For many people, privacy means more than the secrecy with which a Swiss bank will treat their accounts. At seminars, in consultations and in letters, I've been asked many questions about sending and receiving money secretly and about accounting to others for money that's been secretly shipped to Switzerland.
Such questions are difficult tc answer when I don't know what the questioner's objectives are. Actually, there are many different levels of secrecy—some legal and some illegal.
Surprisingly, very few people with whom I've discussed secrecy ever define their own objectives. Consequently, they're in no position to determine the lengths to which they'll go to maintain their privacy.
Most likely, your situation is one of the following:
1. You have no interest in evading taxes or in hiding anything from the government or anyone else. However, you have decided it would be useful to have a Swiss bank account—possibly to facilitate trading in foreign markets or in foreign currencies, or possibly because you think it's prudent to keep part of your assets outside the country in which you live. Or…
2. You don't want to break laws or evade taxes, but you would like to keep your affairs as private as possible. You're willing to report all your financial affairs to the government if it so requires, but not to anyone else. It may be that you want to shield your business from creditors, friends, business associates or relatives. Or…
3. You don't want to evade taxes because that could get you into a lot of trouble, and so you report all your income. But you also don't want the government or anyone else to know what you're doing, because you don't know what the future will bring. I've found that most Swiss bank customers are in this category. Or…
4. You don't want to evade taxes but you do evade them—simply because you can't report all your taxable income without disclosing other information you want to keep private. (There are ways of getting out of this category and safely into category number three, and they will be discussed in this article.) Or…
5. You are a tax-evader by intention—and hope to hide a lot of money or to make a lot of money through your Swiss bank account, none of which will ever be reported to the government.
There is an additional characteristic to consider that may apply to anyone. That characteristic is the desire to avoid taxes—as opposed to evading them.
Tax avoidance is the use of legal methods to reduce your tax bill. It can involve such straightforward measures as simply making sure you've included every possible deduction on your tax return. Or it can involve such sophisticated methods as establishing an offshore trust.
On the other hand, tax evasion is the use of illegal methods to escape taxes. It includes such things as failing to report income you've earned or making fictitious deductions from your income.
Almost everyone will gladly use any method of tax avoidance handed to him (although I'm always surprised to find how little effort most individuals make toward discovering such methods). At the same time, most people aren't willing to accept the risks involved in tax evasion. A Swiss bank account doesn't of itself provide an avenue for tax avoidance. Any profits or income earned in Switzerland are as subject to U.S. taxes as if they were earned at home.
First, we should identify those laws that pertain to Swiss bank investments. In summary, they are:
You must report as ordinary income, for the year you receive them, any interest or dividends produced by any investment held anywhere in the world.
2. Whenever an investment is sold (or traded for something else), you must report any profit. Again, this applies to investments anywhere in the world.
3. With your income tax return, you must file IRS Form 4683 if, during the year, you had a financial interest in any foreign bank account, securities account or "other financial account." You must file this form even if you only had signature authority over an account belonging to someone else. You must keep available for five years all records pertaining to foreign accounts.
4. Anytime you send or carry more than $5,000 in cash or bearer-type monetary instruments out of the country, you must file Form 4790 with a Customs official on the way out.
5. Anytime you receive from outside the United States, or bring into the United States yourself, more than $5,000 in cash or bearer-type monetary instruments, you must file Form 4790 with the Bureau of Customs. If you carry the money in, you must file the report immediately. If it is shipped to you, you must file the report within 30 days.
6. Anytime you withdraw more than $10,000 in currency from a U.S. bank or similar financial institution, it must record your identity and send a report to the IRS within 45 days.
7. U.S. banks are required to obtain taxpayer identification numbers or social security numbers from all depositors.
8. All financial institutions are required to retain for five years the originals or copies of:
(a) records of loans exceeding $5,000, except mortgages;
(b) all records and instructions concerning transfers of over $10,000 into or out of the U.S.—including transfers to other financial institutions within the United States that are instructed to transfer the money out of the United States.
9. U.S. banks are required to retain for five years the originals or copies of:
(a) signature cards, statements, ledger cards and debit items for all accounts;
(b) all checks, drafts and money orders drawn on the bank—except for checks written by certain categories of customers who write a large volume of checks.
(c) all records concerning transactions of over $10,000 going out of or coming into the United States.
(d) whatever records are needed to construct the activity of a checking account for the most recent two years.
10. Securities brokers and dealers are required to keep substantially the same records required of banks.
The penalties for violations by banks and other financial institutions aren't important for our purposes here. The maximum civil penalty if you fail to report currency transported into or out of the United States is the value of the currency. If you're caught exporting currency on the sly, the money can be confiscated; some or all of it might be returned to you. The same applies if you bring in more than $5,000. If it's discovered later, you can be fined up to the amount of the currency involved. The same penalty applies if you file the report but make a significant misstatement or omission.
If it can be proven that you knowingly made false statements in any currency report filed or in the foreign bank account section of your income tax return, it becomes a criminal matter. And you can be fined up to an additional $10,000 and imprisoned for up to five years—or both.
Also, if you violate any part of the reporting law to aid in a violation of some other Federal law, you can be fined up to $500,000 or be imprisoned for up to five years—or both. This is also the case if you violate any part of the reporting law as part of a series of illegal activities involving transactions exceeding $100,000 in any 12-month period.
If privacy isn't important to you, transmitting money overseas is simple. Just use one of the methods described in my book—probably a cashier's check or bank wire.
Sending money abroad with privacy is another matter. Despite the laws, it is possible to transmit money to Switzerland both privately and legally. However, the wealthier you are, the more difficult the job becomes.
Money orders are both silent and legal, but they are convenient only for sending modest amounts. You can buy a money order for up to $500 at a bank without giving your name or the name of the payee. After you acquire the money order, write in the name of the Swiss bank and mail it, together with a letter specifying the account to which it is to be deposited. Your name shouldn't appear on the money order.
When the money order is processed by the Swiss bank, it will eventually come back to the bank where it was issued. It will have the Swiss bank's name on it, but no record of the purchaser. You can also avoid putting the bank's name on the envelope—by using the name of your bank contact and the bank's postal box address.
To protect against loss of the money order, you can register the letter when you send it. You'll have to give your name (or some other name) to register the letter, but no one will know its contents. If the letter is actually lost, the registration may help recover it. If it's irretrievably lost, you won't be compensated for the money order (unless it's insured, which requires disclosing its contents in advance).
For deposits over $500, you can buy several money orders and put them in the same envelope. There's no legal limit to the amount you can send at any one time—as long as the money orders are payable to a specific bank and not to "cash."
You can also buy money orders, up to $300 apiece, at the post office, and money orders up to $199 at drugstores and supermarkets.
To preserve your anonymity, you'll have to purchase the money orders with cash. And you should accumulate the cash in small amounts to avoid calling attention to yourself. U.S. banks aren't required to keep a record of any withdrawal that seems unusually large. In general, any withdrawal of under $1,000 won't call attention to you; and you could make larger withdrawals if you have already been doing so for other reasons.
Money orders are available for cash from so many different sources that it isn't difficult to follow these three rules:
1. Buy money orders only where you aren't known and where you don't transact other business.
2. Don't buy money orders frequently from the same place.
3. Don't buy more than two or three money orders at one time from one source.
A bank clerk may ask where the money order will be sent or where it will be cashed. This is a routine question, asked for the convenience of the person receiving the money order. If you say the money is going to Europe, the bank will issue a money order drawn on a European bank—so that it can be cashed more quickly and easily. You may not want to specify Switzerland, but a money order going to Europe shouldn't raise any eyebrows. If you choose, you can specify New York; at the most, you'll lose only a few value days on the deposit while the money order goes through channels.
Cashier's checks can be used for larger amounts, but your signature is required. If you buy the check for cash, you probably won't be asked for identification, so you can use any name you choose. However, using a fictitious name would make it very difficult for you to stop payment and replace the check if it's lost. And if the purpose of the fictitious name is to cover an evasion of the law, you would be signing a confession that someone might find. Also, the Swiss bank may be unwilling to deposit to your account a check that was apparently purchased by someone else.
It is legal to send any amount by cashier's check and not report it (so long as it isn't made payable to "cash"). But it isn't as private as a money order—which can be purchased only in denominations of $500 or less.
Another private and legal method of sending up to $5,000 is to take the money in cash to Canada or Mexico and wire it from a bank there to your Swiss bank. You can take only $5,000 per trip (without reporting it), but you can make as many trips as you want. Any Canadian or Mexican bank can wire the money to your Swiss bank.
It's also possible to carry the cash all the way to Switzerland. However, there are two main drawbacks to this. One is the danger that the money will be stolen and that the owner will be killed in the process. The other is the $5,000 limitation. If you take more than that without reporting it, you're breaking the law; if you take less, you're spending a lot of money to transmit a little.
Rather than carry cash all the way to Switzerland, it makes more sense to take it to Canada or Mexico and wire it from there. The transmission will be on record at the bank you use, but it won't, as a matter of course, be reported to the U.S. government.
If you aren't hiding your business from the government but want privacy from everyone else, there are a few ideas to consider. You can, of course, use all the methods of transmission already discussed. They are both private and legal. You can also transfer larger sums legally and still maintain privacy from everyone but the government.
For example, you can send any amount of money by cashier's check or bank wire. To keep it private, it's best to buy a cashier's check at a bank where you don't normally do business. Have the check made payable to yourself and endorse it on the back, "Pay to the order of [name of Swiss bank]," and sign your name. The bank clerk who sells you the check will have no knowledge of its destination. When the check is processed and ultimately returns to the bank where it was purchased, it will show its Swiss destination but probably won't be noticed.
When you purchase the check, you can pay for it with cash. If you don't want to carry the cash from your own bank to the bank where the check will be purchased, you can buy a cashier's check at your own bank, made payable to yourself, and endorse it at the bank where you'll purchase the check that is going to Switzerland.
These methods will most likely thwart anyone prying into your affairs. If he gains access to your records at your local bank, he still won't know that you sent money to Switzerland.
If you do decide to evade the law, you should define, for your own benefit, what law you're willing to evade. Do you want privacy so that you can evade taxes—or do you want privacy only as a precaution against future intrusions by the government?
If you don't intend to evade taxes, the legal risks you run are certainly smaller. Your crime will be the failure to include data on your income tax return that has no bearing on your tax liability. If discovered, it's unlikely that you'll ever be convicted for it—unless the government wants to punish you for something else.
But to keep the stakes this small, you must be careful and thorough. Report all income accurately and make certain that you don't receive any income from your Swiss account. That way you won't be evading any taxes.
With this no-income approach, you would restrict your investments to those that offer price appreciation, rather than interest and dividends. Of course, someday you'll sell those investments. If they are sold at a loss and not reported, the IRS is unlikely to prosecute you for evading a possible tax refund. If they are sold at a profit, the gains will be taxable. But the sale may be many years away. And, by that time, it may be clearer what (whether good or ill) to expect from your government.
Tax rates may be so high that evasion is necessary for mere survival. Or you may have decided that you're going to look for a freer country to live in (which wouldn't eliminate your tax liability, but might make it harder to collect). Or, by then, your homeland might have become a better place to live. Tax rates might be lower; and legal restrictions might be aimed at the government, rather than at you. In that case, you would be willing to report your holdings and pay your taxes.
Whatever happens, privacy buys you the time to wait and see before making a final decision. This is its principal benefit in a turbulent world. The person who exposes all his holdings has made a decision that is almost wholly irrevocable. He has decided to depend upon the benevolence of his government.
On the other hand, the person who consciously and illegally evades taxes is usually making an irrevocable decision, too. He's betting on the failure of the present system or the expectation that he'll be fleeing his homeland someday—or else has confidence in some plan to repatriate his money quietly.
But the person who simply protects his privacy, while avoiding serious violations of the law, is buying time while the future unfolds. If he emigrates someday, he'll have money outside the country waiting for him. If he decides to stay, he can be a law-abiding citizen without very much to be embarrassed about.
If you decide to keep your affairs private from the government, whether or not you evade taxes, there are a number of things to consider.
For one thing, you really shouldn't trust anyone within the United States with your secrets. Secrets always seem to be revealed, intentionally or unintentionally, innocently or maliciously. A secret, because it is a secret, is too interesting to keep to oneself. And no one will have a greater interest than you in keeping it quiet. So you're much safer if no one else knows.
This creates the problem that you often have to lie to people you'd never lie to otherwise. You can't be sure your secret is safe from the government unless it's safe from everyone else, too. So you find yourself in a "tangled web." And it may not be worth it to you if you have to lie to your friends to succeed with the deception.
If you decide that you want deep secrecy, there's no catalog available to tell you how to get it. Such a catalog might be legally hazardous to publish—and the methods would become relatively ineffective once they had been published.
The closest thing to a catalog is the book Dirty Money by Thurston Clarke and John Tigue, Jr. (Simon & Schuster, 1975). The authors worked in the U.S. attorney's investigation of the use of Swiss bank accounts by organized crime. The book is valuable for two reasons: (1) it shows what you're up against if you try to outfox the government; and (2) it does call attention to a few as-yet-unplugged loopholes.
Mostly, however, you'll have to use your own imagination and initiative. And you'll have to recognize the many countermeasures the government has available to snare you. If no one ever suspects you, those countermeasures may never be employed.
But it's foolish to assume you'll never be suspected. So imagine that the IRS has been tipped off to your activities. By whom? It could be anyone—perhaps someone who overheard a casual slip of the tongue, who in turn told someone else, who in turn would like to win an IRS informer's reward.
However it might happen, it can happen. So imagine it has. If you were the investigator, how would you go about proving the case? Try to imagine everything that might be done by a government that would spend $15,000 to catch $10,000 in taxes. If you can't create a plan that's foolproof, and if you can't rest easily with the thought of the risks, then don't proceed with any plan to cheat.
Any plan should certainly rule out communications between you and your Swiss bank. You should receive no mail from the bank—for anything can happen to a letter on its way to you. Cables are kept on file, and overseas telephone calls could be taped easily.
If you request it, most Swiss banks are willing to reroute your mail so that it doesn't come from Switzerland. But it still has to enter the United States to reach you—and, once in the country, it could fall open in the post office, in the mail carrier's hand, or in front of your neighbors.
It's best to set up your account in person or from somewhere outside the United States, choose long-term investments that require no supervision or communication, and then ignore your account. Keep no records.
There's another consideration that many people overlook. Suppose you manage to get a large sum of money into a Swiss bank privately. And you forgo all communication with the bank. It's still possible that someday you may be asked what happened to the money.
The IRS often undertakes a "net worth" audit to determine if a taxpayer has increased his wealth more than his tax returns show. The idea is to discover if the taxpayer has more money than he has reported earning. But the objective could easily be reversed—to see if the taxpayer has less wealth than he's known to have acquired. If so, what happened to the money?
If you make $25,000 per year and you somehow manage to sneak $10,000 to Switzerland, it's doubtful that anyone will ever notice. After all, anyone can squander $10,000 by gambling, high living or other nondeductible expenses.
But if you try to hide $100,000, it's not so easy to explain—even if your total assets are $1,000,000 or more. The IRS could run your last 20 tax returns through the computer and come up with a present net worth figure. If your visible net worth appears to be $100,000 less than that, you may be asked to explain the discrepancy.
There are many answers you can give, but they all raise more questions. You lost it in worthless investments? Why didn't you deduct the losses? You gave it away? To whom? Maybe you should have paid a gift tax. And so on. Even if your answers are good ones, you may earn the tax collector's continuing attention.
You would need to determine how much you could reasonably have spent in non-itemized expenses per year over the last several years—expenses you didn't actually incur—and set that as the limit you'll try to smuggle out of your U.5. accounts. But you'll have to do it without large withdrawals. In other words, you can't sell a $100,000 investment and then have that money suddenly disappear.
Some people have arranged to "lose" money in foreign investments. One tactic is to open two forward contracts in gold bullion—one buying gold and the other selling gold short. You would also have a current account in which the security deposit is kept. Because the two contracts are hedged against each other, you'd need virtually no deposit—but, for window dressing, you'd put up the amount normally required for one contract.
When the price has moved sufficiently—up or down—you would close out the two contracts. The profit from the contract that gained from the price change would be transferred into an unreported account somewhere. The contract that lost would be paid for from the current account and reported on your income tax.
You would have a capital loss that could be applied against any reported capital gain. But the main purpose of reporting the loss is to establish that you don't have the money anymore; it has been lost. Notice, though, that deducting the loss makes you guilty of more than just seeking privacy; it makes you guilty of tax evasion.
Because you have to report all foreign accounts with your income tax return, you would have to determine prior to tax time which of the two contracts to report. So such a plan is best undertaken early in the year. That way you'll have almost a year for the price to move sufficiently in one direction or the other—before you have to decide which of the two contracts you'll report.
Obviously, such a plan should be executed only through personal visits to your bank.
There are people who establish a foreign corporation in a line of business they are familiar with and then arrange for the corporation to lose money. The corporation pays out large expenses, usually to other corporations owned less visibly by the same person. Skillfully done, this does not involve tax evasion.
There's another consideration involved in illegal plans to hide money. What will you do with the money once it's hidden? Obviously, you can't just bring it home one day and spend it—not without calling attention to it.
For some people, the object is simply to stash the money away while waiting to see what America's future will be. If the country continues downhill, they may decide to move elsewhere. But if things improve, they may want to bring the money home someday.
If you can't think of any tax-free way to do it, it's usually possible to bring the money home as new income. In other words, you claim to have earned it overseas and pay the current rate of income tax on it. This is an expensive maneuver, but it's better than going to jail. If you have a profession, you can take a trip to Europe for a couple of months, claim to have performed professional services and bring the money back with you. Or you can sell an asset to a fictitious European company that was established for the purpose.
The net result of this type of plan can be similar to that of a legal tax shelter, in that you don't pay taxes on any gains until you decide you want to spend the profits.
Whatever plan you come up with, you can assume that someone else has tried it before. And it's possible that many people have tried it—so many that the IRS has a way of detecting or frustrating it.
The risks are great. Neither the U.S. nor Canadian government looks benevolently on those who try to cheat it of its "due." In fact, they are among the most vengeful governments in matters of taxes.
You have to assume that if the stakes are large enough, the IRS will check out every link in your chain. And you won't be able to sleep very well if your story hinges on the reliability of people you hardly know.
For those who aren't sure where things are headed, an alternative is to have two Swiss accounts—one reported and the other unreported.
Establish one account using all tactics necessary to make it completely secret. Keep the transactions simple and infrequent, so that you won't need to receive correspondence from the bank and won't need to keep any records.
Open a second account with normal methods. Receive correspondence from the bank, transact whatever business you think will make your investments profitable. Report that account on your tax return.
Someday the U.S. government may prohibit Swiss bank accounts for Americans. If so, take your time about complying. Talk to an attorney to see in what way, and for how long, you can drag your feet before bringing the money home. You may be able to wait it out for years without risking criminal action. Before the time runs out, you may decide to pack up and get out—in which case you'll be grateful for both accounts.
If not, close the public account when you seem to have run out of time—and continue to ignore the secret account. The government's acts will have confirmed the secret account's importance. Any government that tells you where you're allowed to keep the money you have earned isn't to be entrusted with knowledge of that money's existence.
No one can tell you whether or not you should break the law. That's a complicated matter that ultimately comes back to your own personal considerations of duty, risks, rewards, nerves, financial position, public exposure and just plain feelings.
Anyone who tells you that you must obey the law is ridiculous. And anyone who tells you that you ought to break it is just as ridiculous. It isn't a matter for anyone but you to decide. No one else will face the consequences of your decision.
Please don't conclude that I'm urging you to break the law. Don't even assume that I'm subtly suggesting it. I'm not. You can get into trouble breaking the law. The risks involved are appropriate only for people who are desperate or unusually ambitious, and who can handle the risks emotionally.
And you shouldn't deliberately break any law without first determining the exact requirements of the law (state or Federal) and the penalties involved.
Harry Browne is the author of several recent best-selling books on investment survival, the most recent of which is his Complete Guide to Swiss Banks. Reprinted by permission of McGraw-Hill Book Company from Harry Browne's Complete Guide to Swiss Banks. Copyright © 1976 by Harry Browne.