Why Confidentiality is a Bad Strategyon Thursday, 18 October 2012. Posted in Financial Advice, General, Investments
Years ago in a previous life, I was working in an internet security company. Being naïve and young I asked our chief programmer to help a key client build a system that was completely impossible to hack and break into. He just laughed “nothing is un-hackable. Nothing”. If a person can legitimately log in, then that can somehow use a similar way for ill-gotten gain. The same applies to promises of “complete confidentiality” that are bandied about in an industry in the banking and investment industry. Three different but related trends are at work to turn what used to be roughly true, into something of a lie.
Millions to clean your Whistle
The first is whistleblower awards with America’s IRS leading the way. Exhibit A is Bradley Birkenfeld. Haven’t heard of him? You should. He is the Amereican fellow who tipped off the IRS on his employer, UBS, and collected $104 million. Yup, MILLION. The IRS is using Brad as a poster boy to convince more tipsters of hot money. Our tip – dozens of potential Brads have already formed an orderly queue at the IRS offices. There will be more to come.
European Governments Stealing Buying Data
The second is the European predilection for buying client data from former employees of Swiss banks. To name just one recent example Julius Baer’s client list was bought by the German Government for 2.5 million Euros. Not a bad price at all. Now sure, it is illegal for Swiss bankers to steal and sell data under their long renowned banking privacy laws.
The Leaky Swiss Vault
But there are three holes in protection. Firstly the purchase price like that is a pretty big incentive to help set up a family, even if you have to go to jail for 5 years. Secondly as long as you don’t go back to Switzerland then there is a good chance you’ll be off free as a bird. And lastly, sometimes it is hard to figure out who was the one responsible for stealing and selling the data.
A lot of uninformed punditry has speculated about millions being moved to Hong Kong or Singapore. No doubt it will move, but it will be no more safe than Switzerland because people are involved. Former Singapore or Hong Kong bank employees will be lining up outside the IRS or the German tax office to collect their winnings soon enough.
The Computers are watching
It’s common knowledge that movements above $10,000 are tracked by the authorities of most developed countries. But don’t expect that limit to protect you in the future. We have friends who used to work at the Australian Tax Office who tell us about the development of data mining software. Data mining has progressed apace recently to the point that it can now tell you when your own kids are pregnant before they tell you themselves, as Target recently did.
All transactions great and small
Data mining is being uses in this case to sift through ALL movements of money, regardless of size, into and out of Australia including ATM withdrawals and look for suspicious transactions from tax havens (say Guernsey) or look for suspicious patterns (say $1,000 per week from Hong Kong from a certain account in a given area). The days of hiding in the snowdrift of data are soon coming to an end also.
If your investment strategy relies on “confidentiality” to avoid tax, then you have the wrong strategy. It’s going to stop working pretty soon and the penalties are pretty nasty and getting worse in most places. For most people in developed countries expatriate life can be a pretty low tax investment environment (except Americans) without fancy strategies. But when it is time to go home and report, you should. With mounting debts and offshore tax free accounts a politically easy target it is simply a matter of time before the tax hounds sniff out all the fox-holes, regardless of the vaults and banking secrecy laws that stand in their way. As my former programmer colleague once said, “if humans are involved, there is always a way in”.