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A number of our readers asked that we put offshore banking – and the Swiss banking system in particular– into some perspective in light of recent events. They go directly to the point and ask the question: is Swiss banking obsolete?
Let’s get right to our newsletter today:
Swiss Banking, Privacy & Offshore….where to next?
You’ve seen the media reports that a major Swiss bank – UBS Bank - admitted in February to participating in a scheme to defraud the U.S. government. As a result, the bank agreed to pay $780 million and disclose the names of more than 250 U.S. clients who allegedly hid assets from the IRS. And that a day later, the IRS again sued the bank for information on as many as 52,000 clients, triggering the negotiations that led to another recent settlement disclosing the names of 4,450 account holders.
Understand that Swiss banks manage one third of the world’s offshore wealth. Total cash assets of the Swiss banking system were estimated at US$2 trillion or more, while the total value of security deposits was well over US$3 trillion. Assets under Swiss management have risen significantly in recent years, reaching a high of US$4 trillion in 2007, according to the Swiss Bankers Association.
Switzerland has political stability, the financial and banking skills of its employees, and its low-tax environment. If all they had to offer was the ability to hide from the tax-man, then this would be a business model built on shifting sand. So rest assured that there are significantly more, legitimate reasons for banking with the Swiss – or anywhere offshore for that matter - than for secrecy and tax evasion.
Abraham Lincoln once said that in his experience, men with no vices had very few virtues. The world of offshore is much maligned and slammed as being full of vices. The very mention of offshore banking in the media conjures up visions of dark sunglasses, brimmed straw Ecuadorian hats, tax evasion and money laundering. This is mostly a tall tale, except for a very tiny part of the overall global population. Nonetheless, it persists as a popular myth.
The U.S. government attacks offshore jurisdictions raising fear in the masses with unfounded claims that hundreds of billions of dollars of tax revenue are being lost by no-good tax cheats. President Obama and his amigo Senator Carl Levin have repeatedly taken aim at the offshore industry, even quoting rage over a building in the Cayman Islands housing 12,000 registered businesses as either the largest building in the world, or the largest tax scam in the world.
Unfortunately, what Obama and Levin failed to mention was that in Delaware, 850,000 companies – seventy (70) times more than in the Cayman’s building – were registered in just one building alone. What these buildings have in common is that inside are places of registration for legitimate, legal companies conducting business and creating jobs in the U.S. and across the world.
But never has a politician or the media let the facts get in the way of a good story. Fear is a popular method to keep the masses in line who are often willing to give up more of their liberties for supposedly a more secure life….and usually accompanied with tax increases to support more government.
The IRS certainly does its part to discredit offshore activities. And they, too, fail to point out that there are very legitimate reasons for an international business or international person to have company entities and trusts located outside of the U.S.
There are an over-whelming number of honest, everyday hard-working individuals looking offshore for investment diversification, asset protection, personal business opportunities, foreign currency exchanges, second home and real estate investments, extended travel, living or retirement plans, or even as a hedge against the future of the U.S. political system’s ability to stay intact.
And for large companies it means staying competitive in, and having access to, international markets by legally minimizing global taxes, reducing currency risks, or employing less expensive labor.
The reality is that the IRS and busy-body government officials would like you to keep your money close at home where they can easily get their hands on it. The valued, legitimate reasons for looking offshore are almost endless. But for today, we stay focused on the Swiss to understand more of what they are really about.
Understanding the Swiss
To understand the reasoning behind Swiss banking and privacy, a little Swiss history is useful. With pride, I reveal that my independent streak - and libertarian approach to life - is admittedly founded upon my father’s Swiss family roots, and spiced up from across the southern border by my mother’s Italian ways.
It easy to envy the Swiss, who appear as the most sensible people from a long, stable democracy, coupled with a genius for keeping out of wars. The Swiss, like the ancients Greeks, see a direct connection between democracy, liberty, and taxes. And most significantly, the Swiss have tenaciously held fast to the belief that liberty, to be real, requires privacy, especially financial privacy. These beliefs are deep rooted.
Switzerland is often said to be the only real democracy in the world, and the final decision on revenue is made by the voters. If there are to be increases in taxes, the Swiss people must approve it. The Swiss practice of submitting all revenue matters to a vote of the people embodies the wisdom of separating the power to tax from the power to spend.
Imagine that: separating the power to tax from the power to spend. As we have often seen throughout recorded history, when these two powers reside in one entity – a Caesar, a king, a parliament, or a Congress - the power to spend will inevitably override restraints against taxation.
The U.S. and U.K revenue authorities look with frustration at Swiss bank secrecy. All they see are opportunities for tax evasion. But what they fail to understand is that the Swiss tradition of privacy is based upon a tradition that is extremely important to the Swiss people, as they refuse to tolerate snooping by their own government.
Starting at birth, the Swiss are taught to love liberty.
Americans too, have been taught to love liberty. However, of recent, both Americans and Brits have bought into the notion that it is necessary to give up liberties and privacies for their greater security and protection. But all of that comes at a huge price, and that price begins with excessive taxation. For all our flags, bills of rights, and constitutions that stand as symbols and bulwarks of a free society, the Swiss significantly find liberty and freedoms in their privacy.
Does the UBS Bank settlement with the U.S. government mean that the Swiss have changed their ways?
Swiss Banking Privacy Laws
Banking privacy in Switzerland has never been absolute. It can and has been lifted by the Swiss courts upon a proper showing and due process of law. Truth be told, it is not difficult to unveil Swiss secrecy upon a proper showing before the Swiss courts. What the Swiss privacy objections are all about, is the improper means that the U.S. government has undertaken with its fishing expeditions and snooping into the private affairs of its citizens without making a showing of good cause through the Swiss courts.
The common law principles found in our Western culture – the dearly guarded Rule of Law – is not alien to these Swiss principles. The doctrine that a man’s house is his castle is fundamental to our English based legal system. Each individual’s castle is where they guard their personal financial matters and private affairs, and no monarch, or modern government, should have a right to intrude without a proper showing and cause. Unfortunately, our modern culture has forgotten its roots.
Understand that Swiss bank secrecy is an ancient rule of Germanic law. It has been maintained for centuries as a matter of custom and tradition. In the 1930s it was put on the Swiss statute books with harsh criminal penalties to discourage the Nazis from piercing its veil.
But the U.S. and U.K. claim today – often through the OECD and FATF – that the Swiss banking laws are used as a shield for law breakers and that in a modern world with no Hitlers, the bank secrecy laws are a “nuisance” for the world.
Importantly, the Swiss and many other countries around the world today do not classify breaches of revenue laws as criminal acts….generally, only as a common crime.
Worse yet, the Swiss believe that the Brits and Americans are shortsighted, sitting idly by as they allow their governments to destroy what’s left of their freedoms and liberties. After all, aren’t all totalitarian states, communists, and fascists characterized by intensive, unrelenting spying and surveillance into the lives of their citizens?
Moreover, the Swiss – and most Libertarians – see a government’s power to print money, raise taxes, and indiscriminately spend, as nothing more than robbing its citizens.......just as a thief steals your money. The Swiss take the position that individual liberties are safe only when the liberties of each individual are protected.
Does this now mean that honest, law abiding individuals should fear ‘going offshore’ for legitimate financial reasons? Hardly, by any stretch of the imagination.
Going Offshore Brings Some Burdens
First, if you are looking to illegally evade income tax obligations – in Switzerland or elsewhere offshore - there is an increasing likelihood you will get caught. The best advice is: don’t take such foolish risks.
Second, it also means that in an ever increasing regulatory environment – particularly for U.S. citizens - you must stay in full compliance and report offshore funds and activities. For example, the FBAR (Report of Foreign Bank and Financial Accounts) form TDF 90-22.1 for Americans is absolutely essential if you own or control more than $10,000 offshore. Reporting bank accounts, location of funds, and now the highest balances of each account during the year, are essential reporting requirements.
Third, it also means that you are giving up more of your privacy and liberties with the draconian reporting and compliance rules. It is crucial that your accountant completes and files necessary forms related to offshore activities at tax time, and to stay tax compliant.
While the extra paperwork is certainly a burden, for many it is a small price to pay when you consider the opportunities for enhanced asset protection planning, added privacy, offshore living & investing, investment diversification, international travel, living or retiring, and much more.
The bottom line is that if you are conducting legal business activities and reporting your income, then getting swept up into a UBS type affair shouldn’t be concerning.
But let’s call a spade a spade.
The Real Culprit
What are the underlying motivations for some individuals to take extreme measures of illegal tax evasion?
For some it might be greed. But history tells us it is something very different.
Generally, most people are good, honest individuals willing to pay a fair and reasonable price in the form of taxes to live in a civilized society with modern conveniences. But history teaches us that at some point when the price outweighs the benefits, individuals will take measures into their own hands. It starts with legal, aggressive planning, then a culture of tax evasion is borne, and finally force and violence is used.
An excellent book on the topic, For Good and Evil, by Charles Adams, was written about the impact of taxes throughout the course of civilization. Adams, a former tax lawyer, spent over twenty years researching the history of taxation and its impact on civilization, and presents it in a clever, witty fashion.
For over 5000 years of civilization, beginning with the Greeks, then the Roman era, during medieval times, throughout the days of the Enlightenment, and up until this past century, history repeated itself with tax revolt after tax revolt. The lesson is that at some point, over-taxed citizens said enough-is-enough and took the law into their own hands. Beheading kings, over-throwing governments, and killing tax collectors for excessive taxation, runs constant throughout history. Lest we forget the Boston Tea Party and the foundation that America was built upon.
Our forefathers consistently were unwilling to tolerate taxation above 10%. Imagine that…10%. Today, a meager 10% tax rate would be welcome tax relief. This generation has been lulled into complacency to tolerate excessive taxation far in excess of generations before us…..but for how much longer?
Thomas Jefferson would have despised the aggressiveness of the U.S. government attacking the Swiss. He is famously quoted for saying that “those that give up freedom for safety deserves neither.” And it was also Thomas Jefferson that said that “a rebellion against the government was necessary every twenty years.”
So even assuming for sake of argument that there is more tax evasion to be found in the Swiss banks, if we look closer at the root of the problem, it’s easy to understand that a more reasonable tax system wouldn’t force so many people to seek out these drastic, illegal measures. I certainly don’t promote tax evasion – quite the contrary - but we need to be honest and address the real culprit as excessive taxation and burdensome compliance measures, based upon an oversized and wasteful government.
What Next?
For some, the ultimate personal freedom is found by removing the yolk of a heavy handed, taxing government. For a few it means giving up their citizenship, living in a more tax friendly, freedom-loving environment. But for many more it means staying right at home and putting in place a strategy that includes international planning options. That’s why more and more U.S. citizens vote with their dollars and realize the American Dream has become the Global Dream.
There is a saying in Switzerland that the people want to be as free as their fathers. The Swiss are among the few people in the world who have come close to that wish.
The rest of us have surrendered the bulk of the privacy and liberty we inherited from our fathers to the ever-expanding, ever-wasteful government bureaucrats who continue to over-tax us and over-burden our children with future repayment of government spending.
Today, many take their liberties for granted and sit idly by as our government strips us of property, and threatens its citizens with surveillance and reprisals.
But a few, smart, forward looking people take calculated steps by integrating legitimate domestic and international planning to preserve what is rightfully theirs.
Until next time…..
David
David A Tanzer, Esq.
JD, BSc, Ph.D (Hon)
David A Tanzer & Assoc., PC.
Datlegal@aol.com
DAT@DavidTanzer.com
www.DavidTanzer.com
Vail, CO USA:
Tel. (970) 476-6100
Fax (720) 293-2272
Auckland, New Zealand:
Tel. (64) 9 353-1328
Fax (64) 9 353-1328
Brisbane, Australia:
Tel. (61) 7 3319 6999
Fax (61) 7 3319 6999
(Licensed to Practice Law in U.S. States & Federal Courts;
Assoc. Member Auckland, N.Z. District Law Society - Foreign Lawyer; &
Assoc. Member Queensland Law Society, AU - Foreign Lawyer)
The comments herein are not intended to constitute a legal or tax opinion regarding any specific legal or tax issue as additional issues may exist; does not reach a conclusion with respect to any specific legal or tax issue addressed herein or any additional issues not included; and cannot be used for the purpose of avoiding legal or tax obligations or penalties with respect to issues in or outside the scope of matters discussed herein.
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