Israel was nearly sanctioned over ‘Milchan Law,’ top finance official says

Israel’s chief economist revealed Monday at a Knesset State Control Committee panel that the country was nearly sanctioned by two multinational banks three years ago for failing to uphold global anti-money laundering standards.

The panel was devoted to a once-obscure tax law that is now at the center of one of the cases in which police have recommended Prime Minister Benjamin Netanyahu be indicted. It was convened to address the question of why Israel had failed to change parts of Amendment 168 to the Tax Ordinance, despite the urgent exhortations of the Tax Authority and professionals within the Finance Ministry, as well as the multinational OECD economic organization, for the past several years.

The law, nicknamed “the Milchan law” at the time of its passage in 2008, gives new immigrants and returning residents to Israel a complete exemption from paying taxes on income earned abroad and even on reporting that income, for a period of 10 years.

Netanyahu has been accused by Israeli police of trying to extend the exemption from 10 years to 20 for businessmen Arnon Milchan and James Packer in exchange for gifts of cigars, champagne and jewelry totaling NIS 1 million ($287,000). Milchan is considered a returning Israeli, who would potentially have saved a fortune had the tax amnesty been extended; Packer was reportedly seeking to become a new immigrant.

At the panel, Chief Economist Yoel Naveh described how he and Tax Authority chairman Moshe Asher received letters from the World Bank and the European Bank for Reconstruction and Development (EBRD) in 2014 stating that if Israel did not step up its compliance with international anti-money laundering standards, the two global bodies would refuse to do business with the Jewish state.

“In October 2014 the Global Forum on Transparency and Exchange of Information for Tax Purposes did a peer review of Israel and we got a whole list of problems with Israel’s tax regime,” Naveh said during the committee meeting. “Amendment 168 was one of the issues that came up. As a result, the Global Forum said that Israel was only ‘partially compliant’ with the international standards.”

The Global Forum is an international organization of mostly OECD countries dedicated to combating tax evasion, tax havens, offshore financial centers and money laundering. As a member, Israel has signed numerous information exchange treaties with other countries.

Naveh then made the shocking revelation that shortly after Israel was labeled “partially compliant,” the Finance Ministry received a letter from the World Bank and the EBRD, two multinational organizations funded by member countries including Israel.  The two bodies provide a combined total of about $20 billion in loans for large-scale development projects all over the world.

“It was during the period when the government had fallen but there hadn’t been new elections,” said Naveh. “There was no finance minister, or the prime minister was serving as finance minister. We got a letter from two respected global bodies — the EBRD and the World Bank — and they told us that because Israel is partially compliant they intend to stop working with us.”

Naveh explained that he and Asher were alarmed by the letter and sought to remedy the situation immediately, but could not.

“We are members of these two multilateral international banks,” he added. “We had no ability to change the law at the time but Moshe Asher and I wrote back saying that we don’t currently have a functioning government, but that immediately after elections are held we will bring all the relevant changes to the government. We bought some time.”

Israel has still not made the change to Amendment 168 demanded by international bodies, namely, to repeal the provision that exempts new immigrants and returning residents from reporting their income abroad for their first 10 years in the country. The Finance Ministry and Tax Authority have also been trying to repeal a second provision in the law that allows the finance minister to issue regulations to extend the period of the tax amnesty from 10 to 20 years for individuals who meet specific criteria.

Yoseph Edrey, a retired professor of tax law who spoke at the panel, said that the income-reporting provision in the law placed Israel among the world’s most generous tax havens.

A representative of the Immigration and Absorption Ministry countered that the UK had a similarly generous tax provision for “non-domiciled residents,” while Asher said that Amendment 168 is even more far-reaching than the UK law.

Naveh further told the panel that each year after that, both he and Asher, with the backing of the finance minister, had tried to cancel the reporting exemption of Amendment 168 and each time their efforts were scuttled by members of the ruling coalition.

Naveh told the panel that he and Asher held long discussions in 2015 with lawyers and professional staff inside the Immigration and Absorption Ministry, trying to explain to them why the law needed to be changed.

“We could not reach an agreement with the professionals in the Immigration and Absorption Ministry and we understood that the government would not pass our changes without their agreement,” he said.

A legal adviser to the Immigration and Absorption Ministry, which has supported Amendment 168 since its inception, including the income-reporting exemption, told the panel that it was the Tax Authority that initiated the amendment in 2007, and that no professionals had viewed it as a money laundering risk at the time. She added that the law had in fact encouraged immigration to Israel as it was designed to do.

The MKs attending the Knesset panel, all of whom hailed from opposition parties, expressed shock at Naveh’s revelations and questioned whether the immigration and absorption minister, whose cabinet position is not considered to be a powerful one, could really have scuttled the proposed change on her own.

“Here’s what bothers me,” Shelly Yachimovich (Zionist Union), the committee’s chairwoman, said to Naveh and Asher, who also attended the panel: “You keep laying this at the feet of [Ze’ev Elkin (Likud) and Sofa Landver (Israel Beytenu)] the successive ministers of absorption. What about the finance minister? What about the prime minister? What about the professional staff within the ministries? Everyone seems to surrender so easily to the immigration ministers.”

Speculating that the prime minister or higher-level ministers could have been involved in thwarting the changes to the law, she asked, “Could there be other interests besides the Immigration Ministry involved?”

MK Karine Elharrar (Yesh Atid) excoriated Netanyahu himself for failing to act to change the law.

“When these letters arrived from the EBRD and the World Bank and were brought to the attention of the prime minister, the first thing he should have done was to fix the law. I don’t see any other way to behave. It is obvious to me that the Immigration and Absorption Ministry is not going to change its view. But the prime minister is senior to them. Not only did the prime minister not try to cancel the law, he reportedly even tried to expand it.”

Eyal Ben Reuven (Zionist Union) called Israel’s failure to cancel the reporting exemption in Amendment 168 “catastrophic.”

“We are hurting the country,” he said. “Israel has become a tax haven, a banana republic. This is unacceptable. We must demand from the prime minister that he change this law. And the public must demand it too.”