Private bank clients urged to avoid U.S. securities

GENEVA Thu Oct 6, 2011 9:13am EDT

GENEVA (Reuters) - Some Swiss bankers are advising clients to steer clear of U.S. securities ahead of a new law that would tax people with over $50,000 invested in stocks or bonds of U.S. companies even if they have never set foot in the United States.

FATCA, or the Foreign Account Tax Compliance Act, will require overseas banks to report U.S. clients to the Internal Revenue Service, but its loose definition of who is a U.S. citizen will create a huge administrative burden and could push non-residents to slash their U.S. exposure, some bankers say.

"Wegelin believe this is a regulatory monster. It is an important regulatory burden not only on Swiss banks but all over the world," said Ivan Adamovich, head of the Geneva branch of Switzerland's oldest bank, Wegelin.

"We decided to tell our clients not to invest in U.S. securities any more. If clients want exposure to U.S. securities we would buy an ETF which does not have a U.S. regulatory base," Adamovich said.

Due to become law in 2014, FATCA will ask overseas banks to report U.S. clients with more than $50,000 in assets to the U.S. Internal Revenue Services, or withhold 30 percent of the interest, dividend and investment payments due those clients and send the money to the IRS.

Bankers say the scheme will be extremely costly to implement, and some say that as the legislation stands, any bank with a client judged to be a U.S. citizen will be also obliged to supply documentation on all other clients.

"FATCA will cost 10 times to the banks than it will generate for the IRS. It is going to be extremely complicated," said Yves Mirabaud, managing partner at Mirabaud & Cie and Swiss Bankers Association board member.

"We (will) try to convince the IRS to make something which is a bit lighter, a bit more reasonable. We are not in favor of automatic exchange of information."

But despite concerns about FATCA, it may be unfeasible to advise clients who want a globally diversified portfolio to sell all their U.S. company stocks and bonds, said Vontobel head of private banking Peter Fanconi.

"We as an industry need to seriously start to talk about the consequences of FATCA. (But) we can't advise clients to pull out of one of the biggest global markets," Fanconi said.

Alexandre Zeller, head of the private banking business for Europe, the Middle East and Africa at HSBC (HSBA.L) said avoiding U.S. assets will not be an option for global institutions.

"We are a global bank... There is no way we are going to say we don't do business with the US so clearly it's about finding the best way to implement this new regulation," he said.

A U.S. inheritance law dating back at least 50 years which may now be more vigorously applied as the United States seeks to rake in tax revenues is also making bankers think twice about client holdings of U.S. securities.

"Holding US securities on a direct basis can give rise to inheritance tax independent of the holders of those securities," said Pierre de Weck, global head of private wealth management at Deutsche Bank.

"Therefore we definitely advise non-U.S. clients not to hold U.S. securities on a direct basis. There's no reason for a Swiss resident with nothing to do with the U.S. to incur 40 percent U.S. inheritance tax."

The broader definition of who is subject to U.S. taxation under FATCA could also bring more private banking clients under the U.S. tax net, regardless of their domicile.

"The client needs to be aware... being a Swiss citizen and having U.S. exposure, there could be an inheritance issue. We have not actively advised, we have informed our clients there is possibly an end risk there," said Fanconi.

(Reporting by Martin de Sa'Pinto; Editing by Mike Nesbit)

(This story is corrected in paragraph 8 to add dropped “not” to show Swiss Bankers' Association is not in favour of automatic exchange of information)

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