Now a member of anti-money-laundering body, has Israel truly cleaned up its act?
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ToI investigates'There's less incentive now to take other needed steps'

Now a member of anti-money-laundering body, has Israel truly cleaned up its act?

Blacklisted 16 years ago, Israel has gained entry to the Financial Action Task Force, yet new immigrants can bring in unreported income for 10 years and vast scams go unprosecuted

Simona Weinglass is an investigative reporter at The Times of Israel.

Justice Minister Ayelet Shaked speaks at a press conference about Israel joining the Financial Action Task Force (FATF), in Tel Aviv on December 10, 2018. (Flash90)
Justice Minister Ayelet Shaked speaks at a press conference about Israel joining the Financial Action Task Force (FATF), in Tel Aviv on December 10, 2018. (Flash90)

Last month, Israel announced that it had been accepted as a full member of the Financial Action Task Force, an international body that sets standards in the fight against money laundering and terror financing. Justice Minister Ayelet Shaked, who presided over a December 10 press conference announcing the event, told reporters that Israel’s acceptance into the FATF was a strategic achievement as significant as its 2010 accession to the OECD, the 36-member policy-setting body of relatively wealthy countries committed to democracy and free market economies.

“The FATF has 35 full-member countries and we are number 36,” Shaked said at the press conference. “This puts us in the company of a small number of countries — the G20 and additional countries that are leading the world in the battle against money laundering.”

The achievement is all the more significant, she pointed out, because only 16 years ago Israel was on the organization’s blacklist.

“We are the first country that got into the FATF on its first attempt,” Shaked said. “We were ranked third in terms of the effectiveness of our anti-money laundering regime, after the United States and Britain.”

Executive secretary of the Financial Action Task Force David Lewis (left) poses with Dr. Shlomit Wagman, head of the Israel Money Laundering and Terror Financing Prohibition Authority on the occasion of Israel’s acceptance as a member of the FATF, Tel Aviv, December 10, 2018. (Justice Ministry)

Shaked also predicted that joining the organization would be good news for the Israeli economy.

“This will help our financial sector become an international player. It will help our economy and business sector and situate Israel as a safe place to invest.”

Israel’s rapid transformation from blacklisted trouble spot to FATF member, and the justice minister’s glowing characterization of the country’s fight against money-laundering, however, is hard to square with numerous economic realities that suggest abiding problems in this field.

If Israel is doing such a good job combating money laundering, how does one account for the astonishingly high number of ghost apartments (apartments that remain empty for most of the year) in the country, and the surge in sales of ultra-high-end luxury cars — both seen as a tell-tale sign of money launderers in action? What about the relatively mild punishments (Hebrew link) for those convicted in fraud cases involving billions of dollars? Not to mention complaints from law enforcement in places like France and the United States that Israel is not cooperating sufficiently on international financial crimes?

Furthermore, how can the officially asserted claim of having effectively faced down money laundering be reconciled with estimates that 20-25 percent of Israel’s economy is off the books? Or the law that allows new immigrants and returning residents to earn income “abroad” (even from shell companies) for ten years without paying taxes on it or, still more problematically, even reporting it — a law that remains on the books despite Israeli tax officials’ relentless efforts to have it amended? What about the fact that for over a decade Israeli law enforcement failed to crack down on, and appears to continue to turn a blind eye to, Israel’s semi-underground investment scam industry, which defrauded victims all over the world out of billions, and also serves as a conduit for criminals to move their money around the world under the guise of online trading?

Could it be that the authors of the FATF report were not aware of these phenomena? Some experts suggest that they were aware, but that in other countries the situation is even worse — so that Israel is indeed, relatively speaking, among the global leaders in the fight against money laundering and terror financing.

‘A very positive report’

Money laundering serves an essential function in any crime motivated by financial gain. It is the process that allows beneficiaries of crime to disguise the source of their funds, reintroduce those funds into the legitimate economy and, if successful, spend their ill-gotten gains with impunity.

“Money laundering is the thing that permits drug traffickers to stay in business and sell Fetanyl, that allows criminals to pay off people in government, to engage in human trafficking or worse,” Kieran Beer, the editor-in-chief of MoneyLaundering.com, the news site of the Association of Certified Anti-Money Laundering Specialists (ACAMs), told The Times of Israel by phone from New York.

“We don’t want crime to pay, and the way crime pays is through laundered funds,” he said.

Kieran Beer (Twitter)

The FATF was founded in 1989 by the G-7 summit in Paris and grew out of the United States’s efforts to crack down on the global drug trade and the realization that international cooperation was needed to track and forfeit the proceeds of transnational crime in a global economy.

Global awareness of the need to combat money laundering increased after the September 11, 2001, terrorist attacks in the United States and after several high-profile leaks about the way high net worth individuals store their money offshore.

Countries wishing to join the FATF are subject to an on-site evaluation in which their anti-money laundering regime is evaluated on the basis of 40 critera, including how seriously the judicial system takes the crime of money laundering, whether the country confiscates proceeds of crime, whether banks and financial institutions know the names of the beneficiary owners of bank accounts, and whether financial and other institutions are properly regulated and supervised. The idea behind these recommendations is to plug every possible hole that criminals could use to introduce dirty money into the financial system. Since criminals can be creative, the FATF recommendations are continually being updated.

The FATF’s 278-page evaluation of Israel, compiled after a team of international experts visited in March 2018, is highly positive in its assessment of the progress Israel has made in the battle against money laundering, with a few caveats.

“Israel has implemented an anti-money-laundering and counter-terror financing system that is effective in many areas,” the report summarized, saying that the authorities here were doing a good job investigating and prosecuting money laundering and terror financing violations, as well as cooperating and exchanging information with other countries.

The report added that preventing and countering corruption is a “high priority at the national level,” and that Israel has legislated a series of laws that align the country with international anti-money laundering standards. It said Israel does a good job meeting its international obligations to recover the proceeds of crime, keeps high-quality records on the beneficial ownership of companies, and cooperates with other countries seeking information on Israel-based suspected criminal activity, although several countries complained that they occasionally experience delays in the execution of extradition requests from Israel.

The report did stress that Israel needs to make major improvements when it comes to supervising financial and non-financial bodies for potential money-laundering violations, and must take more preventive measures that would preempt money laundering in the first place.

How can one account for the discrepancy between the highly positive report and the assessment of critical observers that there is a lot more work to be done?

The report did not mention Amendment 168, the law that exempts new immigrants and returning residents from paying taxes on or reporting their income abroad for a period of ten years. Israeli government officials have been trying unsuccessfully for years to amend the law — which they claim turns Israel into one of the world’s most generous tax havens — but have repeatedly been blocked by the political echelon

“It’s a very positive report,” Moran Harari, the director of Tax Justice Network Israel, told The Times of Israel. “The main criticism is that Israel needs to strengthen its preventive measures. For instance, at present lawyers and accountants don’t have to report suspicious transactions to the anti-money laundering authority. That’s a problem because there are things the anti-money laundering authority isn’t seeing.”

Harari said that FATF reports tend to be very rigorous and high-quality, but there were nevertheless a few things in the 278-page report on Israel that surprised her.

“They mentioned in the report that information on beneficial ownership and public trusts is publicly accessible. That’s not true — what is publicly accessible is information on who owns companies and partnerships but not information on trusts, which is only in the hands of the Tax Authority and not others. Also, in many cases the owner of an Israeli company as indicated in the corporate registry is the legal owner but not the beneficial owner.”

Moran Harari, director of Tax Justice Network Israel. (Courtesy)

The other thing that surprised Harari, she said, is that the report did not mention Amendment 168, the Israeli law that exempts new immigrants and returning residents from paying taxes on or reporting their income abroad for a period of ten years. Israeli government officials have been trying unsuccessfully for years to amend the law — which they claim turns Israel into one of the world’s most generous tax havens — but have repeatedly been blocked by the political echelon, officials have said.

“I was surprised that there was no mention of Amendment 168. I would love to know how many suspicious activity reports there are relating to new immigrants. But the information is not out there, so we can’t really know.”

Harari said that while she is glad Israel took many of the steps required to gain admittance into the FATF, she is worried that the incentive has now decreased for Israel to take the additional steps to really clean up its act.

“For instance, the issue of regulation of gemachim [ultra-Orthodox free loan societies] is still outstanding. We will need international pressure to change it and that is less likely to happen now.”

An A for effort

Beer, the editor-in-chief of MoneyLaundering.com, said that even if Israel’s anti-money-laundering regime could use a lot of improvement, the FATF was likely seeking to note that Israel has made progress.

“Israel has made some high-visibility efforts that meet some of the standards of FATF’s assessment methodology, and the FATF would want to reward that,” he said.

“What you get credit for in the 40 recommendations section of the report [the technical section, with assessments based on 40 criteria] is for putting the right legislation and regulation in place. Israel has relatively speaking done that.” Thus, the overall relatively positive assessment, he said, “is probably a recognition of the fact that Israel was on the blacklist in 2000 and has come a long way since then.”

Still, Beer also expressed surprise that Amendment 168 was not criticized in the report.

“That (amendment) would seem to enable global tax evasion, which has become a predicate crime for money laundering in most places.”

Beer also noted that the report found Israel to be only partially compliant on the issue of wire transfers. In many cases, money service providers, which tend to be hole-in-the-wall, extra-bank financial institutions, are not required to ascertain the identity of the beneficiary of a transfer that is less than NIS 50,000 (or NIS 5,000 for high-risk jurisdictions). This opens the door to money laundering because criminals can easily make a payment in several installments, each of which falls under the threshold.

“Then there are some concerns (in the report) about the fact that lawyers, accountants and others don’t have any kind of suspicious-activity reporting responsibilities,” added Beer. “But Israel is not alone in the world on that. The United States exempts lawyers from having to report any suspicious activity because of the power they have in Congress.”

Asked if perhaps standards of the FATF are not high enough, and that might explain Israel’s strong performance — since even a country like Russia, whose elites are reported to launder money on a massive scale, is a member — Beer said that FATF membership and mutual evaluations shouldn’t be conflated but that some FATF decisions are influenced by a number of factors, including political considerations.

“Basically the FATF has decided under its mission, and under what has evolved since the founding of the FATF, that it’s better to have more countries inside the tent signed on to the standards and undergoing mutual evaluations willingly — and afraid of the outcome of mutual evaluations — and that this has a positive effect in the global effort against money laundering.

“Membership and how you do on the mutual evaluation are two separate issues,” said Beer. He said 198 countries have committed themselves in theory to implement the recommendations of the FATF, but the point is to get them all up to a satisfactory level of compliance.

“In that respect Israel has clearly made the right noises to come into the tent,” he added.

“You mention Russia. I guess there’s a real decision about how hard you can come down on Russia despite the fact that clearly there are some real issues around funds that went to Danske Bank in Estonia, for instance. But on the positive side I guess it can be argued that a global standard for fighting money laundering and certain types of financial crime has been established. Countries don’t say, ‘It’s stupid, we’re not going to abide by it.” They may lie about whether they abide by it or not, but increasingly there is a standard that the world is agreeing on about what constitutes money laundering. I think that’s important.”

A loophole for foreign money?

Ariel Marom, a Belorussian-born former banker and social justice activist who lives in Israel and frequently travels throughout Russia and Eastern Europe for work, told The Times of Israel he believes that hundreds of millions of dollars of dirty money from the former Soviet Union is being smuggled into Israel, including by new immigrants, a phenomenon he fears may have been lost on the FATF. There are certain branches of large Israeli banks, he said, that have developed a reputation among newcomers for looking the other way.

“Much of it is black money — smuggled out of Russia or the Ukraine, Moldova or the Baltic countries that has been stolen from the government budget or constitutes the proceeds of prostitution, drug sales, weapons sales or oil sales in contravention of international law. Israel is one of the financial havens for this black money,” he claimed, based on his conversations with businessmen and politicians in the former Soviet Union and Eastern Europe.

A small percentage of this money is used to corrupt Israeli politicians, he charged. “Russians — and this is no secret — fund the campaigns of a number of politicians, not just one party.”

Much of the money enters the country with the help of new immigrants, he said, who are not required to report their income from abroad for ten years and other funds enter the country as direct investments in Israeli high-tech.

Recent reports raise the concern that Israel’s immigration policies have allowed immigrants from France to launder money in Israel as well.

Money laundering on the internet is uncharted territory

There is another possible explanation for the discrepancy between Israel’s impressive performance on the FATF mutual evaluation and the assessment of some observers on the ground that Israel still has a long way to go to stem illicit money flows. This particular problem, however, is not specific to Israel.

It has to do with the fact that more and more of our lives are spent online, and that the potential for fraud and money laundering online is enormous and almost unchecked by any kind of regulation anywhere. This problem, said Ron Teicher, the founder and CEO of EverCompliant, an Israeli high-tech company that helps financial institutions detect fraud, is analogous to the problem of “fake news” online.

When news consumption migrated online, one of the unforeseen consequences was the spread of “fake news” sites and reports that looked legitimate on the surface but were actually deployed by bad actors who sought to manipulate readers or spread disinformation. Likewise, today, there is a problem of fake e-commerce websites, or of legitimate e-commerce being exploited by bad actors to process payments for illicit activities including child exploitation, weapons sales, fake pharma, online scams and even terrorist financing.

EverCompliant founder and CEO Ron Teicher. (Courtesy)

In fact, an entire “high-risk payment processing” industry has popped up both in Israel and around the world that allows criminals and shady online actors to get their ill-gotten gains into the global payments system by masking and disguising their identities so that credit card companies and banks perceive them as legitimate. Thus, for example, gambling websites that seek to collect payments from gamblers in the United States, where their activity is illegal, have used high-risk payment processors that help them disguise the identity of the beneficiary of the funds, claiming the payments were for flowers or jewelry or even payday loans.

Almost all of Israel’s online fraud industries, including forex, binary options and other scams estimated to steal billions of dollars a year, are reliant on transaction laundering to process payments, and would likely struggle to sustain themselves if these online money laundering loopholes were shut down by authorities.

But the phenomenon is not unique to Israel, and like fake news, is a global consequence of the internet, Teicher said. “Transaction laundering is taking advantage of anonymity online to process illicit payments through merchant accounts that seem to be legitimate,” he said.

In this respect, “Israel is just like any other country. Israeli regulators, like regulators in any other country, are just not understanding the problem yet,” he said. “This is a case right now where you have new technology that creates a new reality, and it takes time for the regulator to fully comprehend the impact this new technology has on society.”

In truth, said Teicher, the impact is profound: He estimated that transaction laundering for the online sales of products and services worldwide reached over $200 billion in 2016.

“If you’re any type of criminal or terrorist, there’s no better way to launder money than to do it over the internet. It’s much easier, faster, cheaper and less risky. The impact is just as terrible as with regular money laundering.”

Teicher explained that in the past, if criminals had proceeds from say, drug sales, and they wanted to spend their ill-gotten gains, they might open a nail salon or car wash in order to have a legitimate cover story for where their money had come from. But opening a car wash costs money, time and effort. Today, those same drug dealers could open innumerable e-commerce sites that purport to sell, say, jewelry or cosmetics, and process transactions in a way that made it look like the money came from those legitimate-looking sites. Or they could use a series of legitimate-looking sites as a front for illegal online activity, like weapons sales.

“A would-be money launderer can set up 3,000 websites pretending to be merchants and they look just like a real merchant,” said Teicher. “It’s really hard to distinguish between the real ones and the fake ones. And that’s part of the reality we live in today. But we need to address it as a society.”

“We can’t ignore it,” he stressed, “because we are basically allowing money laundering to happen and that means we’re allowing criminals to enjoy the fruits of their crime.”

All of which serves to underline that, notwithstanding the Financial Action Task Force’s acceptance of Israel, and its positive report on the authorities’ anti-money-laundering regime, the struggle to identify the proceeds of crime, keep that money out of the economy, and bring the criminals to justice is anything but over.

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