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Wednesday, February 03, 2010

Israel – financial insecurity

Money Laundering Bulletin

Following the September 11, 2001 terrorist attacks on the United States, Israel was quick to come out and identify itself with the ensuing US-led 'war on terror'. This was not surprising, given the Arab-Israeli conflict and the attacks Israel has sustained from militant Palestinian groups. But while the US ramped up its counter terrorist financing and anti-money laundering legislation through the Patriot Act, Israel has been rather lackadaisical in applying international regulations and domestic compliance in the financial sector, despite MONEYVAL saying the threat of terrorist financing and money laundering is 'considerable', writes Paul Cochrane.


In 2000, Israel enacted a Prohibition of Money Laundering Law (PMLL), but for being uncooperative in the fight against money laundering the Financial Action Task Force (FATF) placed Israel on its blacklist. By 2002, Israel was off the blacklist and on the FATF monitoring list until 2003.

For many years, Israel was the last Western country which wasn’t fighting money laundering,” Hebrew University law academic Guy Harpaz was quoted as saying in Forward magazine in July, 2009.

The PMLL enacted the establishment of the Israeli Money Laundering Prohibition Authority (IMPA) under the Ministry of Justice as the country’s financial intelligence unit (FIU) in 2002.

In the years since, Israel has amended, updated and added to regulations on anti-money laundering (AML) and counter terrorist financing (CTF). In 2004, the prohibition on terrorist financing (TF) law 5765-2004 was adopted and went into effect in August 2005. Under Israeli law, the Israel Security Agency (more commonly known as Shin Bet) is responsible for investigating TF offenses, while the Israel Tax Authority handles investigations originating in customs offenses. To ensure cooperation between Israeli government bodies, a ruling was put in place to transmit information between the IMPA, the Israeli National Police and Shin Bet.

But despite tighter regulations, a 2008 report by MONEYVAL stated that the overall threat of ML and TF in Israel is “considerable,” with more than USD$5 billion in illicit proceeds generated through illegal drugs, gambling, extortion, fraud, and human trafficking. The report estimated illegal gambling profits at over USD$2 billion per year and domestic narcotics profits at USD$1.5 billion per year. Political corruption is a further area of concern, with several high profile cases probed over the years. Indeed, Israel has not ratified the UN Convention against Corruption and last year, Israel ranked 33 out of 180 countries in the Transparency International (TI) 2008 Corruption Perceptions Index, a lower ranking than 2007's 30 out of 180 countries. Meanwhile, 82 percent of Israelis believe the public sector to be extremely corrupt, according to a study by TI published June, 2009.

Israel is affected by its fair share of corruption,” said Robert Mitchell of World-Check, a British company that maintains a database on politically exposed persons (PEPs) and high and heightened risk individuals and entities. “There is always another ML probe and corruption probe. Whether it is merely a change of government and a backlash against incumbents or knives out for politicians, it is difficult to tell.”

It is a similar case when it comes to money laundering. “There seems to be no domestic policy regarding ML. Very few individuals are sentenced,” said a banking source familiar with Israel that wanted to remain anonymous.

The Israelis are very good at saying US and British banks finance terrorism, that's bad, but they don't look at their own patch. They are on the front line for TF but need to do so much more in terms of education. The amount of fines the US government has given of late is unbelievable,” he said.

One of the biggest cases involved Israel Discount Bank (IDB) in 2006. The US Treasury, the Federal Deposit Insurance Corporation and the New York State Banking Department penalized the bank for USD$12 million to settle charges that its AML procedures were lax, specifically the transfer of billions of dollars of illicit funds from Brazil to IDB’s New York offices. The IDB was also fined by the New York District Attorney's Office, in December, 2005, this time USD$8.5 million for failing to adhere to Bank Secrecy Act requirements and filing suspicious activity reports.

In mid-July, the FBI arrested 44 people in New Jersey on charges of laundering millions of dollars through charities controlled by rabbis that were linked to Israeli charities.

According to court documents obtained by The Jerusalem Post, one of the rabbis used a source in Israel to supply money through “cash houses” in exchange for a 1.5 percent fee. The FBI stated that the rabbis earned between five to 10 percent per transaction. Prosecutors also charged a rabbi for acquiring and trading human organs that were 'donated' in Israel for $10,000 and sold in the US for up to $160,000.

In a separate incident in August, Israeli police broke up an Israeli-American crime ring specializing in tax fraud and ML. According to the police report, the US internal revenue was defrauded of tens of millions of dollars that were deposited in Israeli bank accounts.

In July, 2009, the Federal Reserve Board and a Florida financial regulator ordered a Miami branch of Bank Hapoalim to overhaul its AML program within 60 days, particularly due diligence. In 2005, some USD$400 million was frozen and 22 employees arrested at a Bank Hapoalim branch in Tel Aviv for failing to report irregular multi-million dollar money transfers.

Other Israeli banks have been fined, this time by Israel's Banking Sanctions Commission (BSC) for lax ML compliance. In 2007, Bank Leumi was fined USD$98,000 for violations of ML regulations, including the know-your-customer (KYC) process, lack of protocol regarding beneficiary statements and the maintaining of identification documents. In 2008, the BSC fined the First International Bank of Israel USD$936,000, and the Poalei Agudat Israel Bank USD$535,000 for infringing ML regulations.

In December, 2008 the BSC ordered IDB to pay nearly USD$1 million in fines over the institution’s inadequate ML controls. The BSC can fine financial institutions up to NIS 2 million (USD$535,000) for every violation it finds.

There are three things Israeli banks don't want to have an issue with: the US Treasury, US Department of Justice (DOJ) and the Israeli Ministry of Defence (IMOD). Those three in that order. How many screen against the Office of Financial Assets and Control (OFAC) list, nearly all now, but how many screen against US DOJ lists? Only one Israeli bank I am aware of,” said Mitchell.

A lot of the larger banks have adopted FATF's 40+9 Recommendations. However, some are woefully unprepared. In Israel the regulation is to screen against an IMOD list, say supplying the Palestinians. World-Check had entities like InterPal for six or seven years before hitting the IMOD list, and there are loads of groups and front companies listed by World-Check before getting on the IMOD list,” he added.

In the European Committee on Crime Problems' 2008 MONEYVAL country report, Israel was advised to apply Article 12 of the European Union AML Second Council Directive on the Extension of AML Obligations, similar to FATF Recommendation 20. “Israel has so far not taken steps to meet this obligation of the Directive,” the report states.

In terms of compliance with FATF Recommendations, the report noted that for legal systems, ML offenses were 'largely compliant', ML offense mental element and corporate liability 'compliant', and confiscation and provisional measures, 'partially compliant'. In preventative measures, Israel was 'compliant' and 'largely compliant' in all fields bar customer due diligence (CDD) obligations for real estate agents, dealers in precious metals and stones, trust and company service providers, and independent legal professionals and accountants. Notably, CDD, PEPs, and unusual transactions were rated 'partially compliant'.

While AML oversight of Israel's precious stones sector is still lacking, particularly in the sizable diamond sector,with USD$6.24 billion of polished diamonds exported in 2008, an amendment to the PMLL has been proposed that will extend the AML regime to cover the sector. The amendment, drafted in 2007, is still awaiting approval by the Knesset, the country's legislative body.

But while Israeli institutions clearly needs to ramp up AML and CTF compliance, there has been progress. According to the Tax Authority, 28 decisions taken in the first half of 2008 resulted in NIS 744,000 (USD$199,000) in fines. Total criminal assets seized by the police in 2008 were reportedly USD$3.2 million, although this was a marked decrease from previous years, according to the US State Department's International Narcotics Control Strategy Report 2009. In 2008, IMPA reported approximately 100 arrests and 10 prosecutions relating to ML and/or TF. In 2008, IMPA received 17,152 suspicious transaction reports, and some NIS 7.7 million ($2 million) was frozen or forfeited in AML/CTF-related actions.

However, the source questioned the number of STRs the FIU had received. “It is defensive reporting, the FIU jumping up and down about reports being low, and not enough done about it. You can read a lot into STRs. Banks were just flagging transactions above a certain amount. 'What about buying a house?' I asked bankers. 'There you go',” said the source. The IMLPA did not reply to questions sent by Money Laundering Bulletin.

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