U.S. Customers Withdraw $4 Billion From Israeli Banks

The withdrawals, over a period of under two years, are not enough to undermine the banks’ stability, amounting to only a few percent of deposits. They are nonetheless more than the banks’ initial projections for withdrawals, and cause for concern.

“The blow is not just in the drop in assets, but also in the drop in investments. Some of these customers, especially the wealthy ones, use the money to make investments and acquisitions in Israel. There is now little chance that they will make these investments, after they moved the money back to the U.S.,” said a banking source.

The withdrawals were in anticipation of the Foreign Account Tax Compliance Act (FATCA), due to go into effect at the end of 2013. The law is intended to improve tax collection by the IRS. It requires financial institutions in foreign countries to report bank accounts and assets held for U.S. citizens so that taxes can be levied on them, even if the citizens do not reside in the U.S.

Israeli banks will face penalties, including potentially heavy fines, if they do not disclose information on accounts. There are 100,000 U.S. citizens estimated to be living in Israel.

The banks have been preparing for FATCA for over a year. The process includes mapping U.S. customers (people with either a U.S. passport or Green Card), even if they reside in Israel and have Israeli citizenship. As part of the process, the banks notified customers about the requirements of FATCA: the banks must locate the bank accounts of U.S. customers, sign the necessary forms, send the forms to the IRS, and, if necessary, collect a 30% tax on the accounts.

As a consequence, many U.S. customers decided to take their money and return it home, since there is no longer any tax advantage to keeping it in Israel. Other customers decided to withdraw the money to buy real estate and thereby evade the tax payment because the purchases were made without mortgages.

The banks say they think the wave of withdrawals is over. “We’ve completed the mapping and marked the Americans’ accounts. Those who want to go have already left, and from now on the identification will only be for new customers, which is a simpler process,” said a source at a bank.

This article appeared in print on page 22 of the July 3rd, 2013 edition of Hamodia.