Why are Israeli banks asking customers where their money comes from?

Why are Israeli banks asking customers where their money comes from?

For many years Israel was a ‘Switzerland for Jews’ when it came to tax evasion for foreigners. Then the US began cracking down

Simona Weinglass is an investigative reporter at The Times of Israel.

Illustrative photo of a Bank Leumi branch (photo credit: Moshe Shai/Flash90)
Illustrative photo of a Bank Leumi branch (photo credit: Moshe Shai/Flash90)

Israelis attempting to transfer large sums of money into their bank accounts from overseas have encountered difficulties of late.

One young man, an early investor in Bitcoin, told The Times of Israel that when he tried to repatriate several hundred thousand dollars’ worth of Bitcoin earnings from Gibraltar to Israel, his local Bank Hapoalim branch refused to accept the wire transfer.

Israelis with business interests abroad report being summoned to their local bank, being asked to explain how they earned their money, and, if unable to provide satisfactory answers, having their bank account closed.

A real estate agent who sells high-end apartments to immigrants and tourists from France lamented to The Times of Israel recently that his business was suffering because banks had begun asking probing questions about where his clients earned their money.

The reason for these changes, Supervisor of Banks Hedva Ber told a conference in December, is that three of Israel’s major banks have come under criminal investigation over the past seven years by the US Justice Department for allegedly helping thousands of US citizens launder money and evade taxes — a fairly devastating state of affairs that has garnered remarkably little public attention.

Hedva Ber, Supervisor of Banks at the Bank of Israel,,second from right, at a press conference in Tel Aviv, May 24, 2017 (Courtesy: Shoshanna Solomon)

“Twenty years ago, Israeli banks did not ask customers about the source of their money and did not ask if they had paid taxes or not,” Ber said.

“But today, whenever I visit a bank, the words on every clerk’s tongue are compliance, compliance. We have been telling banks in the last few years that we do not have tolerance for risk in compliance. If there is a doubt then there is no doubt: do not open an account [for high-risk clients] and do not carry out the transaction.”

Bank Leumi admitted wrongdoing in 2014, agreeing with the US Justice Department that it had conspired to aid and assist a minimum of 1,500 US taxpayers to prepare and present false tax returns to the US Internal Revenue Service by hiding income and assets in offshore bank accounts in Israel and elsewhere around the world. According to a US Justice Department press release, Bank Leumi’s “criminal activity” spanned over a decade from at least 2000 to 2011, during which time Leumi also provided “hold mail” service for approximately 2,450 US accounts whereby bank statements were held abroad and not sent sent to the customer’s address in the United States. To avoid prosecution, Bank Leumi agreed to pay $400 million in fines to the US and New York State governments.

The interior of Bank Hapoalim’s flagship digital branch (Courtesy)

Meanewhile, Bank Hapoalim and Bank Mizrahi are still being investigated by the Department of Justice and the numbers of customers involved and size of the fines are expected to be on a similar scale.

Why don’t Israelis know more about these investigations? After all, the 2016 Panama Papers leak, which named and shamed offshore bank account holders, led to street protests around the world, the resignation of Iceland’s prime minister, and countless investigations by authorities.

Since the 2008 financial crisis, there has been a growing awareness around the world that many of the world’s wealthiest citizens are using offshore secrecy jurisdictions to make themselves exempt from local taxes as well as local laws. The well-heeled and unscrupulous have used offshore companies to do everything from hiding assets from a spouse in a divorce case to hiding money from creditors to stashing money obtained by criminal means.

If Israelis knew the names of individuals laundering money through Israeli banks, they could shed light on possible corrupt and criminal practices that currently remain in the shadows. So why is so little known publicly about the criminal investigations against three of Israel’s largest banks?

According to David Shuster, a lawyer in the International Tax Services group at New York accounting firm Friedman LLP, and that firm’s Director of Tax Controversy Services, it’s because none of the actors involved are particularly interested in the limelight.

“From the US government’s point of view that’s standard operating procedure. If there’s no reason to provide details about their investigation there’s no way they’re going to do it,” said Shuster, who represents many American citizens who had undisclosed bank accounts in Israel and were either caught by US authorities  or came forward voluntarily.

“The same thing goes for the banks. On the advice of their lawyers they’re going to say as little as possible. The more they say, the more evidence can be brought against them. That’s a standard investigation litigation posture.”

‘Switzerland for Jews’

Israeli banks for many years provided essentially the same services as Swiss banks did, minus the banking secrecy laws.

“Israel has been Switzerland for Jews,” Ronen Bar-El, an economics professor at Israel’s Open University, told The Times of Israel.

Shuster said that when the investigation is over, the Department of Justice will issue a press release that dryly says something like “the bank agrees that it has violated these statutes of US law and it is agreeing to pay a fine of X million dollars.”

There will be little drama and it is very unlikely that any of the bank executives will face jail time. Nevertheless, the reason for Israeli banks’ extra caution in vetting customers’ sources of income is so as not to further anger the Department of Justice and to keep the penalty they have to pay to a minimum.

“If Israeli banks are asking people more questions about the source of their money, they are just doing their due diligence to avoid being on the wrong end of another US investigation,” said Shuster.

In the meantime, some of those Israelis who reported having trouble transferring money into their bank accounts have found ways around the problem. The Bitcoin millionaire consulted one of Israel’s most prestigious law firms, who gave him the name of an Israeli fintech company that specializes in “high-risk” payment transfers and assured him that it would be able to complete the transaction.

How it started

Back in 2007, an American employee of UBS in Switzerland, Bradley Birkenfeld, decided to blow the whistle on the entire Swiss banking system. Tens of thousands of wealthy Americans had been stashing undeclared income in Swiss bank accounts, a practice that was illegal. But due to strict Swiss banking secrecy laws, if these Americans could get their money to Switzerland without detection, Swiss banks would keep their secret.

Customers found creative ways to transport their money to Switzerland, whether by private yacht as in the film “The Wolf of Wall Street” or in one case described by Birkenfeld in cash stuffed inside a teddy bear.

In the wake of his revelations, the US demanded in 2009 that UBS hand over the names of thousands of its wealthy American clients, dealing the first in a series of blows to 300 years of Swiss banking secrecy.

The United States probe expanded to other Swiss banks, and then to a few other countries, including Luxembourg. Then, in 2011, Reuters reported that the Department of Justice was investigating three Israeli banks over suspicions that their Swiss branches had also helped Americans launder money and evade taxes.

“The shift to Israel from Switzerland,” said the report, “for years the main focus of the Justice Department’s campaign against offshore private banking secrecy, signals the broadening of a landmark probe by the agency that began in 2007 with UBS AG, Switzerland’s largest bank.”

Shuster told The Times of Israel that once the tax evasion investigation started, it was bound to expand. This is because starting in 2009, the IRS began offering voluntary disclosure programs to citizens and residents with overseas bank accounts. Fearing getting caught, more than 56,000 US citizens have come forward voluntarily.

“The government got more and more leads from these voluntary disclosures and that may be how the trail led to Israeli banks,” surmised Shuster.

As of this writing, the US government probe has extended to about 100 banks (most of them Swiss) and about 50 individuals. More than 50,000 people have come forward though the voluntary disclosure program and the IRS has collected more than $11 billion to date, said Shuster.

Such tax evasion schemes had been going on for many decades, but once Birkenfeld dropped his bombshell, the  US government had no choice but to crack down, analysts say. In addition, after the 2008 financial crisis, many countries were looking for ways to bring more revenue into their coffers.

These circumstances led to the enactment of FATCA in 2010, and the Common Reporting Standard in 2014, whereby over 100 signatory countries have pledged to share foreign citizens’ financial information with each other.

“As a rule when there’s enforcement or at least the appearance of enforcement, compliance goes up drastically,” said Shuster,

“If people know that things are not being enforced or if there’s no appearance of enforcement, compliance does go down. So now that people know there are these evasion schemes going on, if governments don’t act to to pursue these schemes and break them up and impose consequences they will see a breakdown in enforcement.”

Who must report their foreign bank account?

While laws like FATCA are good for the US treasury’s bottom line as well as for the global battle against organized crime and money laundering, they impose extra bureaucracy on Americans living abroad that many view as onerous.

Any US citizen or resident with a bank account abroad that contains more than $10,000 must report it on a form called an FBAR, Shuster told The Times of Israel. This includes US citizens who live abroad and even people with US citizenship who have never resided in the United States.

In fact, the IRS has announced that it is terminating its Offshore Voluntary Disclosure Program on September 28, 2018.

“If anybody has accounts at these banks, they should have been disclosing to the US government and if they haven’t they really need to move fast. If at any point during the course of a year the balance in your Israeli bank account exceeded ten thousand dollars you have to report it on an FBAR, a foreign bank account report,” Shuster said.

Asked if the IRS would target an American living in Israel with a mere $10,000 in their bank account, Shuster replied, “as a practical matter in the course of their investigation they will go after the bigger accounts first. But if for some reason they find out about someone with $15,000 and they don’t see an FBAR, they might just issue a letter to that person asking ‘where is your FBAR?’ If there’s no good excuse then the US government would be within its rights to impose a penalty.”

Not just foreign bank accounts

But it’s not just foreign bank accounts. American citizens who own foreign corporations must file a separate form every year with the IRS.

“If you fail to file that form, there’s a $10,000 a year penalty. I’ve seen the government audit people who were really not making that much money. They had $10,000 or $20,000 in profits a year. The government will still impose a penalty of $10,000 a year on that person.”

For those American expats who haven’t filed for several years, Shuster recommends that they see a lawyer.

“A US citizen with foreign assets really needs to get an understanding of what his or her obligations are. And if there has been noncompliance, how to remedy that. Because if the US government approaches you before you approach them, the consequences will be far more severe than if you approach the government first.”

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