maandag 3 december 2018

Tax transparency watchdog urges Israel to step up moves against money laundering

After global index puts Israel in top third of most financially secretive countries, NGO calls for more public scrutiny and regulations to stop rich from hiding their assets

Illustrative image: Money laundering (iStock)
Illustrative image: Money laundering (iStock)
Israel must immediately move to pass regulations against tax evasion and money laundering if it is to protect its credit rating and avoid being shunned by the international financial community, a tax transparency watchdog cautioned in a report published Sunday.
The strongly worded advice coincided with a plea issued Monday by Angel Gurria, secretary-general of the 36-member Organisation for Economic Co-operation and Development (OECD) to Prime Minister Benjamin Netanyahu and Finance Minister Moshe Kahlon to speedily pass regulations enabling Israel to honor a commitment it made in 2014 to automatically exchange financial information.
Gurria said he would have to report on non-compliant countries as early as next year.
The only other OECD member currently not complying is Turkey.
The Common Reporting Standard (CRS) requires each signatory country to exchange information about accounts held by foreign residents.
Once Israel passes the regulations, it will also receive details about Israeli-held accounts overseas estimated at some $100 billion, according to Calcalist, a business daily.
Prime Minister Benjamin Netanyahu (2L) seen with Angel Gurria (2R), Secretary-General of the Organization for Economic Co-operation and Development (OECD), during the weekly cabinet meeting in Jerusalem on January 31, 2016. (Kobi Gideon/GPO)
Twenty-six OECD countries have already begun to exchange CRS information since the start of 2017.
Out of 101 nations — OECD members and others — that agreed to start implementing the CRS by 2018, Israel is one of the only ones not to have done so. It is joined by Dominica, the Caribbean island of St. Maarten, and Trinidad and Tobago, all of which are classic tax havens, and the US, which has its own system introduced before the OECD’s and called the Foreign Account Tax Compliance Act (FATCA).
In its report issued Sunday, NGO Tax Justice Network Israel also called on the government to scrap a legal loophole that exempts new immigrants and returning Israelis from reporting on their overseas assets for 10 years, due to the ease with which this can be abused by money launderers.
And it said the country must honor an additional commitment it made to the OECD to join a scheme to force large multinational companies to submit reports on each country in which they are active so that they can be obliged to pay proper taxes where the money is being made.
In the middle of next year, Israel will come up for a biennial review by the OECD’s 154-member Global Forum on Transparency and Exchange of Information for Tax Purposes, the report says. But as things stand, the country risks damage to its reputation, at the very least.
“There is a real risk that if Israel does not improve its ability to collect and exchange information, it is likely to enter the lists of non-cooperative countries maintained by the OECD and the European Union, ” the report warns.
“The inclusion of Israel in such a list could even lead to a lowering of its credit rating, which could lead to an increase in taxes, a cutback in state expenditure and an increase in unemployment.”

Sharing tax information

The Knesset missed a September deadline for passing the CRS regulations.
At present, Israel exchanges information — on request — with some 60 countries with which it has bilateral tax agreements.
But, as reported by The Times of Israel last week, the ultra-Orthodox chairman of the powerful Knesset Finance Committee, Moshe Gafni, has been refusing to send the regulations for ratification by the Knesset until he can be sure that the Haredi community’s free loan societies, known as gemachim, are fully protected under a separate information sharing agreement with the US.
Israel’s anti-money laundering authority has warned that gemachim must be regulated because many are being used to evade taxes and for money laundering purposes.
Gafni wants an extension to the August 2018 deadline for finishing the gemachim-related regulations as well as more time to implement the CRS — extensions that the Justice Ministry denied him for a fifth time on Wednesday for reasons that remain unclear.
A Justice Ministry spokesman declined to comment for this article.
United Torah Judaism MK Moshe Gafni chairs a Knesset Finance Committee on March 5, 2018. (Yonatan Sindel/Flash90)
Even if the government does pass the CRS regulations, though, Israel will not be able to take its place among tax-transparent nations until it cancels Amendment 168 to the Income Tax Ordinance, the report charges, because of limits it imposes on collecting and sharing tax information.

Secrecy loophole

Passed in 2008, the amendment was ostensibly aimed at attracting to the country well-heeled new immigrants and Israelis who had been living for at least 10 consecutive years overseas.
Amendment 168 not only exempts newcomers from paying taxes on overseas assets and income for their first 10 years — it exempts them from reporting on those assets as well.
Jewish Agency head Isaac Herzog, center, at an event at Ben Gurion Airport to welcome some 300 new immigrants from France on a special flight organized by the Jewish Agency, July 23, 2018. (Miriam Alster/Flash90)
Under pressure from international organizations, a provision to cancel the reporting exemption has been placed before the Ministerial Committee for Legislation as part of the Economic Arrangements Bill every year since 2014.
But each year, the minister of immigrant absorption — first Sofa Landver (Yisrael Beytenu), then Ze’ev Elkin (Likud) then Landver again — negotiated to have the provision removed from the bill before the other ministers could even vote on it.
With Yisrael Beytenu’s departure from the government earlier this month over disagreement on policy in Gaza, the immigration portfolio is currently in limbo.
Furthermore, because the government has already passed a two-year budget for 2018-2019, the next Economic Arrangements Bill will not come before the Knesset until 2020.
At a Tax Justice Network Israel round table event last month at the College of Management in Rishon LeZion, attended by high-ranking figures from the Israel Tax Authority, State Comptroller’s Office and Companies Registrar, as well as accountants and academics, a senior tax official said that the reporting exemption of Amendment 168 was raised as a problem “in all the [relevant local and international] reports, as if by copy paste.”
Many of those present agreed that Israel would only pass the CRS regulations and abandon Amendment 168 under international pressure.
In its recommendations, TJN Israel called on the government to cancel Amendment 168 forthwith, noting “it appears that the exemption from reporting determined in Amendment 168 to the Ordinance actually attracts people who wish to conceal their income, launder capital, etc.”
State Comptroller Yosef Shapira attends the presentation of the State Comptroller’s report at the Knesset, March 14, 2018. (Yonatan Sindel/Flash90)
Not only can Israel not collect information on irregularities or criminal acts, the report says, but the tax authority lacks any systematic procedures for collecting information on money held by Israelis overseas by, for example, cross-referencing information submitted to it with records held by other countries, real estate agents or media and internet reports.
A 2016 State Comptroller’s report noted that this failure had caused “considerable financial damage over the years” and enabled many to evade paying taxes by not reporting income, knowing that the chances of being caught were not high.
As far back as four years ago, the State Comptroller’s office warned that the exemption on reporting overseas assets for new immigrants and returning veteran Israelis not only did not meet international standards for transparency and information exchange, but raised concerns that dirty money could enter the country.
“The Israel Money Laundering Prohibition Authority has no details on new immigrants and returning Israelis,” a State Comptroller’s report said at the time, warning that wide exemptions on reporting were “likely to create an incentive to launder capital or to use capital which has been laundered overseas” in ways that would harm both society and the Israeli economy.
The report described a random check by the State Comptroller’s Office of 600 immigrants and veteran returning residents who arrived in Israel between 2008 and 2012.
Illustrative photo of departing passengers at Terminal 3, Ben Gurion International Airport, Israel, March 19, 2008. (Anna Kaplan/Flash90)
After cross-referencing, it emerged that 100 had been flagged for potentially irregular financial activity, that five were the subject of requests for information to the Prohibition of Money Laundering Authority from foreign authorities, and that two of the five were also suspected by the Israel Police of involvement in trafficking of women and money laundering.
The State Comptroller’s report also noted that a “considerable number” of individuals who benefited from the 10-year exemption promptly left the country after the decade was up.

Making multinationals accountable

Israel is also in breach of a commitment to the OECD to oblige multinational companies to provide annual reports about every country in which they operate, the TJN Israel report said.
This scheme, officially named Country by Country Reporting, or CbCR, aims to stop multinationals with an annual turnover of 750 million euros ($850 million) and above from exploiting differences in tax laws and transfer pricing rules between countries to artificially shift their profits to tax havens or low tax jurisdictions and thereby minimize or avoid paying tax.
Transfer pricing is a term for the pricing of transactions within and between enterprises that are owned by the same concern.
European Union Competition Commissioner Margrethe Vestager speaks during a media conference at EU headquarters in Brussels on August 30, 2016. The European Union said Ireland had given illegal tax benefits to Apple Inc. and was obliged to recover the unpaid back taxes from the company, plus interest. (AP Photo/Virginia Mayo)
In one well-known case, the company which owns most of Apple’s offshore subsidiaries managed to avoid paying taxes to anyone by being incorporated in Ireland, even though it is a US company.
As Nicholas Shaxson explains in The Finance Curse: How Global Finance is Making us all Poorer, “Under US law, AOI (Apple Operations International) is incorporated in Ireland so isn’t a tax resident in the US. But Ireland uses a different test for tax residence: what matters is where the company is ‘functionally managed and controlled from,” which, in AOI’s case, is the United States. …So AOI was taxed by nobody and this helped Apple generate a mighty chunk of the $215 billion that it was estimated to have stashed offshore by the end of 2017 — out of reach, effectively nowhere.”
CbCR not only obliges multinationals to report separately on what they do in each tax jurisdiction in which they are active and to pay taxes in the respective countries. It also ensures that all the countries in which they have a presence exchange tax-related information.
Israel’s regulations for taking part in CbCR are stuck in the Knesset Finance Committee, along with those for the CRS.

The 34th ‘most financially secretive’ country

The TJN Israel report, written in collaboration with the Friedrich-Ebert-Stiftung, Israel, adds meat to the 2018 financial secrecy index published by international TJN in January, which ranked Israel the 34th most secretive country out of 112, with a secrecy score of 64 out of 100.
Switzerland was the most secretive, followed in second place by the US, on a calculation that weights how secretive a country is in relation to 20 different indicators by the scale of its activity in the global financial services market.
Israel occupies the 34th spot for reasons that include Amendment 168.
Senators debate banking secrecy in Switzerland’s Council of States, the Swiss federal assembly’s upper house, in the parliament building in Berne, Switzerland on March 17, 2009. (AP Photo/Keystone/Peter Klaunzer)
The report’s good news is that Israel performs efficiently on bilateral tax treaties and cooperates well with other countries on money laundering, even though, according to the OECD, it can take more than a year to get any information out of the Israeli tax authorities.
Israel also gets good marks for being one of just a few OECD nations that require taxpayers to report on certain aggressive tax planning schemes — which use loopholes or interpretations of specific clauses to save on tax — and for not giving Israeli citizenship in return for financial investment in the country.
This latter requirement contrasts with several countries, including Cyprus, which sell passports to those able to afford them – and in so doing, open a way for the wealthy, as well as the crooked, to travel visa-free around the world.

Allowing the rich to hide from public scrutiny

On the other hand, the TJN Israel report is critical of the many ways in which Israel continues to allow the rich to hide their assets from public scrutiny.
One way is by not insisting that companies, real estate and offshore trusts reveal the identities of their true “beneficial” owners.
A legal owner of a company, property, or trust is the formal owner who carries out various responsibilities. But it is the beneficial owner who actually enjoys the fruits.
And it is the anonymity of beneficial owners worldwide that allows inconceivable amounts of money to slosh across borders, from one tax haven to another, without any supervision.
In Israel, all companies except those traded on the Israeli stock exchange, must register their legal owners with the companies registrar, but not the beneficial ones.
Israel does maintain a central register of real estate owners, which contains limited information and is accessible to the Israeli public online for a small fee.
But in common with 32 other countries, the report said, it does not require the registration of a property’s beneficial owner, perpetuating a level of secrecy that, it warned, “increases the attractiveness of the real estate industry for crime, money laundering, and the use of complex legal structures in aggressive tax planning. “
A couple looks at real estate ads in the coastal city of Netanya, July 29, 2015. (AP Photo/Sebastian Scheiner)
“There are a number of reasons why real estate transactions are particularly attractive for criminals who seek to hide and/or launder assets and cash they have obtained illegally,” the report continues.
“First, money laundering through real estate does not require much planning or expertise and is therefore relatively simple compared to other methods of money laundering. Second, the use of cash to purchase real estate leaves no trace to researchers. Third, the prices of the higher units involved in land transactions make it easier to launder the amounts of illegal money.”

Trusts and Israel’s maximum secrecy score

Israel receives the maximum secrecy score when it comes to trusts, described by Shaxson as “one of the most useful versatile, slippery, powerful and also dangerous mechanisms in the entire menagerie of modern global finance.”
A trust is a legal structure created to separate the real owner of an asset from its beneficiary.
Originally established by medieval knights to put their assets in the care of a trusted person for the benefit of their families, in case they did not return, it is often used legally to minimize inheritance tax, to prevent a business from being exposed to creditors or to keep an ex-wife’s hands off one’s assets.
If a person puts his or her funds into a trust for the benefit of their grandchildren, for example, they cannot be taxed on those funds — only on the revenue they generate — because legally, they are no longer the owner.
The problem is that trusts can be — and are being — widely abused for money laundering and other nefarious purposes.
Nobody has ever worked out how much wealth is held in trusts worldwide, says Shaxson, although estimates range from $9 to $36 trillion.
File: World Bank headquarters in Washington DC (Courtesy World Bank)
He writes, “When the World Bank carried out a survey of how criminals use legal structures to hide stolen assets, it said trusts were so difficult to investigate or prosecute that they were rarely prioritized in corruption investigations, because they were so hard to crack open.”
Israel is grouped with another 10 countries in the most secretive category when it comes to requiring overseas trusts to register, even if they are managed in the country by an Israeli trustee.
Trusts created in Israel do have to provide details about beneficial owners and trustees to the Israel Tax Authority, but not to the registrar of companies, which means that the information is not made public. Again, Article 168 exempts new immigrants and returning Israelis from reporting on such trusts.
“Although trusts can have many legitimate aims, it seems that today there is almost no dispute that they can be exploited relatively easily to hide illegal activity by, inter alia, concealing the identity of the creator or beneficiary, especially in cases where the creator is also the beneficiary,” the report said, adding that it was not clear why it is the Israel Tax Authority rather than the companies’ registrar which registers trusts.
“Many trusts are established as part of complex legal structures of corporations and the lack of availability of information to the public does not allow journalists, researchers or the public at large to do their work properly and harms the transparency of the business environment,” it said.
In June, the UK government started to publish the world’s first open data register of the beneficial owners of companies.
Out of 3.5 million companies, 1.3 million had already filed beneficial ownership information as of November 17, 2018, according to the NGO Global Witness.
This April 3, 2009 file photo shows a general view of Road Town, Tortola in the British Virgin Islands, which has become a thriving center for the offshore financial services industry. (AP Photo/Todd VanSickle, File)
The UK also ordered its overseas territories – some of which, like the British Virgin Islands and the Cayman Islands have become bywords for hiding money – to publicize the beneficial owners of their registered companies by the end of 2020.
TJN Israel also called on the Israeli authorities to take steps to ensure that beneficial owners of companies and trusts are named in publicly available registers; that all limited liability companies submit annual financial statements, on pain of fines or other punishments, to the companies registrar to be made accessible to the public; to oblige identification of beneficial owners in a real estate database that is open to all; and to create a special Israel Tax Authority unit for dealing with high net-worth individuals.
Asked why there is such a reluctance to force publication of beneficial owners’ names, Moran Harari, director of TJN Israel, said: “It’s a very political question. Transparency has a price. Many companies, for example, may think twice about investing if they have to reveal their beneficial owners.”
She added, “Many private companies do have stuff to hide. Maybe they don’t want governments to know how much money they have so as to avoid paying tax. Maybe they’re cooperating with states that Israel would not want them to be in contact with.”
Private companies often argue that providing information hurts their business secrets.
Moran Harari, director of Tax Justice Network Israel. (Courtesy)
But, said the report, 15 OECD countries already require all private limited liability companies and limited partnerships to publish their financial statements – evidence, it said, that such a transparency requirement does not constitute a real threat to the business secrets of these entities.
Another way of concealing one’s identity as a part-owner of a company is through the purchase of bearer shares. The owner of such a share receives a piece of paper that lays out what the unnamed “bearer of this share” is entitled to. He or she must present that piece of paper in order to cash the share, but does not need to show any identity.
Amendment 28 to the Israeli Companies Law-1999, published in March 2016, eliminates the concept of bearer shares but — for reasons the report described as “puzzling” — sets no deadline for cancelling or converting shares of this type.
Israel is ranked third most secretive of all OECD member states after Switzerland and Austria on its tough stance — via fines and even prison sentences — against financial whistle blowers, individuals employed by banks and other financial institutions who break client confidentiality.
“Such laws threaten to silence insiders who expose corruption,” the report warns, “and must ensure that they do not allow individuals, companies and banks to break the law.”
The country is at the bottom it comes to publishing information which helps provide a comprehensive statistical overview of the country’s economic involvement with the wider world.
It publishes only three out of 10 databases holding information on the fields of financial, commercial, investment and international taxation.