigation with local businessman Lester Turnquest, a former member of Parliament. 

Jones's death marks the 25th homicide in the Bahamas in 2009.  This grim statistic underscores the reality that the Bahamas has become one of the most violent locations in the western hemisphere.  On an annualized basis, there more murders per capita in the Bahamas than in the most violent U.S. cities.
 
Turks and Caicos Islands: Is Captive Insurance Enough?

Still recovering from two Category 2 hurricanes last year, the Turks & Caicos Islands (TCI) faces a major challenge in restoring its infrastructure.  And it doesn't help that the U.K. government doesn't want to invest more money in a dependent territory with massive corruption problems.  Indeed, the U.K. government recently suspended the constitution to deal with corruption issues.  A governor appointed in London now rules the island.

One of the few sources of hard currency for the TCI is tourism.  However, the government recently announced that it planned to ding departing tourists US$100 for the privilege of leaving.  Come back soon, now!  Meanwhile, import duties are to increase as well to raise revenue.  While the TCI was never a low cost jurisdiction, it's quickly getting even more expensive.

On the offshore front, the TCI is best known as a haven for captive insurance.  This industry remains relatively healthy, but the real question is whether this one trick pony is enough to make the TCI a viable offshore jurisdiction.  There simply isn't much else here, with banking and Internet infrastructure years behind what other offshore jurisdictions offer.

Copyright © 2009 by Mark Nestmann

IRS Backs Down on Foreigners' Obligations to Report non-U.S. Accounts

A few weeks ago, I described a new requirement from the IRS that requires foreigners "in or doing business" in the United States to report details of all their non-U.S. financial accounts to the U.S. Treasury.

I also described the downside of this obligation as it relates to foreign persons, especially if the information they provide finds its way to organized crime syndicates in their own countries.  This is hardly an unforeseeable consequence, as data from the Treasury's "Foreign Bank Account Report" form (FBAR) is widely shared with authorities in other countries.  And in some of these countries, government corruption is rife.

Not surprisingly, this new obligation led to an outcry by those affected by it.  And some of those persons hired the requisite legal talent in Washington, D.C. to persuade the IRS to temporarily suspend the reporting requirement for foreigners "in or doing business" in the United States.  As a result, the IRS has reverted to the narrower filing obligation that existed prior to the October 2008 revision of the FBAR.

Under those prior requirements, now reinstated, a "U.S. person" subject to filing the FBAR is defined as

(1)    A citizen or resident of the United States
(2)    A domestic partnership,
(3)    A domestic corporation, or
(4)    A domestic estate or trust.

Just as a reminder, if you or your partnership, corporation, estate, or trust is a "U.S. person," you must report the existence of all “foreign bank, securities or ‘other’ financial accounts” if the aggregate value of those accounts exceeded US$10,000 at any time during the preceding year.  Those failing to do so face a fine up to US$250,000, imprisonment up to five years, or both.

The report for 2008 is due June 30, 2009.  You can download the FBAR here.

Copyright © 2009 by Mark Nestmann

To File or not to File…that is the Question

If the date June 30, 2009 doesn't mean anything to you, you're not alone.  But if you're a U.S. taxpayer, or a foreigner foreign person "in or doing business" in the United States, June 30 is the deadline for filing a rather obscure form with the U.S. Treasury with the cryptic name "Form TD F 90-22.1" (link here to the form).

The "foreign bank account report" or FBAR requires you to disclose the details of all "financial accounts" you hold outside the United States, if their aggregate value exceeds US$10,000.  You must file the form if you're a U.S. citizen, permanent resident, or conduct business on a regular and ongoing basis in the United States.  Fail to file it, and you could face a negligence penalty of US$10,000.  If you "willfully" fail to file the FBAR, you face a fine up to US$250,000, imprisonment up to five years, or both. Penalties are doubled if you violate any other U.S. law.

While you're at it, don't forget that you have a separate obligation to disclose any "reportable" foreign accounts on Schedule B of Form 1040.  Hopefully you already made that acknowledgment when you filed your 2008 tax return.  If not, you should file an amended return and make the required disclosure (check "yes" on line 7a of Schedule B).

Unfortunately, it's not always easy to figure out whether you need to file the FBAR or not.  If you have financial interest in, or signature or other authority over foreign bank, securities or “other” financial accounts with an aggregate value exceeding US$10,000, you're supposed to file the form. (See IRS guidance here.)

Therefore, if you have a foreign bank account or securities account, it's clear you must file the form.  But it's less clear whether you must disclose details of other offshore relationships.

Late last year, the Treasury Department issued a revised version of the FBAR, along with revised instructions.  The instructions resolve some of the unanswered questions about reporting offshore accounts.  For instance, they make it clear that you must report financial interests in foreign mutual funds, even if you hold them outside a bank.   Hedge fund managers and other investment managers with control over offshore accounts must also file the form.

However, other questions remain unanswered.  For instance: 

• Are interests in offshore electronic gold accounts or offshore precious metals certificates reportable?
• Are offshore variable annuities or offshore life insurance policies reportable?

I've always recommended reporting these investments as "foreign accounts," although plenty of advisors disagree with me.  But I'd rather be safe than sorry.

There's another complication as well.  The IRS has unveiled a "voluntary compliance" program that offers reduced penalties for U.S. persons who disclose previously unreported offshore accounts before Sept. 23, 2009.   To qualify, you must file the FBAR for past years when you should have, but didn't, file it. 

If you're planning to go through this program, should you file the form before June 30?  Some attorneys say you should.  Others say don't do it, because doing so may red flag you for an audit and disqualify you for the voluntary compliance program.  If you're considering this program, I recommend contacting a tax attorney immediately to seek professional advice on whether to file by June 30, or not. 

Otherwise, while I realize the FBAR is a "tell all" form that you'd probably rather not file, my advice is to file it even in borderline situations.  The consequences of NOT filing are severe, should you get caught. 

Copyright © 2009 by Mark Nestmann

"Article 26" and the Demise of Offshore Banking Secrecy

If you invest or do business internationally, you need to know about double taxation agreements, more commonly called "tax treaties."  These agreements are designed to avoid or at least minimize double taxation.  However, they have another, less publicized function: to facilitate information exchange to help enforce domestic tax laws. 

One of the consequences of the political firestorm in recent months over bank secrecy laws in Switzerland and other offshore financial centers is that information exchange through tax treaties will become increasingly common.

Tax treaties are based on a model treaty prepared by the Organization for Economic Cooperation and Development (OECD).  The OECD regularly updates its model treaty.  Each successive model provides tax authorities greater powers to retrieve financial information from the other signatory.  This is accomplished via the "Exchange of Information" provision in the model treaty; Article 26.

Early tax treaties gave signatories wide latitude to turn down requests for information under Article 26.  Signatories could turn down requests for information under several different rationales, all based on the concept of "comity;" i.e., the recognition accorded by one nation to the laws and institutions of another. 

For instance, a signatory could turn down an information request if it concerned a tax not imposed by that country (“domestic tax interest”).  It could also invoke a "dual criminality" requirement: if the conduct in question wasn't illegal in both countries, the request wouldn't be honored. 

However, in 2000, the OECD completely revamped Article 26 to expand the scope of information exchange.  Bank secrecy laws, dual criminality requirements, and domestic tax interest requirements could no longer be invoked to prevent information exchange.  These provisions have gradually made their way into the international network of tax treaties. 

Therefore, if a particular country agrees to implement information exchange arrangements "consistent with OECD standards," the laws you thought might have prevented your financial information from being disclosed to your domestic tax authorities may no longer apply.  Almost every country with strict bank secrecy laws, including Andorra, Austria, Belgium, Liechtenstein, Luxembourg, Monaco, and Singapore, has announced it will comply with the expanded version of Article 26.  Panama has not provided specific assurance on this point, but has made a commitment for "effective exchange of information" in accordance with OECD standards.

Still, there are limits to Article 26.  The OECD model only requires treaty signatories to exchange information on request.  That is, the country requesting information must know that your assets or accounts are in a particular jurisdiction—and likely, in a particular institution—before it can request information.

These limits are unlikely to satisfy the more rabid advocates of full disclosure.  You can likely expect the next round of the OECD model tax treaty to include a provision for mandatory "automatic" exchange of information between tax authorities. 

In the meantime, the handwriting is definitely on the wall.  Offshore bank secrecy laws will not protect you from having your account information turned over to your domestic tax authorities.  If you have unreported offshore accounts, you need to deal with the problem now—not later.  A good start would be a call to an attorney specializing in criminal tax defense.

Copyright © 2009 by Mark Nestmann

Austria Shutters Banking System for U.S. Residents…but the Door Remains Cracked

I arrived yesterday afternoon, May 18, in Vienna for a series of meetings with Austrian banks, lawyers, and financial advisors.

Here, the story is much the same as it is in other offshore financial centers: Americans, stay away!  Since I published my book Austria Money Secrets in 2007, every bank I mentioned in it (with one exception) has imposed significant trading restrictions on U.S. clients. 

A bank I’ll call Bank X is typical.  It’s a subsidiary of one of the largest and most successful banks in Switzerland.  Two years ago, Bank X welcomed U.S. depositors with open arms, although it didn’t have many of them.  The assistant head of the Austrian branch of Bank X told me in a meeting in late 2006 that Americans were welcome to open accounts there on the same terms as anyone else.  There were virtually no restrictions.  The minimum investment was only US$100,000—very low by private banking standards.

But recently, I received an urgent call from a Sovereign Society member who had contacted Bank X to open an account there.  Now, the picture was completely different.  Bank X told the member that the minimum investment for Americans was now US$400,000—not US$100,000.  Further, Bank X wouldn’t allow any U.S. depositor to purchase any security not listed on a U.S. exchange.  Otherwise, U.S. depositors could only purchase CDs.  In other words, the entire universe of investments that a foreign account normally opens was now shut down!

I’ll be in Vienna until May 29, and I hope during that time to find some alternatives to Bank X and the other banks that have severely restricted, or prohibited entirely, investments by U.S. persons. 

The opportunities for Austrian banks willing to service U.S. clients is definitely there.  While larger Austrian banks have imposed restrictions on U.S. clients, smaller institutions with no significant U.S. presence have much less to lose from any future U.S. crackdown against them.  Those are the banks I’m seeking out on this visit.

Well, that’s all for now—I’m headed out the door for one of my bank appointments.  But first, I’ll pick up some freshly baked Kürbiskernbrötchen (pumpkin seed rolls)—my favorite Austrian breakfast treat!

Copyright © by Mark Nestmann

Seeds of Hope in Swiss Banking

Greetings from Zurich, where your jet-lagged blogger landed yesterday morning after a grueling 16-hour trip from Phoenix.  I’m here to meet with Swiss banks, money managers, and attorneys to learn more about how the Swiss financial industry is reacting to the worst threats against it in 70 years, since the rise of Nazi Germany. And also to explore the opportunities that are developing from the carnage.

The threat this time around isn’t from invading armies, but from the demands of high-tax governments for Switzerland to enforce those countries’ tax laws.  This is an outrageous intrusion into Swiss sovereignty.  One of the Swiss bankers I’ve met with put it this way:

“How would U.S. politicians react if Switzerland threatened the United States with financial sanctions due to provisions of U.S. domestic laws?  The United States has no more right to demand that Switzerland enforce other country’s tax laws than Switzerland has to demand that the United States; e.g., abolish the death penalty.”

Be that as it may, there’s no question that “might makes right.”  Little Switzerland will be badly hurt if the United States and other high-tax follow through on their threats to impose financial sanctions against it.  And so Switzerland has in principal agreed to significantly relax in its strict bank secrecy laws.  Not because any other country has the right to dictate to Switzerland, but because isolating Switzerland from the global financial system would lead it to economic ruin.

At the same time, the reaction of Swiss banks to the legal onslaught from abroad has been anything but rational, according to the experts I’ve met.  Because the United States has made the loudest threats against Switzerland—and carries the biggest battering ram against bank secrecy—the largest Swiss banks are unilaterally severing accounts with U.S. clients, even fully tax compliant clients who have maintained accounts for decades. 

That’s an unspeakably rude way to sever long and successful relationships with valued clients who have done nothing wrong.  But the point I’ve been trying to make is that this situation is actually an enormous opportunity for everyone else. 

Tens of thousands of U.S. depositors in big Swiss banks are now looking for a new home for their money.  Smaller banks and service providers that have no significant U.S. presence have much less to lose if U.S. authorities target them.  And a few of them are now positioning themselves to begin accepting what could become a landslide of new business.

These banks will do things differently than the large Swiss banks that actively courted U.S. depositors.  They won’t advertise or market in the United States.  They’ll be very selective of the clients they accept.  Many will do business only with U.S. clients referred to them by trusted intermediaries, or by other clients.   They may also require U.S. clients to operate their accounts through offshore structures. 

Even the larger Swiss banks are catching onto this trend, according to an attorney I met with today.  They’ve developed U.S.- compliant banking operations managed in accordance with U.S. tax and securities laws.  Some of the banks closing U.S. accounts are now offering depositors the option of moving their funds to these subsidiaries.

One thing is for certain.  The Swiss financial industry has been forced to retreat, but it hasn’t given up.  It’s adapting to the new reality.  And some farsighted banks will not just survive, but prosper in the years to come.

Copyright © 2009 by Mark Nestmann