In his opening remarks, the Supervisor noted that the work of the Banking Supervision Department and of the banking system together with all the other participants in working to prevent money laundering and terrorism financing (AML/CFT), is one of the main and most significant activities, the success of which helps Israel’s economy and society. Laundering money or financing terrorism through a bank or through nay other means negatively impacts the values protected by relevant law and the battle against major crime. In addition, as noted—in society as well, such exploitation is liable to also adversely impact the bank’s good reputation, the public’s confidence in it and in the banking system in general, and even the good reputation of the State of Israel.
As such, the Banking Supervision Department ascribes considerable importance to managing AML/CFT (anti-money laundering and countering the financing of terrorism) risk in the banking system, and has sent a clear message to the banking system about the importance of managing the risk in an enhanced and optimal manner, with no tolerance for compliance risks.
Accordingly, the Banking Supervision Department required, and requires, that the banking system invest huge resources in information systems for managing AML/CFT risks. As part of that, stringent systems of control and monitoring of customer activity were integrated, while receiving explanations and documentation regarding funds transfers made to and from their accounts. This activity is further challenged by the various developments and the changing banking environment, such as products and services, technology and digitization being divested, or in contrast, by the increase in sophistication and methods of crime. These factors require the strengthening of the monitoring and control systems from the technological perspective, locating anomalies and the money trail or as can be described in one word—RegTech. The supervisory expectation is that the board of directors and management work effectively to strengthen the integration of the procedures, directives, and controls in the area of AML/CFT, and as part of this will allocate the required resources, over time.
Further in his remarks, the Supervisor noted that the Banking Supervision Department welcomes the establishing of a Prohibition on Money Laundering Order that will apply to the activity of financial-asset service providers. Completing the process of granting licenses to such entities by the Capital Markets Authority and the going into effect of the said Order in November 2021 will serve as an additional central and important pillar in reducing risks. The Supervisor emphasized that it is important to note and remember that a chain is as strong as its weakest link. Therefore, promoting and strengthening synchronized regulation, together with collaboration among regulators, enforcement entities, and the Authority, together with recruiting and placing the proper resources, each within the framework of their area of responsibility, will help in reducing regulatory arbitrage and improve the manner of identification, minimization and effective management of the risks.
Afterwards, the Supervisor also referred to the issue of cryptocurrencies and said that the Banking Supervision Department views virtual-asset activity as high-risk activity from the perspective of AML/CFT, and as such it should be subject to enhanced means of monitoring and control. This stance is in line with the views of leading international entities in the field (including the FATF[1] and BIS[2]) and other enforcement entities.
Therefore, the view of the Banking Supervision Department is that a cautious approach should be taken—an approach in which banks should not be forced to provide services related to virtual assets to an entity—individual or corporation—that will deal in such assets. In addition, the Banking Supervision Department’s expectation is that a bank that chooses to provide such services will be required to act with informed risk management, including monitoring activity at a level sufficient to ensure that it cannot be used for money laundering or terrorism financing.
However, in view of the legislation of the Order, the Banking Supervision Department intends to continue promoting designated regulation for private customers who buy or sell cryptocurrencies by the end of this year. As an integral part of the considerations of the Banking Supervision Department and the banking system, it will be necessary to verify the effectiveness of the enforcement capabilities of the other relevant regulators in the value chain. Preventing arbitrage among regulators and enforcement entities will lead to minimizing the “cracks” in the industry—and clearly that is where to act in this area.
The Supervisor of Banks concluded his remarks by saying that the activity to prevent money laundering or terrorism financing is important and significant for all of us. The identification, monitoring, and follow-up become increasingly challenging with the development of technology and changes in the business environment. In contrast, it is important to use technology in order to strengthen the means of monitoring and control and the risk management so that it has the capability for informed management and appropriate regulation, in order to allow appropriate business activity. We should persist in working in this sphere, and this is all so that we can live here in a better society, economy and state.
[1] Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers, June 2019 – "Some countries may decide to prohibit VA activities or VASPs, based on their assessment of risk and national regulatory context…"