Securing Your Assets When Financial Privacy Is Dead

Securing Your Assets When Financial Privacy Is Dead

I recently sat down with our friends over at The Daily Bell for an in-depth conversation. We covered a lot of topics, like the war on cash and the state of financial privacy in the world, and what you can do about it.

I think you’ll find value in this discussion, which they have kindly allowed me to share with you below.


Daily Bell: Hi, Nick. It’s a pleasure to have another opportunity to speak with you. Last time we interviewed you, you dug into the US government’s new FATCA rules and how they will impact Americans who invest outside the country. At InternationalMan.com, you often deal with the broad topic of privacy. Do you truly believe that Western governments have embarked on a coordinated attack on the private lives of their citizens?

Nick Giambruno: Not only have they embarked, but they have succeeded in killing off financial privacy. But before we go into details of why I say that, it’s important to identify the countries that are and are not responsible for this push, as it gives a clue to the motive. You never hear of financially sound countries, like Switzerland, Singapore, or Hong Kong advocating privacy-killing measures like FATCA. You never hear their governments denouncing the supposed “danger” of tax havens. It’s only the bankrupt states drowning in debt—like the US, France, and the UK—that have become hostile to privacy. The hostiles have won. Practically speaking, financial privacy is dead.

Given what has happened, it’s only prudent to assume that sooner or later all the details of your financial life will come to rest in a government computer—if they’re not sitting there already. You should plan accordingly. We live in a world where pretty much every penny you earn, save, and spend leaves a permanent record somewhere, and that can be retrieved for scrutiny by government employees at any time.

That’s not a comfortable or happy thought. But no matter how unpleasant it is, I believe it’s a reality we have to face. Knowing that you are financially naked and exposed to an insolvent government hungry for revenue should make you very uncomfortable.

That said, don’t be tempted to try to illegally hide your income or skirt the reporting rules. That’s a fool’s strategy. The draconian penalties make a cost/benefit analysis easy… don’t even think about it.

But don’t freeze up. Having to report it doesn’t make an offshore bank account pointless. Offshore banks are in many cases much safer and better capitalized than banks in the US. And a foreign bank account can’t be seized or frozen at the drop of a hat by your home government, the way an account at your local bank can be.

Offshore banks allow you to diversify out of the US dollar and gain access to markets in countries you otherwise might not be able to reach. So even though financial privacy is no longer possible, offshore banking still leaves you safer.

While privacy for financial assets like bank and brokerage accounts is essentially dead, non-financial assets like foreign real estate are a different story. Owning foreign real estate is one of the very few ways Americans can legally keep some of their wealth abroad while still retaining a measure of privacy.

If the foreign real estate is held directly in your name (i.e., not in a trust, LLC, real estate fund, partnership, etc.), it is not reportable to the IRS. Of course, any rental or other income generated is reportable.

This means it’s possible to use foreign real estate—as long as it doesn't generate any income—to diversify some of your savings abroad and retain your privacy. In that sense, foreign real estate has become the new Swiss bank account.

Daily Bell: Give us some concrete examples of infringements on privacy that are not directed at criminals but instead target law-abiding citizens.

Nick Giambruno: There are many examples, but the most poignant is the metastasizing global War on Cash, which is part and parcel of the assault on financial privacy. It’s no secret that governments around the world hate cash, as cash transactions are harder for them to track and control. That’s why we’ve seen increasingly restrictive measures in countries around the world. In just the last few years…

  • Italy made cash transactions over 1,000 euros illegal;
  • Switzerland has proposed banning cash payments in excess of 100,000 francs;
  • Russia banned cash transactions over $10,000;
  • Spain banned cash transactions over 2,500 euros;
  • Mexico made cash payments of more than 200,000 pesos illegal; and
  • Uruguay banned cash transactions over $5,000.

And most recently, France made cash transactions over €1,000 illegal, down from the previous limit of €3,000. Once the French people have gotten used to the €1,000 rule, expect the limit to be lowered again and again until the government can document the purchase and sale of every baguette. Even if they don’t lower the nominal official cash limit that the bureaucrats have deemed illegal, the constantly depreciating nature of fiat currencies will do the same thing.

The worldwide trend is clear: expect less privacy and more government control in all realms of life, especially your finances.

Daily Bell: Many readers would ask, “If I have not done anything wrong, why should I care?”

Nick Giambruno: Privacy—financial and otherwise—is a fundamental element of human dignity. Decide for yourself what the enemies of privacy really want to achieve.

Daily Bell: Any other examples that demonstrate that when it comes to the US, “Land of the Free” is about the past?

Nick Giambruno: I think one sign things are going the wrong way is the increasing number of Americans who renounce their citizenship. Last year a record number of US citizens handed back their US passports. In response, the US has made it harder to renounce your citizenship by imposing a punitive exit tax and increasing the fees for the forms required to renounce. When a country tries to prevent its citizens from leaving—as in Cuba or the USSR–it is really a sign of a nation in decay.

After WWII, nobody would have given up his American citizenship. It was something to be cherished. That so many people today are paying so much to escape the liabilities of American citizenship shows how much times have changed.

A primary driver for all this is the complexity and demands of the US tax code. Unlike every other country in the world, the US successfully taxes its nonresident citizens on their global income. This means Americans abroad not only have to deal with the tax system where they live, they also must satisfy the multiple layers of tax bureaucracy that reach out to control them from Washington. It’s a uniquely American burden.

By contrast, every other country in the world bases its tax system on residency rather than citizenship. For example, if you’re an Italian citizen and leave Italy to become a resident of Dubai, you wouldn’t have to pay Italian taxes on the income you earn there. But if you are American, you would have to file and pay taxes to the US government even if you never stepped foot in the US again. In fact, the Congress claims that you are liable for US taxes even if you move to Mars.

Daily Bell: Is there any way around this taxation until death for US citizens?

Nick Giambruno: Besides death, renouncing your citizenship was really the only way to get out of the US tax system until recently. This is where Puerto Rico’s tax incentives come in. Specifically, for Puerto Rican residents and businesses that qualify—mostly expatriates from the US mainland or their enterprises—the recently enacted Act 22 and Act 20 provide for a zero tax rate on capital gains and certain interest and dividends earned by individuals, and for low single-digit tax rates on qualifying service income earned by corporations operating in Puerto Rico.

Due to Puerto Rico’s situation as a commonwealth of the US, its residents are not subject to US federal income taxes from income generated in Puerto Rico. Previously, this didn’t offer any practical opportunities, because Puerto Rican residents are subject to Puerto Rican taxes under rules that were nearly a mirror image of US rules.

However, the situation has changed immensely with the two powerful, new laws that exempt new Puerto Rican residents from certain Puerto Rican taxes. Anyone who relocates to Puerto Rico can apply for these tax incentives.

If you want to find out more about taking advantage of Puerto Rico’s tax benefits, I’d suggest you check out this free video that we put together.

Daily Bell: Are you concerned about the expansion of the use of drones by the police and many agencies in the US?

Nick Giambruno: The developing police state in the US and many Western countries is another excellent reason to diversify internationally. It is one of the great ironies of our modern time that the country that bills itself as the land of the free—the United States—is increasingly becoming one of the least-free nations on the planet.

I am personally a fan of countries like Argentina, which might appear to be more corrupt and less free on paper but actually offer you significantly more personal freedom than the US or Europe. This is because the governments of Argentina and of certain other countries are inept and broke. They’re not able to control and effectively tax and regulate their citizens’ lives. There no doubt are some crazy laws and taxes on the books in these countries, but for the most part, the governments are ineffective. Argentines ignore theirs. The net effect is that people come and go pretty much as they please and pay the government almost no heed.

Daily Bell: Talk to us about how international diversification can protect one’s digital presence.

Nick Giambruno: An often-overlooked ingredient of international diversification is spreading your digital presence across multiple friendly jurisdictions. This move will help mitigate the political risk of subjecting your personal and business Internet presence to a single, intrusive jurisdiction—like the United States.

A digital presence commonly includes your IP address (which can often pinpoint you to a precise physical address), email account, online file storage, and the components of personal/business websites. Most of us today have a significant digital presence both in our personal and professional lives. In this digital age, restricting Internet access, seizing and spying on digital data, and otherwise tampering with an individual’s digital presence have become new tools in the toolbox of desperate governments.

Fortunately, mitigating this risk is relatively easy. Whether it’s setting up an offshore email service or cloud file storage, moving the components of your personal and business websites abroad, or using secure encryption or using a VPN to disguise which country you are accessing the Internet from, internationalizing your digital presence can help.

If we’ve learned anything over the past couple of years, it’s that the NSA and the US government are very much in the business of trying to undermine your digital rights. Internationalizing your digital presence is the solution. You will secure your privacy and ensure that no government can pull the plug on your digital life.

Daily Bell: What kinds of missteps can lead to trouble when a US investor sets out to invest outside the country?

Nick Giambruno: If you have an offshore financial account and have the dubious pleasure of being a US taxpayer, you should be familiar with the Report of Foreign Bank and Financial Accounts (FBAR) form. The FBAR is perhaps the most common reporting requirement burden (but certainly not the only one) US taxpayers with international assets have to deal with. These reporting requirements, backed up by truly draconian penalties, are some of the main tools the US government uses in its unrelenting crusade to track and control every penny you earn, spend, and save… a mission that dovetails nicely with the infrastructure of the NSA’s surveillance state.

If you have an aggregate of $10,000 or more in foreign financial accounts at any time during the year, you must file an FBAR (FinCEN Form 114). It’s important to note that the $10,000 FBAR threshold is not adjusted for inflation, which causes more and more people to be subject to its reporting requirements due to the continuous devaluation of the dollar. US taxpayers became burdened with the FBAR after the Bank Secrecy Act was passed in 1970. It’s administered by the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCen) and enforced by the IRS.

The Bank Secrecy Act is a misnomer—like pretty much everything to come out of DC. The Bank Secrecy Act does exactly the opposite of what its name implies—i.e., it destroys rather than protects the financial privacy of Americans.

The penalties (both civil and criminal) for not filing the FBAR are what can only be described as a form of cruel and unusual punishment. The criminal penalties can result in a fine up to $250,000, or five years in prison, or both. If the violation occurs in combination with other violations (like other tax offenses, which it commonly does), the penalties can be increased to $500,000 and/or 10 years in prison. Many real aggressions, like violent crimes, receive far lighter punishment than would someone suffering criminal penalties from FBAR violations.

The civil penalties—which are in addition to the criminal penalties—for noncompliance depend on whether the violation was willful or nonwillful. A fine for a nonwillful violation can amount to $10,000 per account per year—and of course, the onus will be on you to prove to the IRS that the violation was nonwillful (good luck with that).

However, if the violations are deemed “willful,” the penalties become truly extreme. The civil penalty for a willful FBAR violation is the greater of $100,000 or 50% of the value of the account for each account for each year. This can easily add up to several times the value of the foreign account itself.

Taking a step back and looking at the big picture, it’s clear the US government uses burdensome regulations and draconian penalties to effectively shrink the number of options available for those seeking to diversify internationally. These roadblocks are a clue as to how desperate and bankrupt it really is.

You shouldn’t be deterred, as that is exactly what the politicians want to happen. They prefer that your savings remain within their immediate reach. Instead of being deterred by the reporting requirements, you should hear them as an alarm that you need to act now to protect yourself before the door is slammed shut. You do not want to be like a sheep that has been penned in for a shearing. If you keep your tax accountant informed about what you are doing and instruct him to prepare the required forms, you should have nothing to worry about.

Daily Bell: What themes about internationalizing do you find in the mass media? Do they encourage the public to invest overseas, or do they discourage it?

Nick Giambruno: Since most people are unfamiliar with the topic, it is quite easy for the mass media to shape the public’s opinion on international financial issues. International diversification is routinely demonized in the media and popular culture as some sort of shady money-laundering strategy or something of the realm of Bond villains. Never mind the fact that unlike murder, robbery, and rape, money laundering is a victimless, make-believe crime invented by politicians.

But let’s set that argument aside and assume that money laundering is indeed a real crime. The people who demonize internationalization never mention that New York and London are among the busiest money-laundering centers in the world. Most reputable tax havens by contrast are squeaky clean, with tight “know your customer” and other banking controls. The reason is that these countries and their financial institutions live or die by their reputation, and even one bad apple can stink up an entire jurisdiction.

What this all means is that the popular (mis)conception about international diversification is nothing but propaganda from proponents of big government.

So, despite what you may have heard, internationalization is completely legal and is not about tax evasion, money laundering, or other illegal activities. It’s simply about legally diversifying your political risk by putting your money in sound, well-capitalized institutions where it’s treated best.

Daily Bell: The safety and opportunity that Americans can achieve by internationalizing seem so compelling. Why is it that most Americans keep all their money at home?

Nick Giambruno: Perhaps it seems like a complex and unfamiliar topic. Perhaps it’s the reporting requirements and regulations. However unpleasant and uncomfortable it is to deal with the FBAR and other reporting requirements, it does not at all negate the need to internationalize.

Quite the contrary. It is far better to deal with the burdens associated with internationalization than to leave your savings within the easy-grab range of a desperate government.

Fortunately, practical strategies are available to you, including some that you can execute from your own living room. However, things can change quickly. New options emerge, while others disappear. This is why it’s so important to have the most up-to-date and accurate information possible. Our free video crash course is a good way to get up to speed on the best international diversification strategies.

Daily Bell: Thanks for talking with us, Nick.

Nick Giambruno

Nick is Doug Casey’s globetrotting companion and is the Senior Editor of Casey Research’s International Man. He writes about economics, offshore banking, second passports, value investing in crisis markets, geopolitics, and surviving a financial collapse, among other topics. He is a CFA charterholder. In short, Nick’s work helps people make the most of their personal freedom and financial opportunity around the world. To get his free video crash course, click here.

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