Bank of Israel backs down on foreign remittances

The Bank of Israel Bank Supervisory Department published draft new instructions to Israeli banks regarding checks required to ascertain whether money was properly taxed. In 2016, certain tax offenses were made “predicate offenses” under Israel’s anti money laundering rules, which Israeli banks administer. In other words, Israeli banks were turned into tax police.

Few doubt the banks are ill-suited to this job. But as a result, moving money to and from Israel has become a major headache. People understand the need for KYC (Know Your Customer) to prevent terror and money laundering. But abrupt rudeness is another thing.

Olim and businesses often face demands by bank legal departments via local bank clerks to prove the money concerned was fully taxed in each country, even if this is complex or means going back years. The money is first frozen in a suspense account, and before you know it, it is returned to where it came from abroad.

Fortunately, the Bank of Israel (BOI) and Israeli Tax Authority (ITA) have woken up to the absurdity of the situation and issued the aforementioned draft revised instructions which should be adopted “by January 1, 2019” (Compliance Risks Procedure Now That Tax Offenses Are Predicate Offenses, September 12, 2018).

What’s in the revised draft instructions?

As before, banks are required to have KYC (Know Your Customer) procedures for detecting money laundering. A money laundering risk may exist if any of 18 red flags are spotted by the bank. These are intended to focus on complex structures that make it difficult who holds control, or trusts that make it difficult to identify a beneficiary. The BOI still claims that all amounts must be checked even if they are below the minimum for a predicate money laundering offense.

But revised instructions should allow the banks to rely on self-certifications from the customer that all taxes in Israel have been paid. Two standard self-certification forms are prescribed. First, a form for all clients reporting activity, confirming tax compliance and explaining any red flags (see below). Second, a form for companies requiring details of shareholders and signatories. The new forms are apparently now largely silent about any possible foreign tax offenses. And there are certain let-outs for public companies which are already heavily regulated.

The 18 red flags:

If you want to minimize Israeli banking delays, avoid the 18 red flags in the revised BOI instructions summarized here:

• Two companies with similar names in different jurisdictions (not public companies);

• Transfers to non-treaty countries (see below; not public companies);

• Deposits or withdrawals approaching NIS 50,000;

• Circular cash flows;

• Irregular account activity;

• Israeli resident holds power of attorney for foreign resident;

• Accounts of companies incorporated in non-treaty countries controlled by Israeli residents or Israeli resident signatories (not public companies);

• Back-to-back loans using collateral (not public companies);

• Back-to-back loans using a guarantee by non-treaty country company (not public companies);

• Concealing dual citizenship or taxability;

• Concealing residency;

• Hold-mail arrangement unless in country lacking diplomatic relations;

• Moving account due to new tax laws or questions at the old bank;

• Keen interest in bank reporting to the Tax Authority (Israeli?);

• Won’t reveal source of wealth or income;

• Won’t confirm that source of wealth and income reported to the Tax Authority (Israeli?)

Which are the okay treaty countries?

The revised draft instructions list 29 countries which have bilateral or multilateral treaties with Israel. It is unclear which type of treaty, as the OECD has many more members and partner countries.

The listed countries are: Austria, Estonia, Belgium, Brazil, China except Hong Kong, Bulgaria, Canada, Croatia, Czech Republic, Japan, Denmark, Finland, Germany, Portugal, Greece, Russia, Hungary, India, Slovak Republic, Latvia, South Korea, Lithuania, Spain, Mexico, Poland, France, Sweden, USA, Uruguay.

Comments:

The revised draft self-certification forms may hopefully speed up international banking procedures. There is no reference to olim and their 10-year tax holiday. Many major countries are missing from the okay treaty country list for some reason. It remains to be seen whether the Israeli banks have learned their lesson about not messing legitimate clients around.

As always, consult experienced tax advisors in each country at an early stage in specific cases. leon@hcat.co

The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.