Israeli Banks Urge America Clients to Close Israeli Accounts

Israel banks aiming to avoid conflict with Washington in wake of new U.S. banking regulations.

Obedient to intensifying U.S. government pressure to crack down on offshore tax evaders, in January Israeli banks began ordering clients they identify as "Americans" or "U.S. tax residents" to close investment accounts they hold in Israel. It is apparently an anticipatory measure, ahead of changes in U.S. law. Local banks are apparently responding to changes in American regulations as their legal counsels interpret them.

The Bank of Israel hasn't handed down instructions to the banks on the matter, which doesn't fall under its purview.

In February, for instance, Bank Mizrahi-Tefahot informed clients that as a "result of current U.S. regulations" it can no longer provide "securities services to U.S. persons," and explained the termination procedure. "You are receiving this letter because you are identified in our records as a customer who may be a U.S. person, within the meaning of the applicable regulations," Mizrahi wrote. The letter said that clients who fall into this category have until April 7 to tell the bank how to dispose of their holdings, adding that the bank will continue to provide "banking and non-securities services, including deposit accounts and CDs as well as foreign currency, checking and credit card services".

"If we do not receive your instructions by March 16, 2010, we may liquidate the securities in your account," Mizrahi warned.

Local finance professionals agree that the situation is likely will evolve as the Americans develop and implement new banking guidelines, but differ in their assessment of the possible consequences for U.S. citizens living in Israel.

"Theoretically, any American who has an account here could be affected by the changes," Aaron Katsman, a Jerusalem-based financial consultant who specializes in English-speaking clients, said. "They won't be able to hold stocks. They could have deposits here, but that's about it."

Americans in Israel are left with "with very few options," added Philip Braude, CEO of Beit Shemesh-based financial planning company Anglo Capital Limited. His suggestion: "Take the money back to America. If you're an American you should be investing in America." He agrees that the current situation is murky, with Israeli banks aiming to avoid conflict with U.S. authorities.

"The bank aims to comply with legal and regulatory requirements and constantly reviews the services offered to its clients to adapt them to the changing regulatory environment," Bank Hapoalim spokeswoman Ofra Preuss told TheMarker. She declined to elaborate.

Bank Leumi spokesman Aviram Cohen said that while he could not discuss the bank's customer relations policies, its business decisions are "based on legal standards."

What is not under contention is that American citizens must file annual tax returns with the Internal Revenue Service even if they live abroad, hold dual or multiple citizenships and pay taxes to another country.

While the U.S. has not instructed Israeli banks to close accounts held by American nationals, the IRS is widely expected to ask foreign banks to disclose information about U.S. account holders at some point.

The IRS "does not comment on pending legislation," agency spokesman Bruce Friedland told TheMarker. He said that U.S. citizens may bank in Israel "so long as they appropriately report the existence of accounts, report the income from the accounts and pay the tax on the income generated from the accounts."

Braude, of Anglo Capital Limited, points out that even if the bank is not specifically aware that a particular customer hold U.S. citizenship, that fact would not help them in a court of law. The bank could not argue that it did not know the client was American, he said: Israeli identity cards indicate place of birth, and banks obtain a copy of the document when opening an account.

The problems Americans face in Israel are part of the fallout from a tax evasion scandal involving Switzerland's biggest bank, UBS. In 2008 the U.S. accused the Zurich-based bank of helping wealthy Americans to evade taxes. In response, UBS announced it would stop providing cross-border private banking services to American clients. Last month the Swiss bank UBS agreed to pay $780 million to avoid being prosecuted by the American authorities. It also disclosed the names of some account holders.

It's perfectly legal for U.S. citizens to own stocks outside the U.S., Jerusalem wealth manager Katsman explained. However, he added, many people open accounts abroad for the express purpose of dodging tax payments. "Since the U.S. is desperate to get any kind of revenue possible, because things are tough there and they're running huge deficits, this is one of their ways: to make American citizens either pay huge fines or repatriate the money back to America."

America has a weapon: It could withdraw the licenses of U.S. branches of foreign banks if it suspects collusion in tax evasion.

"Israeli banks have branches in the U.S. and they know [the U.S.] would make it very hard for them to operate if they don't give them the same information that UBS gave them," Nir Amikam, head of research at Wareham Investment Bank, told TheMarker. "I don't know if it makes economic sense, I guess it depends on how much money [Americans have in Israeli banks]," he added. "The banks are probably thinking that it's not as much as they themselves are making by having branches in the U.S."

Finance professionals estimate that U.S. residents hold several billion dollars in Israeli investment accounts.

"The banks here in Israel, and all around the world, just took a business decision: They're not going to deal with Americans having stocks and bonds portfolios here because they don't want to take any risks," an investment advisor in one Israel's leading banks told TheMarker. However, she added, she believes that at present only U.S. residents are directly affected by the banks' decision. Americans living in Israel would not be asked to liquidate their stocks and bonds portfolios, in her opinion.

"We definitely think that in the next two or three years, there's going to come a point when America will stop and declare: OK, we're happy now," said Dylan Shub, principal of Tel-Aviv-based Fortress Capital Management. At that point we'll be able to understand exactly what has to happen and what we need to do."

Since the American authorities have not yet clarified what guidelines they might implement in the future, it is likely that Israeli banks will take further preemptive measures to avoid any conflicts with the U.S. authorities, several finance professionals agreed.