Israel: the impact of the anti‐money laundering legislation on the banking system
| Date | 01 January 2004 |
| Pages | 18-37 |
| Published date | 01 January 2004 |
| DOI | https://doi.org/10.1108/13685200410809742 |
| Author | Ruth Plato‐Shinar |
| Subject Matter | Accounting & finance |
Journal of Money Laundering Control Ð Vol. 7 No. 1
Israel: The Impact of the Anti-Money Laundering
Legislation on the Banking System
Ruth Plato-Shinar
INTRODUCTION
In 2002 the Prohibition on Money Laundering Law,
5760± 2000 entered fully into force in Israel. The
object of the Law, as is evident from its name, was
to combat the serious and widespread phenomenon,
both in Israel as well as throughout the world, of
money laundering originating in criminal activity.
The Prohibition on Money Laundering Law deals
with money laundering from a number of aspects.
First, money laundering is criminalised, and deter-
mined to be an independent oence. The actual act
of money laundering, regardless of the original
oences from which the laundered money derived,
constitutes an independent oence.
1
Secondly, the
Law imposes extensive obligations on ®nancial insti-
tutions, recruiting them, against their will, to the war
on money laundering. Financial institutions are
required, inter alia, to identify their customers and
to know and become familiar with their customers'
activities and the nature of their businesses, a duty
known throughout the world as `know your custo-
mer'. Financial institutions are also required to
report to the authorities on various transactions per-
formed by their customers, in particular with respect
to those transactions where money laundering is sus-
pected.
2
A further chapter of the Law deals with obli-
gations to report on monies entering or leaving Israel,
in order to prevent the transfer of cash between
states.
3
Another chapter is devoted to money chan-
gers and providers of currency services who had pre-
viously not been subject to any regulatory control.
4
One of the most signi®cant innovations of the Law
was to establish the Israel Money Laundering Prohi-
bition Authority and set up a database on unusual
transactions and activities or those where money
laundering was suspected.
5
The Money Laundering Law is broad in its scope.
Its enactment was followed by extensive secondary
legislation. The Law has important economic and
social implications, while also raising serious ethical
and philosophical questions. This paper will focus
on one aspect of the Law, namely, the impact of
the Law on one category of ®nancial institutions Ð
the banks.
BACKGROUND TO THE ENACTMENT
OF THE LAW
6
Over the last decade Israel has become a haven for
money launderers. A number of factors are responsi-
ble for this, including the development of organised
crime in the former Soviet Union states, with a
simultaneous strengthening of economic and
diplomatic ties between Israel and these states; the
liberalisation of foreign currency regulations and
encouragement of ®nancial investments in Israel;
stringent rules safeguarding banking secrecy, that
were prevalent in Israel; a change in the economic
map of the Middle East as a result of the peace process
between Israel and the Arab states, and the opening of
new options for bringing money into the region, as
well as new drug tracking routes.
7
The fact that
other countries took action to eliminate money laun-
dering from within their borders meant that money
launderers had to move to other countries that had
not yet implemented such measures, including
Israel. Israel's inactivity even caused the Financial
Action Task Force (FATF)
8
to issue a warning
about money laundering in Israel. The pressure
reached its height in the FATF report published in
June 2000. The report included a `blacklist' of 15
non-cooperative states in which Israel appeared
alongside such states as the Dominican Republic,
the Cook Islands, the Marshall Islands, the Philip-
pines, Russia and Lebanon.
9
The aforesaid report
also determined that blacklisted states would be sub-
ject to various economic and commercial sanctions.
Following this report the American Finance Depart-
ment published a warning concerning transactions
with Israeli entities, including the Israeli ®nancial
system. A similar warning was also published in
other states.
10
Actually, it had already been understood by the
beginning of the 1990s, that a law needed to be
enacted in Israel to combat money laundering. The
legislative process for the Law took seven years, a
lengthy period at anyone's reckoning, due to the pro-
tracted discussions that took place between the Bank
of Israel, the Banks' Union, the Ministry of Justice,
the Israel Police, various tax authorities, the General
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Journalof Money Laundering Control
Vol.7, No. 1, 2003, pp. 18± 37
#HenryStewart Publications
ISSN1368-5201
Security Service and other entities.
11
The Prohibition
on Money Laundering Law, 5760± 2000 was even-
tually enacted in August 2000, but did not enter
fully into force until 17th February, 2002. Around
this date various secondary laws were also enacted
to implement the provisions of the Law. The
`Competent Authority to Combat Money Launder-
ing' was established and a database was set up for
information on irregular or suspicious transactions.
Israel complied with all the FATF requirements and
was consequently removed from the blacklist.
12
The American Department of Finance warning was
cancelled,
13
the banks in Israel obtained the status of
Quali®ed Intermediator, granting them concessions
in the performance of transactions and trading in
American securities.
14
PROHIBITION ON MONEY
LAUNDERING LAW, 5760± 2000
The main provisions of the Law with respect to the
banking system will be set forth below.
Oences under the Law
15
The Prohibition on Money Laundering Law
prescribes three oences. Two are called `money
laundering' and the third is called `performing a
property transaction on prohibited property.'
The ®rst oence of money laundering is prescribed
in s. 3(a) of the Law, and is de®ned as `performing a
property transaction on prohibited property with the
object of concealing or disguising its source, the iden-
tity of its owner, its location, its movements, or the
performance of a transaction with respect to such
property'. `Prohibited property' is de®ned in the sec-
tion as property originating, directly or indirectly, in
an oence, or used to commit an oence or enabled
the commission of an oence. An `oence' is one of
the oences speci®ed in the First Schedule to the
Law, including tracking in dangerous drugs, illegal
trading in arms, gambling, bribery, murder, damage
to property, vehicle theft, forgery of banknotes and
coins, breach of copyright, terrorism, money laun-
dering in connection with these oences, etc (but
not tax oences). The legislature was not content to
restrict itself to drug oences, and rightly so. By
expanding the spectrum of oences it would be
possible to counter additional serious crimes, such as
terrorism. This is also in conformity with the
international legislation
16
and laws in other states.
17
The terms `property transaction' and `property' are
also de®ned broadly
18
to prevent any legal routes of
escape. The use of this oence is directed against the
money launderers themselves, and requires proof of
the mens rea of the object of the transaction.
The second oence of money laundering is deter-
mined in s. 3(b) of the Law and deals with avoidance
of reporting. The oence is `performing a property
transaction or delivering false information with the
object of preventing any reporting by providers of
®nancial services ...tocauseincorrect reporting.
The element `delivery of false information' also
includes failure to deliver updated information
about any item required to be reported on. An exam-
ple of such an oence is where a person opens an
account and fails to deliver true identifying particu-
lars, or deposits money in an account (a property
transaction) and fails to provide a true report, all in
order to avoid reporting with respect to such transac-
tion. The section refers to all property and not just
prohibited property, to make things easier for the
police and exempt them from having to prove any
connection between the property and the oence.
Both these oences of money laundering have
identical penalties of 12 years' imprisonment or a
®ne of NIS3m (New Israeli Shekels).
19
The penalties
were made severe on account of the negative conse-
quences in the commission of such an oence and
the severe breach of public order.
20
The third oence established in the Law is pre-
scribed in s. 4 of the Law and is called `performing
a transaction with prohibited property'. The oence
is performing a transaction with property knowing
that it is prohibited property, where the property is
of the category of property speci®ed in the Second
Schedule to the Law and at the value determined
therein (such as objets d'art, real estate, antiquities,
carpets, securities, precious stones and metals, means
of transportation and additional items valued at in
excess of NIS120,000 or monies, bankers' drafts, tra-
vellers' cheques, ®nancial deposits, investments in
®nancial assets and other ®nancial means valued at
in excess of NIS400,000).
21
Section 4 will apply in two kinds of circumstances.
One is against the money launderers themselves, in
circumstances where it is impossible to prove the
mens rea required for the oence under s. 3(a). The
second is against any person aiding a money laun-
derer with the knowledge that he is performing a
transaction with prohibited property, such as a
bank, an attorney or a trader selling property to the
money launderer in consideration for obtaining
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Israel: Anti-Money Laundering Legislation's Impact on the Banking System
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