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Keep your Assets in Safe Havens not Tax Havens

30 May 2013

With the Swiss government caving in to US pressure to relax their bank secrecy laws, the pressure continues to squeeze tax havens in order to curb tax evasion. Peter Wollege of Monitronic Safe Deposits highlights the trend towards keeping financial and physical assets in safe havens, as opposed to tax havens.

Today’s Financial Times headlines concerning Switzerland’s long-running dispute with the US over tax evasion describes the latest news as “another nail in the coffin of tax secrecy”. The Swiss government has proposed a law that will relax the country’s bank secrecy laws, albeit temporarily. This decision is largely in response to the US Foreign Account Tax Compliant Act (FATCA), which requires banks in tax havens to give up client information to US prosecutors.

Given the size and importance of the US market, together with the growing support of European governments, there was only ever going to be one winner. The Swiss and an increasing number of other offshore financial centres are bowing to the inevitable. The latest deal provides a degree of protection for the beleaguered Swiss banking sector and allows their banks to “sidestep national secrecy laws” and reach individual settlements with the US authorities over their role in helping US citizens evade taxes. Substantial fines will no doubt follow.

In the developed economies, there is an increasing lack of tolerance for criminal and unethical behaviour. This has been driven not only by tough economic conditions (and large fiscal deficits), but also by the growing realisation that cleaner tax systems will reduce the burden on the law-abiding masses. At the same time, the scale of international money laundering of criminal cash has shocked the public. An eye-catching example was this week’s US police raids on Costa Rica-based Liberty Reserve, which allegedly exposed a digital money service involving a US$6 billion money-laundering hub with a million users and more than 55 million illegal transactions.

The drive to curb criminal activity, including tax evasion, across borders will remain high on the international policy agenda. The public mood has turned and it will become increasingly difficult for individuals to hide their untaxed wealth (onshore or offshore). It is no longer acceptable for businesses, whether they are banks or non-financial firms, to turn a blind eye on criminal behaviour or corrupt practice.

In the USA, the law states that any regulated firm is required not only to report suspicions of money laundering, but also to implement actively policies and practices that detect and deter it. Any well-managed company no longer sees such regulatory laws as an unwanted obligation, but as good business practice. “Know Your Client” and other anti-money laundering procedures contribute to the success of a business, and there is a growing appetite for exposing criminals including those who cheat on their taxes. This is not for self-righteous reasons, but because of heightened awareness among both politicians and voters that tax dodgers impose an unfair burden on those adhering to the law.

Whilst tax havens are under intense scrutiny, there is an increasing demand for safe havens for investors seeking good protection for their (legitimate) financial and physical assets. The Cyprus banking bail-out announced in April 2013 highlighted the need for cash depositors to keep their money in well-capitalised banks in countries that are financially and politically stable. Investors have discovered to their cost that higher interest rates reflect the level of principal risk. By the same token, bankers and their tax-evading clients will discover the true cost of their activities with substantial fines. One small Swiss bank, Wegelin & Co, has already closed its doors, having pleaded guilty earlier this year in a New York court to allowing American citizens to hide $1.2 billion from the IRS over a 10-year period.

One of the reasons for Rhode Island’s extraordinarily strong real estate market has been the flight of capital from wealthy individuals from less stable countries. We have even noticed a surge in demand for safe custody services from overseas families seeking a secure home for their valuables and investment gold. It is fair to say that Rhode Island enjoys its safe haven status among global investors.

The expressions “tax haven” and “safe haven” have varying definitions and connotations. They are sometimes intertwined, such as “safe tax haven”. In today’s increasingly transparent world of information-sharing by tax authorities, we foresee a continuing trend (by investors) away from bank secrecy and offshore tax havens. Even legitimate tax avoidance schemes are under the spotlight. They are steadily gaining public attention and moving up the political agenda. What a “safe haven” should offer, on the other hand, is privacy and a secure place to protect your hard-earned or inherited assets.