Money Laundering Predicate Offenses: Which Tax Offenses Are Included and at What Amounts

A tax offense is a predicate offense under the Prohibition on Money Laundering Law only when one of the conditions set out in the First Schedule to the Law is met. Since October 7, 2016, the Schedule has included offenses under Section 220 of the Income Tax Ordinance, Section 117(b) of the VAT Law and Section 98(c2) of the Real Estate Taxation Law. For income tax, for example, the concealed income must exceed ₪2,500,000 over four years or ₪1,000,000 in a single year. When such a condition is met, dealing in money derived from the offense may constitute a separate offense punishable by up to 10 years' imprisonment, along with forfeiture of property.

The Law sets out a closed list of predicate offenses, and tax offenses are included only under specific conditions. Under Section 3(a) of the Prohibition on Money Laundering Law, 5760-2000, a person who performs a transaction in "prohibited property" with the aim of concealing or disguising its source is liable to up to 10 years' imprisonment. Prohibited property is property derived from a predicate offense, used to commit it, that enabled its commission, or in respect of which the offense was committed. Section 4 prohibits transactions in prohibited property worth more than ₪150,000, punishable by up to 7 years' imprisonment.

Amendment No. 14 to the Law was passed by the Knesset on March 29, 2016 and took effect on October 7, 2016. Following the amendment, tax offenses appear in the First Schedule under four items. For most other offenses on the list, such as bribery or gambling, there is no monetary threshold. For tax offenses, the Law adds thresholds and circumstances.

VAT: Items 17 and 17A

Item 17 concerns fictitious invoices: issuing a tax invoice or deducting input tax without an actual transaction, where the offense was committed under aggravating circumstances. Item 17A covers most offenses under Section 117(b) of the VAT Law, if one of the following applies:

• The tax in respect of which the offense was committed exceeds ₪480,000 over a 48-month period, or ₪170,000 over a 12-month period.

• The offense was committed with sophistication, and the tax exceeds ₪120,000.

• The offense was committed in connection with a criminal organization or a terrorist organization.

• The laundering offense was committed by someone other than the taxpayer.

Income Tax: Item 17B

Item 17B applies to an offense under Section 220 of the Income Tax Ordinance, i.e., willful tax evasion. Here the threshold is measured by the concealed income rather than the tax: more than ₪2,500,000 over four years, or more than ₪1,000,000 in a single year. Where the concealment was carried out with sophistication, the threshold drops to income of more than ₪625,000. Here too, a connection to a criminal organization, or laundering by a person other than the taxpayer, is sufficient.

Real Estate Taxation: Item 17C

Item 17C applies to an offense under Section 98(c2) of the Real Estate Taxation Law (Betterment and Acquisition). The conditions: omission of a transaction value exceeding ₪1.5 million, or failure to report the transaction or false reporting of the parties' identities where the property's value exceeds ₪100,000. In addition, sophistication, a connection to a criminal organization, and laundering by someone other than the taxpayer also qualify.

In practice, the first question in a case is whether the tax offense itself meets one of the thresholds. Without this, there is no tax-derived "prohibited property," and no laundering offense that relies on it. The tax offenses listed in the Schedule require a specific intent to evade tax, and the explanatory notes to the bill state that they carry a penalty of five to seven years' imprisonment. The laundering offense adds up to 10 years on top of that.

For example: a business owner failed to report income of ₪400,000 in each of three years. The total concealed income is ₪1,200,000, less than ₪2,500,000 over four years, and in no single year did it exceed ₪1,000,000. The quantitative condition is not met. If the income was hidden through a foreign shell company, the prosecution may argue sophistication. In that case, income of more than ₪625,000 is sufficient, and the ₪1,200,000 exceeds the threshold.

The Law does not define "sophistication." State Attorney Guideline 2.23, published alongside the amendment, lists, among other things, the use of corporations and trusts, straw men, cross-border transfers of property and circular movements of funds. This is an internal prosecution guideline. Whether there was sophistication in a particular case is for the court to decide.

The classification has implications for property. Under the Law, in addition to the sentence, the court orders forfeiture of property equal in value to the property in respect of which the offense was committed. Because forfeiture is based on value, it may also apply to other property of the offender. According to the 2024 State Comptroller's report, following the amendment, direct transfer of information from the Money Laundering and Terror Financing Prohibition Authority to the Israel Tax Authority began in 2017, based on reports from banks and financial service providers.

It is advisable to examine the classification as soon as a large sum, a corporate structure, or money that passed through other people appears in the case. These are the situations in which the question typically arises:

• A summons to a questioning under caution at the Israel Tax Authority, where the suspicion is concealment of income in amounts approaching the Item 17B thresholds, or invoices issued without a transaction.

• A bank that has frozen an account or requested an explanation of the source of funds, following transfers between related companies or from abroad.

• A family member, partner or bookkeeper through whom the funds passed. The "someone other than the taxpayer" alternative applies with no monetary threshold.

• A real estate transaction in which a price lower than the actual price was reported, or in which the identity of the true buyer was not reported.

If the account has already been frozen, the first step is usually releasing seized bank accounts, alongside examining the suspicion itself. The defense in a tax-based money laundering case is built first and foremost on the predicate offense: the amounts, the periods, and whether there was sophistication. The page on representation in money laundering offenses explains how the firm handles such cases.

This practice area is handled at the firm by Shlomi Vaknin, Adv. & CPA, who served for about a decade as a National Supervisor in the VAT Professional Department of the Israel Tax Authority.