Israel Seeks ‘Uniform’ Law to Fight Money Laundering, Tax Evasion

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By Matthew Kalman

Israeli practitioners are skeptical of the nation’s efforts to create uniform anti-money laundering rules, an effort that comes after sweeping tax evasion investigations.

The push fits into a time of major change in Israel’s regulatory landscape. As the country prepares for the creation of a digital bank and faces the growth of cryptocurrency platforms, officials are looking closely at the regulatory regime.

Shlomit Wagman, head of Israel’s Anti-Money Laundering Authority, is seeking more streamlined legislation that would create a uniform regulatory regime. Wagman also said the country needs a faster mechanism to freeze criminal accounts.

“Today, there are about 15 different orders for each sector, leading to regulatory arbitrage between different sectors and a great deal of work to update them,” Shlomit Wagman, head of Israel’s Anti-Money Laundering Authority, told a professional gathering in Tel Aviv June 7. “The goal is to pass a uniform law and order for all, based on general principles and risk-based approach, according to the unique risks of each sector.”

Bank Investigations

Israel’s finance ministry published draft rules May 23 to extend anti-money laundering regulations to cryptocurrency exchanges, part of a tax avoidance effort. The draft was meant to accompany a revised Financial Services Law that, for the first time, subjects financial service providers to licensing and regulation. But the law has been delayed four months.

As cryptocurrency use has expanded, pressure on banks has increased. Over the last several years, U.S. tax probes into Israel’s largest banks resulted in massive fines and a dramatic drop in deposits held by foreign residents.

Since the introduction of anti-money laundering legislation, subsequent U.S. tax evasion probes, and the definition of tax evasion as a predicate offense in 2016, “there has been a marked increase in the stringency” of Israel’s Banking Supervision Department requirements and “a marked tightening in the manner of managing compliance risks at banks,” Hedva Ber, the supervisor of banks at the Bank of Israel, told a conference in December. Banks have “become the authorities’ long arm with regard to preventing money laundering, terrorism financing, and tax evasion, including enforcement of foreign countries’ tax laws,” she said. “The banks set up large compliance systems, invested huge amounts of resources—among other things in computer systems and human resources—and essentially changed their whole work processes vis-à-vis their customers.”

The resulting crackdown meant banks demanding increased paperwork, leading to friction with customers, especially those involved in unsupervised areas such as virtual currencies, she acknowledged. “Against the background of the situation we have reached, in which regulation and enforcement in the area of compliance risks lead to bankers’ fear and to an adverse impact for some groups in the economy, I call on regulators and enforcement entities to sit down together and think of what can be done to somewhat balance the pendulum,” she said.

Bank Leumi Le-Israel Ltd. avoided prosecution in 2014 by paying a fine of $400 million, handing over the names of 1,500 account holders and admitting it helped taxpayers create false returns. Bank Hapoalim Ltd. has set aside $343 million for potential fines, though indications are the amount could increase. Bank Mizrahi-Tefahot Ltd. has set aside $46.1 million to settle its ongoing case.

Foreigners’ deposits in Israeli bank accounts slumped to 28 billion shekels ($8 billion) in 2017 from 89 billion shekels in 2007, according to the Bank of Israel’s annual survey of the banking system for 2017. The outflow accelerated by U.S. investigations and a resulting crackdown by the Bank of Israel on tax evasion and money laundering requiring customers to provide Israeli banks with detailed information on the source of funds.

Some Hurdles

Practitioners warned that unifying the myriad regulations currently applied to each sector would require a complex consultative process and would be unlikely to achieve Wagman’s goal.

“I don’t see how she can succeed in making a single law or regulation for everyone. She’d have to go through all the legislative process again. It’s very problematic and she’ll face a lot of bodies and sectors and companies that will oppose her,” said Ariel Katz, a lawyer and certified public accountant at Amos Katz and Co. accounting firm in Tel Aviv.

The current regulations are more likely to be effective than a broader measure that fails to address the requirements of each sector, Katz said June 10. A new system would have to take the differences into account, “but if we end up with one law that’s too general because it tries to take all the sectors together, there will still be some holes,” he said.

Unifying the different standards applied to the variety of providers in the financial sector could be counter-productive, said Boaz Feinberg, a partner at Zysman, Aharoni, Gayer and Co. law firm in Tel Aviv.

It would be “more beneficial to have a different set of rules to be applied by the regulators to different gate keepers, who are each facing different risks and exposures, based on the nature of their activities and the nature of their clients. Consolidating the regulation would most definitely harm those businesses who are compelled to put in place an anti-money laundering regime, but will be hit by unsuitable regulative procedures,” Feinberg said by email June 11.

Instead, officials should focus on being able to freeze suspect accounts, he said.

“Today each financial institution has its own set of rules as to when it is appropriate to freeze an account in the event there is a high risk that the account is being used for money laundering or terror financing,” Feinberg said. “Having the Justice Ministry set a mechanism which would allow for financial institutions to receive confirmation as to their ability to freeze accounts would be very helpful in combating money laundering and terror financing, including tax evasion.”

To contact the reporter on this story: Matthew Kalman in Jerusalem at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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