Offshore, Out of Mind?

Feb 6 2010 | 10:08am ET

While the situation in Delaware lays the US federal government open to charges of hypocrisy over its vigorous assault on offshore tax havens, it has not helped Switzerland resist the remorseless US power-play in negotiations. If your banks wish to continue to do business in the US, the Americans have told the Swiss, you will either have to release hitherto confidential information about our citizens or pay a financial levy.

But will tax-compliant banking secrecy vitiate the business model of the Swiss banks? Surely, some argue, the raison d’être of banking secrecy will disappear. Indeed, according to the Tax Justice Network, modern banking secrecy began ‘when Swiss banks offered secrecy, for a fee, to aristocrats who were sending money abroad during the French Revolution. From its inception, banking secrecy existed for one central reason: the rich wished to avoid taxes. In its various formulations today, from shell corporations to numbered bank accounts, this remains the primary motivation for banking secrecy.’

But just as there are other improper motives behind banking secrecy — such as money laundering by organised crime, the hiding of bribes by public officials, and the facilitation of terrorist funding — so there are also legitimate reasons why ultra-high-net-worth individuals and corporations value banking secrecy, foremost among them being privacy, the ability to generate capital flows offshore for international business purposes, and security from politically unstable regimes.

‘Transparency for tax purposes does not mean that bank secrecy does not remain an important need of today’s wealth-owning family,’ says Philip Marcovici, a Zurich-based partner at global law firm Baker & McKenzie. ‘A wealth owner needs and wants to play by the tax rules of their home country and this doesn’t compromise his or her ability to retain privacy in relation to their financial affairs.’

Banking secrecy will continue to exist for US citizens who have other motives for offshoring money than tax evasion. To borrow from Mark Twain, rumours of its death have been greatly exaggerated.

This article first appeared in Spear’s Wealth Management, a quarterly magazine for high-net-worth individuals and those in the financial service industries. It has been called “the Bible of the banking fraternity” by GQ and “a European rival to Forbes” by the Evening Standard, and goes to 30,000 of Europe’s decision-makers and wealth-creators.

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