What is money laundering?
Money laundering is an act of utilizing property originating from criminal activity, such as blackmail, drug trafficking, managing illegal gambling, bribery, human and arms trafficking. See a “severe criminal file” 1049/07 State of Israel v. Assi Ben Felix Abutbul, p. 539 of the verdict: “The review of operations in different accounts shows that the account holders’ statement that they are the only beneficiaries of the accounts, is false towards the banking corporation, which assumed that operations are associated with the account holder. According to this premise, the bank conducted its records and reports to the authorities in compliance with the Prohibition on Money Laundering Law.
Once it was clarified that the statement does not reflect the actual operations related to the accounts, we are dealing with a case of physical fundamental offense committed by the account owners, the statement providers, as well as by those carrying out bank operations on behalf of the account owners.”
Offenders, who wish to disguise the illegal source of the property, will usually operate in three stages, as follows:
- Money that originates from the world of crime is invested in the financial system.
- The financial system uses the money to finance and invest in projects and legal properties in order to blur the source of these funds.
- The offender takes the laundered money from the financial system and uses it for his private needs, while presenting the legal and legitimate source of the funds.
In 2012, the International Monetary Fund has estimated that capital originating from criminal activities totals about 3%-5% of the global production. Regarding Israel, the amount totals approximately 20-50 billion NIS a year.
In fact, the damage is immense in several respects. The economy suffers damage, since due to the black economy activities the state can lose up to 15 billion NIS a year. In addition, there is a lack of cash flow control, which endangers the financial sector and open trade. There is also a concern that such funds may be used to finance unwanted activities, which may destabilize the country, such as in case of inefficient resource allocation, operations that present a security risk and financing terrorist activities.
There is a global consensus regarding the issue of money laundering and terrorism financing. However, the capital that is used to finance terrorist activities is legitimate and it may not originate from criminal activities, although people tend to think that the methods of money transfer are very similar and therefore, resources and systems established to handle the problem are used for the same purposes, i.e. the global fight against money laundering and terrorism financing.
To fight this phenomenon, 131 countries agreed to cooperate and share information. In 1989, the G-7 countries established the FATF organization. The minimal activity required to be accepted into the organization would be declaring that all money laundering related operations are criminal offenses. Financial institutions will be obligated to identify all their clients and their money source, monitor and report unusual or suspicious activity in accordance with the standard reporting procedure.
See the words of the Honorable Judge Heshin regarding lawsuit 9796/03 Haviv Shem Tov v. the State of Israel: “Upon thorough examination we find out that the authorities encounter many difficulties, until they find out the relation between the big money moving from one location to another and the source of that money. In this case, due to the fact that the funds are illicit, the way to get out of this maze would be by imposing a total and comprehensive report requirement.”
Following the events of September 11, it was decided to expand the recommendations and include terrorism financing.
In Israel, the Prohibition on Money Laundering Law was enacted in 2000, focusing on the following subjects:
- Such financial bodies, as banks, credit card companies and trust companies are obligated to report to the regulator – the Bank of Israel. The ministry of finance will serve as the regulator that will receive reports from insurance companies, provident funds and currency services. The securities authority will serve as the regulator that will receive reports from stock exchange members and account managers, while the Ministry of Communications will be responsible for the Postal Bank. In addition, obligation to report will concern properties and assets of over 100,000 NIS transferred abroad (crossing the Erez Checkpoint – 12,000 NIS). See lawsuit No. 36/14 of the Financial Sanctions Committee as of July 2014: a person that entered the country with approximately $38,000 upon his return from Turkey. The person did not report the amount and received 3000 NIS fine, despite the fact the committee has accepted and approved the source of money.
- A severe punishment (7 to 10 years in prison) as a sanction aimed to show the offender that it is not feasible. We are talking about forbidden actions, such as carrying out operations with illegal property or providing false information despite the ruling.
- 3. The low allows to confiscate the property that was acquired as a result of criminal activity and/or somehow related to it. For example, in case the property is a payment for committing the crime. However, it does not serve as substitute for punishment, while many people thing that if the property belongs to the state it is considered as it was returned to the state. See criminal lawsuit 6817/07 the State of Israel v. Yosef Sitbon: “Confiscation is not a punishment, although it features punitive aspects”.
- 4. International cooperation with organization’s member countries in order to obtain and share information regarding suspicious activities and operations, such as money laundering or terrorism financing.
In 2005, the Prohibition of Financing Terrorism Law was enacted in order to cause damage to the sources of terrorism financing and report any international terrorist organization, even if it does not act against Israel. It was decided, among other things, that even trade relations with Iranian entities will be considered as direct or indirect support of Iran’s nuclear program and therefore, they are prohibited.
In addition, it was decided that operations with properties aimed to finance terrorist activities, remuneration for terrorist activity, failure to inform the authorities regarding terror related information, etc., are criminal offenses subject to penalties as prescribed by law.
The Israel Money Laundering and Terror Financing Prohibition Authority was established in 2002 and it operates the departments of data collection and control, research and evaluation, model development, communication technology and a database required to detect and prevent the aforementioned operations.
Data and its analysis are transferred between countries via documents called “articles”, which contain detailed information required for handling the problem worldwide.
In 2012, decisions were made to intensify the fight against money laundering by stipulating a more profound definition of identification obligation and reporting to additional entities, Israeli and international corporations. For example, such sanctions were imposed on Bank Tefahot, the Union Bank, insurance companies, diamond merchants, currency service providers and many others, totaling an amount of hundreds of millions of shekels.
Fields that will serve as the authority’s focal points:
- Online gambling – criminal offenses in the field of illegal gambling are quite frequent and information regarding them is delivered to the Israel Police for further treatment.
- Winning cardholders – criminals acquire winning cards from the original winners in order to present the prize as the source of money.
- Database analysis aimed to detect the routes of money transfer for money laundering purposes.
- Detecting charity associations suspected to serve as a method of concealing the route of money transfer.
- Detect money laundering carried out via diamond and gem trade.
- War on corruption and bribery of international public officials.
- Monitoring purchase of products online via trade trading platforms, which are also used for cash transfer.