Israeli banks toughen requirements for dual nationals

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Banks are making absurd demands of new immigrants and freezing banks accounts of those unable to comply.

Israel Discount Bank (TASE: DSCT) demanded that a customer who immigrated to Israel 18 months ago from Italy sign a statement that she was a resident of Italy for tax purposes; otherwise, the bank notified her, it would freeze her bank account. Bank Hapoalim (TASE: POLI) demanded that a new immigrant seeking to transfer his savings from overseas to Israel provide the bank with authorization for the transaction from one of the five leading accounting or law firms in his country of origin, not from the accountant he had used for many years. In another case, a Russian-Jewish businessman who presented Bank Hapoalim with confirmation from his lawyer in Russia of his wealth and the tax he had paid on it encountered a refusal from the bank to accept it, because the law firm was not listed in the Legal 500 or Chambers directories. In another instance, Bank Hapoalim demanded that a customer who immigrated to Israel from Switzerland and had NIS 700,000 in her bank account to transfer the money to Switzerland, and from there back to the bank in Israel.

These are only some of the odd demands, arbitrariness, obstacles, and pitfalls recently imposed by banks in Israel on their new immigrant customers or dual citizens in the framework of the international struggle against unreported capital and the shadow economy.

As a result of the new international regulation, international exchanges of information, and exposure of the banks to trans-border risks, the banks in Israel are trying as hard as they can to neutralize as much as possible their exposure to risk, "and it appears that all means are acceptable for this," lawyers representing the banks' customers in the banking labyrinth say.

Illegal demands

"In recent years, following the change in international regulation, the worldwide breaching of banking confidentiality, and investigations of banks in Israel and elsewhere in the world, some of which have resulted in fines totaling hundreds of millions of dollars, or in the case of Bank Leumi (TASE: LUMI), a $400 million fine paid to the US for abetting tax evasion by US citizens, the banks have begun to recalculate the trans-border risks they are incurring," says Advocate Itay Bracha, who specializes in international taxation.

Bracha adds, "The banks, which are known for their intense risk aversion, were instructed by a circular from the Supervisor of Banks published two years ago to use extra caution with respect to risks incurred in international activity, and to institute a stringent internal policy in order to cope with this problem. The panic created in the banking system and the banks' fear of risk have led the banks to take many actions, some of which appear to exceed their authority, and some of which are even illegal."

According to Bracha, "As part of their measures for dealing with the new era in banking, the Israeli banks have cut back on the services they provide to foreign residents and new immigrants in order to make them give up and leave the bank. They have concentrated the customers exposed to tax in foreign countries in special branches, and have begun to make tough demands, some illegal, for every transaction that the customers want to conduct."

Bracha relates that in one of the cases he handled recently, Discount Bank demanded that a customer who immigrated from Italy to Israel completely 18 months ago and wanted to conduct a transaction in her account to sign "a completely false statement," as Bracha put it, that she was a resident of Italy for tax purposes.

"Otherwise, the bank informed her, it would freeze her account, although the customer had not resided in Italy for 18 months," Bracha says, adding that the bank retracted this demand only after prolonged discussions he held with the bank manager and its legal advisor.

In another case, Bank Hapoalim demanded that a new immigrant seeking to transfer his savings to the bank from overseas that he supply the bank with confirmation from a leading accounting or law firm in the country from which he immigrated that he had declared the money he was seeking to transfer to Israel.

"The customer, who wanted to provide this confirmation from the accountant he had used for many years, was turned down by the bank, which demanded that the confirmation be issued by a very large firm. This was impossible for the customer, who had never worked with any such firm. Furthermore, when one of the firms agreed to provide such confirmation, the firm demanded a great deal of money for the confirmation after his personal reports had been transferred," Bracha explains.

In still another case, one of Bracha's clients who immigrated from Switzerland and had NIS 700,000 in her account was required by Bank Hapoalim to transfer the her money to Switzerland and send it back to the bank from there.

"This transaction was completely illogical," Bracha states. "Out of despair, the customer agreed to the bank's demand and asked to divide the amount between three of her accounts in Switzerland, but this request was refused; she was required to make only one transfer."

Disproportionate demands

Advocate Eli (Ilya) Gervits has also encountered stringent demands by banks of their customers. "It is known that in the framework of the global trend towards enforcement of tax laws, the Bank of Israel Banking Supervision Department has instructed the banks to verify that foreign residents with bank accounts in Israeli banks are making the required reports to the tax authorities in the customer's country of residence. It turns out, however, that Bank Hapoalim is doing even more than what is required of it, and is even blocking the accounts of customers unable to comply with its unreasonable demands," he says, and explains that he has come across a number of cases in which Bank Hapoalim blocked accounts of customers with foreign citizenship. Bank Hapoalim is demanding that citizens with accounts at the bank who hold additional citizenship and who are not residents to produce confirmation from a lawyer advertised in a directory or having an international commercial rating.

"The bank has recently been making this demand from more and more customers," says Gervits, whose firm represents Israelis in Russia and companies and businessmen from Russia in Israel. Gervits also recently sent a letter to the Supervisor of Banks claiming that accounts of his customers had been blocked because of this unreasonable demand.

In one case Gervits came across, a customer, a Jewish businessman with dual Israeli and Russian citizenship gave the bank confirmation from his lawyer in Russia, as required. Bank Hapoalim refused to accept it, however, because the law firm was not on the Legal 500 or Chambers lists. In another case, the bank froze a customer's account and refused to release it, despite the fact that the customer provided many documents from the Russian tax authority itself.

Gervits asserts, "The bank's demands are unreasonable, and are more stringent than the Bank of Israel's instructions and the prevailing practices at the other banks in Israel and the rest of the world. In general, according to the Supervisor of Banks' instructions to the banks, a statement by the customer that he is meeting the tax requirements in his country of residence is sufficient, but Bank Hapoalim is apparently demanding confirmation of this, with no exceptions."

In addition, Gervits explains, Bank Hapoalim is demanding from its customers confirmation from a tax specialist in the country of origin listed in one of the leading directories. "There are two such directories: Legal 500 and Chambers Online," he says.

"Bank Hapoalim is not willing to accept registration in the local bar association, which is the professional and authorized association. The Legal 500 and Chambers directories are advertising directories. Being listed in them involves considerable cost. The firms listed in them are naturally large ones specializing mostly in business clients, not private clients, while the accounts involved are private accounts," Gervits complains.

Gervits argues that restricting clients to large and expensive firms from these two directories is creating extra difficulties and generating excessive costs. He says, "The bank's demand to verify that the customer is bringing confirmation from a senior lawyer who specializes in taxation listed in an international directory is disproportionate."

In a letter send last week to Bank Hapoalim's management, copies of which were sent to the Governor of the Bank of Israel and the Supervisor of Banks, Gervits is trying to make sure that Bank Hapoalim will not restrict its customers to obtaining confirmation only from lawyers listed in commercial directories. He is also demanding that Bank Hapoalim adopt a reasonable policy on blocking banking services and refrain from a total block that includes small and essential standing orders, for example institutions such as Israel Electric Corporation (IEC) (TASE: ELEC.B22) and municipalities.

A demand for non-existent confirmations

The banks are also making weird demands of the Israel Tax Authority. A senior Tax Authority source told "Globes" that in recent years, the Tax Authority has more than once encountered cases in which a bank demanded that customers provide confirmation from the Israel Tax Authority that does not exist, and is not granted at all by the authorities in Israel.

"When a customer returns to the bank with empty hands, the bank ridiculously tries to use this as evidence that the customer's actions are illegal, or do not meet the requirements," the Tax Authority source says. The only confirmation issued by the Israel Tax Authority is confirmation of residence and status for tax purposes, which can help new immigrants in coping with the banks. In many cases, however, this is not enough for a bank.

Bracha says, "This conduct by the banks is violating the rights of foreign residents conducting business in Israel, and especially the rights of new immigrants, thereby impeding economic growth by preventing the entry into Israel of the new immigrants' money and investment money of foreign residents."

The global all-out war against tax evaders and money launderers, and the international struggle against unreported international capital and the shadow economy has undergone dramatic changes in recent years. Regulators worldwide, headed by US regulators, have declared total war on tax evaders and money launderers, and have sent their octopus tentacles all over the world to combat the problem. This struggle has also changed the face of banking worldwide, after years in which the banks were regarded as collaborators in tax evasion that closed their eyes to irregular actions by customers (and even helped these customers in certain cases). The banks have had to take the side of the countries in the struggle in this matter, especially after a long list of banks, including Israeli banks, have had to pay heavy fines for their cooperation with tax evaders.

Bank Leumi was fined $400 million by the US, and Bank Hapoalim and Mizrahi-Tefahot Bank are also liable to be fined. In view of these events, the banks have begun unloading problem customers, and are reporting the questionable actions of other customers in order to get the regulators and the risk of huge fines off their backs.

The Bank of Israel's instructions to the banks concerning detection of patterns of action by customers liable to indicate tax offenses went into effect in December 2016. The Bank of Israel Banking Supervision Department has compiled a list of 18 signs that the banks are required to report to the authorities as "unusual activity." Among other things, the Bank of Israel has cited the following red flags that should attract a bank's attention: many and large money transfers to off-shore countries, a volume of activity that does not match the character of the account, foreign residents' accounts with a power of attorney granted to an Israeli resident, numbered or coded accounts, loans backed by collateral or guarantees located in overseas branches, concealment of the customer's dual citizenship, excessive interest in tax questions by the customer, a customer's refusal to report the source of his wealth, and the customer's refusal to present confirmation that his assets have been reported to the tax authorities.

Bank Hapoalim said in response, "The question is part of a broader matter that has been greatly engaging the global banking system in recent years - 'cross-border activity.' This refers to financial activity by residents or citizens of a given country with respect to the financial system of another country. The global financial system in general, and the global banking system in particular, regards this subject as involving many risks, headed by risks of prohibited money laundering (whether relating to tax offenses or other offenses). As a result of this, due to their wish to preserve the standing of the Israeli banking system, regulators in Israel, have also published instructions and requirements binding on the banks in Israel, including Bank Hapoalim. The bank is accordingly acting according to these instructions, including 'refraining from providing banking services' to accounts for which data and/or documentation required by the regulatory provisions have not been supplied."

Published by Globes [online], Israel Business News - www.globes-online.com - on June 20, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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