Is Israel the Next Switzerland?

As the Internal Revenue Service (IRS) and the criminal tax division of the U.S. Department of Justice (DOJ) expand the global scrutiny of offshore bank accounts, they have turned their attention on three of Israel's biggest banks: Bank Leumi Le-Israel, Bank Hapoalim and Mizrahi-Tefahot Bank, to determine whether these banks helped U.S. citizens to evade taxes, and other Israeli banks are beginning to take notice.

As previously reported by Reuters, Leumi and two other Israeli banks, Bank Hapoalim POLIO.UL and Mizrahi-Tefahot (MZTF.TA), are under investigation by the U.S. Justice Department in connection with offshore private banking services that may have enabled wealthy Americans to evade taxes.

The broad probe comes as the United States moves closer to fully implementing in 2014 the Foreign Account Tax Compliance Act (FATCA), which requires foreign financial institutions to help ensure that U.S. clients comply with U.S. tax laws.

It should come as no surprise to Israeli banks that the IRS has arrived on its shores, since it has been widely reported that Israel's Ministry of Finance is working on an agreement with the US Department of the Treasury to transfer information relating to the bank accounts of foreign nationals. The Ministry is attempting to help Israeli banks deal with strict US regulations under the Foreign Account Tax Compliance Act (FATCA), which applies to US citizens residing overseas. Under FATCA, banks in other countries, including Israeli banks, are required to disclose to the IRS account information of US citizens, details of the accounts, and declarations that they have paid the required taxes. Additionally, Israel Tax Authority director general Doron Arbeli met IRS acting commissioner Steven Miller in an effort to come to terms on an agreement. Some banks, however, are taking the initiative.

Bank Leumi is now urging clients to disclose information related to their accounts to U.S. authorities:

Last March, Leumi wrote to U.S. clients, citing FATCA and requesting that they submit W-9 forms and sign declarations that their accounts complied with U.S. tax laws, according to a copy of the letter from the bank's Haifa branch that was obtained by Reuters. In signing the forms, the letter said, clients "explicitly waive banking secrecy/consent to such disclosure."

Additionally:

In a December 16 letter obtained by Reuters, Bank Leumi le-Israel BM (LUMI.TA) LUMIIU.UL urged U.S. clients to enter the Internal Revenue Service's voluntary disclosure program, part of a wide-ranging U.S. crackdown on offshore tax dodging.

"As published in the media, U.S. authorities are conducting investigations of foreign banks in connection with compliance with U.S. tax laws," the bank said in the letter.

The U.S. effort has been focused largely on banks in Switzerland, but it has been known that banks in other countries, including Israel, are under scrutiny.

Unlike Swiss bank secrecy laws that presented a formidable challenge to the IRS, pursuing undisclosed accounts in Israel will not require such a herculean effort on the part of the IRS. Currently, there is a tax treaty between the U.S. and Israel that enables both countries to exchange information pertinent to fraud or fiscal evasion in relation to the taxes of each respective country. Additionally, the U.S. and Israel routinely cooperate in tax related matters.

In addition, the U.S. and Israel currently grant legal assistance to each other in criminal matters via a Mutual Legal Assistance Treaty (MLAT). The MLAT, signed in 1998, states that U.S. and Israeli "criminal tax offenses," will be covered by the agreement, including providing for the exchange of bank records between the two countries.

To read the Reuters news article, click here.

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