Israel’s regulatory regime for Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF), while rooted in the guidance of the Financial Action Task Force, has taken a path distinct from its European and American counterparts. At its core, Israel’s regulatory framework is governed by two key laws: the Anti-Money Laundering Law and the Counter-Terrorism Law. In addition, each category of financial institution (FI) is governed by its own order, with regulators further supplementing these requirements with specialized guidelines tailored to their respective financial entities.

The Israeli Money Laundering Prohibition Authority (IMPA) is the Israeli Financial Intelligence Unit (FIU). Unlike many other jurisdictions, the IMPA doesn’t possess direct supervisory powers. Instead, the responsibility of oversight for each FI is held by their supervising regulator, such as the Bank of Israel, the Israeli Securities Authority (ISA), and the Israeli Capital Markets Insurance and Savings Authority (CMISA). 

The National Bureau for Counter-Terror Financing (NBCTF) within the Israeli Ministry of Defense publishes and enforces sanctions related to terror financing. Simultaneously, the Sanctions Bureau within the Chief Economist’s Department of the Israeli Ministry of Finance upholds sanctions rolled out by the United Nations Security Department. Israel’s sanctions programs are limited to terror financing and enforcement of EU sanctions, with no published program targeting other illicit activities.

Similarly to other FATF member countries, Israel has implemented the key FATF guidelines, including the preparation of policy and procedure documents, supporting corporate governance, nomination of AML compliance officer, risk assessment, customer risk classification, politically exposed persons (PEPs) identification, sanctions screening, implementation of internal controls, record keeping, continuous transaction monitoring, and reporting to FIU.

The Israeli regulatory framework for AML and CTF differs from other jurisdictions in several ways. First, KYC (Know Your Customer) and CDD (Customer Due Diligence) processes are strictly defined, providing FIs with limited room for interpretation. Second, unlike many of their global counterparts, Israeli regulations predominantly mandate face-to-face identity identification, with a few specified exceptions allowing for alternative identification methods. 

Third, when it comes to AML reporting, the IMPA emphasizes comprehensive data collection through low-threshold Currency Transaction Reports and Unusual Activity Reports, with FIs’ responsibility focused on the timely provision of quality information rather than in-depth investigations. 

Finally, the Israeli sanctions screening framework places a strong emphasis on Terrorism Financing, with no mandatory requirements for other types of criminal activity.

Below is a comparison of key EU, US, and Israeli regulatory frameworks: 

Customer Due Diligence (CDD):

EU & US: In most domestic cases, Financial Institutions (FIs), under certain limitations, have the authority to determine if customers require simplified, regular, or enhanced KYC&CDD based on their risk assessment and risk profile and to structure the process accordingly.

Israel: KYC&CDD requirements are clearly outlined in orders or regulatory guidelines and allow FIs limited to no flexibility for interpretation.  

The equivalent of simplified KYC&CDD is comprehensively outlined in regulatory orders and guidelines. In most cases, it is limited to customers with an accumulated activity of less than 50,000 NIS over six months that doesn’t involve high-risk countries.

Identification methods:

EU & US: In most cases, no “face-to-face” identification is required. An identification process is conducted using government-issued identification documents and address verification, such as utility bills, bank statements, or government-issued identification documents containing the address. Regulatory guidelines focus on digital and remote identification methods. FIs are encouraged to use technological tools and software to identify customers.

Israel: Identifying non-simplified KYC customers in Israel must be conducted face-to-face. Customers must be identified in person unless the activity is specifically conducted using one of two exemptions: Online Identity Verification (IDV) or operating in closed-loop environments.

Identification is conducted by obtaining two identification documents or via obtaining a local ID (Teudat Zehut) together with a registry check of a population registry operated by the Population and Immigration Authority.

IDV requires minimum technological standards for conducting e-KYC. This includes checking document authenticity, conducting OCR-based data extraction, liveness detection, and face matching. 

Another unique Israeli requirement is to record the customer’s audio statement authorizing the UBO information provided in the UBO affidavit. 

Alternatively, the FI can identify the customer using live online interaction with a representative combined with a penny transfer (bank transfer to a verified customer account in an Israeli bank).

Another examption involves providing services in a closed loop environment, when the funds are originated to and returned from the same Israeli bank account. Due to its limitations, this exemption is usually limited to services such as online foreign exchange or loans. 

Unless under exemption, FIs must receive an original signed affidavit from the customer disclosing the beneficial owner and the controlling shareholders in corporations. This affidavit, verifying the identity of the UBOs, is mandatory for most non-simplified equivalent KYC onboarding processes.

Israeli regulations do not require address verification.

Corporate onboarding:

EU & US: The onboarding process mainly focuses on officers and directors of the company, who are listed in official registries and go through identification processes. Additional authorizations for authorized signatories are needed only if they are not listed in official registries.

Israel: A Board meeting minutes document nominating the authorized signatories and authorized by a lawyer or chairman of the board is required in order to open an account for a corporation.

In Israel, in most cases, identification processes are conducted on authorized signatories. For UBOs, there are information disclosure requirements.

Currency Transactions Reports to the FIU:

EU & US: Periodic Currency Transaction Reports (CTRs) concerning cash or cash equivalent transactions are required by the FIUs in some countries. In most cases, when operating in a digital environment, no CTRs are required. 

Israel: FIs are required to submit weekly or monthly CTRs in the format specified by IMPA. The reports detail customers’ activities when they reach certain thresholds defined in the various orders. Usually, transactions over NIS50,000 or NIS5,000 when involving high-risk countries must be reported.

Additionally, some sectors like international money transfer and currency exchange require quarterly reports to the Israeli Tax Authority in a similar format as CTRs to the IMPA.

Suspicious Activity Reports to the FIU:

EU & US: When FIs detect suspicious activity potentially linked to money laundering, they must file Suspicious Activity Reports (SARs) after conducting a thorough investigation and terminate the account.

Israel: FIs are required to file Unusual Activity Reports (UARs) with the IMPA. Unlike SARs, which are submitted once there is clear foundational evidence for suspicions that a customer has committed criminal activity, UARs are expected in the early stages of identifying unusual activity (or attempts) that deviate from the FI’s expectations about the activity in an account for a particular customer. A UAR is generally filed when a behavioral red flag is triggered rather than when there is evidence of illegal activity. Red flags and typologies are stipulated in the order and published by the IMPA and other regulators.

In the event that a UAR is filed, there is no automatic expectation of the account being terminated.

Israel’s anti-money laundering and counter-terror financing framework differs significantly from the EU and US models. Israel’s regulations emphasize specific operational guidance tailored to various financial institutions. In KYC&CDD, Israel leans towards structured, face-to-face identifications, diverging from the EU’s and US’s flexible online methods. Moreover, Israel’s reporting approach emphasizes forwarding much of the customer’s transactional activity to the FIU and detecting unusual activities early rather than waiting for conclusive evidence of wrongdoing.