Dateline: Tbilisi, Georgia
On a drizzly afternoon, Monsieur Mercier rushed through the streets of Zurich. The clouds of war were only beginning to gather over Europe, but Mercier was already on a special mission of his own.
Through hard work and the virtues of capitalism, Mercier had amassed a considerable fortune. His wealth, however, had recently come under attack.
In 1913, the United States had introduced the income tax and many European countries had equally embraced this new era of progressive income taxation. The government of Monsieur Mercier’s home country of France was no exception to the new taxation frenzy.
Mercier was searching the rainy streets of Zurich for a Swiss bank he had heard would provide him the safety he was looking for to protect his money and personal financial information from the ever imposing tax laws of his country.
He soon found the bank he was looking for and was not disappointed.
A little history lesson
While Monsieur Mercier is a fictional character, his story represents that of many wealthy Europeans both before and after the First World War. When income taxation became the new funding method of choice among western governments, the wealthy turned to Switzerland, which was quickly obtaining a reputation as a tax haven.
In fact, before World War I, one Swiss canton modified its laws to facilitate the establishment of foreign corporations and holding companies. In the 1920s, Switzerland’s reputation grew as Swiss bankers refused to aid governments looking to track down tax evaders.
Up to that point, however, the practice of Swiss secrecy was only de facto.
Fast forward to 1932, however, and history reveals a series of political events in France that changed the nature of offshore practices for good.
In 1932, like much of the western world, France was experiencing an economic crisis. To achieve a budgetary balance, the government promoted an intense deflationary policy that included reduced spending. The austerity measures were anything but popular and the ruling government feared an overthrow.
While government officials had been informed of a possible tax evasion scheme involving French citizens and Swiss banks at least six months earlier, the looming threat of political overthrow was what finally prompted the government to authorize a raid in October of 1932 on the offices of a Swiss bank located in France.
The raid revealed a system set up by Swiss bankers to aid their French clients in evading the 20% capital gains tax and to go around French inheritance taxes, significantly reducing their income tax.
The notebooks seized in the raid showed the names of over 1,000 individuals, including senators, generals, aristocrats, two bishops, judges, and successful industrialists, including the Peugeot family, newspaper owners and financial advertisers.
In all, the Swiss bank had helped its clients avoid paying tens of millions of francs in taxes per year, resulting in a total loss for the French government of somewhere between one to two billion francs.
By raiding the the secret branch of the Swiss bank and revealing the names of those implicated of tax fraud, the government had several priorities. First, they hoped to shift attention from their unpopular policies to the scandal and regain respect among their opposing parties. Second, they were determined to recover the money that they desperately needed to balance their budgets. Finally, they aimed to send a clear warning to Swiss banks that their practices were not acceptable.
In the end, revealing the scandal did little to help the ruling coalition. The Herriot government was overthrown December 14, 1932 with a vote of no confidence, less than two months after the raid.
And while the push for bank reform did create political pressure to change Swiss banking laws, the response of the Swiss government and banking sector was far from the transparency France had assumed would result.
Though they conceded to greater government oversight of Swiss banks, Switzerland fought back and made secrecy a state policy in 1934. As part of the legislation, Article 47 stated that disclosing a bank customer’s identity to a foreign government was a criminal act. Cash custodians who did not maintain “absolute silence” about their clients’ financial information would face imprisonment and government fines.
Suffice it to say, the move toward greater secrecy cemented Switzerland’s reputation as a tax haven.
It also set in place a model that other countries looking to attract foreign investment could implement, and eventually did. After World War II, countries across the globe followed Switzerland’s example, creating tax havens from the Bahamas to Lichtenstein and Uruguay to Beirut.
Swiss banks in the 21st century
But things have changed. In fact, since those first days of Swiss dominance, the only constant in the offshore world has been change.
For one, Switzerland is no longer the untouchable, universal answer for bank secrecy. Today, one of the newest tax havens is The Gambia, about as far from Switzerland as you can get. Islands in the Indian Ocean like Seychelles and Mauritius are giving tax havens in continental Europe (once their colonial rulers) a run for their money.
And Swiss banks, despite their long history of defending their clients personal information, have finally caved to government demands for greater transparency, putting their reputation as a tax haven in serious jeopardy.
In 2012, after the US government went after the Swiss bank Wegelin & Company for enabling US tax evaders, the company plead guilty — despite being in compliance with Swiss law. After paying the $57.8 million in fines and restitution, the bank closed after 272 years in business.
Since then, the Swiss government has become much more compliant with the US government and Swiss banks have been required to provide details on US account holders. They have even closed the accounts of any American who set up an account in order to evade paying taxes.
So what does that mean for YOU?
First, realize that if you are a US citizen, there’s only one bank in all of Switzerland that will even touch you. And they’ll only consider your account request if you don’t live in the US.
The reality is that if you are an American who wants to get things done in the offshore world, Switzerland is no longer the answer.
You could say that Switzerland is like the Myspace of the offshore banking world: They were the first big deal, but they are practically obsolete now and have been replaced by other options.
The Squeeze & The Middle
So what are your options? While offshore tax havens have proven to be incredibly resilient despite opposition and demands for reform, the rules of the game have changed and those rules impact where you should take your money and your business.
The offshore world is getting squeezed on both side. The Switzerlands of the world are being squeezed because of all the policies western governments have been throwing at them ever since the financial crisis of 2007 through 2009 put pressure on governments to more effectively collect tax and increase revenue. (Sound familiar? Ahem, France 1932.)
I once met a family who had made a large amount of money and so they decided to fly to Switzerland to open a bank account. That’s what you do if you have a lot of money, right? They were turned down flat. The bank officials had no clue what they were even doing there.
I mentioned just a few days ago a friend of mine whose daughter was denied the opportunity to open a kiddie account because her father had made the mistake of registering his daughter as a US citizen (born overseas) before he knew better.
And then there are the people who contact me who want to hide their money offshore, start a shell company and find a non-FATCA bank so they won’t have to report to the government. Sorry, but even if you were to find a bank crazy enough not to comply with FATCA, you still have the obligation to report your account and your assets to the government.
Oh, and by the way, those numbered accounts have all been unraveled. They don’t exist anymore.
On the other end of the spectrum, all the tiny jurisdictions that didn’t (or don’t) follow the rules are getting squeezed precisely because they haven’t applied the rules and have enabled people to illegally hide money . . . and the US government can easily catch them.
So if the high end and low end offshore banking jurisdictions are off the table, what do you have left? I mean, for those of us who follow the law, but still want the benefits of going offshore, where do we go?
Thankfully, we have the middle.
Because of “the squeeze”, everything is moving to the middle. But what is in the middle? And who ever focuses on the middle anyway? It’s like the middle class in US politics, everyone talks about them, but who are they really?
Nobody knows the middle, unless, of course, they dedicate all their time and effort to figuring it out and making it work.
If you are stuck looking at high end or low-end solutions — depending on whether or not you’re a high end or low-end investor — recognize that there is likely something in the middle that is better for you.
From the origins of tax havens to the present, things have been in constant change. Because of that, if you aren’t an expert, you’ll probably go the wrong direction at some point or do something — or everything — wrong, landing you in a lot of trouble.
If you don’t do your homework, chances are that what you associate with offshore practices may not be the best option, or even a viable option (like banking in Switzerland).
There is a lot of information out there, but just because it’s published on a website or a blog doesn’t mean that it is accurate.
If you really are committed to going offshore and doing it the legal way, my suggestion is that you find an expert who can help you chart those waters. And I’m not just saying that because I am one.
The offshore world is better off when it is used legally to enhance freedom. If you share that opinion and want my expert guidance, apply for a Strategy Call to see if you qualify as one of the small number of individuals I choose to work with each month.