The IRS in Switzerland

Many U.S. citizens, in an effort to shield some of their assets from IRS confiscation, turn to Swiss bank accounts. Likewise, many investment counselors tout Swiss banks for this purpose. But not all Swiss banks are equally suited for such protection, as the following will illustrate.

For several years the American Institute Counselors of Great Barrington, MA, has offered its customers a program that includes the purchase and storage of gold coins. AIC recommended gold coins because it believed investors should hold some assets that are not subject to the caprice of the U.S. government.

Then the Securities and Exchange Commission decided, for reasons only it could explain, that the contracts the program involved were really securities and should be subject to its regulation. American Institute Counselors resisted, and the battle was joined.

A major impediment to the SEC's regulation of the program was the fact that the gold coins were in Switzerland, in the hands of the Swiss Credit Bank, whom AIC had hired as custodian and to perform the bookkeeping chores. So the SEC asked a Federal court to order the Swiss Credit Bank to transfer the records and the assets (estimated to be between $150 and $200 million) of the program to its branch in New York, where they would be within the SEC's grasp. Surprisingly, the court issued such an order.

For about a month the Swiss Credit Bank resisted, wanting neither to violate Swiss law by breaching bank secrecy nor to damage its reputation by abandoning its depositors. The bank asked the court to rescind its order, but the court refused. Finally, encumbered by a Swiss court order forbidding it to disclose bank records, the Swiss Credit Bank reached an expensive compromise with the SEC, agreeing to transfer funds equal to the value of the gold coin program into a special hostage account at its New York branch.

How the matter will finally be settled is not clear. But enough has already happened to demonstrate the point: some Swiss banks are effectively under the jurisdiction of the U.S. government.

Why didn't the Swiss Credit Bank simply tell the government to go fly a kite? Because the SCB is deeply involved in the United States, so deeply that it even owns a seat on the New York Stock Exchange. The bank had to obey because it has assets in the United States that could be confiscated by the government if the bank displeased it. The SCB has branches in Los Angeles and New York with assets that could be seized and has large holdings of U.S. stocks and bonds that it keeps for customers. Although the stock and bond certificates may be in Switzerland, the U.S. government could block the payment of dividends and interest. These and all its other U.S. holdings are liable to seizure when the government wants the Swiss Credit Bank to do as it's told.

The large amount of money involved in the American Institute Counselors case makes it conspicuous. But the principle is the same, no matter what the amount in controversy. A Swiss bank with valuable assets in the United States must obey the U.S. government. As a result, such banks are rather timid about dealing with U.S. nationals. They are concerned, correctly, that if you get into trouble with the U.S. government, you could draw them into it.

For example, suppose the government accuses you of cheating on your income tax and says that, to prove it, the government must get hold of your Swiss bank records. But its appeal to your Swiss bank draws no response. The government might then threaten to confiscate assets held by the Swiss bank in the United States if it doesn't cooperate. The bank would be in a very difficult position. If it gives in, it violates Swiss law. If it doesn't, it might lose its U.S. assets.

The Swiss banks are aware that these things can happen, and they know that the U.S. government doesn't have permanent, unchanging rules governing such matters. New rules are created and then changed; old rules are changed as needed. Naturally, Swiss banks are concerned about their American assets.

NEGATIVE RESPONSE

Swiss banks that are vulnerable to the U.S. government usually react to inquiries from prospective American customers differently from Swiss banks that aren't vulnerable. There are several examples of this:

1. Some Swiss banks won't transact business for a U.S. citizen who might be breaking an American law in the process (a principle they don't usually apply to nationals of other countries). When it was illegal for Americans to own gold bullion, several banks refused to buy it for them.

2. Some Swiss banks won't open numbered accounts for U.S. customers—even though it isn't illegal for them to have such accounts (it is illegal not to report those accounts on one's income tax return).

3. Some Swiss banks require that a "waiver of secrecy" statement be signed when a U.S. citizen opens an account. This means the bank has the privilege of revealing information about the account if it so desires. Of course, the bank won't use the privilege idly, but if it is confronted by the U.S. government over the account, the waiver provides an easy way out and the bank will take it.

4. And some banks will simply refuse to do business with a U.S. national—no matter what references are presented.

If a bank tries to discourage you in any of these ways, they're trying to tell you something—that you'd be better off not dealing with them. They know what they're talking about. The banks that give you a chilly welcome or have special policies for U.S. accounts do so because they are vulnerable to the U.S. government. They might not be able to provide the protection you expect from a Swiss bank.

In general, Swiss banks with branches in the United States are the most exposed. Banks that have only representative offices in the United States aren't as vulnerable, but still want to stay on the good side of the U.S. government. Swiss banks that own separate, subsidiary companies in the United States also are vulnerable, though perhaps less so than banks with U.S. branches.

There also are banks with large portfolios of U.S. investments. They too are shy of Americans. A number of Swiss banks, however, have taken the precaution of using a Swiss broker to buy such investments—thereby concealing both the bank and its customers. (Swiss securities brokers are covered by bank secrecy laws.)

U.S. BANKS IN SWITZERLAND

There are several U.S. companies and banks that have branches or own bank subsidiaries in Switzerland. These Swiss affiliates are subject to the pressure the U.S. government can exert on the parent companies.

Any bank operating in Switzerland is subject to Swiss law, no matter what its country of origin (just as all banks operating in the United States are subject to its law). In principle, that should make your account in a Swiss branch of a U.S. bank completely secret and should put it beyond the reach of the U.S. government. I wouldn't count on it, however. There's just too much pressure the U.S. government could put on the home office.

In general, a U.S. bank's subsidiary in Switzerland has greater autonomy than a branch office. A branch can be distinguished from a subsidiary by the bank's name. If it has the word "Swiss" in the title, it's a subsidiary—a separate company owned by the parent bank in the United States. Otherwise it's a branch of the U.S. bank. For example, Seattle First-National Bank (Suisse) is a separate company, a subsidiary of the U.S. bank. But Manufacturers Hanover Trust Company of New York is merely a branch of the New York bank.

Some investment advisors have suggested that it's better for a U.S. national to deal with U.S. banks in Switzerland—because there is no language barrier and they are more familiar with the needs of such customers.

I don't agree with this. You may find one officer who's an American to serve as your contact, but U.S. branches are staffed mostly by Swiss citizens—because of the Swiss government's restrictive immigration policies. There are a few U.S. banks in Switzerland where you can deal with American officers, but their vulnerability to the U.S. government probably outweighs the advantage of common language.

Exposure to the government isn't the only test to which a Swiss bank should be put, of course. You want a bank that offers the specific services you need, will allow you to deal with one individual who becomes your contact, deals articulately in English, and—most of all—is highly liquid.

But the exposure test is one that has been too often overlooked. The day could come when any Swiss bank with U.S. vulnerabilities might give in too easily to the IRS. That might seem far-fetched right now. But a few years ago, most people would have scoffed at the suggestion that the Swiss Credit Bank would give in to the SEC.

Harry Browne is well known as the author of the 1974 best-selling book You Can Profit from a Monetary Crisis. His two previous books were How You Can Profit from the Coming Devaluation (1970) and How I Found Freedom in an Unfree World (1973). He is currently publishing a newsletter, Harry Browne's Special Reports. This article is adapted from his new book, Harry Browne's Complete Guide to Swiss Banks, to be published in June by McGraw-Hill.