Dear clients and colleagues,

On November 5, 2024, the Prohibition of Money Laundering (Identification, Reporting and Recordkeeping Duties of Payment Companies for the Prevention of Money Laundering and Terror Financing) Order, 2024 (“the AML Order”) was published in Israel’s official Gazette.

The AML Order imposes designated anti-money laundering obligations on payment companies, following the addition of payment companies to the list of financial entities listed in the Prohibition on Money Laundering Law, 5760-2000 (“the Law”) that are subject to designated AML obligations thereunder. It is another step in imposing financial regulation on this sector, the main regulation of which is the Regulation of Payment Services and Payment Initiation Law 5783-2023 (“the Regulation of Payment Services Law”).

Shortly after the publication of the AML order, on November 6, 2024, a draft directive for Payment Companies to implement anti-money laundering obligations using online identification technology was published for public comments. Comments on the draft directive may be submitted until December 8, 2024.

A. The AML Order – Payment Companies

The following are a number of key provisions under the AML Order:

1. The AML Obligations under the AML Order – the AML obligations and requirements under the AML Order are in general similar to those imposed under the AML orders applicable to other supervised financial entities, and includes (inter-alia) requirements regarding: Know Your Client; registration of identification details; authentication of details and requests for documents; declaration of a beneficial owner and a controlling person; face-to-face identification; requirements regarding electronic transfers; control requirements; reporting requirements; prohibition on disclosure and inspection; requirement to cross-check against the Lists as defined under the AML Order; requirements to define AML and CTF policy, tools and risk management; record-keeping requirements; submission of documents and information to the Supervisor – the chairman of the Israel Securities Authority (“the ISA”); etc.

The wording of the AML Order is generally similar to the AML order that applies to financial asset service providers and credit service providers due to the similar features that payment companies and such service providers share in their operation. However, some of the obligations have been adjusted to adapt the obligations to the specific features of payment services activity, including adjustments pertaining to the provision of online payment services.

2. Applicability of the AML Order– the AML Order applies to Payment Companies, as this term is defined in the Regulation of Payment Services Law and refers to: a payment service, credit ancillary to a payment transaction, money conversion ancillary to a payment service or a service listed in Part B of the Seventh Addendum of the Regulation of Payment Services Law, all as stipulated in the AML Order. The AML Order does not apply to a basic payment initiation service, and it establishes concessions regarding an advanced initiation service at a low risk level.

 However, as stipulated in the AML Order, the AML Order will not apply to a payment account and a payment instrument that is a payment card (as defined in the AML Order) which is limited by its balance as well as cumulative charging per year in certain amounts and under the conditions stipulated in the AML Order.

3. Distinction between the AML obligations pertaining to a Casual Service Recipient and a non-Casual Service Recipient – the AML Order distinguishes between the imposition of duties pertaining to a Causal Service Recipient and a non-Causal Service Recipient, and imposes reduced obligations on the provision of services to a Casual Service Recipient. In accordance with the AML Order, a Causal Service Recipient is a service recipient who, during a six months period, received a service from the same service provider, in a total amount (for this purpose, several transactions of different types, related to each other will be considered as one transaction) that does not exceed NIS 50,000, unless in the case of a transaction in the total amount exceeding NIS 5,000 in which a country or territory listed in the first addendum to the AML Order (countries which are regarded as high-risk countries) is involved.

 A new provision introduced into the AML Order is the establishment of a designated provision for cases where a Causal Service Recipient has become a non-Casual Service Recipient. This allows a postponement of the schedules for completing the service recipient’s identification and verification process, subject to certain conditions. This enables continuity and consistency in the provision of the service to such service recipients.

4. AML Adjustments in the Provision of Online Payment Services – as many payment services are provided and expected to be provided online, certain adjustments were made in the AML Order to allow online payment services. In this regard, provisions were established in the AML Order providing the Supervisor (the Chairman of the ISA) with the authority to issue directives on this subject, such as directives regarding alternative digital means for identification and authentication; providing the possibility to identify a service recipient using technology that enables visual identification of the service recipient according to the Supervisor’s instructions (please see Section B below regarding this matter). In addition, it will be possible to receive a declaration of a beneficial owner and a controlling person that does not bear an original (wet-ink) signature, provided that the declaration is made in a manner that the identity of the declarant can be verified (the requirement for a wet-ink signature that was included in the original draft of the AML Order has been removed). In this regard, the Supervisor is authorized to issue directives with respect to the manner in which the aforementioned declaration is given; Another adjustment is the postponement of the commencement date of the AML Order due to the recognition of the need for certainty regarding the Supervisor’s directives on this subject, as will be noted below.

5. The Commencement Date of the AML Order – In general, the AML Order will come into effect six months from the date of publication of the Supervisor’s directives (pursuant to the AML Order) regarding alternative digital means for identification and authentication and regarding the identification of a service recipient using technology that enables visual identification of the service recipient (“the Commencement Date”).

The reason for this is that the publication of supplementary regulatory directives by the Supervisor is necessary for the implementation of the provisions of the AML Order and in particular with respect to online payment services, and the need for the supervised entities to prepare in advance for the implementation of these directives. In this regard, please note that on November 6, 2024 the ISA published a draft directive for payment companies to implement anti-money laundering obligations using online identification technology. For further information regarding this draft directive, please see Section B below.

It was further determined in the AML Order that without prejudice to the specific commencement date with respect to the reporting obligation for reports by type and size of transaction as stipulated in the AML Order, a service provider who is interested to apply the provisions of the AML Order already from the date the AML Order was published, may do so, provided that it has notified this to the Supervisor and the Israel Money Laundering and Terror Financing Prohibition Authority (“the IMPA”).

Commencement and Transition Provisions Regarding the Obligation to Submit Reports by Type and Size of Transaction as Specified in the AML Order 

Regarding the obligation to submit reports by type and size of transaction (regular reports) as specified in the AML Order, a different commencement date and transition provisions have been set. This is in light of the promotion of an AML uniform order for the financial sector (which is expected to replace the various anti-money laundering orders applicable to supervised financial entities) and to prevent regulatory burden due to frequent transitions between different reporting formats currently set in the various AML orders.

Accordingly, the AML Order stipulates that the commencement date of the regular reporting obligation as required by the AML Order will be six months from the earlier of: (a) three years from the Commencement Date of the AML Order; or (b) the entry into force of another anti-money laundering order that will be established under the AML Law and will apply to the service provider (a payment company). A transition provision was also established in this regard according to which, the service provider must notify the Chairman of the ISA and the IMPA prior to the receipt of a payment services license, indicating according to which of the following AML orders it intends to report the regular reports under: (a) the AML order applicable to banking corporations; (b) the AML order applicable to financial asset service providers; or (c) the AML order applicable to a credit intermediation system operator; and the chosen reporting provisions as mentioned will apply to it until the commencement date of the regular reporting obligation as specified in the AML Order.

 Transition Provisions for Payment Service Providers Who Provided Payment Services in Israel Prior to the Entry Into force of the AML Order

In this regard, it was determined that:

• • Service providers who held a license to provide financial asset services or an acquirer license – for such entities, the AML Order acknowledges their actions for KYC, recording identification details, authenticating details and requesting documents, declaration of beneficiary and a controlling person, and face-to-face identification, performed according to the aforementioned AML orders before the Commencement Date of the AML Order, so that they will be considered as having met the equivalent requirements in the AML Order.

• • Service providers who did not hold such a license (as mentioned in the subsection above) prior to the entry into force of the AML Order – for such entities, a transition period was granted from the Commencement Date until 12 months from the Commencement Date or from the date of obtaining the license, whichever is later (“the Later Commencement Date”), during which they will be considered as complying with the provisions of sections 2 to 8 of the AML Order, provided that for a service provided before the Later Commencement Date, the service provider will act to complete the AML Order’s requirements within a reasonable time after performing a new transaction, except for a transaction of withdrawing the existing balance, debt repayment, or account closure. A new transaction was defined for this purpose as a transaction performed by the service provider from the Later Commencement Date onwards, at the request of the service recipient.

It was also determined that notwithstanding the above, for a service provider subject to an anti-money laundering and terrorist financing regime under foreign law before the Commencement Date, the Supervisor (the Chairman of the ISA) may determine that they will be considered as complying with the provisions of sections 2 to 8 of the AML Order with respect to those who were service recipients before the Later Commencement Date, if it is found that circumstances justify this.

B. Draft Directive for Payment Companies to Implement Anti-Money Laundering Obligations Using Online Identification Technology

On November 6, 2024, the Israel Securities Authority published a draft provision intended to allow payment companies to identify and authenticate a client online, without the need for a physical meeting with the client, while ensuring the reliability of the identification and reducing the risks of money laundering and terrorist financing associated with the use of these alternative means (“the Draft Directive”).

The Draft Directive includes:

• • Preconditions and principles for using online identification technology (including the requirement to conduct a risk assessment on the subject, the obligation to establish a policy for the use of online identification technology, and more);
  • Provisions regarding the responsibility of the service provider’s board of directors;
  • Obligation to appoint an officer for online identification and related provisions regarding such an officer;
  • Requirements regarding internal audit;
  • Provisions regarding the possibility of conducting online identification and authentication process for the service recipient using video conference or visual identification technology, as well as specific provisions on the subject concerning different types of service recipients (including Casual Service Recipients, individuals, corporations, and recognized entities (as this term is defined under the AML Order));
  • Provisions regarding the possibility of receiving a declaration of beneficiary and controlling person online;
  • Provisions regarding the possibility of online identification through a third party (outsourcing);
  • Provisions regarding the possibility of conducting the “Know Your Customer” process using various technological means;
  • Retaining, security, and backup requirements;
  • Requirements regarding risk management, monitoring and control measures;
  • An obligation to obtain the approval of the Chairman of the ISA in order to implement visual identification technology for providing services to service recipients.

Comments on the Draft Directive can be submitted until December 8, 2024.

The above highlights are general and provided for assistance only. They are not exhaustive nor a summary of all the provisions of the AML Order and the Draft Directive, and we recommend reading the AML Order and the Draft Directive thoroughly.

To read the AML Order (published in the official gazette in Hebrew), Click here

To read the Draft Directive (in Hebrew), Click here.

Our office advises financial entities in the field of payment services as well as in anti-money laundering and Terror financing. We have also actively participated in the discussions held regarding the drafting of the AML Order.

We would be happy to assist with any questions in this regard and examine the implications of the above to your activities, as well as assisting with providing comments on the Draft Directive.

Banking and Finance Department
Herzog Fox & Neeman