Safe Deposit Boxes: Understanding the Risks
It is remarkable how change can creep up on us sometimes. Incremental improvements and minor tweaks in products and services we use every day can go unnoticed for a long time, with each individual step providing only a marginally better experience. Most of the time, we either take these small upgrades for granted or, at best, we notice a useful new feature and briefly think to ourselves “oh, that’s a good idea”, before we forget about it again and go about our day. Constant change and unceasing progress in modern technologies and new systems simply become the norm. And yet, if you stop and really think about the technological miracle that is a modern smartphone and compare it to your first cell phone, the leap suddenly seems giant.
What is even more staggering is the effect that “change” has had on us. Realizing just how dependent we have become on new technologies, how often we casually sign away our privacy rights and how we willingly compromise the security of our private data, and even of our property, by handing control over to third parties, is something of an epiphany.
I had such an epiphany a few weeks back on a Saturday afternoon during a visit to a local, small bank, when I went to see a friend’s safe deposit box. My friend - let's call him "David" for the sake of this article - knew I worked with precious metals and storage and thought I might find it interesting. I'm not a huge fan of keeping bullion at the bank, something I've occasionally debated with others about. In David's case, he has relegated its use largely to holding the numismatic and semi-numismatic coins he's collected over the years, plus some documents.
The last time I visited a bank safe deposit box in Switzerland was about 15 years ago in Bern. You might imagine all the assumptions about the process, the setting, and the experience of accessing one’s safe deposit box at a Swiss bank. Hollywood spy movies were not really that much off the mark at that bank in Bern 15 years ago, so I expected nothing less this time. Wow, was I wrong! Change has crept up and entirely transformed this experience, even in the tiny cantonal bank of the small Swiss town I live in.
Today, the safe deposit box “ritual” is nothing like the old days. Gone are the guys with bespoke suits and solemn looks to escort you to a centuries-old underground vault, and to match their key with yours, before leaving you on your own in a room with your box, closing the curtain or door behind you. Allow me to describe my experience: David took out a card and password, we stepped in front of a glass door immediately next to the entrance to the bank, entered our information, and walked into a small room. Once in, the glass door glazed over behind us so no one could see us from the outside. In this very plain, small room, there was a counter top, roughly the size of a work desk, but with a rectangular “mechanism” that looked like small trapdoor in the middle of the table and a keypad above it, where clearly a card and another password needed to be entered.
As soon as the code was accepted and we were verified as the “right one”, the safe deposit box began its automated journey from the underground storage facilities and arrived through an elaborate system hidden underneath the table. After a few low-toned whizzes and whirs – that made me conjure up an image of a miniature Amazon supply chain underground – a green light went on above the rectangular cut-out of the table. A door slid back, we plugged in our key in the spot provided, gave it a twist, the cover opened up away from us, and our box was revealed: slightly bigger than a shoe box, with its top side flush with the counter top. There, in their bundled-up glory, was the mishmash of crumpled envelopes and old plastic containers that housed David's coins.
It was clear the space to the right and to the left on the table was to take our holdings out on for examination, and we proceeded to rummage a bit. I tried to hide the blank look I had on my face that clearly betrayed my confusion over the process I just witnessed. More interestingly, I seemed to suspiciously keep looking back at the glazed-over door thinking someone could be looking at us. When we were done, the box was closed, the key turned, the cover closed, and with some whizzes and whirs, our box was gone again. The glazed door opened, and we were out in front of the bank, as well as the local grocery store, and walked on our way amongst those shopping for Saturday's dinner.
Convenience, but at what cost?
Naturally, my first reaction was to marvel at the ingenuity of the system, as well as at the added convenience it affords the clients. Having direct access to one’s box, independently and at all times apparently, is undoubtedly an advantage. However, it didn’t take long for me to start recognizing the implications of this technological shift and the practical limitations, vulnerabilities, and shortcomings of a system like this.
For one thing, the lack of privacy poses a serious concern, as does the security issue that it raises. When you walk out of this dedicated, glazed-over side door, everyone in the village of 7,000 knows that you’ve just accessed your safe deposit box. Much like taking money from an ATM, it struck me as the perfect spot to rob someone. In fact, it is even more attractive than an ATM: every criminal worth his salt knows that people tend to keep things much more valuable than cash in their safe deposit boxes. Even if it is “only cash” that’s retrieved, in the age of digital payments, there’s a good chance it’d be a much higher amount than what people would routinely withdraw from an ATM. In countries like Switzerland and Germany, some of the staunchest of defenders of cash transactions in Europe, the average ATM withdrawal is just EUR215, according to Bundesbank data.
Staying on the topic of security for a moment, it is highly debatable whether such automated systems are better at eliminating threats than traditional vaults and secure storage facilities or if they come with their own set of problems and added vulnerabilities. For instance, one might argue that the complete lack of the human element and the reliance on technology for client identification and access are very efficient and accurate ways of preventing errors and fraud, and of making sensitive processes tamperproof. However, as technology has transformed our financial activities, it also transformed security threats. The time between the release of a new security update or a new system and the first successful attempt to compromise it is getting shorter and shorter. At the same time, the impact of cybercrime and the losses from individual attacks are skyrocketing, as illustrated by a recent report by Cybersecurity Ventures which predicted that global losses will reach $6 trillion annually by 2021.
“The devil’s in the details”
Another very important issue is paying attention to the fine print. The contracts that outline the precise terms and conditions of keeping one’s valuables at a bank, all the caveats, and the rights that the bank has over its clients’ property, must be carefully scrutinized. More often than not, one finds very unpleasant surprises lurking in these lease agreements. This is especially true for prudent precious metals investors, who see their holdings as a hedge against economic crises and as an insurance against severe financial or political instability. This strategy is heavily undermined if their bank can simply deny them access to their property in such a scenario, or if it goes bankrupt. And if these risks might seem far-fetched, at least to those who might not recall the experiences of thousands of bank customers in the 2008 crisis, there is a much more likely scenario to take into account.
Most people choose to place their valuables in a safe deposit box because they assume that there is no place safer than the vault of a reputable bank. However, as was revealed by a New York Times exposé published in July, the obscure contracts, the very limited liability that banks assume, and the lack of accountability has already cost millions to US clients who kept safe deposit boxes at the largest banks of the nation. According to the NYT article, almost 33,000 boxes every year are harmed by accidents, natural disasters and theft. Of course, sometimes it is the customer’s own fault, as they might be careless with their identification credentials or grant access to the wrong people. Nevertheless, it is all too often the case that it is the bank itself that is directly responsible for the losses, as numerous documented complaints and court cases demonstrate.
Some clients lost all their valuables when their banks lost track of their boxes during relocation. Others, like a Wells Fargo client from California, lost everything when the bank accidentally re-rented her box to another client who apparently made off with its contents. In many other cases, jewelry, art, rare collection items and precious metals have gone missing when the bank attempted to move them to a new box, only for the client to discover that not all of their items actually made it there. If there is anything more striking than the staggering amounts of the loses, sometimes in the tens of millions, is the fact than in the vast majority of those cases the law was actually on the banks’ side.
Even when the clients did have grounds to sue and the court found the bank guilty, the compensation awarded was ludicrous, as was illustrated by a 2017 verdict that awarded $2,460 in loses and $150,000 in punitive damages to a Bank of America client who lost items worth over $7 million from her box. This incident is far from isolated and verdicts like that are not unusual, thanks to the fine print in the lease contracts that all too often goes unread. As the NYT highlighted, “Wells Fargo’s safe deposit box contract caps the bank’s liability at $500. Citigroup limits it to 500 times the box’s annual rent, while JPMorgan Chase has a $25,000 ceiling on its liability”.
Food for thought
On a superficial level, one might argue that this is another one of those “privacy vs. automation” or “security vs. convenience” debates we seem to be having more and more of these days. However, it goes deeper than that. It’s impossible to make that choice if you don’t realize you even have to. In the case of modern safe deposit boxes, it’s not just Hollywood that failed to keep up with the times. Most people did too, as they still assume that both privacy and security are part of the deal, and not the price they might actually have to pay.
At Global Gold, we always say “privacy starts with you”. This is why it’s imperative for precious metals investors to do their homework and to carefully consider all the risks and trade-offs that come with their storage options. For instance, it is important to understand that the rules are very different for a dedicated high-security precious metals storage facility when it comes to insurance and liability, as are the security standards. The same goes for privacy. For instance, when you drive up to our storage facility in Zurich, you’d never guess there’s a vault in that location and you can enter discretely from a side entrance (and that’s only the start of the security provisions you end up going through). Alternatively, you can safely pick up your metals from our client advisory center in Ebmatingen, a little village outside of Zurich, with no one around to see you come and go.
Storage options all have their pros and cons, but for the long-term investor, who has chosen precious metals as a way to protect and preserve their wealth, it is wise for this investment strategy to also be reflected in their storage strategy as well. Keeping some of your most liquid holdings instantly accessible in a safe at home is a prudent step, especially in case of an emergency. On the other hand, long-term precious metals investments are best kept with a storage provider with high security standards, a specialization in high-value items, and a transparent relationship with the client.
Let’s face it: as much as you may trust them, you don’t want your neighbors seeing you walk in to access your safe deposit box, while they go shopping for their Saturday evening dinner.
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