Bank of Israel joins war against unreported income

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The Supervisor of Banks has ordered Israeli banks to require foreign residents to declare they have paid tax on the money in their accounts.

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The Bank of Israel is joining the global war against tax evasion, and is ordering the banks to require from customers who are foreign residents a declaration that they have paid the legally required tax on the money in their accounts. Sources inform “Globes” that Supervisor of Banks David Zaken recently sent the banks a draft circular on the subject of how to handle foreign residents.

In the draft, the Bank of Israel sets forth the binding procedures for the banks with their customers who are foreign residents. Among other things, every foreign resident customer (both new and existing ones) will have to present data about the source of his wealth and income, and declare that he has paid the legally required taxes. The customer will also have to waive banking secrecy with respect to the overseas law authorities. The bank will employ measures to discover in which countries the customer must pay tax. The bank will be required to clarify its procedures for classifying foreign resident customers as high-risk customers, and will have to determine who at the bank has the authority to approve opening an account, and to manage and conduct transactions for these customers. The Bank of Israel also allows the banks not to open an account for foreign residents who do not provide all these particulars, and to freeze an account (i.e. to not provide banking services) in cases exposing the bank to the risk of violating overseas law.

“In recent years, we have been witnessing more determined and forceful activity by various countries aimed at locating money of their residents held outside the country. This trend is liable to increase the exposure of Israeli banks to compliance risks and reputation risks, and to require them to take proper measures with both their existing customers and new ones, ” the Bank of Israel said in explaining the new rules.

These rules allegedly constitute a burden for the banks, requiring them to utilize considerable bureaucracy, and are liable to cause foreign residents to withdraw their money. At the same time, banking sources welcomed the Bank of Israel’s rules, which end the current lack of clarity about what the banks must require from their foreign resident customers.

In recent years, the war against tax evasion waged by the overseas tax authorities, especially in the US, has been stepped up, and the banks are an important player in this war. The most prominent example of this trend in Israel is the investigation taking place in the US against a collection of banks around the world, including three Israeli banks – Bank Leumi (TASE: LUMI), Bank Hapoalim (TASE: POLI), and Mizrahi Tefahot Bank (TASE:MZTF), on suspicions of helping their American customers evade taxes. Bank Leumi has already made a provision of over $1.5 billion in its accounts in this matter, and it is likely that Bank Hapoalim and Mizrahi Tefahot will also pay considerable sums.

The Bank of Israel is anxiously following the investigation and the ensuing stiffening of regulations on tax evasion around the world. In a “Globes” interview at the Israel Business Conference last week, Zaken said, “This is a heavy, significant, and alarming fine. In recent years, the US authorities have beefed up their legislation and enforcement against tax evasion by US citizens, and this has had an effect on international banking systems, including banks in Israel. One of the issues under assessment is how to make sure that such events do not recur, and not necessarily in activities with US citizens in general, in order to reduce the risk of tax evasion by citizens of any country, ” thereby hinting at the action he was planning.

The banks themselves were disturbed about the stiffer regulation. They prefer losing customers to getting in trouble with the foreign legal authorities, and in the past two years have therefore established rules for dealing with foreign residents. Declarations that the assets in their accounts were reported to the tax authorities have been required from several of them (especially Europeans), and the banks have even threatened to freeze or close accounts for which such affirmation was not provided. These demands led to complaints by several customers, who felt that the bank had betrayed them by violating banking confidentiality.

Furthermore, not all the banks have enforced these requirements. It appears that the lack of clarity and uniformity among the various banks in their requirements from customers and the customers’ complaints on the subject led the Bank of Israel to set uniform requirements for all the banks. The new regulations are also liable to cause foreign customers to withdraw their money from banks in Israel. The banks have been forced to require such declarations from their US customers (as part of implementation of the FATCA rules).

“Globes” reported that US customers have withdrawn an estimated $4-5 billion from banks in Israel. At the same time, it is doubtful whether large amounts will be withdrawn. Legal sources told “Globes” that money could not be withdrawn easily from banks when the reporting declaration required for it had not been provided.

Published by Globes [online], Israel business news – www.globes-online.com