Banking in Europe

Many people ask me whether banking options still exist for Americans to open a bank account in Europe. The answer is “yes”…but. The truth is that global banking regulations led by the US and EU have made it more difficult to bank on the other side of the pond for citizens of both. I’ll leave Europeans trying to open a bank account in the US for another day, but today we’ll look at the advantages and disadvantages for American banking in Europe.

Numerous regulations, such as FATCA, The Patriot Act, Sarbanes Oxley, have forced up the compliance costs that banks have to bear when doing business, especially business with foreigners. So it’s not a question of whether it is legal or not for foreigners to bank in other countries (it is completely legal), but rather whether a European bank “WANTS” to have clients from the US and if so under what circumstances does it make economic sense for the bank to serve Americans. So before we look at the opportunities for Americans to bank in a Europe, let’s have a brief historical overview of the major legislative and regulatory actions that effect Americans investing and banking abroad.

First, the Bank Secrecy Act of 1970 was enacted by Congress not to protect the individual’s private information but rather to force the disclosure of such foreign information to the US Treasury. This initial disclosure law was the precursor of the modern day FBAR (Foreign Bank Account Report), that any US person with more than $10,000 in a Foreign Financial Institution (one or more accounts collectively) must fill out annually as part of their overall tax return. Over the years, the definition of a “foreign financial account” has been expanded far beyond the initial definition of a bank account in the initial Act to include brokerage accounts, mutual funds, hedge funds and even life insurance.

Next, the Tax Reform Act of 1986 introduced the distinction between “active” and “passive” income. The term PFIC or Passive Foreign Investment Company was introduced and income from foreign passive sources, including bank account interest was subject to these provisions which could not be deferred or offset, but rather passed through to the investor and was subject to tax in the current year. Tax on PFICs is due for the current tax year regardless of whether a distribution was made to the individual or whether the money was retained at the corporate level.

In 2001, the Patriot Act brought about regulatory changes to the global banking system. These changes focused on “know your customer” or “KYC” provisions, as well as “anti-money laundering” or “AML” rules as well as provisions to combat the financial use of the banking system by terrorist organizations. The Patriot Act essentially ended the practice of what was called “numbered” or “bearer” accounts. This was a common banking practice especially in countries such as Switzerland and Austria, but really all over Europe, where you could open a savings account simply by creating a password on the numbered bank book you were given (hence the term “numbered” account).

In 2010, the HIRE Act was signed into law. On its surface it was a job stimulus bill designed to lift the US economy out of recession. Hidden within the “offset” provisions of the Act, however, was the now infamous FATCA Act, which stands for the Foreign Account Tax Compliance Act. The Act created new reporting requirements not only for US persons, but also for ANY foreign financial institution that served US persons. Foreign Financial Institutions are charged with reporting on the financial activity of their US customers or face a stiff 30 percent withholding tax on the gross amount of any funds sent to these “non-compliant financial institutions” from any US bank or compliant foreign financial institution. To date, roughly 300,000 foreign financial institutions have signed up with the US IRS to become compliant and have received their Global Intermediary Identification Number or “GIIN” number for short. It should be noted that the fastest, easiest and cheapest method for a foreign bank to obtain a GIIN number and avoid US withholding tax is to certify that they do NOT do business with US persons. This is the reason so many US Citizens have been unceremoniously “fired” by their European Banks. In many cases, the cost of these banks to comply with FATCA simply outweighed whatever profit they could have earned from having those US accounts.

It should also be noted that the US 6th Circuit Court of Appeals rejected a constitutional challenge to FATCA in 2017, and the matter is presently being appealed to the United States Supreme Court. But FATCA is clearly the law of the land and nothing in the most recent Trump Tax bill undermined, eliminated or even restricted the extraterritorial effects of FATCA. Quite the contrary, the remaining tax deferral rules that applied to US controlled overseas businesses with active income were now subject to current taxation rules similarly to the PFIC rules enacted back in 1986. So while I do not see the regulatory or compliance burdens for banking abroad increasing under the Trump Administration, I also do not see any major changes towards liberalization or turning back the hands of time with regard to any aspect of the regulatory regime as described above.

The US, of course was not the only country enacting new laws and regulations concerning banking. Europe for its side passed a series of laws referred to as “UCITS” which are essentially comprehensive supervisory framework laws regulating banks, brokers and all investment houses. These laws regulate all aspects of banking from the bank opening process, the disclosure rules, AML and KYC rules, deposit guarantees (similar to FDIC) and even the “right” to all EU Residents and Nationals to open a European bank account. So it is within these overlapping and at times conflicting regulatory systems that European and American banks must operate when deciding the question of whether they want to offer an account to a citizen or resident from the other side of the Atlantic.

In examining that question, the issue needs to be broken down into two subsets of Americans; those who have European residency and those who do not. For the first group, the issue is much more, straight forward, and European law actually mandates that banks open accounts for any EU legal resident, regardless of their nationality. Because the European directives apply across country lines within the EU, you do not have to live in the same European country where you bank. So, for example, you could have Portuguese residency and open a bank account in Germany, France or Italy. Of course the individual banks will still have their own specific requirements, account sizes, fee structures that will apply to you when opening an account, but they will not be able legally to exclude you from opening an account because you are non-European.

A variety of advocacy groups have sprung up specifically to assist Americans who are European residents. These organizations include the “Association of Americans Overseas” based in Paris, France and the “American Citizens Abroad”, which is a registered 501(c)(3), based outside Washington DC. Both organizations maintain current information on specific European banks open to US citizens who are resident in Europe.

For those Americans who are not European Residents, the picture becomes a bit more, cloudy. Remember, there are not laws outlawing the practice, but pragmatically many banks make the decision not to serve non-resident Americans simply because of the regulatory cost as well as the disproportionality of fines levied by the US on banks perceived to be violating any aspects of the various banking laws cited above. UBS for example was fined a record $780 million dollars to settle a DOJ case involving improper disclosure of US accounts being held in Switzerland. That record was shattered shortly thereafter by a fine levied against Credit Swiss in the amount of $2.6 Billion. It’s in the context of such potential fines that European banks must decide whether it makes sense to offer any services to US non-residents.

For many European banks, the answer is a simple “no”. The perceived risks outweigh any income that could be earned. And while US offshore money helped rebuild Europe and especially European banks after World War II, the reality is that American money is just not as important to these banks as it once was. It’s simply easier to focus on offshore money from other parts of the world that have less regulatory interference.

Then there are banks which will open an account for a US non-resident, but only “IF” there is some type of connection between the individual and the country where the account is trying to be open. Examples include things like having a major customer in the area that regularly pays invoices into the account; having a student studying in the area, a close family member such as a parent who receives regular remittances, or some other type of “connection”. In this case, the account will be opened as long as the extensive paperwork is completed and maintained. One client of mine is asked to provide new and complete account paperwork every six months.

Other banks will only offer accounts to US persons who have professional intermediary introductions. The basic “reference” letter stating that Mr. Jones is a good guy is no longer enough. Now the professional intermediary, such as an accountant or lawyer is being asked to state that they are aware of the clients’ source of funds and that the client is fully compliant with their US income tax obligations. This can put the professional into a difficult position because they might not have independent knowledge of those facts. At the very least, the professional will need to do substantially more due diligence of their own before providing such a letter. That time and those costs will either need to be absorbed by the professional when maintaining important client relationships or passed along to the client, in turn driving up the costs of opening a bank account. In some cases, lawyers and agents who do overseas corporate formations report that they spend considerably more time helping their client establish a European bank account than they do in establishing a European company.

Most banks will only consider a bank account for a non-resident who comes to the bank in person to open the account. There are a variety of reasons to do that, one of which is where and how the US person came to know about the bank, since foreign banks may not advertise their services into the US or “target” US customers. It’s important that you interface with the bank and make sure they are willing to accept your account, pending the final visit and account opening signatures. Otherwise, you may be surprised to find out that your visit was a waste of time and that you’ll need to make another visit after the paperwork is complete. In no cases, will you be able to simply walk into the bank and the walk out in ten minutes with your new bank account in hand. It is a process and you’ll need to be prepared to work through the process wherever you decide to open an account.

Finally, is the issue of account size. Many European banks have extremely high account opening minimums, which have only gotten higher in light of the regulatory compliance regimes mentioned above. It only makes sense that if the bank determines that its internal costs to service its US accounts are X, then they must earn some amount greater than X to stay in business. The banks achieve their X through fees, or account size or both. And while some European private banks have a minimum account size of 5 million euros to open an account, the median amount for such an account is 1 million euros with 500,000 euros at the bottom of the spectrum. Other banks that offer transaction type accounts without the private banking advisory function may go down to as low as $50,000 to open an account for a US non-resident. Additionally, new virtual non-banking financial institutions are pushing into the space with regard to payment processing at even lower thresholds and costs. Even these “transaction only” accounts will have monthly costs and transaction fees that exceed what you are used to paying in the States for your banking.

Traditional private banks also charge an annual fee in the range of 1 percent to service the account. In cases where an independent investment adviser does the investing in the account, then the bank and the investment adviser generally split that fee. If the bank and adviser collectively can provide solid non-dollar denomin financial performance, then the fee is certainly justified. If the bank makes investments outside of the dollar universe and outside the US, then the account serves an important diversification, hedging strategy and asset protection strategy. If the bank turns around and puts your money into a US or even global mutual fund that you could buy through your US stock brokerage account, then the cost of that account and regulatory compliance obligations you’ll incur by having that account may not be justified.

As one of my long time colleagues likes to say “foreign bank accounts are like a fine French cheese. To some they excite the pallet and enhance the imagination of creating things you just can’t do with cheddar. To others, it’s just not worth the effort, the price and as for the taste…, they actually prefer cheddar.”

In conclusion, if you decide to open a European bank account, make sure it serves a valid purpose. It’s not a prize to be flouted at your local golf club, but rather a potentially important and powerful economic tool. It can open the world of non US and non US dollar investment. It’s a hedge against potential future dollar devaluation. It can be a tool for stronger asset protection and estate planning when combined with corporate and legal strategies such as international trusts and foundations. If used in that manner, then the extra costs and regulatory burden are indeed appropriate and manageable. If you plan to go down that path, align yourself with knowledgeable professionals who can help you use the European bank account as part of your overall investment, asset protection, and estate planning strategies. Like a special piece of a French cheese, it’s not for everyone, but it might be the exact right thing for you.