Set to Miss Bank Account Sharing Cutoff, Israel Sanctions Loom

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By Matthew Kalman

Israel will miss the September deadline to start exchanging financial account information with foreign tax authorities, a finance ministry official said June 25.

The finance committee of Israel’s Knesset parliament June 25 failed to approve the secondary legislation required to instruct banks and other financial institutions to transfer details of relevant accounts to the Israel Tax Authority so they can be shared with other jurisdictions. The delay is tied to disagreement over regulations for certain loan-free funds.

As a result, the country may end up on an international financial blacklist and its banks could face sanctions from foreign lenders.

“Israel is the only OECD country not to fulfill its obligations and one of only a handful from more than 100 countries who have failed to implement the treaty,” Frida Israeli, chief senior deputy director and head of state revenue, research and international affairs at Israel’s finance ministry, told the committee June 25.

Israel is “permanently under the scrutiny of international forums,” and has faced the threat of sanctions in the past over the lack of banking transparency, she said. “Those sanctions will return. The OECD will not accept it. It’s not possible that an OECD member will not implement this procedure. It’s hard for me to even imagine at this committee what sanctions might be involved, but it would be extremely uncomfortable and threaten our position in the OECD.”

Israeli told the committee “to place the matter on the agenda for discussion and to approve the regulations as quickly as possible.”

Behind the Scenes

Eran Yaacov, director general of the Israel Tax Authority, had said at a tax conference in Tel Aviv June 19 that he hoped the issue “will be legislated in the finance committee and we will also be able to become part of this process which is delayed for the moment because of the legislators. What can we do?”

Observers blame the delay on the finance committee’s powerful chairman, Moshe Gafni, who is concerned that the treaty will affect charitable free-loan funds known as “gemachim,” or “acts of loving kindness.” The funds are widespread in the ultra-orthodox Jewish community, which Gafni represents.

Gemachim, which provide essential services to the poor among Israel’s largely impoverished ultra-orthodox society, are also suspected of being a significant channel for money-laundering and tax evasion. After decades of largely unsupervised operation, the Israeli authorities are tightening regulations around the funds, demanding they be registered, regulated and transparent. Not all the funds are rushing to comply.

“Apart from the consequences related to the violation of an international agreement as such, the meaning of such a delay is that meanwhile Israel is not able to receive information on the billions of shekels held by Israelis in bank accounts abroad and in this way is allowing tax dodgers to continue avoiding or evading tax on our account,” said Moran Harari, founder and director of Tax Justice Network Israel, which campaigns against tax evasion.

A Compromise?

Gafni said he isn’t to blame for the fact that the committee hasn’t discussed CRS since last October.

“We are making laws which make it more difficult for Israeli citizens to manage accounts, particularly at banks, because we have agreements with foreign countries,” Gafni told the committee. “I’m in favor. I stand behind this, but I want to conclude everything together. I don’t want the law on gemachim to be left hanging.”

But Gafni has refused to approve the CRS regulation unless the status of gemachim is also agreed to. In the draft regulations presented to the committee on June 25, registered gemachim are given the special status of non-financial “public institutions,” exempting them from CRS reporting obligations. There are also different provisions depending on whether the funds have deposits above or below $50,000.

An interim arrangement allowing the gemachim to operate and manage bank accounts expires Aug. 1.

“These are critical issues. We need to know the size of the accounts that we are required to report. None of the issues have been discussed between us and the government and we are still standing still,” Tibi Rabinovici, director of external relations at the Association of Banks in Israel, told the committee.

Israeli officials are unsure whether the OECD will approve the exemption, but say they can’t persuade Gafni’s committee to approve the CRS regulations without the compromise.

“If we do not advance this legislation, the country will pay a very, very heavy price,” warned Mickey Levy, a committee member, former deputy finance minister and former Jerusalem police commander. “We’ve already missed the deadline. I am very concerned what will happen to Israel if we don’t make progress.”

To contact the reporter on this story: Matthew Kalman in Jerusalem at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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