Praetorian Trust

April 7 (Bloomberg) — Swiss regulators are probing whether investors are buying life insurance to hide undeclared assets from tax authorities as the dispute over banking secrecy widens.

“We are checking selectively if there is a need for regulator action,” said Alain Bichsel, a spokesman for the Swiss Financial Market Supervisory Authority, known as Finma, in Bern. “We are warning of the risk.”

The concern is that so-called wrapper products, sold by insurers through units in Luxembourg, Liechtenstein and Singapore, are being used to conceal untaxed money. Finma’s review comes a year after Switzerland agreed to cooperate with international regulators to avoid being blacklisted by the Organization for Economic Cooperation and Development.

Swiss Life Holding AG doubled premiums from life policies that mask underlying bank deposits and client identities to about 5 billion Swiss francs ($4.7 billion) last year. Baloise Holding AG in Basel reported a similar increase in sales at its Liechtenstein life insurance unit.

An insurer that accepts premiums “without checking whether it comes from untaxed money makes itself guilty of assisting foreign tax evasion,” said Walter Frei, a partner at Zurich- based law firm Bill Isenegger Ackermann AG, referring to the insurance wrappers. “It is nothing but old wine in new bottles,” he said. Frei represents some UBS AG clients whose account data Switzerland agreed to turn over to the U.S. last August.

Wrapper Evaders

When a client buys a wrapper, the beneficial ownership of the assets is transferred to the insurer while the funds often remain on the balance sheet of private banks. Insurers invest the premiums through advisers and clients receive benefits tied to the performance of the underlying investment. Taxes are minimized or deferred because life insurance policies are classified as non-income producing assets.

Swiss Life Chief Executive Officer Bruno Pfister said the country’s biggest life insurer doesn’t want its wrapper business to be open to tax evaders.

“We take Finma’s warning seriously,” Pfister said in a March 30 interview from his Zurich headquarters. “We see it as positive to try and curb this misuse.”

Baloise says its Liechtenstein unit, which had life insurance premiums of 1.6 billion francs last year, asks foreign clients for a written declaration on the tax status of assets.

The examination of sales practices at Swiss insurers comes as France and Germany step up the search for tax cheats and tighten rules on life policies. Swiss insurers may open themselves to lawsuits when they provide wrappers to French and German citizens seeking to evade taxes, according to Finma.

Private banking clients are buying wrappers in the wake of the Swiss government’s agreement to hand over account data on UBS customers to the U.S. Internal Revenue Service to settle a dispute over suspected tax evasion. Zurich-based UBS is Switzerland’s largest bank by market value.

Swiss Life and Baloise say their cross-border businesses benefitted from the Italian tax amnesty, or scudo fiscale. The exemption, extended until April 30, allows Italians to apply for pardons in return for paying a fine of 5 percent to 7 percent of undeclared assets. Investors also may opt to take out life insurance and leave the assets at their private banks instead of repatriating them.

Demand for wrappers increased in the past year as clients search for low-tax investments, said Alfredo Gysi, chief executive officer of BSI Group, the Lugano, Switzerland-based private bank owned by Assicurazioni Generali SpA, Europe’s third-biggest insurer.

“The move toward tax compliant models has increased the attractiveness of those products,” Gysi said. “Lower taxes are a part of it.”

PRAETORIAN NOTE:

We have followed the Sale and Marketing of these wrappers for the last 4-5 years, and always wondered how Promoters, could sell this product as an end all product to make undeclared assets, declared! Surely pitching ‘heat’ would have something to do with it, since the fees were so high, making it very attractive to the promoters selling wrappers.

There is no Silver bullet in international tax planning, but there are some sound strategies that can be applied, if planned carefully.