With a View to the Future: Adjustments to AML Requirements on the Financial Sector in the Digital Age
14 November 2021
Dear Clients and Colleagues,
In recent years we have witnessed a flourishing of technological innovation in the financial sector. This trend is reflected in the services offered by both traditional and new financial entities in their day-to-day operations, and in the increasing transition to the use of online financial services. In light of these developments, we can see a readiness on the part of financial regulators in Israel to make adjustments in the legal provisions applicable to supervised financial entities, including the regulations aimed at combating money laundering and terrorist financing.
Recently, the Israeli Money Laundering and Terror Financing Prohibition Authority (“IMPA”) and the financial regulators have published various drafts and instructions. These publications include, inter alia:
(a) a proposed reform of the Anti-Money Laundering Law, with a view to setting a uniform Anti-Money Laundering Order that will apply to financial entities;
(b) publications from IMPA and the Capital Market Insurance and Savings Authority (“Capital Market Authority”) in preparation for the entry into force of the Anti-Money Laundering Order that imposes obligations on Financial Assets Service Providers;
(c) the Israel Securities Authority’s draft instruction for non-bank stock exchange members, in the context of opening accounts using online identification technology; and-
(d) the Supervisor of Banks updates to the Proper Banking Conduct Directive No. 411 (regarding the risks of money laundering), pursuant to the changes in the payments sector and technological changes.
In all the above publications, we can see the willingness of the financial regulators to allow necessary adjustments to provide financial services in the digital age.
Below is a brief description of some of the publications mentioned above:
A. Reform of the Anti-Money Laundering Law – Draft Uniform Anti-Money Laundering Order for Entities in the Financial Sector
IMPA, in collaboration with the Department of (Criminal) Advice and Legislation at the Ministry of Justice as well as the Israeli financial regulators, are currently promoting a substantial reform of the anti-money laundering and terrorist financing regime in Israel. At the center of this reform, is the publication of a Uniform Anti-Money Laundering Order that will apply to all financial entities supervised under the anti-money laundering regime. The Order will include principles and uniform provisions for the supervised entities, and alongside, the financial regulators will establish detailed complementary arrangements, taking into account the characteristics of the supervised entities. The purpose of the reform is to adapt Israel’s legislation in the area of anti-money laundering to the latest international standards and to the accepted practices around the world, and to allow flexibility for amending the provisions more effectively.
Accordingly, in a letter dated October 3, 2021, IMPA distributed a preliminary draft of the Uniform Order (“the Draft Order”). The Draft Order was sent for preliminary consideration to Israeli financial institutions as part of an initial consultation stage. Later, the official draft of the Order will be published for public comments.
The draft Order reflects a transition from “rule based” regulation to a “principle based” approach. This effectively gives discretion to the supervised entities to formulate how to manage money laundering and terror financing risks, by applying a risk-based approach in the conduct of the supervised entity, in light of its characteristics and activities.
Here are some key highlights from the wording of the draft Order relating to adjustments for the provision of financial services in the digital era:
- Customer Due Diligence – According to the Draft Order, customer due diligence requirements will be updated so that customer due diligence will be performed for regular customers, and customers who perform occasional transactions over the amount of NIS 50,000 (and in the case of activity with countries at risk or activity in virtual currencies over NIS 5,000) as detailed in the Draft Order. Additionally, it will be necessary to register the identification details of occasional customers who perform a transaction in any amount, but with no obligation to verify their identity or perform a customer due diligence review. In addition, principles have been established regarding customer identification and authentication, without specifying what the required identification documents will be. In addition, it will be possible to conduct a more lenient customer due diligence process under certain conditions specified in the draft Order (in general – if the risk of money laundering and terror financing is assessed as low, there is no doubt as to the reliability and veracity of information, and there is no concern of money laundering and terror financing). The draft Order also provides the authority for the relevant financial regulator to determine cases in which it will be possible to carry out the client verification procedure required after the commencement of the business arrangement, subject to a number of cumulative conditions.
- The possibility to rely on a third party – the possibility is being considered of allowing a financial institution to rely on a third party to carry out the customer due diligence process, subject to compliance with certain conditions: the third party is subject to anti-money laundering and terrorist financing regime, the information collected will be immediately transferred to the financial body, and the responsibility for carrying out the customer due diligence will remain with the financial institution.
- Alternatives to original signatures – the possibility is currently being examined of alternatives to the original signature requirements that exist in various Orders today. This is in light of technological advances, and the transition to the use of financial services online.
For the draft Order Click here ; For the letter to the financial institutions Click here (both in Hebrew).
B. Preparations for the entry into force of the Anti-Money Laundering Order that imposes AML obligations on Financial Asset Service Providers, and updating the provisions that apply to Regulated Financial Service Providers [1]
On November 14, 2021, the Prohibition of Money Laundering (Identification, Reporting and Recordkeeping Duties of Financial Asset Service Providers and Credit Service Providers for the Prevention of Money Laundering and Terrorism Financing) Order, 5778-2018 (“the New Order”) came into force. The New Order imposes obligations under the anti-money laundering and terror financing regime, on Financial Assets Service Providers and updates some of the provisions that apply to Credit Service Providers.
Prior to and following the entry into force of the New Order, a number of related supplementary provisions have recently been published, including:
1. IMPA’s Reporting Guidelines for Financial Asset Service Providers and Credit Service Providers These guidelines outline the format and dates for reporting under the New Order for actions/transactions (or attempted transactions) that appear unusual to the financial service provider, as well as for transactions in certain amounts as provided in the Order.
For additional information please see our Client Update on this topic: Click here
2. Draft Circular regarding Managing Money Laundering and Terror Financing Risks for Regulated Financial Service Providers (draft dated November 3 2021) – The draft refers to both the New Order and the Anti-Money Laundering Order applicable to the operator of a credit intermediary platform. The draft provisions are intended to guide Financial Service Providers in adopting a risk-based approach to preventing money laundering and terror financing, which includes carrying out orderly processes for identifying and assessing risks and taking measures to manage and reduce risks according to their scale.Among the provisions set out in the draft, the possibility was added of an exemption from the requirement for an original signature on the declaration of beneficiary and controlling persons in face-to-face identification. The possibility will exist for the service recipient to sign the declaration using one of the following technological means:
(1) the service recipient’s signature on a designated pad that complies with the international standard ISO 19794-7; or
(2) the service recipient’s signature in front of a representative of the service provider in a way that enables proper recording of the signature, and securely linking the signature to the declaration, along with providing certain statements by the representative (statements regarding the face-to-face identification of the service recipient and that the service recipient’s signature in front of him/her was made by digital means).
Comments on the draft can be submitted to the Capital Market Authority until November 18, 2021.
For the Draft circular Click here and for the related letter Click here (both in Hebrew).
3. A Draft Amendment to the Circular “Remote Engagement with a Service Recipient Online” (draft dated November 14, 2021) – The draft amends the current Circular on the subject, in order to apply the Circular also to Financial Asset Service Providers. In addition the draft also includes updates regarding the reporting requirements to the Capital Market Authority in respect of the use of remote identification technology.The provisions of the amended Circular will apply to a Financial Services Provider that is subject to one of the Anti-Money Laundering Orders, provided that the Financial Services Provider is a corporation. The draft was published as another complementary step to the entry into force of the New Order.
Comments on the draft can be submitted to the Capital Market Authority until December 12, 2021.
For the Draft circular Click here and for the related letter Click here (both in Hebrew).
4.IMPA and the Capital Market Authority’s Explanatory Document regarding the New Order (dated November 14, 2021) – IMPA and the Capital Market Authority issued an explanatory document regarding the obligations under the New Order. The document is intended to assist Financial Assets Service Providers and Credit Service Providers in fulfilling their obligations under the Anti-Money Laundering and Terrorist Financing regime.
For the publication Click here (in Hebrew).
C. The Israel Securities Authority’s Draft Instruction for Non-Bank Stock Exchange Members in the Context of Opening Accounts using Online Identification Technology
In light of the trend towards digital processes, operations and the provision of services, on November 4, 2021, the Israel Securities Authority issued a draft Directive that would allow non-bank exchange members to open accounts for customers remotely, without necessarily having a physical meeting with the customer (even when the account is not an account in a “closed system”).
The draft Directive was published following the publication of similar instructions by the Supervisor of Banks (as part of Proper Banking Conduct Directive No. 367 “Online Banking”) and the Capital Market Authority (“Remote Engagement with a Service Recipient Online”).
The draft Directive specifies the format for opening an account using online identification technology, taking into account the obligations under the Anti-Money Laundering Order applicable to non-bank stock exchange members, as well as the conditions and requirements for this arrangement.
In general, online identification procedures can be performed using one of the following two technologies:
- Video conference technology – a technology that enables communication between two or more centers, in which a video image and sound are transmitted in real time, as long as it is secure and encrypted, in order to prevent information leakage and to maintain the confidentiality and reliability of the information.
- Visual identification technology – Identification technology based on video and audio communication between the service provider and the service recipient. Such communication can be through real-time visual interaction or through non-real-time video photography; provided that it is secure and encrypted for the purpose of preventing information leakage, and to maintain the confidentiality and reliability of the information.
The draft Directive also sets out provisions regarding the possibility of signing a declaration of beneficiary and controlling shareholder online.
Comments on the draft Directive can be submitted to the Israel Securities Authority until December 18, 2021.
For the draft circular Click here (Hebrew).
The above summary does not set out all of the instructions and requirements specified in the publications outlined above. We recommend any interested party to read the publications carefully.
We will be happy to advise and assist with any questions on the subject.
Herzog Fox & Neeman
Ayelet Regavim Kahanov | Partner
[1]As defined under the applicable AML order.
