But who will take our money to finance the mortgage?

Update 25 July 07:20  Switzerland (GenevaLunch) - Two well-known Swiss cooperative banks, Migros and Bank Raiffeisen, have made changes in recent weeks to their policies concerning customers who are US citizens, or who are resident in the US. Specifically, both banks refuse all contact from the US. The steps taken by the banks, who are best known for mortgages and retail banking to middle-class customers, are a clear indication that US pressure is having an impact on the Swiss banking system. The moves are part of a trend that saw UBS in July 2008 alert non-US citizens who were resident in the US that their accounts would be closed as it reduced its US business.

Ironically, it is Americans trying to lead normal lives and pay their bills through their banks who are most affected – not the infamously wealthy and stealthy people the Internal Revenue Service (IRS) is hunting down. Also affected: Swiss citizens living in the US and people of other nationalities who have at some point lived in both countries. These are not the mythical secret, numbered accounts made famous by the likes of James Bond, but typical Swiss bank accounts covered by data protection laws in Switzerland.

The problem is complicated for US citizens and residents living outside the US because, according to American Citizens Abroad, a Geneva-based group, US banks are increasingly applying “due diligence” rules to refuse banking services outside the country.

This leaves what appears to be a growing number of people in a quandery: not wanted by banks in their home country or their country of residence.

The account-opening process at a Swiss bank for US citizens has long been far more complicated than for others, and involves signing various additional documents. The additional paperwork is the result of the tax implications of holding US securities. A US citizen anywhere in the world must pay taxes on dividends and interest on US securities; a non-US person who holds US stock or bonds will have the taxes deducted automatically but can claim the taxes back.

Most non-US customers avoid owning US securities directly. This was true long before Swiss bank UBS got into trouble with the United States in 2008 for illegally helping US citizens to hide money from the IRS, the US tax authority. It appears to date back to a 2001 requirement for US citizens to fill out special IRS reporting forms, with Swiss banks starting at that point to ask clients if they were US citizens or residents.

ACA recently wrote to US Treasury Secretary Timothy Geithner to plead for help for US citizens caught in the crossfire between the IRS and foreign banks (see end of article).

MigrosBank sends a letter to its US-domiciled clients

MigrosBank sent a letter 8 July 2009 to all its US-domiciled clients explaining that due to “legal dispositions in force”:

• correspondence with the customer will no longer be sent to the customer, but be held at the bank
• the customer can designate an alternative mailing address outside of the US
• no e-banking, e-mail, fax, telephone or regular mail contact with customers is possible on US territory
• e-banking customers will only be allowed to consult their accounts
• and customers will no longer be able to manage their own portfolios. Portfolio management will now be done by the bank or by a professional third party.

MigrosBank told GenevaLunch that no US customers had been asked to leave the bank, and that in any case, they represent only 0.2 percent of its client base.

Raiffeisen Bank’s simple rules to avoid problems with the US Dept of Justice

Raiffeisen flatly refuses to open an account for US citizens in the US, but will allow Swiss clients in the US to bank with it. US citizens in Switzerland are also free to open an account with it, Raiffeisen’s Stefan Kern told GenevaLunch. Policy is clear: no direct contact of any kind between the customer in the US and the bank; someone – anyone – residing outside of the US must have power of attorney over the account. Raiffeisen has only “a few thousand” such clients, GenevaLunch was told. A third smaller bank which recently tightened its policies for US clients, “ZKB, said US money makes up only 1% of its overall $114 billion in assets,” reported the Wall Street Journal 21 July 2009.

The stated reasons differ slightly. The concern of MigrosBank is to not appear to provide financial advice of any kind to customers on US soil. Raiffeisen wants to reduce its exposure to what it calls the continually shifting US rules, and the fact that increasingly any legal dispute is judged under US law, which dramatically increases costs.

Big banks, small banks, cash outflows from private clients

Several Swiss private banks in Geneva, those that really do provide private banking services to the wealthy, have confirmed to GenevaLunch that US citizens and green card holders are not welcome. In some cases they have asked these clients to transfer their accounts elsewhere. The Economist points out, in a 20 July 2009 article, that money has been flowing out of the large Swiss banks, to the tune of CHF23 billion in the first quarter of 2009, without noting that some of it is the banks’ own doing. The article looks mainly at the disproportionate size of private assets managed by the country’s two big banks, UBS and Credit Suisse, for Switzerland’s GDP: over 9 percent compared to 5-7 percent for other European countries’ banks.

Some of this outflow has gone to Switzerland’s smaller banks, in particular MigrosBank and Raiffaisen. The International Monetary Fund (IMF), in a scheduled review of Switzerland in March 2009 (see end of article), noted that “while many smaller and medium-sized banks have benefited from cash outflows from larger banks, strong liquidity at these firms also creates some risk of less prudent and riskier lending practices.”

The Swiss National Bank has brokered four deals to date between the country’s large banks and the smaller, cash-rich regional and local banks, to redress the balance. Reuters reported 22 July that transactions worth CHF1.27 billion of “Covered bonds, known as Pfandbriefe” have recently taken place: these “are bonds backed with high-quality Swiss mortgages” and the bonds, purchased by the smaller banks, effectively provide the big banks with loans.

Figures for the number of inidividuals’ accounts held by Swiss banks that have been closed, either by the bank or the account holder, are impossible to obtain, says spokesperson James Nason of the Swiss Bankers Association. “Although individual banks may keep statistical data about client activity and movements for their own purposes they are not obliged to forward them to any authority or centralized database . . .    While there are figures [Ed.note: kept by the Swiss National Bank] for the value of securities held in custody accounts, these figures are not broken down according to the nationality of clients.”

Others, not just US citizens, affected by Swiss banks’ reluctance

US citizens are not the only ones caught up in the controversy involving Swiss banks and the US government. Swissinfo 20 July interviewed a legal expert with the Swiss Abroad organization, who noted that some Swiss citizens with inherited money in Switzerland or mortgages have found their accounts closed by their Swiss banks back home. International bank clients, have also been caught in the crossfire (Ed. note: details changed to protect their privacy):

• A Colombian couple employed by the United Nations in Geneva, whose daughter is studying in a US university, can no longer use her Maestro card with a Swiss bank to pay her monthly bills and travel abroad.

• A Danish divorcé, a long-time Swiss resident whose children still live in Switzerland, and who now lives in New York City and needs to pay child support and other on-going expenses in Switzerland, finds that his bank no longer wants him as a customer.

• The Czech-born manager of a multinational company, a permanent US resident, who has been assigned to work in Switzerland for two or three years, finds no bank willing to work with her in either country.

The taxman knocks twice

The IRS, pursuing US citizens and residents for their undeclared assets, is at the root of the banking problems. Several US citizens in Switzerland, most of whom are not wealthy, and who for obvious reasons don’t want their names used, have told GenevaLunch that they either lie to their Swiss banks and don’t admit to being a US citizen (in many cases they are dual nationals) and/or they simply don’t file US taxes and haven’t done so for several years. They hope, by lying low, to be able to maintain a Swiss bank account to pay bills, including mortgages, and to avoid the hassle and what they consider the unfairness of double taxation. Many of them have spouses from other countries who object to the family’s income being scrutizined by American authorities: they file joint returns in Switzerland. Others complain that the complexity and cost of filing US taxes when outside the country is too heavy a burden: 64 percent of US citizens abroad turn to professionals to complete their tax forms, according to ACA, and the cost is generally far higher than in the US, where this is a thriving and competitive business.

US legal and tax experts regularly caution US citizens to file taxes when abroad, pointing out that there is no statute of limitations on the legal obligation to do so. It is a crime in the US to give up your citizenship to avoid paying taxes.

The US taxes its citizens on income worldwide, with a complex set of exclusions in place since 2005, replacing an earlier IRS foreign earned income exclusion of $80,000.

The rules apply even when Americans pay taxes to their host country, for example federal, cantonal and communal taxes in Switzerland. . Americans are expected to declare money over $10,000 in any “offshore”, meaning outside the US, account.

“The United States is almost unique in that it requires its citizens to pay US taxes even if they have not lived in America for many years,” note tax consultants Hartmann & Partners.

Resources for US wannabe taxpayers:

• American Citizens Abroad tax information page
• ACA letter to Secretary Geithner, 17 July 2009 and ACA letter to US President Obama, 17 July 2009
• IRS page for international taxpayers
• Swiss Bankers Association, web site section on opening an account with a Swiss bank

Related:

• HSBC fined record £3.2 billion for UK data lapses, Reuters, 22 July 2009
• IMF report on Switzerland, March 2009 (pdf)
• “Undeclared money global problem”, Philip Marcovici, Baker & McKenzie, in GenevaLunch, 8 July 2008

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