Are Financial Safe Havens Really Safe Anymore?

The largest US financial institutions are on government life support. Smaller banks are collapsing under the weight of plunging real estate values and worthless loans. Other than US Treasury debt, with near-zero interest rates, there aren’t many safe places left to park your savings. In this toxic financial climate, does it make sense to look to the traditional banking havens in Switzerland and the Caribbean? It depends what you are looking for; there are several advantages to the specialized private banking available in some offshore locations, but there are risks to consider, as well.

Asset protection

The strongest argument for offshore banking is the availability of asset protection benefits. In most cases, accounts can be held in the name of a trust or a limited liability company formed in a jurisdiction with favorable finance laws. For example, sometimes our firm advises clients to use a Delaware LLC for tax reasons but establish the bank account in an overseas location. Or we might create the LLC or trust outside the US because of favorable rules that protect these structures from creditors. However, although these arrangements can confer substantial asset protection benefits, some of their purported advantages should be viewed with a critical eye.

Safety

Foreign banks have government deposit guarantees that vary by country. Deposits in US banks are insured by the FDIC up to $250,000 and can be combined within a family to increase those limits. Switzerland has increased its guarantee to the equivalent of about $85,000 and also allows combination accounts. You should avoid financial institutions with significant and unknown exposure to loans or other risky asset classes. The overseas private wealth management banks, unlike the commercial banks, generally make few if any loans and earn their fees solely from advisory and custodial services. These institutions are generally the safest bets for offshore accounts.

Privacy

Accounts in countries with strict bank secrecy laws provide enhanced privacy. In the US, your records and the details of your financial life are widely available because there are very few legal restrictions on banks’ ability to sell your personal account information to third parties. The banks in countries with strict secrecy laws are prohibited from these practices; revealing any customer information is a crime in most circumstances. That said, violations can still occur: an employee of the largest bank in Lichtenstein recently sold thousands of customer records to the German government, which was investigating tax evasion by some of its wealthy citizens. In another case, the giant Swiss bank UBS allegedly promoted a variety of tax schemes to some of its wealthy US clients involving the use of “secret” Swiss accounts. The US is now prosecuting the bank and it’s likely that the names and accounts of these clients will be turned over to the authorities. Although, the privacy of overseas accounts can be a valuable tool in limiting access to your bank records, this protection has definite limits and all reporting and disclosure requirements should always be strictly followed.

Investment opportunities

Can you make more money overseas due to higher interest rates or investments that earn more than current opportunities in the US? Just like in the US, the rate will vary based on the level of risk. Interest rates on dollar-denominated investments will be similar to US money market rates. In fact, if you’re offered a return greater than you can get in the US, chances are it’s a phony deal. Many offshore banks, along with their US counterparts, funneled investor money into the Madoff scheme with promises of unusually high and consistent returns. As I write this, Stanford Financial Group, a multi-billion dollar institution, is accused by the SEC of a massive fraud, offering bogus high-yielding CDs through its offshore bank. It’s likely that investor losses will be substantial. In these times, since the amount of risk in any investment can’t be accurately calculated and therefore can’t be accurately priced, the highest degree of skepticism should be applied to any investment opportunity.

For those seeking asset protection and privacy advantages, overseas banking may be worth investigating as a part of a strong financial plan. However, with a global financial crisis at hand, exercise extreme caution before opening an account with any bank and certainly avoid investments with promised returns that exceed rates that are generally available in the market.

Robert J. Mintz, JD, is an attorney and the author of the book Asset Protection for

Physicians and High-Risk Business Owners. To receive a complimentary copy of the

book call 800-223-4291 or visit www.rjmintz.com.