In a move that some tax lawyers are calling a blatant violation of customer privacy, two Israeli banks are requiring current and prospective account holders with American citizenship to furnish portions of their U.S. tax returns.
Those who refuse to do so risk having their applications denied, or their existing bank accounts frozen.
For several months, two Israeli banks - Bank Leumi and Bank Hapoalim - have required customers to sign a waiver authorizing the banks to review a series of financial disclosure forms. One such form is the Schedule B - which shows dividend and interest income, including the names of all financial institutions paying out dividend and interest income - and a supplementary form known as a Foreign Bank and Financial Accounts form, or FBAR, for Americans with at least $10,000 in non-U.S. bank accounts.
"That the banks here can demand to see a portion of your tax return is something I haven't seen anywhere else in the world," said Dave Wolf, a tax attorney and partner with Hacohen Wolf Law Offices, which has offices in Israel, the United States and the Far East. "The Israeli banking industry is so aggressive, it's amazing. Many of our clients who received this waiver are outraged by this. The banks are turning into revenue agents."
Last April, Haaretz reported that both Bank Leumi and Bank Hapoalim were warning American clients that their Israeli accounts would be frozen unless they reported their bank accounts to the U.S. tax authorities. The admonitions - which were accompanied by requests for financial documentation - were widely seen by financial industry observers as harbingers of the U.S. Foreign Account Tax Compliance Act, which requires global financial institutions to report Americans' financial activities to the Internal Revenue Service or else face severe penalties. Elements of FATCA are set to go into effect at the beginning of 2014.
Although the scope of documentation required by Israeli banks was not clear at the time the notices went out, legal and accounting experts who have reviewed the waivers are now claiming Israeli banks have crossed the line.
"Forcing the customer to submit a copy of his U.S. tax return, or Schedule B, and/or copies of the FBARs is an invasion of privacy," said Don Shrensky, managing partner of Don Shrensky & Co., a firm with offices in Jerusalem and Ramat Gan specializing in both U.S. and Israeli tax planning and compliance. "Under FATCA, the bank has no obligation to ensure that the customer is complying with U.S. income tax and Bank Secrecy laws. The bank has to identify a customer as a U.S. person [have them sign a W-9 form] and transmit information to the I.R.S. about the customer and his accounts. The Israeli banks are going overboard by demanding this additional proof of compliance by their customers."
Louis Tuchman, a partner in the tax department of Kaye Scholer LLP, a leading U.S. law firm, said he had never before encountered an instance of a bank asking a depositor to agree to furnish copies of a Schedule B, FBAR or other forms relating to disclosure of income from non-U.S. bank accounts.
'Invasive' policy a harbinger
But under what he characterized as "the new FATCA regime," where banks "are making commitments to ensure that they are verifying and monitoring the U.S. status of their depositors," Tuchman said the request might not be so "unexpected."
"I consider it invasive, but it may be the picture of things to come," said Tuchman, a New York City native who was in Israel this week. "Remember, a depositor's relationship with its bank is a business relationship, and a bank can require that conditions otherwise not required by law be met by the depositor. The customer always has the option to go elsewhere."
A spokesperson for Bank Hapoalim, Ofra Preuss, told Anglo File that "according to the American Foreign Account Tax Compliance Act (FATCA ), banks worldwide will be required to provide information to the U.S. tax authorities with respect to the accounts held by American customers. In accordance with advice given by its American lawyers, Bank Hapoalim requires from its American customers to undertake to provide the bank - if and when required to do so - with documents attesting that their accounts have been reported to the American tax authorities."
It should be stressed that the customers shall not be required to provide the bank with a copy of their entire tax report (i.e. Form 1040) but only with the part thereof - Schedule B of the tax report- which directly relates to income derived from the account.
"Accordingly, the Bank acts as required by FATCA and in no way invades the privacy of its customers," Preuss said.
Bank Leumi's deputy spokesperson, Orit Reuveni, responded, "Bank Leumi conducts itself according to the law and regulations of every location in which it operates."