On Banks, Anxiety and Money Laundering

On Banks, Anxiety and Money Laundering

April 22, 2019

The Israeli Prohibition on Money Laundering Law was enacted in 2000 and marked a new era in the State's handling of money laundering. In the explanatory notes to the law, prior to its enactment, money laundering was defined as "an act in property, sometimes by means of the financial system, with the aim of inculcating property originating in criminal activity into property of a legal and innocent character, while blurring the illegal origin of the property." In the early years of its enactment, Israel was still a site in which money laundering operations were carried out. Over the years, and especially after the establishment of the Anti-Money Laundering Authority and after a broad legislative campaign, the word "money laundering" became one of the most important brakes on economic activity in Israel, including money transfers and opening of bank accounts, even when the source of the money is completely legal. The financial systems entered into anxiety from fear of sweeping incrimination and imposing significant fines and began to issue increasingly complex procedures that make any account opening or transfer of funds (especially fund transfers abroad or into Israel) potentially suspect and innocent parameters such as amount, origin, the transferor and the recipient, into potential "crimes" and "criminals", although in many cases they are completely innocent. Note that real money launderers are sophisticated enough to circumvent these procedures and those who are really damaged by it are the innocent businessmen and the State economy.

The fear of administrative and criminal actions, such as financial sanctions and confiscation of property and too few verdicts, increased the fear of financial institutions and familiarity with the customer (KYC - "Know Your Client") became familiarity with his clothing repertoire or the number of scars on his torso ... Banks and the other financial institutions examine every detail - relevant or irrelevant - in the customer's past. If one of the details of the past raises concerns (not necessarily reasonable), these institutions will raise difficulties in opening accounts and transferring money, including activities that were legitimate in the past and there is no reason that such should not be legitimate today. At the same time, the financial institutions also examine the source of the money, how was accumulated, agreements signed by the transferor, whether tax was paid on the same amount; and if it is a company, the transferor is demanded to give details about the shareholders, to provide balance sheets and confirmations that weigh on financial activities that were very simple in the past. Banks do not "like" money that comes from, for example, arms deals (even legal ones), forex or binary options, issues related to cannabis etc.

Another problem is the lack of uniformity between the different banks: one bank will punish a customer for a tax offense while another bank will accept a customer who paid income tax and/or ransom. There are also banks that require the approval of the accountant that the customer paid a full tax law – an approval that in effect has no significance beyond the heavy burdening, as the accountant knows only the information that the client has given him. There were cases in which a person came to an agreement with the Income Tax Authority, wished to transfer the ransom money from abroad, and the bank refused to open an account for him and receive the income tax payment, while another bank agreed under certain circumstances. The lack of uniformity creates a difficult problem that I shall address later on, in the discussion as to legal opinions.

As the Money Laundering Prohibition Law may impose personal liability on employees of the financial institutions, from the junior clerk to the CEO, the banks employ compliance officers in each branch, and the compliance officers often transfer the decision making to the district compliance officer or to the chief compliance officer. The compliance officer may prefer to receive a pre-ruling from the Anti Money Laundering Authority. A compliance officers may prefer to say "no" rather than approve, and the suspicious transactions are "stuck" or suspended for many months. As a result, systemic anxiety intensifies and these bilateral anxieties seek a solution.

Another trend that intensified in recent years is the demand for a broader reporting when the client is politically "linked": a close political affiliation of someone to the government may adversely affect the considerations of the financial institution. Whereas in the past government ties were an advantage, today they are a disadvantage and a limitation.
One of the possible routes for financial activity for both the client and the financial institution is to provide a reliable legal opinion that "protects" both sides. It is clear that such an opinion should not be a shield that will stand up at Court, but one that will allow the flow of legal funds to and from the State. Such an opinion must meet the tests set by the Supreme Court and may remove from its users the threat that any of their actions will be deemed illegal. The opinion must be practical and legal and meet several criteria set out in a series of holdings of the Supreme Court.

In the Promedico case, it was held that a person's good faith reliance on advice receive in connection with a particular act, from an attorney whom he could rely on as having the necessary legal knowledge, and who knew all the facts and circumstances required for the matter, might negate a criminal intent on his part. In such a case, he would be able to hold a defense of acting pursuant to a legal advice. In this regard, it is important that the Court be convinced that the person acted in good faith on the advice of an authority that he could rely on as a person who knows the facts and the law and has professional competence to provide opinions and his opinion may be relied upon. An important element of such an opinion is its structure: it must include all the facts on which it is based, alongside the legal analysis and conclusions, as without the facts, it is not possible to know whether the opinion is correct.

In the Tager case it was held that in order for a person to obtain a reliance defense against criminal liability, due to his actions been based on counsel, two conditions must be met: the mistake must be sincere and in good faith, and it must meet the criterion of reasonableness. The Court need be convinced that the mistake as to the legal situation occurred despite all the efforts that should be expected of a reasonable person in order to ascertain the legal situation. The burden of proving this lies with those contending to rely on it, but as far as the criminal law is concerned, it is sufficient that the contention is proven to the level of creating a reasonable doubt. That is, legal advice may establish a protection for person in appropriate cases. A person assisted by the advice of a lawyer may assume that the specific matter or transaction that the lawyer accompanies is handled and examined in all its legal aspects.
In the Tnuva case, the Supreme Court reviewed data that may serve as a basis for raising the "defense of error in law" based on the advice of an attorney. First, the legal counsel must rely on the full relevant factual basis; Second, the lawyer must have expertise in the area in which the opinion is requested; Third, the legal advice must be serious, on the face and preferably given in writing; Fourth, the opinion will be of value only if the person ordering the opinion decided to seek a lawyer after finding no more appropriate means to clarify the law; And fifth, which I believe is the most important of all: the reliance should be made in good faith. In the Promedico case, the Supreme Court held that a bona fide reliance on a professional opinion (in that case, by a tax expert) would constitute a defense against criminal liability. In other words, relying on an attorney's opinion will be a defense argument, according to which when a person mistakenly believes that an act that is a criminal offense is not prohibited at all, his mistake would be deemed "reasonably unavoidable", and he will be protected from prosecution.

And meanwhile, who pays the price? The public and the economy. In a verdict given in March 2019, the Tel Aviv District Court held that a bank was not allowed to decide categorically that it refused to open an account for a company engaged in the "mining" of Bitcoin digital coins in light of the bank's procedures prohibiting the opening of accounts for companies in the crypto-currency and even refused to receive funds that derived from conversion of digital currencies into Israeli shekels. The bank was ordered to pay the company legal expenses of ILS 2,600... If that company still exists, it is lucky. Businesses are collapsing due to the inability to operate and a sum of ILS 2,600 is far from covering even a small part of their legal expenses, let alone the damage that may be caused to them. Until the Courts order banks to compensate in millions of Israeli Shekels companies whose accounts were closed or money transfers were not made on time, the financial institutions will continue to operate under the cloud of anxiety and business owners, as well as the entire business community, will continue to suffer. Over-legalization, over-regulation and anxiety paralyzing financial activity harm both the "good" and the "evil" without distinguishing between them. Financial institutions and their clients should use rational and non-emotional tools to enable legal financial activity - such as the use of a legal opinion - rather than hide behind the phrase "money laundering" as an excuse to blocking economic activity.