Tighter US tax laws have taken a toll on Israeli banks. The banks estimate that US citizens have withdrawn $4-5 billion from Israeli banks in less than two years. Although this amount is not enough to undermine the banks' stability, as it amounts to only a few percent of deposits, it is nonetheless a substantial sum and some banks say that it is more than their initial projections for withdrawals.
"The blow is not just in the drop in assets, but also in the drop in investments. Some of these customers, especially the wealthy ones, use the money to make investments and acquisitions in Israel. There is now little chance that they will make these investments, after they moved the money back to the US," said a banking source.
In most cases, the money withdrawn from the Israeli banks was sent to banks overseas, mostly in the US. In many cases, the money was intended to buy property in Israel, especially luxury apartments, which had helped inflate prices in this market segment where prices were already high.
The withdrawal of funds was partly in preparation for the coming into effect of the Foreign Account Tax Compliance Act (FATCA) at the end of 2013. The law is intended to improve tax collection by the Internal Revenue Service (IRS). It requires financial institutions in foreign countries to report bank accounts and assets held for US citizens so that taxes can be levied on them, even if the citizens do not reside in the US.
100,000 US citizens are estimated to live in Israel. A bank which does not provide the information demanded about its US customers will be subject to penalties, ranging from heavy fines to barring it from the US.
The banks have been preparing to implement FACTA for over a year. The process includes mapping US customers (people with either a US passport or Green Card), even if they reside in Israel and have Israeli citizenship. As part of the process, the banks notified the relevant customers about the significance of FATCA: the banks must locate the bank accounts of US customers, sign them on the necessary forms, and send the forms to the IRS, and, if necessary, to collect a 30% tax on the accounts.
As a result of this process, many US customers decided to withdraw their money and return it to the US, since there is no tax advantage in keeping the money in Israel. Other customers decided to withdraw the money to buy real estate, and thereby evade the tax payment because the purchases were made without mortgages.
The banks believe that the wave of withdrawals is over. We've completed the mapping and marked the Americans' accounts. Those who want to go have already left, and from now on the identification will only be for new customers, which is a simpler process," said a source at a bank.
SEC license needed
The tighter US regulations in general, and FACTA in particular, have increased Israeli financial institutions' awareness of US regulations. One US Securities and Exchange Commission (SEC) rule states that an investment manager for a US resident must have an SEC license to advise on US securities.
The restriction applies to US residents, not all US citizens, who manage assets in Israel. These customers' assets in Israel are estimated at several billion shekels. So far as is known, two Israeli institutions have a US license: Analyst IMS Investment Management Services Ltd. (TASE:ANLT) and Clarity Capital KCPS Ltd., which manages assets for wealthy individuals and institutions.
KCPS, which has $1.5 billion in assets under management, saw the opportunity, and is trying to tighten its ties with Israeli banks to manage investments for their US customers. "There are American customers who want to keep their money in Israeli banks, which are considered stable and conservative," says KCPS CEO Tal Keinan.
"We are a solution for American residents who want to manage investments in Israel, because, in contrast to the banks, we have the right capabilities and licenses to manage their portfolios," says Keinan, and estimates the potential for raising capital from this niche at hundreds of millions of dollars.
Keinan adds that while the banks were affected by FACTA, because in addition to the high costs of setting up the necessary infrastructure, they lost more than $4 billion in assets which customers pulled from the banks. However, KCPS believes that besides the blow suffered by the banks, opportunities were created for them.
There is global pressure, especially at traditional banking centers, on banking confidentiality. Regulatory changes, led by the US government, have caused cracks in Switzerland, the capital of private banking. KCPS CIO Eran Peleg says that there are many Jewish customers who realize this and are seeking alternatives.
"There are signs of a change, in which European and South American Jews are considering moving their money to banks in Israel. This is because Israel's banking system is seen as stable and safe, and because Switzerland's attractiveness as a center of banking and capital management is falling. Banks which know how to exploit this correctly can benefit from this trend. You only have to know how to deal with it, and to offer world-class capital management," says Peleg.
Published by Globes [online], Israel business news - www.globes-online.com - on July 1, 2013
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