No Commission? Israel's Money Changers Targeted for Tax Evasion

Money-changing business accounts for a tenth of Israel’s financial market, or NIS 100 billion annually.

The money-changing business accounts for a tenth of Israel’s financial market, or NIS 100 billion annually, but it operates without any regular supervision, Finance Ministry officials said this week during a Knesset hearing on a proposal to change this situation.

The industry has grown into a giant, unregulated market, with 2,100 establishments across the country, the officials told the Knesset’s Constitution, Law and Justice Committee.

For the sake of comparison, there are 24 banks in Israel, which together operate 1,300 branches.

The treasury’s estimate assumes average annual turnover of NIS 50 million for each money-changing business. No one has an exact figure, because the sector is unsupervised. But it is likely that total turnover reaches hundreds of billions of shekels annually.

The officials released the figures as they urged lawmakers to approve a bill to create a database of all money-changing transactions exceeding NIS 50,000. They said the database is needed to help the authorities fight tax evasion.

Money changers are already required to report all transactions greater than NIS 50,000 to the Israel Money Laundering Prohibition Authority. The new bill would require such transactions to be reported to the Tax Authority as well, and allow the latter to enter them into a database that it could use to identify tax evaders.

The bill constitutes one section of the Economic Arrangements Bill, most of whose other sections were approved by the Knesset Finance Committee last week along with the budget. The full arrangements bill, which is regularly passed as supplementary legislation to the annual budget, will be brought to the Knesset plenum for its final readings next week.

In the version originally proposed by the Justice Ministry, information in the database would be available to tax fraud investigators even when there was no serious suspicion of tax evasion. But the Constitution Committee’s legal counsel objected, leading chairman David Rotem ‏(Yisrael Beiteinu‏) to make several changes. As it now stands, the bill would allow tax investigators access to the information only when they suspect someone is evading taxes exceeding a sum of NIS 500,000 in a given year.

The measure is part of a growing recognition by the tax authorities of the role played by money changers in facilitating tax evasion and organized crime.

“A large proportion of money changers feed criminal organizations,” Avi Ardati, the Tax Authority’s senior deputy director general, told the Knesset Constitution Committee last week. “Every criminal group has its in-house money changer.”

In recent years, money changers have become an important component of thegray market. They not only compete with the banks in changing foreign currencies, but also provide banking services like cashing checks and making loans, particularly to people too heavily in debt to borrow from a bank. Despite this, neither the supervisor of banks, the commissioner of capital markets, insurance and savings, nor any other financial regulator regularly supervises the industry’s activities.

The one piece of legislation that currently regulates money changers is the Prohibition of Money Laundering Law, which requires them to report any transaction they process involving a sum greater than NIS 50,000. But the treasury’s Insurance and Capital Market Division has just eight employees who verify that money changers are properly filing their reports with the Israel Money Laundering Prohibition Authority, and only 300 audits of money changers’ reports have taken place since the law was implemented 11 years ago. From these audits, it appears that the money changers’ compliance rate with reporting requirements is just 65%.

Similarly, a Tax Authority audit of 320 large tax files discovered that in about half the cases, income equivalent to NIS 7 billion went unreported through the use of currency exchange and check cashing services. That led to tax evasion costing the state between NIS 2 billion and NIS 3 billion.

The measure now being weighed in the Knesset will be a temporary law that expires in three years. In the interim, the Tax Authority will provide reports every six months to the Constitution Committee on whether the new law is effective. If the law is not extended, the database will be erased.

AP