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Lessons From a Small Island - Birth of the Bail-In

Cyprus Cartoon

July 5, 2014 | by Steve McCurdy

On March 30, 2013, customers at the two largest banks in Cyprus, the Bank of Cyprus and Laiki (Popular Bank), had their deposits frozen, purportedly to preclude a feared run on both banks. The following is a summary of the penalties, euphemistically known as “capital controls,” that the innocent depositors learned of after their accounts were frozen and the Banks had already closed:

• People with deposits exceeding €100,000 would receive shares of stock in a new, surviving bank with a face value equal to 37.5% of their deposit amounts, 

• People with deposits up to €100,000 would be allowed to withdraw only €300 per day from their accounts,
• No one would be allowed to pay bills by check without prior approval of the Central Bank, and the use of debit and credit cards would be prohibited,
• No one would be allowed to leave Cyprus with more than €1,000.

As we all know, Cyprus is an island. It is forty-seven miles from Cyprus to the nearest land in Turkey, which, unfortunately, is too far to swim. Leaving the island requires either an airplane or a boat, and since they could take only Lined Up to Get Their Money€1,000 with them and could not use checks or credit cards, Cypriots were prisoners in their own homes, simply because they made the mistake of trusting banks to safeguard their money.
Now, a little more than a year later, Laiki Bank has been absorbed into Bank of Cyprus, which has been “reorganized,” and some of the controls have been eased or lifted. Of course the deposits which were stolen to recapitalize the surviving bank (the now famous “Bail In”) are gone forever.
Stressed Cyprus DepositorsThe events in Cyprus were but the latest in a series of grim reminders that banking systems in the Western world are infected by a self-inflicted, incurable disease called mismanage-ment, and that once again savers and depositors – and not bankers – will be the victims.

National Emergencies

Entirely at their whim and without any advance warning governments can declare “national emergencies,” and use the declarations as license to steal. In April, 1933 President Franklin Roosevelt issued Executive Order 6102 confiscating all private gold in the United States, and history is replete with countless other terrifying examples of “capital controls.” The cold reality is that the biggest risk to financial portfolios is not investment risk; it is political risk.

Among measures you can take to minimize political risk are moving your money into non-bank asset classes that are difficult or impossible to confiscate, and moving assets offshore into countries with lower political risk. If you live in the United States, it is imperative you understand the concept of “reportable assets,” as defined by the Internal Revenue Service, before you begin diversifying or offshoring

Protecting Your Assets

As this article is written there remain viable options for U.S. citizens to own non-reportable assets offshore. If you own real estate in a foreign country, for example, that real estate is not currently reportable (See Note below). Investor-friendly, capitalist enclaves are springing up around the globe today.

La Estancia Cafayete,” in the Salta province of Argentina, features a constant year round temperature range of 40° to 80° with sunshine almost every day.  Rancho Santana and Guacolita De La Isla, both located on the unspoiled Pacific coast of Nicaraugua, are among the most strikingly beautiful places on the planet. Singapore offers low taxes and abundant opportunities for entrepreneurial investments, and Hong Kong and Southern Spain are also popular offshore options. Offshore real estate ownership provides the additional benefit of being a safe haven for escape if staying home becomes too dangerous. Click here to see photo images of some of the world's most popular havens for capitalists.

U.S. citizens can open and maintain bank accounts in foreign countries up to a maximum of $9,999.99 per person without reporting, and there are many good options available. You should of course be sure that you can make deposits and withdrawals to and from the account you choose by wire transfer, and you must also verify that the bank you choose is both safe and liquid. It is currently possible to open accounts in the relatively safe jurisdictions of Belize, Switzerland, Singapore, and Australia among others.

Precious metals held abroad are not currently reportable, so offshoring your ownership of gold and silver provides a third opportunity to internationalize your assets without reporting.
You can find more detailed descriptions of these and additional options here and here.

The Clear Message

History repeats itself, and the evolving story in tiny Cyprus demonstrates once again that as the current financial crisis deepens, you cannot trust your financial future to banks or governments. Investment options will disappear without warning, and the universal purpose of capital controls is to stop the flight of capital out of the home country. So the message from Cyprus is clear and the window of opportunity is closing. Act now. Rebalancing your portfolio and moving some assets outside your country of residence are critical to protecting your net worth from impending political devastation.

Important Note: Reporting requirements for assets held abroad by US citizens changed dramatically on July 1, 2014, effective with implementation of a provision of HR 2847 called “The Foreign Account Tax Compliance Act,” commonly known as “FATCA.” To read a detailed discussion of the new reporting requirements go here.

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