Secret Foreign Bank Accounts By Vernon K. Jacobs, CPA  & J. Richard Duke, J.D., LLM

There still seems to be a pervasive belief that secret foreign bank accounts can provide both asset protection and tax savings. Perhaps this stems from movies and novels that describe the much vaunted Swiss numbered account or secret accounts in the Cayman Islands and other tax havens. Perhaps some of this stems from the hundreds (or even thousands) of web sites that extol the asset protection and alleged tax savings from secret foreign accounts. And many of the popular books (sold in bookstores) about "going offshore" devote a lot of space to the subject of banking secrecy. A lawyer and a business man who both have extensive experience in the realm of international finance have argued that a secret foreign bank account could provide protection from the claims of creditors. (They were well aware that secret foreign accounts were not a legal way to save taxes.) We decided to see if anyone else that we know agrees with this theory so we posed the question to a group of international lawyers and consultants. We basically presented the theory to this group of lawyers and then presented our own understanding of the issues. We asked the lawyers to comment if they disagree with our view on the subject. Without exception, they all agreed that secret foreign bank accounts do NOT provide protection from the claims of a judgment creditor. At issue is the question of whether a creditor must get a court order to get an attachment (lien) against a bank account in a foreign country. If that were the case, it would present a costly and time-consuming obstacle to a U.S. creditor who was trying to collect on a judgment. The advocates of this position argue that the U.S. courts don't have jurisdiction in foreign countries. They argue that in order to enforce his judgment, a U.S. creditor …. (1)    would have to hire a local lawyer in a foreign country, (2)    would have to pay for the court costs, (3)    would not be able to get a lawyer to represent them on a contingent fee basis and (4)    would even have to pay the fees of the opposing counsel if they lost the case. However, what they have overlooked is that while a court may not have jurisdiction over a foreign (account), the court does have jurisdiction over it’s own citizen or resident. If you have a foreign bank account, you probably expect the foreign bank to honor your checks or bank drafts payable to third parties. After all that's what a bank does. They accept money on deposit and agree to transfer stipulated amounts of that account balance to third parties based on a signed bank draft or check. If you want to invest some of the funds in your foreign account, you would be upset if the bank would refuse to honor a check you wrote to purchase an investment. If you wanted to buy a car (anywhere in the world), you would expect the bank to honor your check or draft to the car dealer as long as you have sufficient funds in the account. There is no reason why a foreign bank would refuse to honor your check payable to anyone, so long as you have enough funds to cover the check. So let's suppose you are sued by a person who claims to have been injured on your property and is represented by one of those lawyers who work for a contingent fee. Your lawyer tells you they don't have a chance of winning the case, but it turns out that the plaintiff is an effective liar and the jury is sympathetic to the plaintiff. They get a preposterously large award against you. But then, they have to collect on that judgment. If you have funds in any bank accounts, you will be required to transfer those funds to the creditor by check or draft. If necessary, they can get a lien against your domestic bank accounts, savings accounts, investments and a lot of other assets that are not protected by domestic law or by an entity such as a foreign trust or a foreign limited liability company. Let's suppose that you have a substantial amount of money in a Swiss or Austrian bank account. Can your judgment creditor also get an attachment on that account? The court might grant them a lien on all your assets, but the foreign bank will not honor that lien. Would the creditor have to sue you again in the foreign court in order to get to those assets? No. The domestic judge would simply order you to write a check or a draft on your foreign account and make it payable to your judgment creditor. What if you refused to do that? The judge would order the marshal to take you into custody and keep you in jail until you change your mind. The only way you could avoid going to jail is to be able to convince the judge that you are legally unable to comply with his order. That might be possible if your foreign account was owned by the trustee of a foreign trust that you had previously established when there were no claims against you. It might also be possible if your foreign account were owned by a foreign limited liability company in which you had no management powers. It might even be possible if the foreign account were owned by a foreign corporation in which you were a minority owner and were not an officer of the corporation. But if you have the authority and the legal right to draw a check or draft against a foreign bank account, there is no legal reason why you can't make a check or draft payable to your judgment creditor. As long as you have the legal power to do that, a domestic judge can simply order you to transfer the money in your foreign account to your creditor -- or spend some time in jail. At this point, we suspect some readers are thinking, "What if no one knows about the foreign bank account?" In order to ascertain what assets you have, as well as the existence of any debts secured by those assets, a plaintiff's lawyer can require you to provide extensive financial information. They will ask for two or three years of your tax returns, for your credit records, bank history, details of all your investments and your sources of income. The plaintiff's lawyer can also interrogate you under oath (a deposition) to ask about whether you have any assets that are not disclosed in the financial information that you provide. If you are a U.S. resident or citizen and have any authority over a foreign financial account (or accounts) with a combined balance in excess of $10,000 at any time during the year, you are required to respond to a question on your tax Form 1040, Schedule B, part III -- regarding foreign accounts. If you answer falsely, you have committed perjury on your tax return. In addition, if you have not filed a Form TD F 90-22.1 with the Treasury Department to disclose the location of your foreign accounts, you could be subject to some preposterously huge penalties. And, if you fail to report the income from the foreign account (regardless of whether it was paid to you), you have committed tax evasion. The "bottom line" is that you can't legally avoid the disclosure of a foreign account to a judgment creditor. In order to keep it secret, you must commit perjury if you are deposed and you must commit perjury on your tax return to avoid having the account be discovered. So, while it might be true that a foreign bank would refuse to honor a lien by your domestic judgment creditor or an order from a foreign court, it doesn't matter. The domestic court can simply order you to write a check to your judgment creditor and the foreign bank will not refuse to honor the check so long as you have sufficient funds in the account. Vernon Jacobs & Richard Duke Reprinted in part from The Offshore Tax Seminar Manual Copyright, 2002, All rights reserved. Co-authors of The Offshore Tax Seminar Manual http://www.offshorepress.com/offshoretaxmanual.htm

About the authors: Vernon Jacobs is a CPA who provides tax accounting and consulting services for clients with international interests. He edits and publishes the online International Wealth Protection Reports ..  J. Richard Duke , JD, LLM is an attorney who specializes in international tax law and is an Adjunct J. Richard Duke is a Professor of international tax law. and a practicing attorney in the international specialty.  He is a Consulting Editor for the online International Wealth Protection Reports Sponsored by Offshore Press, Inc .., Copyright, 2004, All rights reserved. Offshore Press, Inc., Box 8194, Prairie Village, KS 66208. Phone (913) 362-9667. Email to Offshore Press  Vernon K. Jacobs, Webauthor.