Israel is at risk of incurring international sanctions for its failure to comply with a key OECD anti-money laundering measure, after the head of the powerful Knesset Finance Committee conditioned all further discussion of the issue on the granting of extra time by the Justice Ministry.
Israel failed to implement the Common Reporting Standard (CRS) by the OECD’s September deadline.
Along with Dominica, the Caribbean island of Sint Maarten, and Trinidad and Tobago, all of which are classic tax havens, Israel is now the only OECD country — other than the United States, which has its own system — that has not implemented the CRS.
Following a series of scandals over financial secrecy and international money laundering, the US passed the first of the two agreements, the Foreign Account Tax Compliance Act (FATCA), in 2010.
The act obliges US citizens with foreign bank accounts to report their assets to America’s Internal Revenue Service, as well as requiring foreign financial institutions to report accounts held in their countries by US citizens.
In June 2014, the Israeli government signed onto FATCA, pledging that the Israel Tax Authority would share the information it held about US citizens.
Until then, Israel had provided such information only if another country had requested it via a dual taxation treaty.
Compliance with FATCA has, however, been far from smooth.
US citizens living in Israel have had their Israeli bank accounts closed because the banks have struggled with FATCA-related paperwork and have opted to shut accounts down rather than risk breaking regulations, the finance committee heard last week.
In one example that was cited, an elderly woman who immigrated to Israel from the US at the age of 9 had her Israeli bank account closed because she had been unable to provide a US Social Security Number. When she left the US, there was no such thing.
In exchanges worthy of a Monty Python sketch, the bank officials at the committee meeting blamed the Israel Tax Authority for having failed to provide the right FATCA-related form, while a Bank of Israel official charged with looking into closed accounts claimed that he had been unable to do so because he had not been supplied with sufficient details about the clients.
For MK Moshe Gafni of the ultra-Orthodox United Torah Judaism party, the committee’s longtime chairman, however, the pressing issue is that the banks have also been closing Haredi free-loan societies or ordering their managers to go to other branches.
There are thousands of such free-loan societies – known as gemahim — in Israel’s one-million-strong ultra-Orthodox community, with total deposits estimated by one economist to be between NIS 5 billion ($1.4 billion) and tens of billions of shekels.
The gemah is one of the backbones of Haredi society. An acronym for gemilut hasadim (acts of lovingkindness), it enables those with the means to do good deeds to donate money or physical items while allowing poorer community members to borrow without feeling ashamed.
The problem, according to Israel’s anti-money laundering authority, is that many free-loan societies are being used to launder cash and evade paying taxes, although reportedly to a lesser extent than a decade ago, thanks to anti-money laundering measures taken by the Israeli government.
Israel got the US authorities to agree to exclude from FATCA information about free-loan societies that hold less than $50,000. (The CRS deal excludes the free-loan societies altogether).
But the two-year period that the Israeli Justice Ministry allocated to ground this exemption in Israeli regulations ended in August, and since then, the loan societies have been in limbo.
Until those regulations are passed, Gafni has signaled that he does not intend to greenlight the passage of separate regulations that will allow implementation of the CRS.
As its name suggests, the CRS standardizes the automatic exchange of information between OECD countries.
Israel has until May 2019 to start collecting information.
As The Times of Israel has previously reported, the failure to pass the necessary legislation for the CRS by September puts the country at risk of sanctions, possibly including a place on a European Union blacklist for non-compliance.
Although the timing and nature of possible sanctions are not yet clear, a banking official at the Knesset Finance committee told The Times of Israel that overseas banks could make it much harder for Israeli banks to transfer clients’ money abroad.
Implementation of FATCA and the CRS has already been discussed four times by the committee.
Gafni said the messy implementation of FATCA boded ill for the implementation of the CRS and that he would not hold a fifth discussion until the deputy attorney general extended the implementation periods for both.