What is private banking?

The expression 'private banking' is nowadays more to be seen as a gateway into investment management in the broader sense than as offering a confidential, almost family relationship with a man to whom you entrust your money. Those relationships still exist in the traditional places, but they apply more to extremely rich people than to moderately wealthy or well-off people who want more personalised treatment than they can get from their high street branch, or their regional 'personal banker'.

In InvestorsOffshore.com, 'private banking' is taken to mean investment management offered on a personalised basis by a bank to an individual (or indeed his company) with disposable wealth of more than $100,000. 'Private banking' is obviously not synonymous with 'offshore', but the costs of a personalised relationship begin to be worthwhile at the $100,000 level in the light of the superior gains to be realised from offshore investment.

How does a private banker get rewarded?

Depositing money with a bank is reward enough, of course, whether into the bank or into one of its financial products, but private banking when it has an advisory nature and is not accompanied by lending or borrowing may be fee-based. The level of the fees is highly variable: they will be lower if the bank will get the benefit from time to time of being able to offer bridging finance, or of holding large amounts in transit etc, or if it can hope for more substantial involvement with you in future. If the relationship is purely between financial adviser and client, then the fees may be substantial.

What is Offshore Asset Protection, and do I need it?

Asset Protection. Does exactly what it says on the tin. If you have a substantial liquid net worth, this may be an aspect of offshore private banking which interests you. Especially in the USA, people are turning to offshore asset protection as a way of safeguarding their savings by distancing themselves from their assets in the eyes of the law, although such moves have not gone unchallenged in the courts.

Offshore asset protection can be achieved in a number of ways, for example the establishment of trusts, IBCs (International Business Corporations), foundations, partnerships, and other legal entities.

There is, however, absolutely no point in attempting to set up an offshore structure for the purposes of asset protection during, or immediately before action is taken against you, as fraudulent conveyance statutes will mean that if your intention is seen to be to defraud a legitimate creditor, your structure will afford little or no protection.

Is private banking private?

In most countries one of the terms of the relationship between banker and customer is that the banker will keep the customer's affairs secret. Staff members are normally required to sign a declaration to this effect. In certain countries (e.g. Switzerland and the Cayman Islands) specific legislation makes breaches of bank secrecy subject to criminal law sanctions.

However, in all legal systems (including Switzerland) there are specific cases where the duty of secrecy of a banker is overridden by local legislation or international treaties, eg where fraud, money laundering and drugs are involved.

Pressure from the OECD and the G20 in 2009 has led many offshore jurisdictions to enter Tax Information Exchange Agreements with prominent OECD member states.

What is the situation regarding exchange of information between countries?

The recommendations of the FATF and the initiatives of the G7 and EU countries, and the OECD have thrown bank secrecy policy into turmoil. These recommendations were targeted at jurisdictions which the FATF considered to have ‘serious systemic problems with money laundering controls' and for those who failed to review their practices and make reforms, the adoption of ‘counter measures' was darkly hinted at. The recommendations hinged on creating greater transparency during the process of offshore investment/banking, and the reporting and exchange of information regarding transactions deemed to be unusual.

Pressure from the OECD and the G20 in 2009 has led many offshore jurisdictions to enter Tax Information Exchange Agreements with prominent OECD member states.

In 2002, the IRS was awarded the right to demand the records of American Express and MasterCard transactions for customers who held cards issued through Antigua, the Bahamas and the Cayman Islands. This came as a result of the testimony of John Mathewson, a former Cayman Islands banker who revealed that the cards could be used for tax evasion purposes.

Another significant development in this regard took place in 2010, with the conclusion of an administrative assistance agreement between the US and Switzerland. The agreement allows for the names and bank account details of 4,450 US clients of UBS suspected of having evaded US taxes over a number of years to be handed over to the US tax authority (although this was significantly less than the 52,000 names originally sought by the US).

The implementation of Qualified Intermediary legislation in January 2001 also affected those with American source income, meaning that financial institutions in countries which hadn't obtained approval from the IRS came under heavy pressure to divulge information about their customers to the IRS, and to tax US source income at the full rate in many cases, even when a lower rate was due.

Furthemore, the Foreign Account Tax Compliance Act (FATCA) provisions of the HIRE Act 2010 adds a new chapter 4 to Subtitle A of the US Internal Revenue Code which expands the information reporting requirements imposed on foreign financial institutions (FFIs) with respect to accounts held abroad by US residents.

FFIs are required to deduct and withhold a tax equal to 30% of the amount of any payment to an FFI unless the FFI agrees to disclose the identity of the US residents and report on their bank transactions. The name, address and taxpayer identification number (TIN) is required of each account holder which is a specified US person; and, in the case of any account holder which is a US-owned foreign entity, the name, address, and TIN of each substantial US owner of such entity. The account number is also required to be provided, together with the account balance or value, and the gross receipts and gross withdrawals or payments from the account. Chapter 4 is generally effective for payments made after December 31, 2012, and any US resident who holds more than USD50,000 in a depository or custodial account maintained by an FFI is required to report on any such account under this legislation.

How will this affect me?

With regards to the FATF recommendations, the vast majority of the 'blacklisted jurisdictions' made moves towards greater transparency.

From the point of view of a US citizen or expat seeking confidentiality for legitimate reasons, the wisdom of seeking a confidential banking relationship with an institution with a corporate presence in the US should also be carefully considered, as the IRS was able to gain access to the transaction records of AmEx and MasterCard customers via the Miami based sections of the companies' Caribbean operations.

What is the Savings Tax Directive?

The European Union Savings Tax Directive (STD), which came into effect on 1st July, 2005, in fact formed merely one part of a major tax reform package launched by the European Commission in 1997. As originally drafted, the STD aimed at a uniform 'information exchange' regime to apply across the Union, with all countries agreeing to report interest on savings paid to the citizens of other Member States to those States' tax authorities.

Because of resistance from EU Member States with strong traditions of banking secrecy, the Commission had to allow Austria, Luxembourg and Belgium to apply a withholding tax (at 15%) until 2009. Many of the UK's offshore financial centres have been forced to join the STD, along with the Netherlands Antilles, Aruba and some European centres (Andorra, Monaco, Liechtenstein and San Marino). Most of these places have also taken the withholding tax route, in addition to Switzerland, which was the hardest nut for the EU to crack.

The STD applies to many types of return on savings instruments, all loosely described as interest, when received by individuals, but does not affect interest paid to companies. Under the information exchange system, the identity of recipients will be known to their home tax authorities; when tax is withheld, the identity of the recipient will not be reported, thus preserving confidentiality.

There is a comprehensive description of the Savings Tax Directive at http://www.investorsoffshore.com/html/specials/july06_std.html.