bout de papier, Vol. 8, No. 4 (1991) — Fall 1991 // Automne 1991, pp. 31–32
A recent article on “Swiss Banking” by Betty Lee in the March issue of Canadian Business caught my attention. I was always under the impression that Swiss bank accounts were designed exclusively for the very rich or for characters in spy novels such as Ludlum’s Jason Bourne. The reason they seemed so intriguing was that they made perfect sense for investors looking for a little asset diversification abroad. I don’t know about you, but at the end of each month, I sit in Ottawa developing new financial strategies with all the disposable income I retain on my FS-1 salary.
Actually, my “portfolio” consists of a savings account and a few RRSPs, and presently does not warrant a Swiss bank account. Still, some of you who have slaved over the years by eating at fast food restaurants and socking your overtime cheques away, or those looking for a safe haven for your posting allowances, might consider an offshore bank account.
In today’s economic times, long term protection of your permanent portfolio is very important. It is unlikely that Canada will witness major disruptions such as a civil war or an economic catastrophe. However, to a certain extent, political uncertainty does exist, and there is always potential for the government to enact new policies calling for increased personal income tax and a higher marginal tax rate at retirement. These factors, plus others, make Switzerland a natural choice to keep a little cache.
For years, world leaders and prudent investors have enjoyed the use of a Swiss bank account. Switzerland has been a neutral country since the 16th century, and the Swiss do not believe in waging war. Switzerland has never joined NATO, the United Nations, and the International Monetary Fund, nor had it participated in a collective security agreement until last year when it supported the UN embargo against Iraq during the Gulf war. For the last half century, the Government of Switzerland has been formed from a coalition of conservative parties which has provided added stability to a world-renowned banking system. Historically, Switzerland has been so stable and predictable that one need not worry about an unexpected change in the political mood.
Besides stability, financial freedom is another advantage when contemplating banking in Switzerland. For years the Government of Switzerland has allowed capitalists and the forces of supply and demand to manage the economy. One of Europe’s most successful economic stories, Switzerland enjoys GDP per capita of $34,190, the highest in Europe and an unemployment rate of 1.1 per cent (versus over 10 per cent in Canada). Open market economy principles have worked so well that the extent of intervention by the Swiss Government even today is so attenuated that we in Canada have not experienced a similar hands-off approach in the last twenty to thirty years.
A big advantage of using the Swiss banking system is that Swiss banks can be one-stop financial shopping centres. They provide as many banking services as Canadian banks, while allowing the flexibility of using a single institution to carry out an aggressive financial portfolio abroad. Through a Swiss bank, one can buy short and long term deposits, treasury bills, commodities, gold, all major currencies, and acquire sound investment advice while gaining access to world stock markets. Banks operating in Canada are constrained by law from offering “non-banking” services. (The closest comparable institutions are the “near-banks” or trust companies, which are able to offer a wider range of financial services, but only a limited range of banking services.)
Another advantage of the Swiss system is its secrecy. For years, the Swiss have been very circumspect people who respect financial privacy. By law, Swiss bankers were required to honour the confidentiality of their clients. This feature, together with the undoubted security of these institutions, meant that investors traditionally looked to Switzerland as an attractive and discreet refuge for their money. However, Swiss banking secrecy laws dating back to 1934 are slowly disappearing. In fact, the legend of the totally anonymous Swiss bank account may be finished. There has been a worldwide effort by governments to obtain the assets of criminals by curtailing the growing number of international financial transactions in which they laundered the money gained through their illegal activities. The perception that the secrecy surrounding Swiss bank accounts fostered international money-laundering was difficult to dispel. As a result, Swiss banks have begun abolishing some of the secrecy behind the majority of their anonymous bank accounts.
According to “Anonymous Swiss Banking Accounts: The End of a Myth?” which appeared in the July International Financial Law Review, past practice had allowed an agent (normally a lawyer) to open a private account on behalf of a client. In doing so, the onus was on the agent (and not on the • bank) to be satisfied that the client was not abusing bank secrecy laws. The agent would then open what was called a “Form B” : Account on behalf of the client (and the client’s identity would not be disclosed to the bank). This meant that the only name which a bank would have on the record would be that of the agent. In turn, the bank was constrained by law to report the identity of a client of a Form B account if ordered to do so by a Swiss Criminal Judge. In the case of revealing the identity of the unidentified client, the bank would only be in a position to reveal the name of the account holder of record (ie. the agent) unless, somehow through some other means, it had learned the name of the anonymous : client. Legislation provided that the Court always had the power to order the identity of an account holder to be disclosed if the Court deemed it necessary. Thus, in these circumstances, the bank would turn to the agent, and the agent would be compelled to disclose the name. However, in the case of agents who were lawyers, another issue would come into play; namely that of solicitor-
• client privilege with its corresponding, requirement for maintaining privacy. This system has now been amended somewhat. Effective 1 July 1991, Form B accounts, which allowed unidentified clients to conduct financial transactions through agents, were abolished. Registration of new accounts is presently under way. Banks with current Form B account holders have until September 1992 to disclose their identity.
However, the privilege of legal anonymity has not completely vanished with the Form B account. Bank secrecy is still available if the client (ie. not an agent on behalf of an unnamed client) seeking to open an account can clearly document that the deposits are directly related to legal proceedings, for example divorce settlements or inheritance. Perhaps one spouse does not want the other to know the full extent of the assets, or their location. Perhaps siblings wish to segregate and safeguard an inheritance from their other assets — who knows. There are many legitimate reasons for maintaining secrecy.
Although the need for privacy is definitely at the investor’s discretion, the overall objective for having a Swiss account should not be to hide from the Canadian tax authorities. Canadian tax law does not require you to disclose foreign accounts; however, you are required to report any interest, dividends or capital gains accrued through an offshore account when filing your annual Canadian income tax return. In addition, the Swiss Government, like many others, will impose its own withholding tax (about 35 per cent) on all interest and dividends earned from Swiss savings accounts, stock and bonds. If privacy is your ultimate concern, or tax evasion is your hobby, you will want to forego the option of applying to the Swiss Government for a non-resident refund.
As Betty Lee outlines in her article: “One way of getting around the tax altogether is to plow your funds into non-Swiss certificates of deposit — which are paying 8 per cent in Swiss francs, and 10 per cent on Canadian dollars, for three months — or various investment instruments that are not subject to the levy.”
After you have decided to take the plunge, opening a Swiss bank account is relatively painless. There are two types of accounts which are of interest to the average investor. A “current” account, like a regular chequing account, allows you to withdraw money as required. A “safekeeping” account allows you to store separately from the bank’s own assets those investments which the bank has acquired on your behalf.
One notable difference from Canadian banks is that clients of Swiss banks must maintain a fairly hefty balance in their account at all times. Minimum deposits for opening and maintaining an account vary from bank to bank, but are usually in the range of $5,000 to $90,000. Transaction fees depend on the type of investment. For instance, transaction fees on the purchase of Canadian stocks and bonds would obviously be higher through a Swiss bank than they would be if purchased in Canada.
Opening an account can be done through the mail. There are over 450 commercial banks in Switzerland, and the “big three” (the Swiss Bank Corporation, the Swiss Credit Bank and the Union Bank of Switzerland) have offices in Canada which can provide information on establishing an account through their parent branches in Switzerland But bear in mind that opening an account in a Swiss bank in Canada or in another country is not the same as opening the same account in Switzerland. All banks (whether domestic or foreign) operating in Canada are governed by Canadian banking laws.
In addition to the big three, there are approximately two hundred other banks in Switzerland which were formed with the primary purpose of acquiring and storing investments. Smaller and less bureaucratic, these banks may be ideal for the investor with a narrowly defined portfolio.
When choosing a Swiss bank, look for some of the same characteristics one enjoys in Canada: quality and range of services; the value of its assets; its ability to communicate in the language of your choice; and most importantly, its financial solidity. The quickest way to confirm your choice may be to talk to a colleague who has been posted in Switzerland or to your financial advisor, both of whom may have some experience in offshore banking. Should you later become unhappy with your choice, there is no financial penalty for changing from one Swiss institution to another. As Europe ’92 approaches and the European financial market deregulates, Swiss banks will find it necessary to improve their services even more with the goal of preserving their first-class reputation.
And if you are not totally convinced that Switzerland is for you, consult the experts. A great read is the chapter on Swiss banking in financial strategist Harry Browne’s book Why the Best-Laid Investment Plans Usually Go Wrong, or Betty Lee’s Canadian Business article, “Looking for a Place to Hide Your Money?”
By no means do I warrant the title of “Financial Advisor”, and my bank book will corroborate this statement. Being employed in the government, my financial future looks dismal. Yet, one day, I hope to have a diversified portfolio. A portfolio that would allow me the opportunity to park a small part of my money and investments in Switzerland Research assures me I would find comfort with a little nest egg in Zurich, awaiting my retirement.
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Originally published in bout de papier, Vol. 8, No. 4 (1991) — Fall 1991 // Automne 1991, pp. 31–32. Read the rest of this issue →
