Eying Granny’s Cayman Islands Windfall

Who's afraid of the idea of letting the state paw through Israelis' private bank accounts? The Tax Authority wants the Knesset to give it the right but many fret over privacy issues.

Israel Tax Authority offices in Jerusalem.
Lior Mizrahi

‘Tis the age of Facebook, WhatsApp and Instagram, yet privacy remains a cherished convenience.

Protection of privacy is precisely what is being championed by the opponents of one of the more draconian bills being promoted by the Israel Tax Authority, which would force the banks to divulge their clients’ account information, in the name of combating tax dodging and the shadow economy.

The draft law is now being discussed by the Knesset Constitution, Law and Justice Committee, chaired by Nissan Slomiansky (Habayit Hayehudi).

Originally, the ITA meant to make the banks report on the closing monthly balance of all business accounts in Israel. That idea had every accountant and tax consultant in the land up in arms. Nor did Slomiansky appreciate it, so that proposal has apparently been abandoned. In any case, accountants and tax consultants pointed out, the ITA already has the information on business accounts. All the monthly reports would produce is more red tape.

The ITA people see the point - the authority does have access to the figures of corporate bank accounts. Anyway, the ITA knows perfectly well that most tax dodging in Israel isn’t done through business accounts in banks, precisely because these accounts are monitored and reported for tax purposes. Most tax-dodge schemes are done through private accounts in the name of the schemer’s aunt, grandmother or child, into which hundreds of thousands of shekels are suddenly transferred from some trust fund in a Cayman Islands bank.

Which is why the debate on the bill is now focusing on another of the ITA’s demands: to be able to receive information on any bank account in Israel, corporate or private, when its suspicions are provoked. For instance, on all accounts that send or recieve money to or from accounts in the Caymans as well as accounts held by minors that are suddenly blessed by large deposits.

A special team at the ITA would study the banks’ findings. Accounts for which no reasonable explanation for the suspect activity would be investigated.

Slomiansky leans toward approving the ITA’s demand with some modifications. The agency wants to formulate the requests for information it sends the banks, which the attorney general would have to approve. Slomiansky wants the requests to be drawn up by a public committee and reviewed by the Justice Ministry.

For some eyes only

He also wants guarantees that actual account information would be handled by a very small team within the ITA, inaccessible to other agency departments, and that it is destroyed once the review is completed.

But Slomiansky isn’t alone on the Knesset Constitution, Law and Justice Committee. At least some of its other members oppose his position. MKs from Yisrael Beiteinu, for instance, are citing privacy concerns. Nor is the Israel Bar Association a fan of the proposal, for the same reason.

One can understand their opposition - the idea that all bank account information could be bared before the tax authority would spell the death knell for the principle of banking confidentiality. It also crushes the principle that we are all entitled to hold bank accounts without the state prying into them.

These are two fundamental principles, in democracy and the free market, too, so ostensibly, the whole idea should be shot down. But in practice, things are completely different.

In practice, for instance, the banks are already required to report any unusual transaction involving more than 50,000 shekels ($12,600) to the Money Laundering and Terror Financing Prohibition Authority.

Also, the world is also making its peace with disclosure by banks, as part of the effort to eradicate the banks’ status as tax havens. In the United States, for instance, everybody has to report their income and their bank balances to the Internal Revenue Service. In fact, it was the U.S. that broke the principle of bank confidentiality, after tax revenues collapsed in the wake of the 2008 global financial crisis. The Americans simply enacted the Foreign Account Tax Compliance Act, which requires any foreign bank operating in the United States (nearly every bank in the world) to divulge information on accounts belonging to Americans.

Following the American lead, the Organization for Economic Cooperation and Development came up with the Common Reporting Standard. Any country signed on the CRS treaty must routinely give each other information about accounts held by another country’s citizens. Israel is signatory to both FATCA and CRS which means that as of 2018, the information on most of the accounts Israeli citizens hold abroad will be routinely supplied to the Israel Tax Authority. Full report, mind you, without limit in time and without some preliminary requirement regarding suspicions.

Israelis will never have banking confidentiality again. So why bother to cling to banking confidentiality within the country?

Shadow economy

Privacy is an important principle and the use the ITA makes of account information should be constrained.

Like many lawyers, Sigal Kogot, legal adviser to the Constitution Committee, feels the principle of privacy trumps effective battle on tax dodgers.

“The proposed arrangement makes whole groups of people suspect,” Kogot said. Anyone could wake up in the morning and discover he’s under investigation by the ITA just because he fits into some rubric, Kogot asserted.

The concerns are serious and indeed the ITA’s powers need constraining. How?

For instance by having the request be approved by people other than ITA staffers and by the Justice Ministry; by keeping the reports confidential, including within the ITA. And, by having only suspicious cases transferred for handling and by deleting reports that can be satisfactorily explained without delay.

It is impossible to continue hiding behind the apron of privacy when it provides convenient tax havens for people living in a country like Israel and its enormous shadow economy.

Remember that just a year ago, when investigating allegations that Bank Leumi helped Americans dodge taxes, the U.S. demanded details on all bank accounts held by Americans at the bank based only on suspicions.

Leumi agreed and the State of Israel didn’t even bother to object. Consequently, the bank delivered thousands of names to the IRS even though there were no specific suspicions against any of them.

No excuse

Protecting privacy is no longer an excuse to hide from the taxman in today’s world, and in contrast to theoretical concerns raised by Kogot, a query specifying “a public personality whose bank balance is greater than his salary” would not be approved for exhaustive investigation, nor would the inquiry be carried out by the ITA, it seems.

We may assume that the ITA has no interest in hounding public personalities either. All it wants is to become more effective at enforcement among tax dodgers. It could make enlightened use of its power to look at all bank accounts in Israel. And in any case, as we said, the form of query it uses has to pass vetting by external elements and the Justice Ministry.

The bottom line is there’s no point in fearmongering about draconian damage to our privacy, and tax dodgers shouldn’t be allowed to use privacy as a shelter for their misdeeds. If we want to live in an efficient, fair country, we need to support the state’s ability to enforcement tax collection.

The rest of the world got that point and are striding in the direction of increasing bank disclosures. There is no reason for Israel, where the black market is about 21% of gross domestic product (according to the Taub Center) - more than 50 billion shekels a year - to be the exception.