It is a law that is proving central to the corruption case against Prime Minister Benjamin Netanyahu. It has been dubbed “the Milchan law” because of its centrality to the investigation of the alleged illicit interactions between Netanyahu and Israel-born Hollywood mogul Arnon Milchan. But its widely misunderstood provisions extend far beyond the prime minister and his associates, and now threaten to derail years of effort by Israel’s financial oversight authorities to reverse Israel’s reputation as a haven for criminal money launderers.
On February 13, Israeli police revealed six cases of fraud for which they recommended that Netanyahu be indicted on bribery and breach of trust charges. In the first of these, Netanyahu and his wife Sara are alleged to have received gifts totaling about NIS 1 million ($282,000) from billionaire benefactors, notably Milchan and Australian tycoon James Packer, in exchange for working to expand the provisions of the little-known tax law known as Amendment 168 to the Tax Ordinance, which grants a 10-year exemption from filing and paying taxes on income earned abroad by new immigrants and returning residents.
Many articles in the Hebrew media have described this allegation as one in which Netanyahu offered tax breaks worth millions or even hundreds of millions to Milchan and Packer in exchange for gifts of cigars, champagne and jewelry. But the law’s repercussions resonate beyond the very scrutinized relationship between the prime minister and his billionaire friends.
Since 2001, Israel had been working to free itself from the stigma and repercussions of having laundered billions for the Russian mafia in the 1990s, by enacting increasingly strict anti-money laundering legislation and monitoring. Amendment 168 may have undermined these efforts.
How so? By providing a back door that allows tax evaders and criminals to immigrate to Israel and keep their earnings hidden — secret from both Israeli authorities and from any other government that might inquire.
Since 2013, Israel’s Tax Authority has been trying in vain to cancel parts of Amendment 168. And year after year, its efforts have been thwarted. Strikingly, the Tax Authority cannot explain how or by whom.
‘A national mission’
Last December, Attorney General Avichai Mandelblit — the man overseeing the corruption probe against Netanyahu, and who will ultimately decide whether to prosecute him — spoke at a conference celebrating the 15th anniversary of the Israel Money Laundering and Terror Financing Prohibition Authority (IMPA). Israel is working hard to become a member of the Financial Action Task Force (FATF), an international body that sets global anti-money laundering standards, and Mandelblit warned of grave consequences if Israel did not pass a scheduled on-site inspection by the FATF in March.
“Israel’s anti-money laundering authority is working hard to ensure we can meet international standards and be counted among leading Western nations on this issue,” he said.
“I am not sure everyone understands this,” cautioned Mandelblit, “but if we don’t combat money laundering, there can be disastrous consequences — I don’t want to be overly dramatic, but it will be very problematic for Israel’s standing in the world and for our economy.”
Eighteen years ago, in June 2000, the FATF publicly named and shamed Israel on a blacklist — along with 14 other jurisdictions, including The Bahamas, Cayman Islands, Cook Islands, Lebanon, Panama, the Philippines, and Russia — as non-cooperative and deficient in its anti-money-laundering regime. Next month’s inspection, the culmination of a series of evaluations in which Israel has made progress, is Israel’s opportunity to clear its name and join the ranks of credible nations on this issue.
Money laundering refers to the process of taking the proceeds of crime and disguising the source of the funds so that they can be spent in the legitimate economy. The types of crimes that lead to money laundering are known as predicate crimes, and these can range from illegal arms sales and drug trafficking to bribery, fraud and in some countries, tax evasion.
Money laundering was not illegal in Israel at the time that the country was labeled as non-cooperative in 2000. Indeed, during the 1990s, Israel had become a choice destination for corrupt Russian bureaucrats and organized crime syndicates to launder their ill-gotten gains.
‘I am not sure everyone understands this,’ cautioned Mandelblit, ‘but if we don’t combat money laundering there can be disastrous consequences — I don’t want to be overly dramatic, but it will be very problematic for Israel’s standing in the world and for our economy’
“Since the collapse of the Soviet Union,” reads a December 2000 US National Security Council Assessment, “Israel has become a significant operating area for Russian criminals, who take advantage of Israel’s large Russian immigrant community of more than 600,000 to conduct criminal activities in Israel and abroad and launder illicit proceeds. Several international criminal figures from Russia, Ukraine, and other NIS (newly independent states) have obtained Israeli citizenship and passports, often fraudulently, for the purpose of establishing a safe haven in Israel and to facilitate their international travel. According to press reports, Israeli police officials have estimated that 10 to 15 organized crime groups from the former Soviet Union, including Solntsevo (an organized crime organization), have a presence in Israel.”
The report added that Russian criminals who had obtained Israeli citizenship seemed to believe they were protected from foreign police and would not be extradited. Israeli police claimed that these criminals had laundered about $4.5 billion through the country, while other sources put the figure at $20 billion.
Some crimes thought to have been perpetrated by these groups shocked Israelis with their unprecedented brutality, like a 1995 hit against a man who was indebted to a crime baron. The hit man shot dead the debtor’s grandmother as well and beheaded both. “Entire families are erased in Russian mafia hits,” Prof. Menachem Amir of the Hebrew University said in 2009. The hit new British TV series “McMafia” offered a fictional depiction of this period in Israel’s history.
Soon after Israel appeared on the FATF blacklist, the US Treasury issued to US financial institutions a “Warning on transactions with Israelis due to suspected money laundering.” Other G-7 countries did the same. Facing imminent international sanctions, the Knesset passed the Prohibition on Money Laundering Law in 2000, requiring that banks know the names of beneficiaries of bank accounts, that they know how their clients earned their money, and that they report any suspicious activities in their clients’ accounts to the soon-to-be established anti-money laundering authority.
In the intervening 17 years, Israel has progressively tightened its anti-money laundering regime, and passed numerous laws in the hope of becoming a full-fledged member of the FATF. After the international FATF delegation arrives in Israel next month to assess the country’s progress, the body will vote on whether to accept Israel as a member later this year. Sources told The Times of Israel that there is a chance the process of entering the FATF will be tainted by extraneous considerations like political and ideological opposition to Israel by some member states, but that on the whole the organization is rigorous and objective.
“We’ve already received early drafts of the FATF’s technical report,” Shlomit Wagman-Ratner, the director of Israel’s Money Laundering and Terror Financing Prohibition Authority, told the audience at the December 2017 conference. “It’s not going to be easy. We’ve made a lot of progress and we will have to make efforts to show the delegation how effective the anti-money laundering regime is in Israel. And there are a few laws we have to pass urgently, like the law to reduce the amount of cash in the economy. As we all know, cash is the engine of the shadow economy and organized crime.”
“This is a national mission,” Emi Talmor, the director-general of the Justice Ministry, told the conference goers. “Moshe Asher (the director of the Tax Authority); the police; Hedva Ber, the supervisor of the banks — everyone is mobilized for this mission.”
A law with remarkable staying power
It is against this backdrop that Tax Authority chief Asher has been trying unsuccessfully to tackle Amendment 168 to the Tax Ordinance ever since his appointment to the job in 2013.
The law, which grants an income tax exemption and tax reporting exemption on income earned abroad to new immigrants and returning residents for a period of ten years, is at the center of police accusations of bribery against Netanyahu.
The prime minister is accused of having tried to lengthen the tax amnesty — to 20 years from the current 10 — in exchange for gifts from Milchan and Packer. (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.)
Israel is a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes, an international forum 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. In a 2013 report devoted to Israel, the organization came down hard on the tax-reporting exemption contained in Amendment 168.
“Israel does not ensure availability of accounting records in respect of activities outside of Israel of foreign companies that are managed and controlled in Israel by new immigrants or veteran returning residents for a period of ten years,” the report said.
In other words, the law flies in the face of Israel’s efforts to clamp down on money laundering and financial secrecy, by turning Israel into a tax haven for new immigrants and returning residents. As reported multiple times in the Hebrew media over the years, Asher has been focused on trying to cancel not the whole law, but two of its most problematic clauses: the exemption it provides immigrants and returning Israelis on reporting about income derived abroad; and a clause that says the finance minister can unilaterally publish regulations allowing the exemption to be extended for another ten years for individuals who meet certain criteria. These regulations would then have to be approved by the Knesset Finance Committee. Asher’s efforts to cancel these two clauses have been to no avail.
Year after year, the finance minister, at the behest of the Tax Authority, has introduced a provision to Israel’s annual Arrangements Bill that would cancel these two clauses. And each year, the provision canceling these clauses has been removed from the Arrangements Bill before it came to the plenary for a vote.
Two weeks ago, it happened again: The provision to cancel the reporting exemption was once again removed from the 2019 Arrangements Bill, which passed a first reading in the Knesset plenary last week.
The battle over this amendment is not transparent. Israel’s TheMarker business daily recently described an “invisible hand” working behind the scenes to prevent Amendment 168 from being changed.
When the Times of Israel tried to find out what had happened this month, the Tax Authority, could only confirm that the effort to change the law was again thwarted. “In recent years, the Tax Authority has recommended on several occasions that the Arrangements Bill include the abrogation of the reporting exemption on income abroad for new immigrants and returning residents, but the provision was not advanced by the Knesset,” the Tax Authority said in a statement.
The statement added that the provision canceling the Finance Minister’s authority to extend the exemption for ten years was also removed. The finance minister, it indicated, retains the authority to extend the law for particular individuals, subject to the approval of the Knesset Finance Committee.
Asked who was behind the scuttling of these two provisions, the authority said that the decision was made by government ministers and the Knesset, but could provide no further information.
Ha’aretz reported on Monday that that police suspect Netanyahu was actively involved in preventing Amendment 168 from being revoked. When contacted by The Times of Israel, police spokesman Mickey Rosenfeld said: “don’t have that info.” Asked to clarify, he repeated: “no info as I said.”
Other sources told The Times of Israel that the effort to remove the two provisions was thwarted by the cabinet and that on some occasions the most vocal opponent of any change to Amendment 168 was Sofa Landver, the minister of immigrant absorption. The Times of Israel has further been informed that the Ministry of Immigrant Absorption has the names of the beneficiaries of this law but does not share them with The Tax Authority, leading to a situation where these individuals are not on the radar of any tax authority at all.
In response to these claims, Landver told The Times of Israel, “As Minister of Immigration and Absorption I have opposed and continue to oppose the cancellation of this law. The purpose of this law is to encourage immigrants and returning residents to immigrate to Israel. All other interpretations are unacceptable to me.”
The Times of Israel attempted to clarify with other spokespeople who else may have responsible for scuttling the Tax Authority’s recommendations, but received contradictory responses from some, and no response from others.
The Finance Ministry spokesperson said the issue was resolved “in agreements between the finance minister and the Knesset speaker.”
The Knesset’s spokesperson said that “apparently this fell at the government (ministerial) stage, and not at the stage of our (Knesset) negotiations with the Finance Ministry.”
The Times of Israel asked the cabinet secretary which minister or ministers scuttled the provisions, but had not received a response at time of publication.
In response to renewed scrutiny of Amendment 168, opposition MK Mossi Raz (Meretz) is reportedly drafting a bill that would modify the amendment by eliminating the reporting exemption and capping the untaxed income at NIS 100,000 ($28.250).
‘Letting criminals into your banking system’
The Times of Israel spoke to Jack de Kluiver, a former senior legal counsel to the chief of the International Unit of the Money Laundering and Asset Recovery Section (MLARS) of the United States Department of Justice, who has been involved with FATF evaluations for 15 years.
We asked de Kluiver if Israel’s failure to repeal the reporting exemption could be an issue in the FATF delegation’s upcoming visit.
“Laws like this can be problematic for a nation’s AML/CTF evaluation,” he confirmed, referring to anti-money laundering and counter-terrorism financing.
“The reason being that such laws can create a huge anti-money laundering and counter-terrorism financing loophole or back door and result in financial institutions shirking their customer due diligence (CDD) and know your customer (KYC) obligations under a nation’s AML/CFT laws and regulations. It is one thing to let tax cheats bring back unreported income to promote capital investments in a country, but it is quite another thing to also let criminals into your banking system almost unchecked.”
De Kluiver said he imagines that the FATF’s evaluation of Israel, in this regard, will depend on how the law was crafted and whether banks pick up the slack in vetting customers.
“If the law makes clear that the tax reporting exemption does not relieve financial institutions from vetting their customers under normal AML procedures, and, if needed, reporting them to IMPA, then such laws generally have not caused the FATF any heartburn. But if it is silent on this issue, then it can be a major problem,” he cautioned.
“Tax evasion and money laundering of criminal proceeds often look the same on paper. So, in my view, if an immigrant or ex-pat seeks to take advantage of the tax amnesties, then the Israeli banks taking on such customers should use enhanced due diligence to make sure the source of the income not declared was in fact legitimate, and if it is not report that conclusion to IMPA.”
What’s wrong with a tax exemption for new immigrants?
On February 15, two days after Israeli police published their recommendations to indict Netanyahu for bribery, the pro-Netanyahu daily Israel Hayom published an article by its economics editor Eran Bar-Tal in which he questioned why promoting a law that gives tax breaks to new immigrants, as Netanyahu is alleged to have done, is considered a bad thing.
“What could be more natural and right for Israel than to attempt to attract wealthy Jews to Israel after years when it only attracted Jews from countries in distress?” Bar-Tal opined. “The central question needs to be whether this law is good or bad for Israel.”
In the article, Bar-Tal interviewed Tali Yaron-Eldar, a tax attorney who served as income tax commissioner between 2002 and 2004 and later co-founded Israel’s first binary options company, Etrader, in 2007. (Binary options is a widely fraudulent Israel-centered industry that fleeced billions from victims worldwide for a decade before the Knesset finally outlawed it in October.)
Yaron-Eldar told him that an initial version of the tax exemption was conceived when she was commissioner.
“In 2003, the Israeli tax system changed and became personal, so that Israelis owed taxes on all their income all over the world,” she was quoted as saying. “The law did not exclude new immigrants or returning residents but determined that they could benefit from an exemption from their income abroad for five years. Later, the exemption was extended to ten years. The thinking was that it makes no sense that someone who arrives from abroad should immediately get caught in the Israeli tax net for his income abroad.”
Yaron-Eldar told Israel Hayom that Israel is not the only country with a law like Amendment 168. “The UK has a law that is almost exactly like this, that allows people not to report their income for 15 years. So does Italy and so do other countries as well. Ultimately the argument over whether this is a good or bad thing is a matter of your worldview.”
Bar-Tal also interviewed Israeli tax lawyer Amichai Perry, who in 2012 appeared on the British magazine CityWealth’s list of leading lawyers who cater to ultra-high-net-worth clients. Perry said that the exemption from reporting was not problematic.
“To the extent that you have a tax exemption, whether or not you report the income will not help the immigrants in question and will not lower the amount of taxes the government collects, since those individuals are already exempt from taxes. In terms of the transparency issue, there is a very fine line between transparency and invading someone’s privacy,” he was quoted saying.
But experts contacted by The Times of Israel said that lack of transparency, or what they call secrecy, is in fact the central issue. While tax breaks on income that is fully reported may be problematic because they (fairly or unfairly) favor one segment of the population over another, reporting exemptions, which decrease transparency, are likely to attract criminal money, and criminals themselves, to the country that provides them.
“As a general matter, tax breaks are transparent, assuming all income and assets are properly disclosed,” Claiborne Porter, a former supervisor and trial attorney with the US Department of Justice’s Money Laundering and Asset Recovery Section, told The Times of Israel in a phone interview. “Reporting exemptions are less transparent when not accompanied by strict application procedures and controls. When proper controls are absent the system is ripe for abuse.”
Richard Smith, a British journalist and expert on tax havens and the offshore world, told The Times of Israel that Amendment 168, as it currently stands, is not merely a tax break but what he called a “secrecy measure.”
“If you were genuinely lowering the tax rate, you would keep the income reporting and charge 0% tax on it (or 1% or whatever). The exemption is a secrecy measure, preferentially extended to a privileged minority.”
Alex Cobham, chief executive of the Tax Justice Network, a research and advocacy organization devoted to the issue of international tax, tax havens and illicit financial flows, said that until at least the early 2000s, “there was a strongly embedded narrative that tax havens were a useful part of a globalizing world.”
This view began to change after 9/11 and the global financial crisis of 2008, according to the OECD Observer, an OECD publication. Many Western countries now see tax havens and the offshore world as undermining global welfare and stability, experts told The Times of Israel, even though some of them, the UK included, are themselves seen as major players in the offshore system.
‘Tax havens are not really about taxes’
“Tax havens, or secrecy jurisdictions as we prefer to see them, are not primarily about tax,” Cobham said.
“That is, they are not generally using transparently lower tax rates to attract real economic activity,” Cobham told The Times of Israel by email. “Rather, they are using financial secrecy to attract the taxable income and profits that in reality arise elsewhere — but in a way that is sufficiently opaque as to reduce the risk of challenge from the jurisdictions that are losing out (either in revenue terms, or as the victims of money laundering and other corrupt practices).”
In other words, many countries that try to attract wealthy foreigners by offering low taxes tend to offer secrecy as well.
The Tax Justice Network defines a secrecy jurisdiction as “a jurisdiction provides facilities that enable people or entities escape or undermine the laws, rules and regulations of other jurisdictions elsewhere, using secrecy as a prime tool.”
Cobham said that the problem with Israel’s Amendment 168 is “not that it incentivizes real (income-generating) activity, but that it seeks to exempt from tax, income which arose elsewhere. In that sense, it is classic tax-havenry — and not genuine tax competition.”
Aside from attracting bad actors, turning your country into a tax haven is bad for other reasons as well, said Cobham.
“There are a range of impacts from this — but they are likely to include worse inequality elsewhere, because progressive taxation will be thwarted to an extent; and worse inequality in Israel, because the price of tax havenry tends to be that the home jurisdiction also cannot pursue progressive taxation. In the case of the tax haven itself, that inequality will have a particular dynamic: that non-residents, or non-citizens of some form, will not be taxed on the same basis as full residents. And so what is locked in is an inequality against the haven’s own citizens. Among other things, this also tends to have a gender impact (because women are usually systematically under-represented among non-residents taking advantage of the laws; and because the weakening of public spending etc will disproportionately hurt women).”
Significantly, importing large numbers of wealthy, possibly corrupt people into your country can eat away at good governance and lead to corruption, several experts said.
But has that in fact, happened? Has Israel imported criminals as a result of Amendment 168?
The August 3, 2017, Knesset testimony of police superintendent Gabi Biton, who oversees money laundering investigations, suggests that some recent immigrants to Israel are criminals, although there is no way to know how many can be characterized as such or if they were drawn to the country by Amendment 168.
At a meeting of the Knesset Reforms Committee where the law to ban Israel’s fraudulent binary options industry was being finalized, Biton said that a sophisticated network of criminals, many of them from France, had established itself in Israel over the last decade. They specialize in carrying out scams over the internet, he said, including the carbon-VAT scam, which was dubbed the “sting of the century” in France, the CEO scam, forex and binary options. As a result, he said, Israeli organized crime had grown “meteorically” richer.