A Big Victory for Bank Secrecy

There’s lots of scuttlebutt in the mainstream press – and beyond – about how bank secrecy is dead. But to paraphrase Mark Twain, “The rumors of my death are greatly exaggerated.”

To be sure, there’s an element of truth to this assertion. Thanks to laws like the Foreign Account Tax Compliance Act (FATCA), for instance, every non-US financial institution in the world must now identify their US clients. And once they do, they must share details of those clients’ transactions with the IRS.

So, it’s safe to say that if you’re a US citizen, offshore bank secrecy no longer exists when it comes to the IRS. But it’s certainly not dead for other purposes, and a recent case out of Switzerland proves my point.

Late last month, a Swiss court sentenced Hervé Falciani, a former employee of HSBC’s Swiss private banking arm, to a five-year prison term. The criminal conviction under Swiss law was for aggravated industrial espionage, data theft, and violation of commercial and banking secrecy.

From 2006–2008, Falciani worked in HSBC’s information technology department. While there, he secretly downloaded the account details of more than 100,000 HSBC clients. He is alleged to have then sold this information to tax authorities in France, although Falciani claims his only motivation was to expose tax fraud at one of the world’s largest banks. Subsequently, France and other countries used the information Falciani provided to prosecute numerous prominent citizens for tax evasion.

It’s not likely that Falciani will ever spend a single day of this sentence in prison. He’s a dual French-Spanish national living in France, and both countries have refused extradition requests from Switzerland.

This case conveys a great deal about the Swiss attitude toward bank secrecy. In France and Spain, Falciani is considered a national hero for exposing wrongdoing at HSBC. But Switzerland insisted on prosecuting him for his data theft – and obtained a five-year conviction.

It’s easy to understand why. Swiss banks and asset managers hold nearly US$2 trillion of global wealth. Indeed, despite the bad publicity Switzerland has received in recent years, it still holds more of the world’s wealth than any other country.

The last thing Switzerland wants to do is to encourage more Hervé Falcianis to commit industrial espionage. In addition, Switzerland has already agreed to end or greatly restrict bank secrecy in tax-related investigations. That means any employee of a Swiss bank considering a similar exploit isn’t likely to have an altruistic motivation. More likely, it will be for criminal purposes – to sell client data to identity thieves, kidnappers, or governments like Russia’s that have launched “de-offshorization” campaigns to stem capital flight.

Is Swiss secrecy really dead? Only if you’re determined to cheat the taxman or are trying to use funds of criminal origin to fund your account. Otherwise, the Swiss government has demonstrated once again its determination to protect the data of legitimate bank customers from thieves, kidnappers, or extortionate governments.

That’s certainly more than you can say for banks in the US. Not only do US banks use your data to market to you directly or through affiliates, many of them also allow non-affiliated outside companies to market to you based on the size of your account and the activity that occurs in it. You can opt out of some (but not all) of these marketing arrangements, but it’s not always easy to figure out how to do it. And of course, if a US government agency wants a look at your domestic financial records, it doesn’t need to show probable cause. It merely needs to issue a subpoena certifying that the records are relevant to a current investigation.

All in all, if you’re looking for a secure place to stash some of your wealth outside the US, and you want it in a country that takes financial secrecy seriously, Switzerland is definitely worth considering. Unfortunately, if you’re a US citizen, it won’t be cheap, because you’ll need to deal with a Swiss private bank with a minimum opening deposit of US$500,000 – often more. Fortunately, you can open accounts at banks in other countries with stringent secrecy laws, including Austria and the Cook Islands, with a much lower initial investment.

In addition, your timing couldn’t be better. The US dollar has been on a tear in recent years and has racked up big gains against the Swiss franc, euro, British pound, Australian dollar, and many other global currencies. Because the US dollar is so strong, you can buy more international stocks, bonds, real estate, or other non-US investment at a more advantageous price (in dollar terms) than in the last several years.

Of course, the dollar could go up farther. But assuming you live in the US, do you really want to keep all your eggs in one basket and just buy US assets? Or have your bank offer your data to just about anyone who’s interested in looking at it?

Reprinted with permission from Nestmann.com.

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