The offshore world is under assault on a number of fronts and there are steps that HNW individuals and their managers should take to adjust to the changing financial landscape, this report argues.
The recent actions by the US Justice Department and the IRS against UBS highlight the increasing pressure on the so-called offshore banking model. Private banks in Switzerland, Liechtenstein, Luxembourg, Austria, Singapore, and many Caribbean jurisdictions are well known for managing money which left the home country without taxation. But offshore banking is much wider spread. Even some Swiss take their money to neighbouring German banks in order to avoid Swiss taxation.
We are convinced that offshore banking will largely come to an end within the next 10 years due to a triple assault by cash strapped governments around the world. This triple assault is happening right now, lead by the US and major EU countries to end offshore banking as we know it:
Pressure on governments of offshore banking destinations is mounting, especially on all countries that are on a “black/grey list” of the OECD, allegedly providing safe haven to tax evaders. Major EU countries and the G20 countries have announced that they want a joint initiative against these “30 to 40 countries” that are suspected of “hiding” substantial offshore assets. President Obama has campaigned on the issue and has also introduced the “Stop Tax Haven Abuse” act in the US with other Senators. Luxemburg, Switzerland and Liechtenstein have already given in and announced that they will co-operate and forward information in cases of tax evasion in accordance with OECD standards. Tax treaties will be re-negotiated accordingly.
Pressure on the banking industry: Governments and courts are increasingly attacking certain banks through legal actions. Various lawsuits of the US government against UBS are only the tip of the iceberg. We will see many more such actions in the coming years.
Pressure on individual investors: Governments and tax authorities are aggressively prosecuting individuals with undeclared assets. In a recent case the German government’s intelligence service obtained a CD from a criminal informant containing thousands of names of investors who had shifted their assets into Liechtenstein trust funds. The German authorities even sent the data to a number of other governments so they could also prosecute their citizens with assets in Liechtenstein.
This aggressive government behaviour is supported by technological developments and also caused by the necessity to compensate for tax losses in other areas.
The internet makes it much simpler to keep track of the rich. It has become quite difficult to hide your assets. The internet makes it quite simple to keep track of yachts, villas and private jets. Lifestyle magazines and magazines write about every celebrity party and keep track of everybody who was there. Business magazines and online information services provide real time data on public and private transactions, giving the exact amount of money that changed hands.
Governments are harnessing the power of online search, routinely looking into cross-border transactions and bank accounts. 9/11 was the starting point, when money laundering across borders came under intense scrutiny. In the meantime governments have learned to follow the money trails very closely. This is bad for terrorists and drug dealers but ordinary citizens not willing to pay taxes feel the heat as well.
Individuals have to compensate for the falling corporations’ share of the global tax income. This happened because many governments have attracted businesses by offering favourable tax rates for relocation. Since most politicians are unwilling to cut public expenses because that would hurt their votes, an ever‑higher amount of tax money must come from individuals. The economic crisis of 2008/2009 has only increased governments’ voracious hunger for people's money.
So what will happen over the next 10 years?
Banking secrecy will become largely obsolete. Governments and judges will force banks to hand over client data across borders. But beware not only banking clients of Swiss banks will get hurt. Banks in many countries are hiding assets of citizens of other countries. Retaliatory actions will provoke a big showdown of disclosing confidential client data in many countries.
The offshore banking model as we know it has no future. Banking secrecy, financial privacy and numbered bank accounts are - to a large degree ‑ a thing of the past. These pillars of the offshore model will fall and consequently wealthy clients will shift their focus. With the benefit of tax evasion gone neither fat wealth management fees nor bad investment strategies will be tolerated any more. Of course, there will always remain some offshore activities in some parts of the world. Investors may shift their assets from country to country but the costs and risk in doing so will become substantial.
Money will relocate, but people will relocate as well. Many wealthy people will reconsider their offshore investments and consequently repatriate their money, making voluntary deals with tax authorities to avoid prosecutions and sentencing. Other people will choose a new legal residence in countries with friendly tax regimes, just as corporations have been doing for decades. In fact, many wealthy people already view themselves economically as a corporation, employing their own consulting staff and easily shifting their business to other countries and continents as the world of the 21st century gets flatter by the day.
What should clients with offshore assets do?
Don’t sit around and wait till it is too late. Start now to find a way to disclose your offshore assets without risking severe sanctions. Move your money to a completely legal onshore model. Take advantage of the onshore model. Offshore you have paid a lot solely for maintaining banking and financial secrecy. Onshore, you have a far greater choice of wealth managers. You can negotiate better fees and keep a closer eye on your investment strategy. Higher returns will follow, which would make up for some of the tax losses.
Make yourself heard. Wealthy people already provide the bulk of tax income earned from private persons in many developed countries. It is time to lower the burden. Governments should understand that a fairer tax burden provides the best incentive for citizens to keep assets onshore.
What should banks with significant offshore business do?
Prepare for the end of offshore as concealment. Shift your business focus to onshore and service models. Make your fee structures more attractive and provide your clients with good, independent advice. The days when you met your client only once a year in the airport or a yacht are going to be over soon. Advise your clients how to legalize their situation. Depending on their home countries, there might be various options and some room for negotiations. Lend a hand to those clients who want to escape the threat of legal actions. Expert lawyers and tax advisors should be provided at modest fees.
Co-operate with your government and foreign authorities to find regulatory solutions. There should be and will be inter-governmental negotiations on how those vast amounts of offshore assets should be treated. Banks should participate as a mediator between clients and authorities. It is absolutely preferable to find a managed solution to the end of offshore, protecting your clients to a certain degree rather than to have an escalation of legal actions and counter‑actions on a global scale.