A duty to report cryptocurrencies worth more than NIS 200,000, and any other property or cash worth more than NIS 1 million or a restriction on holding cash over NIS 200,000; Implementation of the Chilean model for tracking real-time fictitious invoices; Limiting cash loans to only NIS 6,000 and changing the method of collecting VAT in the cleaning and security industries – these are part of the recommendations of the inter-ministerial team to fight black capital in Arab society, headed by the director general of the Ministry of Finance.
The team’s recommendations include quite a few initiatives that the Tax Authority tried to pass in the previous Arrangements Law, as part of the budget approval 2021-2022, but were removed from the legislation, including the Chilean model for tracking real-time invoices (reporting each invoice over NIS 5,000) and applying currency reporting Virtual.
The team “To examine the phenomenon of crime in Arab society, resulting from the conduct of the black market in the financial field” was established in October last year in accordance with the government decision as part of the plan to deal with crime and violence in Arab society 2022-2026. Members of the team: Adv. Meir Levin, Deputy Attorney General (Economic Law), Head of the Tax Authority Eran Yaakov, Dr. Shlomit Wegman, former head of the Anti-Money Laundering and Terrorist Financing Authority, Hassan Taufra, Head of the Economic Development Authority in Arab Society, Yahli Rotenberg , Lt. Gen. Yoav Telem, Deputy Head of the Intelligence and Investigations Division of the Israel Police, Itai Temkin, Deputy Commissioner of Budgets, Eli Tobol, Senior Deputy Commissioner of the Capital Market, Financial Services Providers and Andrew Avir, Deputy Governor of the Bank of Israel.
The rate of black capital in relation to GDP in Israel is high in relation to the world
The volume of black capital in Israel is estimated at at least tens of billions of shekels a year. The various models for estimating the scope offer estimates over a wide range ranging from 6.6% to 19% of GDP, depending on the year and the estimation method. The main conclusion that emerges from the staff’s examination is that there is a close connection between crime and serious crime, including in Arab society, and black capital and economic activity that is not reported to the tax authorities. The scope of this activity is estimated at tens of billions of shekels. Crime financing is made possible mainly due to the use of cash, the conduct of some financial service providers, and the phenomenon of fictitious invoices.
The staff’s investigation revealed that the financial infrastructure of crime in Israel and in the Arab sector rests on black capital – unreported economic movements. The rate of black capital in relation to GDP in Israel is high in international comparison, and there is a direct connection between it and the use and holding of cash, which has been on the rise in the last two years.
An Israeli study conducted on the subject shows that there is a close connection between serious crime and cash and that while the percentage of tax evasion from black capital is declining, the percentage of crime from black capital in Israel is rising in recent years. According to the study, in the years 2013-2016, the crime rate from black capital in Israel ranged from 68% to 54%, and in the years 2018-19, it increased to 90%.
Is a reporting obligation sufficient or is there a cash limit required?
Among the main recommendations are a number of recommendations for dealing with the phenomenon of holding large sums of cash, but the opinions of team members were divided as to whether the obligation to report cash and cash holdings is sufficient or whether a strict limit should be imposed on holding cash above certain amounts: while some team members Staff member Ram Blinkov, believed that restrictions should be placed on holding cash in excess of NIS 200,000, and that the Tax Authority should be required to report amounts between NIS 50,000 and NIS 200,000; NIS 200,000 with the necessary enforcement tools to achieve the required goal without harming normative people.
For the approach of supporters of restricting the holding of cash, with the entry into force of the prohibition on holding and the reporting obligation in force, after the assessment period, the law enforcement agencies will have the tools to seize the cash, fine its holders, and collect tax for it legally.
According to proponents of imposing a reporting obligation only, such a provision would address the economic enforcement tools lacking today in the war on black capital and crime in particular while minimizing harm, if any, to the normative public, along with instilling a social norm that holding cash in large amounts is illegitimate.
Another recommendation enshrined in the report is a change in the VAT collection mechanism in the manpower services industries, including cleaning, guarding and security services, and construction work services.
According to the Tax Authority, the phenomenon of fictitious invoices is particularly prevalent in industries such as personnel services, construction, maintenance and cleaning. This is because these are industries that have a high added value and extensive use of workers who are illegally employed, and therefore it is necessary to cover the costs involved in their employment by deducting fictitious invoices. In recent years, quite a few criminal networks have been exposed that use the infrastructure of seemingly legitimate companies in the field of construction and cleaning to disguise criminal activity of issuing fictitious invoices, money laundering and tax evasion, in parallel with classic criminal activity of extortion and more.
In order to combat this phenomenon, it is proposed to stipulate that in providing such services to the dealer, the recipient of the service will be liable to pay the tax. There are cases today in VAT regulations where there is a reversal of VAT liability in industries where a widespread problem of distributing illegally issued tax invoices and deducting input tax based on them has been identified (the gold industry as stated), so the proposed amendment actually constitutes an extension of an existing mechanism.
The committee also recommends the solution that the tax authority supports and has been trying to promote in recent years: real-time reporting of invoices over NIS 5,000. According to the recommendation, a technological system for controlling financial crimes will be established, which will transmit to the tax authority in real time each invoice in an amount higher than NIS 5,000. For suspicious transactions – it will not be possible to deduct the VAT inherent in the invoices. The system will assist in tracking and controlling transactions in real time. This will impair the possibility of legally evading tax payment by issuing a fictitious invoice.
The report ignores one of the major issues
Crime data in Arab society show that the rate of involvement of citizens from Arab society is higher than their rate in the population, up to 2. According to police data for 2019, about 170,000 cases were opened, of which 41% are non-Jews, of which the vast majority are from Arab society. Similar data can be found on the filing of indictments and in offenses against a person and weapons offenses the rate reaches about 60%.
About 61% of the cash seized by the Israel Police is suspected of being used for non-economic offenses such as: violence, bribery, terrorist financing and drugs. In the current situation, in many cases where cash is seized by criminals, it is difficult to link it to the suspicion of a specific offense and thus the seizure of cash by law enforcement officers is avoided, and it remains for the use of criminals.
Part of the report dealing with VAT payments is substantial as it states that in some areas the payment of VAT will not be in the normal collection of the companies engaged in it in the Arab company, but directly from the VAT suppliers. The issuance and forgery of these invoices are used by the criminal organizations to launder criminal funds and make a capital from deducting the amounts of the fictitious invoices from the VAT returns of these companies.
However, the report does not deal at all with one of the main problems of Arab society, the issue of the enormous difficulty in obtaining credit in general and mortgages in particular. According to data from the Bank of Israel, Israeli Arabs take just a little over 2% of mortgages, a tenth of their weight in the population, and this is due, among other things, to problems in regulating planning and construction in Arab localities. Credit is also lacking for other needs, due to difficulties in placing guarantees and collateral. The criminal organizations entered this vacuum, among other things through changes, but also in other ways giving high-interest loans to Arab citizens. Those who do not meet the payments suffer violence, injuries and even murders. The committee limits the provision of loans by reputable financial institutions such as changers to NIS 6,000, but does not address the availability of legitimate credit.
The solutions proposed in the discussions, including the provision of a government guarantee to the lending banks, and a loan fund designated for Arab society, met with opposition from the bodies involved, including the Bank of Israel. However, Globes was told that a paper of recommendations on the subject would be submitted after further discussions during the next month.