By Nick Giambruno
Financial privacy is essentially dead.
I think it’s only prudent to assume that sooner or later all the details of your financial life will come to rest in a government computer—if they haven’t done so already—and to plan accordingly.
We live in a world where pretty much every penny you earn, save, and spend is stored in a permanent record somewhere and can be retrieved for scrutiny one day if needed.
It’s not a comfortable or happy thing. But no matter how unpleasant it is, I believe it’s a reality we have to face.
Knowing that you are financially naked and exposed to an insolvent government hungry for revenue might make you feel like you just ate rat poison for lunch.
That said, don’t be tempted to try to illegally hide your income and skirt reporting requirements. It’s a fool’s errand. The draconian penalties make a cost/benefit analysis easy… don’t even think about it.
An Inescapable Global Dragnet
FATCA is at the vanguard of the global trend for the automatic reciprocal exchange of financial information between governments.
In case you don’t know, FATCA, the Foreign Account Tax Compliance Act, is the wildly unpopular law that forces every financial institution in the world to report information about their American clients to the US government, which imposes huge costs on those financial institutions. In effect, FATCA causes every foreign bank to become unpaid agents of the IRS.
The US is in a position to enforce an extra-territorial law only because it controls the world’s reserve currency and has threatened to effectively cut off access to the US financial system for those who do not comply.
This is why a country like Mexico could never impose its own version of FATCA on the world. Not many would care about losing access to the peso-based Mexican financial system.
This success has unfortunately inspired other bankrupt countries to band together and push for a sort of FATCA on steroids. This is where the OECD’s plans for a “global standard” of automatic information exchange—informally known as GATCA—comes in.
Rather than having each country mimic FATCA and tediously create a web of bilateral information-exchanging agreements with every other country, the leaders of this supra-national institution are pushing to make the exchange of such information automatic among all countries.
I’d say it’s safe to assume the OECD will be successful in blanketing most of the world with its new “global standard”—at least I wouldn’t want to bet against it.
It’s very likely in the near future that no citizen from any country will be able to “hide” financial assets anywhere. Every financial institution in the world will automatically send financial information on foreign account holders to the respective government.
FATCA and GATCA mean there’s no escape. Unless you plan to bank in Cuba, Iran, or North Korea, count on your home government finding out about your offshore accounts automatically.
That doesn’t mean obtaining an offshore bank account is a fruitless endeavor.
Offshore banks are often much safer and better capitalized than most banks in the US. Additionally, a foreign bank account cannot be seized or frozen at the drop of a hat by your home government.
Offshore banks usually allow you to diversify out of the US dollar as well and gain access to markets in countries you otherwise might not be able to. So despite not having any financial privacy, offshore banking still gives you many important benefits.
When All Else Fails…
Even if you manage to somehow escape the global FATCA/GATCA dragnet, your private financial information is still very vulnerable.
If it comes down to it, governments are willing and capable of using alternative means to get the information they desire.
They can engage in economic espionage, bribe bank employees, and pay freelance hackers to steal ostensibly secret financial information.
Take for example the case of Sina Lapour, an assistant to a private banker at Credit Suisse. In 2007, Lapour stole the private information of as many as 2,500 clients and sold it to a middleman, who then sold it to the German tax authorities who presumably shared it with other governments. Or in 2008, when a thief stole data from LGT Group in Liechtenstein and then sold it to tax authorities in various countries.
Then there’s Edward Snowden. Before he was an NSA contractor, Snowden worked for the CIA, for which he was posted in Switzerland. Snowden claims that his objective there was to get Swiss bankers in compromising positions so that secret financial information could be gleaned. Specifically, he encouraged a Swiss banker to get drunk and then drive, hoping that he would be arrested. Then, the CIA would offer to help get the banker out of jail and legal trouble… for a price: divulging secret financial information.
And then there’s the hacking and leaks of a number of offshore centers in a sort of WikiLeaks-style operation where confidential information on over 122,000 trusts, companies, and other structures were revealed. The 260 gigabytes of formerly private information was used to publicly identify more than 130,000 people in 170 countries.
A Bright Spot
When you consider the combined effects of FATCA, GATCA, and governments engaging in bribery, blackmail, and hacking, it would be foolish to assume that the privacy of your financial assets is assured.
This is why when I see people argue about which country or which convoluted offshore structure is best for keeping secrets from Uncle Sam, it reminds me of two bald men fighting over a comb.
It should now be clear that privacy for financial assets like bank and brokerage accounts is essentially dead. However, non-financial assets like foreign real estate are a completely different story.
Owning foreign real estate is one of the very few ways Americans can legally keep some of their wealth abroad while still retaining their privacy.
- Compared to fiat currencies, foreign real estate can be an excellent long-term store of value.
- It’s a hard asset outside of the immediate reach of your home government.
- It’s something that cannot be easily confiscated, nationalized, frozen, or devalued at the drop of a hat or with a couple of taps on the keyboard.
But foreign real estate also has a rare and notable feature that foreign financial assets—like offshore bank and brokerage accounts—do not have.
If the foreign real estate is held directly in your name (i.e., not in a trust, LLC, real estate fund, partnership, etc.) it is not reportable to the IRS. Of course, any rental or other income generated is reportable.
What this means is that it’s possible to use foreign real estate—as long as it doesn’t generate any income— to diversify some of your savings abroad and retain your privacy.
In that sense, foreign real estate has become the new Swiss bank account.
One internationalization expert whom we’d highly recommend is none other than Doug Casey, the original International Man. Doug’s been to over 175 countries and invested in real estate in a number them. He wrote a thick and detailed chapter on foreign real estate, including his favorite markets, for our Going Global publication, which is a must-read for those interested in this extremely important topic.
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