Is the state of Israel a haven for undeclared capital? Well, perhaps it used to be. New global anti-money laundering regulations, including CRS and FATCA, make it increasingly hard for wealthy Jews to hold their capital in Israel without reporting it to their country of origin. While Israel has long been an easy and convenient destination for Mexican investors, and especially the wealthy Jewish community of Mexico City, said regulations threaten to end the “golden age” of Israel-Mexico ties.
In 2018, Haaretz reported that foreign deposits in Israeli banks have shrunk by 30% following “heavy pressure brought to bear by the United States on financial institutions worldwide in its fight against money laundering”.
“The Israeli banking industry was based for years on receiving deposits, especially from Jews abroad, which served the Israeli economy’s foreign currency needs. It was a kind of conspiracy of silence between the governments and the banks. The government didn’t ask the banks to be selective about where they got their foreign deposits, either in Israel or abroad, because it served a purpose when Israel was short on foreign currency. That’s not the situation today,” Haaretz writes.
Indeed, when in May 2019 the U.S. Internal Revenue Service (IRS) issued new regulations relating to the Foreign Account Tax Compliance Act (or FATCA), Israel quickly aligned itself. FATCA now “requires that foreign financial Institutions and certain other non-financial foreign entities report on the foreign assets held by their U.S. account holders”. This comes after Israel’s 2014 pledge that “the Israel Tax Authority would share the information it held about U.S. citizens” with U.S. authorities according with FATCA’s demands.
Soon after, in July 2019, Israel officially published regulations pertaining to CRS (Common Reporting Standard), an almost identical agreement initiated by the OECD. CRS affects people who are residents of foreign countries but have bank accounts in Israel, or who are Israeli residents who have bank accounts abroad. Mexico and Israel’s agreement is “effective for taxable periods starting on or after 01 January 2017”. Essentially, it requires that funds held in Israeli bank accounts be reported to Mexican authorities, and vice-versa.
This is, as previously mentioned, a part of a U.S. effort to prevent investors from keeping capital and assets in foreign bank accounts without declaring their origin. Many Jews, it has been alleged, use the jus sanguinis citizenship status which Israel offers people of Jewish descent to deposit funds in Israeli bank accounts without disclosing them to their country of origin or main country of residence, for example the United States or Mexico.
As Jewish communities in Colombia, Argentina and Mexico are thriving, many Mexican investors (most of whom belong to Mexico City’s prominent Jewish community) look for places to discreetly keep their capital. The U.S. (especially Miami) and Israel are (or were) very convenient options. But these investors may now be subject to bilateral data transfer.
“This data transfer includes personal information about investors as well as information related to the investor's bank accounts, ultimate beneficial ownership (UBS), amount of financial assets, and yearly revenues. An information transfer of the US investor's data occurs firstly from the financial institution or bank to his tax administration and secondly, from the tax administration to IRS,” wrote Antoine Dupuis and Gilles Sturbois in December 2018.
Experts believe there are already clear indications of data transfer concerning ultimate beneficial ownership between Mexico, Israel and the United States, and say banks today look for the origin of funds, sometimes ignoring whatever source or nationality the account holder had declared. International banks are now required to report these funds to both the declared country of origin and the suspected country of origin, or else they would be blacklisted.
Some are voicing concerns that this new regulation creates unforeseen complications; Israeli banks are refusing to open accounts for foreign entities, even preventing companies from paying ILS1 billion in due taxes to the state of Israel. “Quite often, ‘kosher’ funds, with no suspicion of money laundering, do not pass the minimum requirement that Israeli banks have set”, Globes writes. This is because the Israeli Tax Authority has tasked Israeli banks with preventing money laundering at any cost.
Be that as it may, sources claim that in specific cases, data transfers between Israel, Mexico and the U.S. have already taken place. This could prove to be a nasty surprise for the Jewish community of Mexico City. Combined with the alleged intention by the Trump administration to implement regulations which would require Mexican investors to meet stricter FATCA compliance or even disclose Mexican-held assets to the Mexican IRS (called SAT), many are already looking for alternatives.
Mexico is currently not a part of FATCA, but experts place capital flight from Mexico to the U.S. at $217 billion, a number high enough to justify a mutual decision by the U.S. and Mexico to enforce FATCA’s Model 1 IGA on Mexico in the near future. If so, the road would be paved to even more facilitated data transfer and a definite end to the Jewish tax shelter.