U.S. investors investing offshore for the first time often wonder why offshore banks won’t accept them as clients.
There’s a reason for this attitude: the expanding extraterritorial reach of U.S. law. Many U.S. laws extend U.S. legal authority to foreign countries or assets (“extraterritorial jurisdiction”). Among the most important U.S. laws and legal initiatives with extraterritorial effect are
- The USA Patriot Act. This law permits the U.S. government to confiscate the U.S. assets of foreign banks, without convicting, much less accusing, the bank, or any of its depositors of a crime.
- Qualified intermediary rules. These are tax rules that impose withholding tax on both income and gross sales proceeds for U.S. securities owned by foreign financial institutions. The only way to avoid this tax is to sign a one-sided agreement with the IRS to help enforce U.S. tax laws.
- Securities laws. Laws enforced by the U.S. Securities & Exchange Commission prohibit marketing non-U.S. registered securities to U.S. investors. The SEC has an extraordinarily expansive definition of what constitutes “marketing.” As a result, most offshore banks no longer permit U.S. residents to purchase foreign securities, even if those orders are unsolicited.
- Foreign Account Tax Compliance Act (FATCA). This is the newest initiative to assert extraterritorial jurisdiction over offshore service providers. Enacted in 2010, the act expands upon the qualified intermediary requirements by extending withholding taxes to many other types of U.S. income and gross sales proceeds. The withholding provisions begin to come into effect on Jan. 1, 2014.
With all these laws in effect, you might wonder why any offshore bank is willing to offer services of any kind to U.S. citizens or permanent residents. And, to be sure, the majority of offshore banks no longer accept anyone with a U.S. passport or green card as a client.
However, I've predicted for some time that offshore banks would eventually become accustomed to negotiating the U.S. legal system and once again begin offering services to U.S. clients. The U.S. market for offshore services is simply too big to ignore.
And, sure enough, in the last few months, I've been able to assist clients in opening accounts at a handful of very safe private banks in Switzerland and Austria.
There are, however, a few caveats:
- Investment minimums are high: $500,000 or more at most of the banks.
- Accounts generally can't be self-directed. If they are self-directed, instructions must be delivered either in person at the bank or through an SEC-registered investment manager.
- Fees are relatively high. The best deal I've been able to negotiate is 1.5% annually all-inclusive for management fees, custody, and commissions.
- U.S. clients must sign waivers of bank secrecy and agree to disclosure of their account information to the IRS. This is non-negotiable. Banks that fail to disclose account data of U.S. persons to the IRS are subject to sanctions both in their home countries and in the United States.
If your offshore bank has informed you that it is closing your account, and you have at least $300,000 to redeploy to an alternative offshore institution, contact me at . I'd be happy to discuss your options with you.
Copyright © 2012 by Mark Nestmann
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How Much Will You Lose to a Bail-In?
Some banks are more stable than others. We all know that. But how likely is it that your bank is going to fail and be victim to a bank bail-in? Our free Bail-In Risk Assessment will tell you.
Enter a few pieces of information and you’ll get a custom report that ranks how likely you are to lose money in the next bank crash. More than 8,000 US banks and credit unions ranked.
