- Since 2015, anti-terror financing and money laundering prevention regulations have become significantly more stringent in Israel;
- Despite this, government regulated authorities – banks especially – are still struggling with domestic and international compliance;
- The resulting mess behind the scenes, while not always apparent to bank customers, often directly affects them;
- Foreign corporations (MNCs, international businesses, etc) operating in Israel may be directly affected;
The fight against crime and terrorism today stretches far beyond the physical battlefield. Technology, only sharpened by globalization, has advanced in strides, making cybersecurity the new name of the game. But as cyber and data has moved up in priority with its ones and zeroes, so too, on the same basis, has the fight against criminal and terror financing. It is not that terror financing and anti-money laundering operations are new so much as they have just become more important.
As usual, governments use the various tools at their disposal, and a popular one has always been that of policy and regulation. The problem is that our technology is not advanced enough that we trust it blindly, meaning that we bring humans into the equation and with it human error, human fear and human ego.
In Israel, regulated authorities such as banks are still struggling to perform in this respect (cease money laundering and other violations). A simple Google search in English will reveal the current status quo. Here are several examples:
This Yediot Achronot article of 17 March 2019 details that Bank Leumi, one of Israel’s largest and most successful multi-national banks, was fined in 2015 by Israeli regulators for failing to meet the minimum KYC (Know Your Customer) requirements in several particularly heinous incidents. They were fined 4.2 Million NIS, appealed, and were denied by the Israeli courts. This article from the same date refers to a $400 Million USD fine placed on Bank Leumi by the United States Government for actions that assisted US citizens in tax evasion between 2000-2011, and more recently, that this month bank Mizrahi Tefahot agreed to pay $195 Million USD for roughly the same violations in roughly the same timespan. The point here is not that the banks are doing less in Israel – just the opposite. However the actions taken and the attempts at compliance are governed by fear of these penalties and a desire to avoid them at all costs.
What this means for your organization
This environment of fear from penalties and regulation violations, while intended to ‘fight the good fight’, has undoubtedly made operations for foreign businesses and foreign corporations in Israel far more difficult. There are various precedents over which it has been debated whether a bank can rightfully refuse opening an account for an individual who is in good standing in Israel. However opening an account for a corporation, and a foreign corporation at that, is not necessarily considered a basic right and is therefore more complicated.
As such, Israeli banks hold all the cards. If your organization is an international giant, a bank in Israel will likely go out of its way to handle your finances. But small-to-medium sized international businesses operation in the country – the type that have several small offices around the world, one of which just happens to be in Israel – may be in trouble. Banks can drown an organization in paperwork and questions or simply flat out refuse to open an account for a company, despite its legal incorporation in Israel and its good standing, simply because they do not want to deal with the hassle or potential risk.
Even if an account is successfully opened and managed, money transfers may be affected, as low-level bank clerks in the corporate/business departments, some who do not grasp English with full proficiency, attempt to make sense of a situation they do not particularly understand or were not specifically trained for. As a result, suppliers and service providers may not be paid on time or at all, which can affect customers and therefore harm business over the course of several years. In a system where every small action requires several bank signatures in order to proceed, all in the name of compliance, the banks are in control and your company is just there for the ride.
Tips for smoother operations
Where then does that leave those organizations trying to locally penetrate the Israeli market? Several tips from personal experience (not to be misconstrued as legal advice):
- Pick your bank and branch diligently. “Banks” are not all the same in Israel, nor are all the branches of a bank equal. Choose one with a Branch Manager and staff;
- Incorporate locally as a subsidiary or daughter company (under foreign ownership) and not as a foreign branch or foreign corporation;
- Do not under any circumstances allow a CPA to manage your organization’s finances through a trust account (a common trick of the trade that is very common in Israel, but is practically impossible for a foreign corporation due to the ever-more-stringent regulations);