There are many solid reasons why Switzerland has been and is still an attractive destination for various aspects of internationalization. Money talks and Switzerland is still by far the top country in terms of foreign assets under management (though Singapore is catching up).
Frank, for those new to internationalization, quickly recap what makes Switzerland a location people should consider.
Frank Suess: The primary reason to keep assets in Switzerland is expressed in one word: Safety. If you are interested in jurisdictional and institutional safety abroad, Switzerland will be at the very top of the list. And, despite all of the hype and the media's shunning of Switzerland, a lot of investors still consider Switzerland the safest and best choice to deposit and manage their wealth. I don't see that changing anytime soon. Switzerland has its challenges; it can't be seen as separate from global trends and developments. But the country overall is doing very well.
A common misconception is that Switzerland's wealth and economic success is based entirely on the success of its financial services industry. In other words, if Switzerland's banking sector is in trouble, the Swiss success story all comes to an end. In fact, the total contribution of financial services to Switzerland's GDP amounts to about 11%. Switzerland has a very well-diversified economy with large portions of GDP originating in manufacturing and trade.
Another common misperception is that Switzerland's success as a financial safe haven and center for international private wealth management is founded solely on banking secrecy. If that was all it took, shouldn't a country like Austria, which has until recently had a constitutionally anchored banking secrecy regime, have been equally, or at least similarly, successful as Switzerland? With about $2 trillion worth of cross-border assets under management, Swiss banks have about 4 times more on deposit than Luxembourg or Singapore. Jurisdictions like Denmark, Gibraltar or, as mentioned, Austria have nowhere near that much. Why is that?
Like you mentioned Nick, there are many reasons and factors. Ultimately, the attraction to Switzerland is based on an aggregate of factors that are not easily summed up or copied. They range from the country's solid and long-standing political system to the outstanding health of the economy.
Contrary to every one of its neighboring countries, Switzerland continues to write budget surpluses. Unemployment stands at about 3%, and that rate is not based on bogus numbers. When people from abroad come to Switzerland, they always seem to enjoy the fact that "things really work in Switzerland". The trains are on time, as are the people, generally. I suppose it is the overall and combined advantages that a lot of international investors are looking for.
Nick: It is unfortunate that, despite its attractiveness, it is a difficult jurisdiction for American citizens to access. Why is that?
Frank: Well, I don't really think it's that difficult. It's our daily bread and butter at BFI to help American clients with their international diversification needs. We help them with their planning, manage their money and generally use Swiss institutions for safe custody.
Although Americans do indeed have to accept a little more scrutiny and red tape when diversifying their assets offshore than do most other world citizens, that is not a phenomenon specific to Switzerland at all. Americans will run into that issue worldwide. It's an issue primarily based on the complexities of US law. FATCA (the Foreign Account Tax Compliance Act) and Dodd-Frank are just two of the US legal gems I can mention that add a redundant level of bureaucracy and hassle to the lives of Americans, and to the lives of their advisors.
The impression that this might be a Swiss problem stems from the fact that, in this context, Switzerland is most prominently mentioned and observed by the media. That again is a result of Switzerland's success, and probably also a reflection of the fact that there's a long list of countries around us that are financially strained. This "hunt for tax dollars" in so-called "offshore havens" might lend itself well as being a welcome diversion. But, in fact, the tax revenues presumably generated from this media-spectacle amount to window dressing in the big scheme of things.
Today, financial institutions from around the world, including Switzerland, are much more hesitant to do business with American clients, or even clients that might have some "US link." We have just set up a managed account with an Italian client who lives in Switzerland. He has grownup kids who live in America. A whole additional pile of forms and questions were the result. I guess Americans should earnestly ask their representatives and lawmakers in Washington whether they are really doing America a favor…
Nick: Can you comment on the tax deal the US Justice Department has just struck with the Swiss government?
Frank: The deal is very fresh, and, frankly, I don't know the details yet. In essence, the US and Swiss governments have come up with a plan that allows Swiss banks to settle any disputes with US authorities over non-declared accounts held by US taxpayers without running afoul of Swiss banking secrecy rules.
The tensions between Switzerland and the US have been building in this context over the past years. This deal may bring this controversy to an end. FATCA is now a fact of life and is here to stay, for foreign institutions as well as for Americans. The deal will allow Swiss banks to clean up any legacy problems. It does pose a significant risk for those Americans and banks that don't fall in line.
Nick: Many dual Swiss-American nationals, like Tina Turner, have been renouncing their US citizenship recently.Last quarter, the number of Americans renouncing their citizenship surged to a record level. What are your thoughts on this trend? What do you think the response of the American government will be?
Frank: Well, the response of the American government already seems underway. The US Congress has taken notice that expatriations have been steeply on the rise and that those expatriating are sometimes "big ones," such as Eduardo Saverin, Denise Rich, or Tina Turner.
As far as I know, just recently, a number of US Senators proposed rules that would target former US citizens who may have expatriated for tax avoidance purposes. It seems that giving up your US citizenship is deemed an "unpatriotic act" and therefore should be subject to a very hefty price tag. And I believe these "traitors" are supposed to be banned from entering the US. Quite extreme, really. Whether such laws will slow down the flight or accelerate it, I can't say.
It comes down to this: American citizens (and long-time green card holders) are subject to the US tax regime, no matter where they live. A lot of Americans who have lived overseas for a long time are tired of dealing with the shenanigans and restrictions of US regulations. FATCA, in particular, has become a hassle to them. So, they decide to cut their regulatory ties to America. That however, is becoming increasingly difficult and expensive.
Nick: Your firm is an exceedingly rare exception in that it is still open for business to American clients. Tell us about what compliance with the American government means for your business and your clients.
Frank: While it's still perfectly legal for Americans to have money or assets overseas, disclosure and worldwide tax reporting are key. All Americans, or "US persons" as defined by the US Internal Revenue Code, must report their worldwide income on their US tax return. Then, in addition, a variety of forms must be filed in regards to accounts and assets held internationally.
The most well-known form is probably the FBAR (Foreign Bank and Financial Accounts Report). It's been around for a long time. As of last year, Americans must also report their foreign assets on form 8938. That form (unlike the FBAR) needs to be filed with their regular taxes.Furthermore, for assets held in trusts, foundations, or other legal structures, other reporting rules will be required. So, in brief, the US government wants to know what their taxpayers have and what they make—everywhere.
The maze of reporting and tax rules might appear a bit daunting. However, ultimately, it comes down to administrative work that can be arranged efficiently and conveniently. We help our clients with that and operate with US-compliant services and solutions that already take into account the regulations. We try to keep abreast of regulatory changes and work closely with a network of accounting and legal experts as required.
At BFI, we are committed to our US clients and work hard to continually adjust our business to their very specific requirements and needs. We have chosen to focus our strategy and service offering on the US market. Accordingly, we accept all of the bureaucracy and compliance work as just all being part of doing business. For example, to be able to manage assets for American clients who live in America, we chose to become a Registered Investment Advisor (RIA) a few years ago. This allows us to communicate and meet with our clients in America without running afoul of SEC rules and Dodd-Frank, in particular.
Nick: You also have certain EU countries calling for a sort of European version of FATCA, where countries engage in the automatic sharing of financial data. Since Switzerland has already signed on with the US-FATCA what are your thoughts about Switzerland signing on with an EU-FATCA?
Frank: Switzerland, at this point, is the only country in Europe that does not allow for automatic information exchange or any regime whereby banks have no restrictions as to sharing detailed client and account information with other banks and tax authorities. In Switzerland, access to client information is only possible via the government procedures defined in the respective double- taxation agreements. Really, in all those other countries, there is no more cross-border privacy.
Obviously, the pressure is on Switzerland to join the bandwagon. This, however, collides with Swiss client confidentiality and banking secrecy rules. And, according to recent polls, the Swiss people are not at all in favor of letting go of those privacy rights. The reason Switzerland has not joined yet is that such a step would certainly be subject to a national vote in Switzerland, as is the case with most critical changes of law. Really, it is ultimately this system of direct democracy that makes a huge difference and is at the root of Switzerland's unique success story.
At this point, it appears that the Swiss government would only lean toward accepting an automatic information exchange, as described above, if and when OECD standards and rules would be implemented by all OECD members, including America and Great Britain. At that point, this might be brought to a vote before the people.
Nick: The future of financial privacy worldwide appears bleak. In many ways it is already dead. In a world where privacy does not exist, what sustainable competitive advantages does Switzerland offer?
Frank: I agree. It really does appear that complete citizen transparency is the direction the world has taken. Whether Switzerland, and possibly a few other countries, are able to carve out some exceptions and privacy benefits needs to be seen. However, as discussed earlier, the success of Switzerland's financial center is not based on banking secrecy alone. Therefore, I would not count Switzerland out too quickly. Switzerland's competitive advantage lies in its overall solidity, history, and tradition.
Nevertheless, the challenges that banks and wealth managers who serve international clients face today are considerable. The biggest burden, in my view, is the growing mountain of red tape and regulations. Rules like FATCA, AIFMD, MIFID, and the like—they all show up in these meaningless abbreviations—do indeed pose a particular challenge to Switzerland, because such a large portion of business is cross-border. Financial institutions have clients from all over the world. They are finding it increasingly difficult to cope with all the different legal regimes. That is where the Swiss financial center is currently in a transition mode that will keep it on its feet for some years to come.
Ultimately, in my view, this will not destroy Swiss financial services. But, it will certainly change the face of the industry in that you will find more specialists and country focus in the service offering of the players. BFI has already taken decisive steps in that direction. I expect many others to follow, or to fail.
Nick: What are the best internationalization options (if any) in Switzerland and through your firm that are available for Americans with modest wealth?
Frank: That really depends on each individual client's situation. We like to take a comprehensive approach and help clients in both their structural as well as their investment needs. The options of structuring yourself overseas are manifold, ranging from a mere bank account to more sophisticated planning strategies.
Many of our clients have trust structures, variable insurance policies or pension solutions to achieve a variety of asset protection, inheritance, and tax planning needs. Generally, those structures are quite straightforward. In other cases, the planning is more involved and may require the assistance of a good US tax attorney or accountant. We work with and coordinate our services with a number of trusted firms that can help our clients.
Nick: Anything else you would like to add?
Frank: I appreciate the opportunity of having this interview. The questions you asked are important. Proper guidance and support is key. That's what we're here for. So, I'd like to invite your readers to contact us at our offices in Switzerland or to join us for one of our upcoming seminars in the US.
We'll be sure to demystify many of the concerns and presumed challenges. It's not as convoluted and difficult as it sounds.
Nick: Thank you, Frank, for keeping us plugged into the situation in Switzerland. I look forward to speaking with you again soon. If you are looking for one of the few remaining doors to Switzerland that remains open for American citizens, be sure to check out BFI Wealth Management.