In Surprise Move, Knesset Approves Law to Reduce Use of Cash

Its aim is to squeeze Israel’s black market by limiting cash transactions, and will increase tax revenue by some 500 million shekels ($145.7 million) annually

Israel's new set of 20, 50, 100 and 200 shekel bills released in February 2018.
Olivier Fitoussi

The Knesset’s approval of the law reducing the use of cash in the Israeli economy is an important achievement and an unexpected one, given that there was little support for it from lawmakers.

In the coalition, the opposition was wall-to-wall. Among those opposed were ultra-Orthodox Knesset members and Arab MKs were also against it. That Likud and Yisrael Beiteinu would oppose a law aimed at cracking down on tax evasion and the black market shouldn’t come as a surprise since more than a few of their leaders are being grilled in police interrogation rooms in connection with allegations involving large amounts of cash changing hands.

Ultra-Orthodox and Arab lawmakers’ opposition to the law came for a number of reasons, some of them legitimate (their voters are on average poorer than other Israelis and are less likely to have a bank account or credit card) and others illegitimate (such as tax avoidance and the black market).

Indeed, the opposition was so broad that for two years MK Nissan Slomiansky (Habayit Hayehudi) dared not advance the legislation in his capacity as chairman of the Constitution, Law and Justice Committee, not with Moshe Gafni (United Torah Judaism) looking over his shoulder.

The only reason the war on cash was won at all was due to the persistent efforts of unelected officials, mainly Finance Ministry Director General Shai Babad and Shaul Meridor, the head of the ministry’s budget division. Without the legislation, they warned, Israel would find itself on the blacklist of the intergovernmental Financial Action Task Force.

Israel is due for a visit from a FATF delegation and ahead of it the Israel Money Laundering and Terror Financing Prohibition Authority released a report setting out the risk the country faced if the FATF added Israel to the blacklist over its failure to deal with the gray market of unregulated loans and its heavy use of cash.

“The use of cash, mainly when it is used in big transactions, is a profitable activity for criminals committing crimes because it is anonymous, easy to hide and easy to assimilate into legitimate financial activity,” the report said. “Most cash is used for drug dealing, gambling and fraud . The threat of money laundering posed by the use of cash is rated at the highest level.”

The authority said the cash limitation law would enable the government to increase its tax revenues by some 500 million shekels ($145.7 million) annually by making it harder to evade taxes and harder to commit the kind of crimes that involve suitcases filled with money.

In any case, in the digital age, the alternatives to cash are easy and convenient to the point when the day may be soon approaching in which cash simply stops being a medium of exchange. In Sweden, this has already happened

The pressure on Slomiansky did the trick and the debate on the law was wrapped up inside of three days in his committee and then went to a full Knesset vote a few days later. (See story on this page for its terms).

Getting it through the Knesset involved some major compromises, among them including a doubling of the ceilings for permissible cash transactions, making them much higher than in most other developed economies. The Palestinian Authority was also excluded from the law because of the understanding that it would not be possible to conduct trade with it without cash.

As a result of these compromises, the projected tax take for the government was reduced to 400 million shekels annually.

The ceilings in the law will now make it illegal for someone to pay a builder sums such as 20,000 shekels in cash so that both sides can avoid value-added tax, as is common in Israel. It will be illegal, but it is hard to see how the Israel Tax Authority – the body enforcing the new cash law – will be able to effectively enforce it even if it does crack down on small building contractors

In any case, it does broaden the law so that not only the contractor will be in violation for not paying VAT but also the person who paid him for exceeding the legal limits on cash payments. The tax authority said that where enforcement fails, it hopes that knowledge of the existence of the law and the risk of getting caught will succeed.

“As ordinary people stop for a red light, even in the middle of the night when there’s no traffic, they will also come to realize that paying cash is something you don’t do any longer,” said a source at the tax authority.