It looks like Israel is going to be the next Switzerland — at least as far as the Department of Justice’s investigation into offshore tax avoidance is concerned.
On June 14, the Department of Justice unsealed an indictment against three American tax preparers for helping clients avoid taxes by moving money to Israel.
The transgressions detailed in the indictment were relatively small-time. The indictment said the father and son duo of David and Nadav Kalai and their colleague David Almog at a firm called United Revenue Service helped several clients duck taxes by moving money to two Israeli banks, identified only as “Bank A” and “Bank B.”
Most of the financial transactions detailed were small — in the tens or hundreds of thousands of dollars. The men could not be reached for comment.
But the indictment revealed the existence of a grand jury that is almost surely going after much bigger fish. And the details provided in it appear to suggest that “Bank A” is Bank Leumi, whose private banking operation is headquartered in Tel Aviv, and “Bank B” is Bank Hapoalim, which also maintains its global private banking center in Israel’s second-biggest city.
Calls to Bank Leumi for comment were not returned. Bank Hapoalim provided CNBC with a statement from its chief spokesperson, Ofra Preuss, who said, “we read the press reports and are checking into them.”
To date, the U.S. government has successfully cracked the code of Swiss bank secrecy, forcing UBS, Switzerland’s largest bank, to turn over thousands of names of American account holders to investigators, and taking similar actions against other Swiss institutions.
Sources tell CNBC the new case is just the beginning of a potential series of indictments, which may snare some of the wealthy American clients who have hidden money in Israel, many for generations. That’s likely to be politically controversial, especially at a time when the U.S. and Israel are working closely together to contain a geopolitical threat from Iran.
Add to that the political sensitivity of an Obama administration Department of Justice in an election year targeting a group of clients of whom many are likely to be Jewish or have historical family ties to Israel.
“There are a substantial number of Americans with unreported assets in Israel,” said Scott Michel, a partner at the law firm Caplin & Drysdale who specializes in criminal tax fraud investigations. “I wouldn’t be surprised if it is on a par with Switzerland.”
Attorney Bryan Skarlatos, a partner at the firm Kostelanetz & Fink LLP, said that he has clients who are being questioned in the wide-ranging investigation into Israeli bankers.
“I have special agents asking questions about specific banks,” Skarlatos said. “They need evidence that somebody spoke to a banker and the banker had a sense that they were dealing with a U.S. person — they’re asking ‘did you give them your U.S. passport?’”
Both Michel and Skarlatos spoke of allegations of cash-transfer banking, in which overseas bankers match up American clients who want to withdraw and deposit the same amount of cash with the foreign bank.
The bankers appear in the U.S., typically at a hotel, and arrange for couriers to bring the cash to the hotel from the depositing customer, and later turn it over to the withdrawing customer, only later crediting each account for the transaction back in the foreign bank offices.
It can be a dangerous way to avoid taxes, Skarlatos said.
“Some people don’t want to pay taxes, but they’ll risk their lives having someone show up on their doorstep with $3 million in cash,” he said.
In a highly technical and global economy, it’s getting more and more difficult for Americans to hide their assets overseas — and keep it hidden from the IRS. And that means the days of $3 million cash transfers may be coming to an end.