Bank Secrecy - Going, Going, Gone.

Though the universe may be expanding, our own world could not be shrinking much faster, especially our financial world. At one time, not that long ago, most jurisdictions carefully kept all information relating to financial activities strictly within their borders, reflecting the well-publicised theme of Las Vegas, Nevada: “What happens here, stays here.”

Now, however, a more appropriate jurisdictional tagline would seem to be, “What happens here, stays here, provided you are not subject to a Tax Information Exchange Treaty (TIEA), Mutual Legal Assistance Treaty (MLAT), or other disclosure agreement.”

Virtually all of the major world jurisdictions and most of the Caribbean jurisdictions have entered into one or both of these disclosure agreements, as well as agreements to comply with OECD and FATF regulations, providing for increased financial transparency, exchange of information among jurisdictions, and a heightened sensitivity to money-laundering activities. While there was a time when a person could actually walk into a Swiss (or other city) bank with an attaché case full of cash and easily open an account with the eager and happy assistance of the banker, today that same person would, if he was lucky, simply be turned away, or in the more serious case, be reported to the authorities to respond to a money-laundering enquiry. In other words, bank or financial secrecy is becoming, if it has not already become, a thing of the past.

Is this a bad trend? What is it about bank ‘secrecy’ that is so important, anyway? In point of fact, there are typically only two reasons for seeking true bank secrecy. One would be to ensure that the existence of the account would not be accessible to creditors of the account holder (perhaps even including a spouse), and the second would be to prevent the government of the account holder’s domicile from discovering anything about the account, including interest or profits thereon.

As for the first reason, this has not changed and probably will not change, as none of the information and exchange agreements offers civil creditors any more access to financial accounts than they had before this movement. Thus, any argument that the information exchange movement undermines the protective nature of accounts where a civil creditor’s attack is concerned is baseless. All of the inter-governmental agreements are primarily concerned with illegal money-laundering activities, including drug dealing, terrorist activities, and the like. Only recently has tax evasion been brought into the mix, amplified by the recent UBS scandal. Though tax evasion is a felony in the United States, it has been treated as only a misdemeanor in Switzerland, but no matter how it is regarded or punished, there is no dispute that it is against the interests of a healthy society, as are the other unsavory activities.

Accordingly, the second reason for objecting to the exchange or release of information on financial accounts is by its own definition immoral and a virtual admission of an intention to violate the laws of the account holder’s own jurisdiction, with the possible exception of those few jurisdictions which impose no tax on assets or income. So, what then would be harm or objection to a government’s access to the account information?

Nevertheless, we see and have seen tens of thousands (or more) of individuals, many, if not most, of whom have adequate wealth, and an impressive number of whom have astonishing wealth, lower themselves to the category of embezzlers or con-men when they covertly contrive to evade the laws of their home jurisdiction and secretly deposit funds or make purchases in ‘offshore’ jurisdictions with so-called bank secrecy, sometimes utilizing fictitious names or phony companies, in order that they can add to their millions by saving on income and perhaps other taxes on their secreted accounts.

These are the individuals who are most vociferous in their objections to the erosion or modification to the bank secrecy rules. And to make matters worse, many offshore bankers not only have turned a ‘blind eye’ to outright tax evasion schemes, but have actually assisted clients in implementing them, professing not to know the tax laws in other jurisdictions. In fact, I have clients who are now in the United States Voluntary Disclosure Program (a form of amnesty for taxpayers with unreported foreign accounts), who began by establishing accounts with a Swiss bank, only to have the banker recommend and assist in the formation of a ‘stiftung’ (family foundation) in Liechtenstein, to which the funds were transferred, so that the US government would not be able to discover the account or activities on the account. It strains the imagination to believe that the banker in this case had no idea that he was assisting in an international concealment of funds from the United States government.

The recent UBS scandal was a large-scale demonstration of this “tax evasion can be a good thing” attitude, where Bradley Birkenfeld and Mario Staggl combined to overtly assist a large number of US taxpayers in committing outright tax fraud by operating accounts in the names of sham corporations, then lying to the authorities by stating that these corporations did not have US owners, when in fact they did. The taxpayers were very wealthy individuals who probably enjoyed little of the fraudulent profits they realized, since they already had so much other money to go around. Now, after Birkenfeld and his cohort turned state’s evidence to try (unsuccessfully) to save their own necks, all of these taxpayers face criminal prosecution plus a likely prison sentence for their tax games. And it is important to note that this scenario is by no means restricted to the United States. Both Germany and France, for instance, have launched attacks against Swiss and other banks in attempts to discover their own tax evaders, and they and numerous other jurisdictions have announced amnesty programs to bring delinquent taxpayers back into the system.

What is it, we might ask, that makes a person who more or less wants for nothing, take the risk of going to federal prison for the savings of a relatively few dollars? Is it some natural resentment to being taxed? That is certainly not new. An archaeological discovery of a 7,000 year old Sumerian tablet contained a saying declaring, “You can have a lord, you can have a king, but the man to fear is the tax collector.” And in the medieval times, when families were taxed on the number of animals they kept, elaborate schemes were devised to hide most of the animals when the tax collector visited, in order to be charged a lower tax. It is said that clever tax collectors would simply follow the trail of droppings to locate the hidden animals.

Despite the reasons we may not want to pay taxes, it is rapidly becoming more and more difficult for us to hide the animals, and, as noted, the risk is a ridiculous one to take. As a result, some people are choosing to simply abandon their high tax jurisdictions in favour of a low tax one. For example, in 2009, more than twice the number of US persons expatriated than in 2008. Though that 2009 number (743) clearly does not reflect a meaningful dent in the US tax system, it does reflect, in large part, an unnaturally strong resentment to taxation and the broadening reach of the US over the world, to discover the ‘secret’ finances of US persons. In addition, the US just recently passed a law requiring all foreign financial institutions with US clients to disclose personal information on such clients, otherwise all distributions from US companies to those institutions will be subject to a 30 per cent withholding tax. To feel so strongly about these taxes (and perhaps about government spending as well, but that is directly correlative to taxes) that one is motivated to completely sever all ties with one’s home country is perhaps more a question for a psychologist than a financial planner. As for other high-tax jurisdictions, they too are following the US approach in broadening reporting requirements and expanding collections, but I have been unable to readily find expatriation statistics in other major jurisdictions. In any event, the practical question is, when do you expatriate (and pay any applicable expatriation tax), just where do you go?

It is no simple matter to obtain permanent residence in any of the major jurisdictions, but why would we, since they all have their own not insignificant taxes (and most, I might add, are higher than the US). There are, of course, a handful of small, low tax jurisdictions with economic stability and all of the comforts of home, such as Monaco and Liechtenstein, but they do not have an ‘open-door’ policy and they actually discourage if not reject new residents who are simply looking for a convenient place to nest. That leaves some of the more receptive, ‘simpler’, low-tax jurisdictions, such as many of the Caribbean islands, but even they have their residency requirements.

In a number of cases, however, these requirements can be resolved by an outright payment of an entrance fee. Citizenship can actually be purchased, for example, in St Kitts and Nevis for a lump sum payment of US$35,000 for a single applicant and US$15,000 for each dependent. In addition, the new resident must invest at least US$250,000 in designated real estate. And the Cayman Islands has recently announced a special deal for would-be new residents. You can purchase a 25 year residency certificate if you invest only US$2.4 million in a Caymanian company that has at least 50 per cent Caymanian employees, provided that you have a net worth of at least US$6 million, have no criminal record, and are in good health with ‘adequate’ health insurance (the Caymans are taking no risks). Is it worth that kind of commitment for a few golf courses and an oversold seven mile beach? The Caymans, incidentally, erroneously regarded by many as having good secrecy and asset protection laws, recently entered into its 15^th bilateral agreement for the sharing of tax information with other countries which include the UK, the US, Ireland, the Netherlands, and France (so much for secrecy), and have provisions for recognition of US judgments (so much for asset protection).

Certainly there must be some jurisdictions somewhere that offer no taxes of any kind, no entrance or exit fees, and complete secrecy, but with most, if not all the comforts and assistance we look for in living a reasonably satisfying lifestyle. Actually, I have heard that there is a small group of islands about 1,000 miles off the coast of Madagascar that just might qualify. All you need to do is to become (and remain) friendly with the chief of your chosen island.

Alexander A Bove
Alexander A. Bove Jr. of Bove & Langa, is an internationally known and respected trust and estate attorney with over thirty-five years of experience. He is Adjunct Professor of Law, Emeritus, of Boston University Law School Graduate Tax Program, where he taught estate planning and advanced estate planning for eighteen years. Prior to that he taught estate planning for four years at Northeastern University Law School. In 1998 he was admitted to practice as a Solicitor in England and Wales. In addition to his J.D. and LL.M. degrees, in 2013, he earned his Doctorate in Law from the University of Zurich Law School.