Bank of Israel Circular on banking transactions with the UAE
1 November 2020
Dear Clients and Colleagues,
Following the execution of the Abraham Accords Peace agreement between the United Arab Emirates (“UAE”) and the State of Israel in September, which also made reference to the Protocol for understandings on cooperation in banking and financial services executed by the UAE and the State of Israel on September 1st, the Bank of Israel recently issued a letter to the banks in Israel which provides guidance on banking transactions and banking relationships with the UAE and with UAE entities (the “Guidance”).
We feel that this Guidance evidences a desire to provide practical guidance and enable the implementation of the declared intent of the parties to advance cooperation in financial services and lower financial impediments to investments.
In parallel to enabling banking transactions vis a vis to the UAE, the Guidance also formally reminds the banks that the UAE is still considered a high risk jurisdiction for money laundering and terrorist finance, and instructs them to very carefully consider and manage the risk in their dealings with the UAE. Additionally, the Guidance includes “safe harbor” conditions (addressing, inter alia, the parties to the transactions, the currency and the financial institutions involved), the fulfilment of which satisfy, in the opinion of the Bank of Israel, the creation of a “risk reduced environment” which permits the carrying out of fund transfers and execution of trade related activity such as issuance of guarantees and letters of credit (subject to the usual requirements imposed upon the banks in the context of prevention of money laundering and terrorist financing in connection with this type of activity).
The Guidance goes on to state that it does not preclude Israeli banks from offering other services vis a vis the UAE to their clients, including correspondent banking.
However, it also clarifies that “to the best of the Bank of Israel’s examination of the subject matter, “the financial and commercial activity in the UAE is highly complex, inter alia due to the inherent risk factors in the UAE”. As a result, the Bank of Israel recommends that Israeli banks should act “carefully and gradually” while allocating adequate recourses for the studying of the “challenging and complex” environment, familiarization with the relevant financial institutions and carrying out ongoing controls.
We believe that it is likely that, at least in the near future, banking activity through the local banking system vis a vis the UAE will be limited to the activities covered by the “Safe harbor” conditions set out in the Guidance. It remains to be seen how local banks will treat other requests for banking services such as account opening for subsidiaries of UAE entities, or fund transfers in Israeli currency.
This is however a positive first step, opening the gates for the commencing of the basic transactions required for the practical implementation of the intent expressed by the execution of the peace agreement.
We will be happy to advise and assist in this matter and any other.
Herzog Fox & Neeman