Israel: Money Laundering: A Clean Break
| Published date | 01 January 2001 |
| DOI | https://doi.org/10.1108/eb027279 |
| Date | 01 January 2001 |
| Pages | 264-282 |
| Author | Guy Harpaz |
| Subject Matter | Accounting & finance |
Journal of Money Laundering Control — Vol. 4 No. 3
Israel:
Money Laundering: A Clean Break
Guy Harpaz
The Financial Action Task Force (the chief interna-
tional agency against money laundering) blacklisted
Israel (June 2000) as one of the 15 countries that fail
to cooperate in the international efforts to combat
money laundering. Soon after, the Israeli Parliament
enacted the Prohibition on Money Laundering Law,
5760-2000 (the 'Law').1 The Law has far-reaching
legal, economic and policy implications. This paper
attempts to sketch the global backdrop against
which the Law was adopted, analyse its provisions,
expose its implications and draw attention to its
pros and cons. It is structured along the following
lines:
the first section sets out the international
campaign against money laundering. The second
section describes the pressures exerted by the inter-
national community to persuade Israel to join the
club of countries that counteract money-laundering
operations. The third and fourth sections analyse
the ratio legis of the Law and its provisions, respec-
tively. In the fifth section an account is provided of
the problematic aspects of the Law. The last section
provides some conclusions that may be drawn at
this early stage.
THE GLOBAL WAR ON MONEY
LAUNDERING AND ISRAEL'S
INACTIVITY
Money laundering is the process by which the
existence, source or illegal application of the proceeds
of serious crimes (but not those of tax evasion per se)
are concealed by means of a series of transactions.2
Recent works indicate that money-laundering
activity around the globe is constantly on the rise.3
Furthermore, it is usually of an international
character:
'The laundering of proceeds of crime is truly an
international phenomenon. No longer are opera-
tions limited to the country in which the illicit
money is generated. On the contrary, the transbor-
der movements of money are now a prominent
feature of money-laundering
operations.'4
The international community has not remained
indifferent to the growth of money-laundering
activities. Professor Barry Rider notes that 'over
the last decade, governments, international as well
as regional organisations and law enforcement
agencies have increasingly recognised that by
interdicting the proceeds of crime, the very motive
behind many serious criminal enterprises may be
undermined . . . today around the world govern-
ments are busy ensuring that appropriate legislation
is passed and systems erected to enable the state to
track, freeze and then eventually seize the proceeds
of crime'.5
Money-laundering operations were first tackled by
unilateral measures. The USA enacted in 1970 the
first legal instrument designed to counteract
money-laundering operations. In the 1980s and
1990s the rest of the Western world followed suit,
together with many other
countries.6
National measures in themselves proved, however,
to be insufficient. Being international in character, the
problem called for an international remedy, a fact
that was recently reiterated by the Financial Action
Task Force:
'In order to ensure the stability of the international
financial system and effective prevention of money
laundering, it is desirable that all financial centres
in the world should have comprehensive control,
regulation and supervision systems. It is also
important that all financial intermediaries or
agents be subject to strict obligations, notably as
regards the prevention, detection and punishment
of money
laundering.'7
Consequently, an international regime against money
laundering emerged in the late 1980s and 1990s.8 This
regime not only reinforced the fight against crime in
general and against money laundering in particular,
but also brought about conspicuous macroeconomic
benefits.9
The seeds of that global regime were planted in
1988,
when the Basel Committee on Banking
Regulations and Supervisory Practices adopted the
Statement on Prevention of Criminal Use of the
Banking System for the Purpose of Money Laun-
dering.10 Also in 1988 the United Nations Con-
vention against Illicit Traffic in Narcotic Drugs
Journal of Money Laundering Control
Vol.
4,
No.
3,
2001,
pp.
264-282
© Henry Stewart Publications
ISSN 1368-5201
Page 264
Journal of Money Laundering Control — Vol. 4 No. 3 — Harpaz
and Psychotropic Substances (known as the Vienna
Convention) was signed.11 The Vienna Convention
calls for the criminalisation of money-laundering
operations and for global coordination and legal
assistance. In 1990 the Council of Europe Convention
on Laundering, Search, Seizure and Confiscation of
Proceeds from Crime (the Strasbourg Convention)
was adopted. As its name indicates, it focuses on
issues such as the investigation, freezing, seizure and
confiscation of the proceeds of serious crime.12
Another noteworthy development was the adoption
of the European Communities Council Directive on
Prevention of the Use of the Financial System for the
Purposes of Money Laundering (Council Directive
91/308/EEC — 'EC Council Directive').13 The EC
Council Directive and its various implementing
national instruments established a harmonised
regime throughout the European Union's member
states.
Recent years have witnessed another wave of
schemes and measures on the international
front.14
The battle against money laundering is spear-
headed by the Financial Action Task Force (FATF),
established in 1989 under the aegis of the seven
leading industrialised nations (the G7). The FATF
monitors the various developments of money-laun-
dering techniques, promotes common policies and
sets of rules to counteract them and follows up on
the implementation of its Recommendations by its
members. In 1990 the FATF published a document
known as the '40 Recommendations' which set out
a proposed regulatory scheme for the fight against
money laundering.15 A number of states and regional
bodies have joined the Task Force.16 The latter acts
forcefully to bring more countries within its fold,
encouraging them to take upon themselves its
guidelines and to subject themselves to its inspection.
The emerging international regime has been
characterised by close cooperation amongst law
enforcement agencies across the globe. This has,
in turn, resulted in some celebrated cases of
multilateral 'sting' operations against international
money-laundering
networks.17
Israel, on the other hand, has not joined these
efforts, refraining until recently from adopting
legislation against money laundering. It therefore
neither joined the Task Force nor ratified the
Vienna Convention.18 The only two legal instru-
ments which existed under Israeli law until lately
were the Dishonoured Cheques Regulations,
198119
and a circular adopted by the Bank of
Israel.20
The
former indirectly assisted the fight against money
laundering by imposing upon banks the duty to deter-
mine the identity of their clients. Under the latter, the
Governor of the Bank of Israel directed the banks to
determine and verify the identity of their clients and
to create an internal control system, so as to reduce
the banks' exposure to money-laundering activities.
Israel's legislative inaction created a loophole in the
international regime against money laundering.21
This has led the international community to exert
much pressure on Israel, an issue dealt with in the
following section.
INTERNATIONAL PRESSURE ON
ISRAEL
Israel's inaction led the FATF to warn against the
risks of money laundering in Israel. For example, it
noted that the Israeli authorities 'are facing general
problems with organised crime and need to tackle
the dangers of laundering in the diamond industry',22
that the growing presence in the Middle East of
financial centres and the country's role as a drug
transit area appear to make the region vulnerable to
laundering activities and that 'such activity involving
organised crime and the diamond industry [in Israel]
has been observed by some FATF
experts'.23
Moreover, financial operations conducted in Israel
were blacklisted at times with a view to pressuring it
to adopt legislation which would enable it to ratify
the Vienna Convention, 'toe the line' with the
other countries of the Western world and play its
part in the international effort to combat money
laundering.24 For example, the FATF's first annual
report stated that: 'Financial institutions should give
special attention to business relations and transactions
with persons, including companies and financial insti-
tutions, from countries which do not or insufficiently
apply these recommendations.'25 The EC Council
Directive is another case in point.26
This pressure culminated in the year 2000. In
February the FATF published a report on Non-
cooperative Countries and Territories.27 The
report called upon all countries and territories that
are part of the global financial system to amend
any rules and practices that impede the anti-money-
laundering fight led by other countries. It also set in
motion a search for criteria to identify the countries
that fail to cooperate in the global efforts to combat
money laundering. This report was followed by
the FATF annual report of 1999-2000, which
included an annex devoted to identifying those
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