They say a leopard never changes its spots. But in recent years Israeli banks have gone from turning a blind eye to shining a spotlight into every nook and cranny. It started with a need to find terrorism finance, but now tax evasion is also targeted.
Potted history: In July 2014, the United States started implementing FATCA (Foreign Account Tax Compliance Act) intergovernmental agreements. These require financial institutions around the world to inform the US government, usually via their own tax authority, of balances and movements on accounts of US persons and vice versa.
In March 2014, the Bank of Israel issued an instruction to Israeli banks to comply with FATCA.
On October 7, 2016, Israel made tax evasion a predicate money-laundering offense. This means the Israeli banks must now watch out for tax evasion in Israel and abroad by account holders. The banks have become the tax police.
By the end of 2018, Israel will also join a similar global initiative of the OECD known as the Common Reporting System (CRS) regarding balances and movements in 2017 – i.e. now.
Initial guidance: The Bank of Israel (BoI) has issued a series of instructions to the Israeli banks on how to be tax policemen, or as the BoI puts it, detect risks.
BoI Circular 411 of 2001 deals with preventing money laundering, terrorism finance and identification of terrorist activity.
BoI Circular of March 15, 2016, requires banks to review and update policy and procedures for checking risks associated with international activity of their customers. Offshore activity is deemed risky. The banks are instructed to obtain declarations of tax residency and tax compliance (or entry into a tax amnesty program) from customers and a waiver of secrecy from them. If the customers don’t cooperate, the BoI instructs that they be denied service.
Recent guidance: At the beginning of 2017, the BoI instituted even tougher stipulations to the Israeli banks in a Circular dated November 23, 2016.
This Circular emphasizes that tax offenses may now be money laundering. With regard to income tax, the following are money-laundering offenses if the income is over NIS 1 million in one year or NIS 2.5m. over four years: income omitted from a tax return, false tax return, false answer, false books, fraud or presenting a false withholding- tax certificate to a payer. But the BoI takes the position that no minimum threshold applies to risk assessment by banks.
The banks are instructed to: review KYC (know your customer) procedures if there is difficulty identifying control holders or use of trusts, especially in a real-estate purchase, and to watch out for certain red flags.
Red flags: The above Circular lists 18 red flags. They include: foreign company with similar name (why?), many large movements to or from an offshore jurisdiction, cash deposits or withdrawals close to the thresholds, circular flows, uncharacteristic acts, Israeli power-of-attorney holder for a foreign resident (why?), numbered or coded accounts, offshore company controlled by an Israeli resident or with an Israeli resident signatory, back-to-back loans, concealment of dual citizenship or taxability, nondisclosure of residency, hold mail, customer refuses to be contacted (unless in country lacking relations with Israel), account closed because rules tightened or the bank requested more tax information, higher-than-normal interest in tax matters, nondisclosure of source of wealth or income, or the customer can’t confirm or prove that his wealth or income was lawfully reported.
Consequences of a red flag: If a red flag or other exceptional activity is spotted, the bank must ask the customer for an explanation, including “relevant supporting documents.” Laconic explanations such as “tax planning” are not enough; the bank must request a declaration that he reported lawfully income and even a reasoned professional opinion to this effect.
Significantly, if the customer does not respond to this request and the bank has reasonable ground to believe money laundering (including tax evasion) has occurred, the bank must deny service and report the irregular act to the competent authority (Circular 411, Section 24).
Comment: In practice, banks sometimes request documents even if they date back decades or no longer exist, not only “relevant supporting documents.” The statute of limitations (typically seven years in Israel) is totally ignored.
Also, the banks tend to insist on proof that all money in an account was reported for tax purposes, not only the income element.
What do you do if your bank makes impossible demands? We asked the Bank of Israel, which advised asking the bank to reconsider.
If that doesn’t work, go to their “public inquiries” department (pniot hatsibur), which is really their complaints department.
If that doesn’t work, go to the Bank of Israel’s “inquiries department.”
Interestingly, the OECD has issued recommendations on tax voluntary disclosure procedures, stating that in cases of incomplete records, a pragmatic approach is needed, which means going back no more than five to 10 years.
This pragmatic approach is sorely needed here.
As always, consult experienced tax advisers in each country at an early stage in specific cases.[email protected] Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.