Wealth managers, lawyers and accountants are assessing how they can win business from US clients who need to declare undisclosed assets by a 23 September deadline.
It is predicted $30 billion in client assets could be moved around by US citizens, mainly in Switzerland, spooked by the US’s legal pursuit of UBS and its offshore clients.
The country’s Internal Revenue Service (IRS) has laid out a framework for citizens who have undisclosed assets to pay tax and take penalties without the need for prosecution. It includes a charge to clients of 20 percent of their assets at their highest value over the last six years.
When the effects of slumping markets and the penalties are taken into account, the measures would leave high net worth individuals (HNWIs) with a fraction of their former wealth, with declines as sharp as 70 percent from their peak. But the alternative is going to jail.
“It is quite penal,” said James Sellon, whose Maseco Financial wealth advisory business specialises in serving expatriate US clients.
“If you consider how much portfolios have declined in the last couple of years, in some cases they might be left with only 30 percent net, net.”
“Part of the prospective legislation states that private bankers or advisers – if they had knowledge of this money going to other jurisdictions or into insurance-based contracts – could be held liable for money laundering charges.
“The result is private bankers and clients are taking good quality legal and tax advice on the best way to disclose these assets.”
As well as the obvious opportunities the changes have presented for accounting and law companies, small wealth management businesses are springing up to fill the grey area between the US and Swiss regulatory systems.
These new companies claim they are well positioned to deal with the new layers of legal complexity being created by an increasing emphasis from the US on prosecuting wealth managers and their clients.
Maseco, run by former Citi private bankers James Sellon and Joshua Matthews, is understood to be looking at ways of offering Swiss banks the capability to outsource the legal liability linked to US clients, while maintaining custody and the client relationship themselves.
One way the business could do this would be to act as an external asset manager using an existing wealth manager’s platform.
The private bank would maintain custody of the assets and remain in charge of the relationship, while Maseco could look after the regulatory structure and oversight, through a business model that was compliant with Swiss and US authorities.
Maseco is already registered as a financial adviser with the Securities and Exchange Commission (SEC) in the US and the Financial Services Authority in the UK.
But private bankers in Switzerland seemed resigned to the fact they would lose their Swiss clients, and many, including UBS, Credit Suisse and Mirabaud have started to “fire” them.
PBI understands that private banks with more than 14 US clients would have to register with the SEC in the US under new regulations, which is seen as too expensive and onerous to be practical, particularly for the smaller Swiss players.
A source in Switzerland said there was little point in finding stop-gap solutions which simply tided US clients over for another six to 12 months.
“You can carry this up to a point, but at some stage it gets very serious,” Joseph Field, attorney at law at US law firm Withers Bergman, told PBI.
“They can get rid of their US clients because of pressure from the authorities this year, but what about next year, when it’s their European neighbours applying the same pressure? Do they get rid of their European clients too?”
He also dismissed as “nonsense” the idea that Swiss private banks would look at further ways of holding on to US clients.
“They have to confront the issue,” he said.
“If they [Swiss banks] get an all clear from the authorities then they are fine, but if they don’t then they’re still on the hook as far as I can see.
“My serious impression is you are adding an extra layer of risk and are you really solving anything?”
He added: “I think the atmosphere is such that the government will go ahead with its agenda and someone who is seeing this kind of thing as a panacea, or a shield to protect them against this… I think it is nonsense.”
Kaiser Ritter Partner Group, a Liechtenstein-based private banking and fiduciary business, is offering a similar service to US citizens who want to declare their assets, though not in partnership with a private bank.
It has an arrangement with the IRS, which includes a contact desk at the government agency to process voluntary disclosures of untaxed assets, and has applied for an investment adviser permit with the SEC.
“Every bank, every lawyer and every asset manager now has to get to grips with the issue very quickly if they want to avoid falling foul of the law themselves,” said Kaiser Ritter CEO Fritz Kaiser.
The 23 September deadline is seen by the industry as the last chance for clients to come forward voluntarily. Previously, an unofficial system was used for US citizens, but since the government discovered the extent of the offshore arrangements being used by private banks it has hardened its stance.
There remains uncertainty over how the run-up to the voluntary disclosure deadline will pan out. In particular, question marks remain over Switzerland’s concessions on bank secrecy, which its government had previously agreed to.
The Ticinese League, a regional conservative party from the Italian-speaking part of Switzerland, has launched a petition which could trigger a national referendum to prevent concessions on secrecy.
The party needs 100,000 signatories to force a vote, according to Swiss constitutional rules.
“I think some of it is predictable and some is not,” said Field.“There will be people prosecuted; I think they [the government] have a few lined up, and if they don’t come forward they will grab them.
“The really interesting thing is what will happen in the duel between UBS and the US and that will depend on how the Swiss voters decide if there is a referendum.
“If it goes ahead and they reject the changes, that will harden positions in a lot of areas.”