As Olim (new immigrants) and others know, getting money into Israel isn’t easy. All the Israeli banks check that the money is clean and not tainted by crime, terror or tax evasion. The onus is on the bank customer to show the money is clean. Now the Haifa District Court has made things even harder. The Court ruled that paying tax on the money isn’t enough to clean up it up for banking purposes.

This article is based on a case summary of the Israeli Tax Authority (published August 20, 2024, no case number given).

Main Facts Of The Case:

The case relates to a client of Bank Hapoalim who sued the bank unsuccessfully to receive funds remitted from a foreign account. The client wrote in a KYC (Know Your Customer) questionnaire that he would be receiving a pension of NIS 7,000 per month in the account concerned. But in 2022 the client was convicted for receiving a bribe of NIS 1 million. That was after trying to transfer large amounts to the Israeli account in 2022 from a Swiss bank account. The customer didn’t provide paperwork showing the source of the funds involved. Instead, the customer said he had paid tax on the money under an Israeli tax amnesty (voluntary disclosure procedure) back in 2015. The bank refused to accept the money, so he tried again to transfer money to Israel from a US account via a British Virgin Islands (BVI) company that were not included in the tax amnesty arrangement. Again the bank refused. Was this an unreasonable refusal to provide banking services? 

Judgement:

The Court ruled that the Bank rightly refused to accept the money due to its suspicions of money laundering under the Money Laundering Prohibition Law, 2000, and the “red flags” in the related Money Laundering Order. The Court quoted the Israel Money Laundering & Terror Financing Prohibition Authority: ”Immunity from prosecution regarding tax crimes doesn’t affect the obligations of financial institutions… to inquire into the source of funds and consider whether there is suspicion of money laundering or terror finance”. Lack of client cooperation may signify a red flag of irregular activity in that Order. Therefore, the Court rejected the bank client’s lawsuit against the bank.

What Are The Red Flags?

The Money Laundering Order, 2^nd Schedule contains a list of 22 “transactions that may be deemed to be unusual activity” i.e. indicate red flags. Following is a brief summary of such red flag activities:

1. Aiming to circumvent reporting or identification requirements.
2. Undisclosed beneficiary.
3. Another financial institution suspected money laundering.
4. Intended to aid terror organization or terrorist.
5. Frequent use of bank safety deposit box by many people.
6. Lack of commercial or economic logic.
7. Operating the account via a power of attorney holder who is not a registered signatory.
8. Funds rapidly passing in and out an account for no obvious business reason.
9. Remittance to/from an unidentified overseas party.
10. Non-typical use of the account for no obvious reason.
11. Extraordinary size of transaction.
12. Number of movements to/from the same party for no obvious reason.
13. Multiple deposits by someone who is not an account holder or signatory.
14. No connection between a borrower and the loan collateral.
15. Multiple accounts not consistent with the account holder’s activity.
16. Frequent or large acquisitions of cash or other means of payment.
17. Ongoing dealings with certain enemy or suspicious countries.
18. Apparently incorrect declaration relating to the Order.
19. Dealings of not-for profit bodies with certain enemy or suspicious territories.
20. Dealings of not-for profit bodies apparently unrelated to their activities.
21. Multiple standing order credits for no obvious reason.
22. Large debit card credit or multiple credits for no obvious reason.

To Sum Up: 

A tax amnesty arrangement may give immunity from prosecution regarding tax offenses, but that is not relevant when an Israeli financial institution is considering whether to accept the money concerned. The moral is crime doesn’t pay even if you pay tax on the criminal proceeds. You still can’t deposit the money in an Israeli bank account or use that money.

The red flags are best avoided. Cooperation with bank questions is more likely to free up your money than suing the bank.

In our experience, Israeli banks typically request accountants’ or lawyers’ confirmation that all relevant taxes have been paid in all relevant countries, for each remittance to Israel.

Next Steps:

Please contact us to discuss any of the above matters further, or any other matter.

As always, consult experienced legal and tax advisors in each country at an early stage in specific cases.

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(c) Leon Harris 2024