CHAPTER 10: BANKING AND INVESTMENT
Client services is one of the more traditional banking activities offered by private banks. These services usually involve financial planning and management for individuals and families and, when appropriate, the structuring of assets through the use of offshore trusts and holding companies. Keep in mind that some of these planning techniques don't work as well for US citizens as they do for residents of other jurisdictions because of US tax laws. In many cases, the planning and management mechanisms are aimed at legitimately minimizing taxation, but more broadly, they address the long-term need to achieve security, diversify assets, and transfer wealth to subsequent generations. Beyond establishing a planning and management structure, the offshore banker provides a complete range of private banking services which include custody, investment management, and banking facilities. Safety, security, and confidentiality are their benchmarks. The level of sophistication of offshore banking is growing to the point that it sometimes can be even better than onshore.
In reviewing the history of the private banking industry, there is a clear indication that the industry itself is not a phenomenon of the twentieth century. Even in the 1600s, banks were privately owned and provided confidential financial services to their clients. However, over the course of the twentieth century, the "snowball effect" of bank mergers has paved the way for the money center banks that now dominate the market. Because the banking industry continues to streamline its operations, it was inevitable that some "traditional" forms of customer service would be eliminated.
Unfortunately, because of this market expansion, the personal relationship bankers had with their clients has become largely disregarded by a sizable percentage of banks. In spite of this, the public's appetite for receiving personalized attention from the banking profession has remained undiminished. As a result, many smaller banks that were not subject to a merger, continue to provide the personalized service their customers want. This consistent level of service was noticed not only by the bank's customers, but by larger financial institutions as well. Recently, the banking profession has begun to see personalized customer service as an opportunity to develop a new market built on a proven "commodity," and a new offspring of banks built on the concept of providing exceptional customer service is emerging.
Professionals who have been involved in banking for quite some time realize that there is more to private banking than just expanding existing services. The foundation of the profession rests largely on the bank's ability to achieve long-term relationships with its customers. Contrary to what others may think, it is not only its investment strategy that determines a bank's success, but also the level and quality of service provided to the customer. Most surveys by trust companies worldwide indicate that personal service is generally as important as investment performance.
For many years, individuals with personal wealth have looked to the offshore banking industry to provide guidance in maintaining their financial assets. In many cases, private clients have been advised to utilize offshore trust accounts as well as holding companies. Although many clients have chosen this strategy to minimize their tax burdens, offshore markets also serve as a stable environment to maintain various personal securities. In these instances, offshore bankers not only provide financial consultation, but also offer clients the benefits of investment management, safe custody, and comprehensive banking facilities. Advice with regard to offshore insurance, foreign exchange management, and interest rate risk are just a sampling of the unique services that the offshore banker can provide to the private client. Although the private banking industry continues to be regarded as the pillar of the offshore market, the past dominance of Swiss banks in the market is starting to change. Commercial banks from other parts of the globe have already made a dent in the market. While the new competition approaches the market from a different perspective than the traditional banking institutions, these institutions nonetheless offer the investor expertise with regard to investment banking, information technology systems, and asset management.
The prominent offshore banks have been regarded as solid, secure, and worthy financial institutions. As the market continues to evolve, the prominence of offshore financial centers continues to be recognized. The changes in the offshore industry can be attributed to fewer restrictions and expanded opportunities. As a result, not only is the market more competitive, but there is a greater variation in the financial services that are offered. Not surprisingly, a substantial percentage of expatriates have chosen to have their investment strategies implemented by offshore banks.
While the financial assets of these individual clients are not comparable to corporate clients, they are nonetheless an important component of the offshore market. Recognizing this, major banks have targeted consumers by offering extensive services with regard to investment funds in major offshore financial centers around the world. Consequently, it is easy to get information through your host bank regarding its offshore services. Some expats want to transact their financial affairs out of their country of employment for reasons of security and confidentiality, concerns which they didn't have back home.
USING YOUR CREDIT CARD
Despite what the advertisements suggest, the credit cards that you're carrying now may or may not be accepted in international locations. Your credit cards may have been issued through a US financial institution that may or may not be accepted or known to the overseas vendor. And that in itself can become a sticking point. Consider the following scenario: After treating his European counterparts to dinner in an expensive French restaurant, an American executive found himself in a very embarrassing situation when the restaurant refused to accept his credit card as payment for the dinner bill. When the gentleman asked for an explanation, the restaurant informed him that they only accepted credit cards issued through banks in the host country. Since his credit card was issued through a small US bank, the gentleman was forced to borrow money from his dinner guests to pay the dinner check. (What a way to influence potential clients!)
Even if the US credit cards that you're carrying now are accepted abroad, common sense and caution need to be used. First, find out in advance if the establishment accepts your US credit card. For those that do, keep in mind that any purchases you make will be calculated with respect to the foreign exchange rate. If the US dollar happens to be weak against that particular currency, then you would be better off paying the bill with the country's own currency. If on the other hand, the US dollar is strong, then it is to your advantage to put the purchase on the credit card. However, be sure to keep an eye on your designated credit limit. There have been cases where Americans were actually incarcerated abroad because they inadvertently attempted to use US credit cards that had exceeded the credit limit. In the long run, the expat who plans to use credit cards on a regular basis would be wise to also possess a card that is issued from a financial institution in the respective country.
A private banker is under pressure to adhere to the banking codes of his jurisdiction. These codes have been put in place to prevent international money laundering. A banker must know his customers and the sources of their funds. As a result of these codes, you are likely to be required to furnish an extensive amount of confidential information about yourself and your finances. To help you understand this necessity a little better, a brief discussion of money laundering may be helpful.
Although useful in many ways, one needs to choose an offshore bank carefully and work with them cautiously. Offshore banking and financial services can be the target of money laundering schemes. Money laundering continues to be an issue of concern to the financial service industry and it is important to recognize the factors that perpetuate its existence. It has been estimated that each year between $100-$300 billion in dirty money infiltrates the world economy. Ironically, money laundering is the third largest business in the world, right behind foreign exchange and the petroleum industry. Because of this, all expatriates and their advisors should have a clear understanding of what's involved. You can reduce the risk of becoming inadvertently involved in a laundering transaction if you understand how it works.
In analytical terms, money laundering is divided into three phases. Obviously, the identity of a proprietor of illegally gotten or held money needs to be hidden in such a manner that no recognizable trail exists. Because there is often a large volume of actual currency, one of the primary objectives is to "downsize" the physical bulk of it. It is impractical for a narcotics dealer to "wash" 5 million dollars in ten or twenty dollar bills. Thus, in the first stage, the cash is often exchanged for traveler's checks, international money orders, or other negotiable forms. In the second phase, often referred to as "heavy soaping" or "layering," the funds are separated from their illegal sources. This is usually achieved by transferring the money to and from fictitious businesses which may only exist on paper but have been designed to eliminate any possibility of an audit. The third phase, sometimes referred to as the "repatriation and integration phase," involves returning the laundered funds to general circulation. Ironically, by the time the third stage has been realized, it is not unusual for the funds to qualify as taxable income.
There are many tax havens that are scrutinized for money laundering. However, most of these jurisdictions are becoming more selective in accepting funds. For example, some people think that Switzerland is a "haven" for quiet money, but even the Swiss have enacted more severe legislation. Although Switzerland has long held a reputation for stability and secrecy in banking, it has nonetheless pursued a proactive role in the war against money laundering. Despite the fact that Switzerland continues to promote cutting-edge financial services, tolerance of money laundering is not part of its agenda. In order to reinforce this security philosophy, Swiss-based financial institutions, accountants, lawyers, fiduciaries, and other applicable providers are requesting detailed comprehensive information about assets from both current and prospective clients. Clients are asked to provide information on the origin of all applicable assets, the disclosure of all beneficiaries of the assets, and statements about what the assets are to be used for. In many cases, an individual's employment history is also fair game for scrutiny.
ASSET PROTECTION PLANNING
A part of the evolution of estate planning is the asset protection trust. An expat may not be exposed to such planning techniques in the States, but it is widely used abroad. Asset protection is a planning process in which assets in one jurisdiction are transferred to another jurisdiction in a way that protects them from the claims of creditors and other claimants.
Because of the continuing demand for proper disclosure in the field of asset protection, the banker will want to determine whether anyone wishing asset protection will be an acceptable client. To protect the bank's reputation and security, the banker will utilize a comprehensive screening process for every prospective client. Failure to do so places the banker at risk of becoming involved with unscrupulous clients, which can ultimately subject the banker to both civil and criminal penalties. During the initial meeting, you will also have questions, and thus a mutual screening process will occur.
During the course of the initial meeting, the banker should discuss all applicable details of the designated retainer agreement with you. If you wish to proceed, the banker should require your signature on the agreement that states that the relationship will be terminated if you fail to pass the screening test. The agreement may also include a provision that you will compensate the banker for services rendered, regardless of whether you pass the screening process. In addition, you will undoubtedly be required to provide at least some of the following:
If you are establishing an offshore trust or offshore company, you may be asked to provide additional information, including:
The bank may also check with various credit bureaus and Dunn and Bradstreet.
As an expat, the only thing that separates your offshore investment needs from those back home is availability of tracking and advice. Some overseas locations have expertise and the ability to follow your investments which others do not. If you have US investments, make sure your advising firm has someone who understands US markets. With the Internet, you may be able to do much of this work yourself.
The probability is high that you will have more disposable income than your counterparts back home, and it is important that these excess funds be well managed. Assessing market conditions and your propensity to accept risk go a long way in choosing the best means to do this. It is not my purpose to provide extensive investment advice; there are volumes of reading material available from many sources, as well as advice from local experts and your banker. It's useful to be aware that whatever your approach to investing, there's no perfect strategy, so don't be overly concerned with finding the "perfect" one. Whatever you do, the earlier you start the better.
The following cart can also be usefull in determining how much you can afford to withdraw from your investments / savings yearly. Assume you have $100,000 and want to withdraw all the interest earned plus take a portion of the principal. Let's assume that you rate of return is 6% and you withdraw 8%. Following the chart, your "nest egg" will last 24 years.
How Long the "Nest Egg" Will Last (Years)