In a scene from the film "The Wolf of Wall Street", currently being screened and based on the true story of stockbroker Jordan Belfort, Belfort goes to a banker in Switzerland to examine the possibility of depositing illegal money with him. Belfort asks what the chances are of the Americans laying hands on the money. The banker answers sarcastically that this could happen if the Americans were to decide to invade and conquer Switzerland, and the two burst out laughing.
Sadly for many bankers, scenes like this can no longer take place. In today's world, the question is whether the Americans have succeeded in changing global banking and killing private banking for overseas residents, or offshore banking.
Until recently, it was a party everyone enjoyed: customers from all over the world would come to various banks, mainly in Switzerland, and hide money that in many cases had not been declared to the tax authorities, and in more serious cases had been gotten illegally. Under the umbrella of banking secrecy, the banks cooperated, and benefitted from a flow of money on which they charged high commissions, because as far as the customer was concerned the main thing was that the money should be protected from the authorities in his country, even at a high price.
The party is over. The US tax authorities decided to eliminate the phenomenon, and went about doing so aggressively, as the Americans can do, and tax authorities in Europe are starting to follow their example. The banks are beginning to realize that the tide has started coming in. "Globes" recently reported that Bank Leumi (TASE: LUMI) had started to approach European customers and ask them to present documentation from their countries of origin showing that the money deposited in their accounts had been duly reported to the tax authorities. Unless such documentation is forthcoming within a few months, the bank threatens to close the accounts concerned.
This is no light step, and it puts the customer in an unpleasant position. Many customers even fear that the bank, which for years has been discrete, is suddenly turning its back on them in favor of the tax authorities. There are customers who even fear that the bank will disclose to the authorities their bank account details, although the banks have no such intention, and in any event, customer details can only be handed over to the authorities after receipt of a court order.
On the face of it, one could say that the customer is under no obligation to provide the details to the bank; he can withdraw his money and switch to another bank. In the current situation, however, the chances of finding another bank that will take him in are low. Any bank with which he might try to deposit the money will raise an eyebrow and ask "why did you leave your previous bank?"
In effect, therefore, customers nowadays have almost no choice. If the bank requires it, they must produce forms showing that they have declared the money to the tax authorities, even if it is a matter of money deposited many years ago.
How did it all start?
In the wake of the economic crisis of 2008, the US found itself in a deep fiscal deficit. US President Barack Obama decided that one of the ways to narrow the deficit would be to step up tax collection efforts. When the Americans set themselves a goal, they go for it full steam ahead. Tax collection was tightened up in two ways: fines for past cases, and legislation to prevent such cases in the future.
Three years ago, the US authorities announced an investigation into several banks in Switzerland on the suspicion that they had assisted their American customers in evading tax. UBS AG (NYSE; SWX: UBS) was fined about $800 million in this affair, and there are those who reckon that since it was the first to reach understandings with the US authorities, it got off lightly.
An investigation is also underway into three Israeli banks: Bank Leumi, Bank Hapoalim (TASE: POLI), and Mizrahi Tefahot Bank (TASE:MZTF). The investigation into Bank Leumi is at the most advanced stage, and should be concluded within the next year.
The US authorities, however, are not making do with heavy penalties for past offenses, and want to prevent such offenses occurring in the future as well. To that end, the Foreign Account Tax Compliance Act (FATCA) rules, due to come into force in June this year, were enacted. Under FATCA rules, financial institutions all over the world must report accounts and assets that they manage for US citizens in order that taxes can be levied on them, even if those customers do not reside in the US. Banks that fail to do so will be banned by the US, and will not be able to work with the US financial system - an impossible condition for any bank. They all therefore have to fall into line with the draconian rules.
The Europeans saw how effective the US measures were, and decided to follow suit. European countries do not have the same hold over foreign banks as the US has, and so at this stage they are placing the emphasis on increased supervision of their residents. So, for example, France has changed the rules concerning tax offenses, putting them into the category of the most serious crimes. In countries such as Germany, Italy and Austria too, supervision has been tightened, and punishment of tax evasion has been made more severe.
What next?
For the time being, Europe is tightening supervision of its own citizens but has no special requirements from foreign banks. However, the belief is that the next stage in Europe will be legislation similar to FATCA in the US, and this will compel the banks to demand a declaration from customers about reporting to the tax authorities. The banks, which have already been burned by the US authorities with investigations and fines that they expect to pay, have decided to take preemptive action, and are now demanding from their clients more than the regulators are demanding from the banks.
For example, banks in Switzerland have begun demanding declarations from European customers that they have reported their money in their countries of origin (as Bank Leumi has begun doing in Israel). In addition, in January, HSBC Holding plc (LSE: HSBA; HKSE: 005; NYSE, Paris: HBC) in the UK announced that it was restricting cash withdrawals by customers to £6,000. A customer wanting to make a bigger withdrawal has to state what the money will be used for.
HSBC's act caused a storm, and even set off rumors that it was suffering from liquidity problems. Although the reason for the bank's directive was tighter controls against tax evasion, it withdrew the directive in response to the criticism.
There is no question that the banks' voluntary steps are an indication of the pressure they are under over tax evasion, and that they are determined to avoid at all costs any new investigation by tax authorities, even at the price of losing customers. A top banker summed up the situation, "Soon, it will be impossible to deposit large sums of money anywhere in the world without declaring that it was reported to the tax authorities in the customer's home country. The world is closing in."
What about Israel?
Israel is different from the rest of the world. Bank accounts of foreign residents are mostly held by Jews, who transfer money to Israel for historic reasons of Zionism and to diversify risks against the dark day when the climate in the Diaspora turns against them. However, unreported income has been included in these transferred.
But tightening regulations around the world, especially the investigation into Bank Leumi and the heavy fine that it is expected to pay, has caused Israeli banks to change their attitude. A few months ago, "Globes" reported that the banks have begun tightening their attitude toward European customers. Some banks are hesitant to open accounts for European customers.
Tighter regulation, both by foreign authorities and by the banks themselves, is taking a toll on banks around the world in general, and in Israel in particular. First, the astronomical fines paid, and which will be paid, by banks have wiped out years of profits from these activities. Furthermore, FATCA requirements have caused massive withdrawals of money by customers, who have sent it back home or used it to buy real estate. For example, US customers have transferred $5 billion from Israel because they were forced to declare the money.
A similar trend is now beginning among European customers, albeit it is still at a much smaller scale. However, if other banks follow Bank Leumi's lead and demand documentation from their European customers, a wave of withdrawals may occur.
Published by Globes [online], Israel business news - www.globes-online.com - on February 25, 2014
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