Swiss Banks Tell American Expats to Empty Their Accounts

A few months ago, Geneva journalist Christophe Ungar got quite a shock: without any prior notice, his local bank closed out his mutual funds account, resulting in considerable losses due to the early withdrawal. This was not an inadvertent mistake, but, rather, an intentional move to oust Ungar, a US citizen, from the financial institution where he had banked for years. “When the bank realized I was American, they started treating me like I had the plague,” he says.

This scenario is all too familiar to another American, Geneva financial adviser Anne Hornung-Soukup. Her accounts – including a pension investment fund – were suddenly closed in recent months by her two banks, each explaining in a letter that its services are no longer available to US citizens.

“This really ticks me off,” says Hornung-Soukup, who adds that the forced early withdrawal of her retirement fund meant she had to pay taxes on it earlier than she had anticipated.

Neither Hornung-Soukup nor Ungar’s case is unique or even rare. According to the Geneva-based expatriate advocacy group, American Citizens Abroad (ACA), which follows this issue closely, increasing numbers of US nationals in Switzerland are being denied banking services. However, according to ACA tax director Jackie Bugnon, the banks may not be totally to blame since they are “held hostage to US policies,” which require opening of American-held accounts to the scrutiny of the Internal Revenue Service (IRS).

The backlash against US clients has been building up since 2008, with the news that Switzerland’s largest financial institution, UBS, helped wealthy Americans hide billions of dollars in undisclosed offshore accounts to evade taxes. The bank had to pay a $780 million fine and release the names of 250 suspected American tax dodgers. In recent years, however, Swiss banks have stepped up their efforts to curb the flow of undeclared money from the U.S. and elsewhere.

The United States is the only developed country (the other one is Eritrea) that taxes its citizens who live overseas, even if their income is generated in a foreign country and they live abroad permanently. Due to the financial burden of double taxation – by their country of residence and the U.S.–growing numbers of US citizens take the drastic step of relinquishing their American nationality. This year, nearly 2,400 expatriates have given up their U.S. citizenship or turned in their green cards. While this number may seem miniscule, it represents a 33% increase over 2011; experts say the real numbers are much higher because thousands of applications are still waiting to be processed.

Because of its tax policy, the U.S government has created a myriad of requirements for other nations to follow in order to ensure that no foreign account belonging to an American goes untaxed by Uncle Sam. The latest such regulation is the Foreign Account Tax Compliance Act (FATCA), which was passed by Congress in 2010 and goes into effect on January 1, 2014. It requires foreign banks to report to IRS all the assets exceeding $50,000 that belong to US citizens – whether living in America or abroad. Additionally, in August Switzerland signed a separate treaty with the United States, ending a longstanding tax dispute between the two countries, that also gave the IRS unprecedented access to Swiss accounts held by Americans and US green card holders.

Banks are reluctantly abiding by the new rules because of hefty fines – the IRS can withhold 30% of dividends and interest payments due to the banks from U.S accounts. Failure to comply with these regulations can seriously impact the Swiss banks’ ability to do business in America. “This is very risky for a financial institution because an indictment could bar the bank from the US capital market,” says Sindy Schmiegel, spokesperson for the Swiss Banking Association, an umbrella group for Switzerland’s financial institutions.

But the compliance with the US rules doesn’t come cheap – banks have to set up special logistics to deal with American clients and the Swiss government estimates the cost of FATCA reporting in a double-digit million figure for bigger financial institutions. Therefore, banks prefer the “better safe than sorry” approach that excludes American clients and the meddlesome oversight of the United States government. But for tens of thousands of US nationals living in Switzerland, no access to financial services means inability to set up retirement accounts, obtain loans, mortgages, or even rent an apartment.

“My U.S. passport has been such a liability,” says a Zurich resident who identifies herself only as “Jeannie.” Not only was she not allowed to open a savings account at any of the four banks she visited last month, but even her Swiss husband was denied a mortgage because Jeannie’s name was on a joint account. “We were told that they don’t deal with Americans because of all the hassle,” she says. “This really makes me mad – how am I supposed to have a normal life if I don’t have access to a bank?”

Paradoxically, regulations that were intended to catch and punish tax cheats are making life difficult for ordinary, middle-class people who have always played by the rules.  Many, like Hornung-Soukup, have lived overseas for decades, and others, like Ungar, have only tenuous ties to the U.S. — his father is American but he himself was born in Switzerland, never lived in the U.S. at all, and has no plans to move there.

The denial of bank services is most acute in Switzerland because the August agreement it signed with the US has accelerated the impact of FATCA. But once the law kicks in worldwide next month, an estimated 7 million Americans who live in other countries will likely face similar difficulties. In fact, some have already experienced problems; at an ACA town hall meeting held last week in London, about a third of the participants said they either had an account closed already or the threat of closing was held over their heads.

So far, no relief is in sight, but in October ACA’s executive director Marylouise Serrato wrote a letter to Robert Stack, IRS’ Deputy Assistant Secretary, noting that while the organization supports the government’s efforts to combat tax evasion, banking services would be more accessible to US nationals abroad if financial accounts located – and taxed – in the country of residence would not be subject to FATCA reporting.

The letter remains unanswered, which means that, for now at least, financial services are one commodity Americans living abroad can no longer bank on.