Two news items in the past month placed the issue of off-the-books capital flowing into the real estate market from foreign investors on the public agenda.
Early in November, Israel Tax Authority agents were sent to the tiny beach town of Herzliya Pituah, in cooperation with the Israel Police and Interpol, as part of an investigation of French Jews who allegedly purchased property in Israel for the purpose of tax evasion.
Two weeks later, after receiving intelligence information, investigators raided some 200 luxury apartments in Ashdod, also owned by foreign residents. The officials requested information about rental fees and whether the foreign owners had reported this income.
This investigation, of possible fraud involving inflated value-added tax receipts from across Europe, was initiated a year ago by French authorities. Several months ago French investigators came to Israel to follow the suspects, wealthy French Jews who allegedly used profits from the VAT fraud to buy luxury homes in Israel.
The assumption is that the suspects believed that in the event they were discovered they could seek refuge in Israel from European prosecution. Sources familiar with the investigation say that was probably why they did little to hide their property purchases.
These are just two of many examples of how investments in the local real estate market could be motivated by something other than legitimate purposes, such as a desire to evade taxes or launder money. Due to the illicit nature of this phenomenon, its scope is difficult to gauge.
In another case, a year ago the French Jewish businessman Aaron Cohen agreed to pay 22 million shekels and plead guilty to money-laundering offenses, in a plea bargain with Israeli authorities. The organized-crime unit of the Israel Police international investigations division had determined that a French criminal ring involving Cohen sought to “launder” unreported income by buying property in Israel.
Cohen admitted to investigators that he owned a single Israeli property, a building lot in Tel Aviv’s Yemenite Quarter.
Attorney Boaz Feinberg, who heads the Tax and Money Laundering Prohibition Department in the law office of Zysman, Aharoni, Gayer & Co., notes that only a small minority of French Jews launder money through Israeli real estate.
Israel doesn’t flinch
“Those who did so didn’t correctly assess the situation,” he says. “When it comes to the prohibition on money laundering, Israel doesn’t flinch from aiding foreign governments to seize assets. If in the past the state gave special weight to the fact that these were Jewish citizens, today it doesn’t cut any slack to Jews who come here.”
Still, seizing property in Israel is a long and difficult and process, says a senior Israeli justice official. He points to a recent case involving a property owned by an American Jew that took three years to work its way through court before the state could seize it.
Two commonly accepted reasons for the sharp increase in real estate prices in Israel since 2005 are the low interest rates and the limited supply of land in this small country.
But people who know the local market say that unrecorded funds also help fuel the market. They tell stories of ultra-Orthodox Jews paying cash for apartments and finance-sector types who purchase luxury homes in Herzliya Pituah or Kfar Shmaryahu using shell companies. And they say it’s done by Israelis and foreigners alike.
“The Anti-Money Laundering Authority seizes 300 million shekels per year in laundered money and confiscates 70 million shekels,” says a senior legal figure. “In every one of these cases, real estate is seized and confiscated.” He adds that the properties range from small apartments to luxury homes.
According to a study conducted last year by the State Revenue Administration, at the request of TheMarker, of 16,600 real-estate investors who were evaluated between June 2003 and June 2012, a full 20% reported earning less than 7,000 shekels a month. The study involved only individuals who owned more than one apartment, not first-time home buyers or others who were buying an apartment as their primary residence. The assumption, therefore, is that at least some of these investors had undeclared income.
Avichai Snir of Netanya Academic College, an economist who studies the shadow economy, points to a number of developments abroad in the past several years that affected the Israeli real estate market and the flow of foreign capital into the country. Between 2005 and 2007, the numbers of secret Swiss bank accounts were leaked to tax authorities in several Western countries, including France and the United States. The subsequent tax investigations led thousands of people to close their accounts and look for other tax havens.
During this period, large numbers of Jews from abroad purchased homes in Israel. The most common explanation, at least for the French Jews, was growing anti-Semitism in that country. For American Jews, most of whom bought property in Jerusalem, the phenomenon was interpreted as a sign of the attraction of Israeli real estate as an investment.
But Snir says that at least part of the upsurge was due to the desire of French and American Jews with Swiss bank accounts to find another place to park their assets.
“At the time, Haredi figures in Brooklyn said the leaking of the Swiss bank accounts was an anti-Semitic plot to screw the Jews,” Snir says. He says that Jews with money in foreign tax shelters have been advised to invest the money not in Israeli banks but in real estate, to make it harder to track, especially if the properties are registered in the name of companies that conceal the name of the owners.
In 2009, foreign law enforcement agencies, particularly in the United States, put more pressure on Swiss banks to reveal the identities of account holders. That spurred another wave, in 2010, of billions of dollars being moved out of Switzerland. During this period Israeli home prices shot up by 30%. The rise was attributed to increased investment from abroad.
This year, the Foreign Account Tax Compliance Act began requiring U.S. citizens with dollar accounts in foreign banks and financial institutions to report their assets to the Internal Revenue Service and pay taxes on them, if owed. FATCA imposes restrictions on foreign financial institutions that do not comply with reporting requirements.
It has been estimated that American citizens withdrew $1 billion from Israeli bank accounts ahead of the enactment of FATCA. Mmuch of this money was channeled into real estate investments in Israel or abroad.
An estimated $4 trillion is still hidden in Swiss bank accounts as a tax dodge. Snir says the leak earlier this year of information on thousands of Swiss bank clients to German tax authorities and Wikileaks will likely increase the flow of capital into real estate in 2014.
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