Israel’s Diamond Industry to Become AML/CFT Compliant

The Israel Money Laundering Prohibition Authority (IMPA) has notified the Israeli diamond industry of its intention to implement those of the FATF 40 Recommendations and its 8 Special Recommendations which apply to designated non-financial businesses and professions, including the diamond industry. Indicative of the cooperative approach, the head of the IMPA, lawyer Yehuda Sheffer, has invited the heads of the Israeli diamond industry to enter into a dialogue with the IMPA in order to enable the adoption of an effective system which will make Israel’s diamond industry fully compliant with the international anti-money laundering (AML) and combating of financing of terrorism (CFT) conventions, while minimizing any unnecessary hardships on the diamond industry.

Following Belgium and the United States – which have adopted specific rules for the diamond and jewelry industries – the implementation of AML/CFT rules will move the major diamond centers to an almost level playing field, which is very important for competitive reasons. Compliance issues should not be allowed to create trade barriers and/or provide competitive advantages or impediments to compliant countries. Issues such as reciprocity – mutual recognition by governments of the diamond-industry relevant compliant systems in the respective diamond trading countries – are of foremost importance and represent a positive incentive to centers (and diamantaires) to become fully AML/CFT compliant.

After Israel’s implementation of diamond industry AML/CFT compliance rules, which is expected still in the current calendar year, the pressure will shift to India to follow suit. Israel is a relative “newcomer” in the AML/CFT regulatory environment – and is following a rather independent line, assuring that rules make sense in the local context. Israel enacted the “Prohibition on Money Laundering Law” (PMLL) in August 2000, more than a year before the 9/11 tragedies. The Financial Intelligence Unit (FIU), called Israeli Money Laundering Prohibition Authority, became operational in February 2002. The PMLL requires financial institutions to report “unusual transactions” to IMPA as soon as possible under the circumstances— “unusual transactions” are loosely defined. The term is used so that the IMPA will receive reports even when the financial institution is unable to link the unusual transaction with money laundering. This will certainly become a point for discussion between the industry and the IMPA, as certainty and clarity on what actually constitutes a “reportable” suspicious activity is an absolute necessity. We have seen that in the United States banks and other relevant institutions will resort to “defensive reporting” – to cover themselves, they tend to report anything that seems unusual, even though often a rational explanation may well lie within the reporting party’s reach.

The diamantaires and jewelers in the United States have a “voluntary” reporting obligation, while in Antwerp it has become mandatory. We don’t know yet what model Israel will follow, though the IMPA on many occasions has stressed that it views these issues to be of such importance to the country that a strict interpretation of the country’s international obligations seems the more likely outcome of the industry-IMPA dialogue.

The law establishes specific procedures for banks with respect to customer identification, record keeping, and the reporting of irregular and suspicious transactions and it is not expected that the limits and thresholds maintained for the diamond industry would be substantially different. The law requires from the banks declarations of currency transferred (including cash, travelers’ checks, and banker checks) into or out of Israel for sums above $10,500, while documents must be retained for any transaction above $2,100.

The current focus on the diamond industry is partly in response to a March 2005 United States Department of State report that recommended that “Israel should examine the misuse of the international diamond trade to launder funds. Israel should continue to enforce regulations pursuant to the [anti-money laundering law] and continue improving its anti-money laundering and counterterrorist financing regime through ensuring the diligent reporting of suspicious activities by banks and non-financial institutions.”

In spite of this unequivocal admonishment, international organizations – especially the International Monetary Fund – are giving Israel high marks for its AML/CFT implementation.

As we do not know yet whether the Israeli rules for the diamond industry will deviate much from the FATF recommendations (we expect that they will be enacted in full), the “working arrangements”, the way in which laws are implemented provide considerable flexibility and accentuate the government’s approaches.

In the United States – where now a New York Times journalist has been jailed for not disclosing a source of information – there is considerable concern with invasion of privacy and the curtailing of citizens' rights all in the name of the war against terror. As discretion and confidentiality are of great significance in the diamond industry, it is only fair to quote an independent assessment (made on behalf of the IMF) which notes that the Israeli AML/CFT system compare very favorably from a “privacy” protection perspective.

Though the Israeli FIU collects enormous amounts of information (including the “unusual transaction reports”) it has adopted a policy of analyzing and reviewing the data by itself. In an average of about 10% of the instances of suspicious activities reporting, it may refer cases to the law enforcement authorities, but “law enforcement investigators cannot review Cash Transaction Reports (CTR) or Unusual Transaction Reports (UTR) information themselves directly and must rely upon the IMPA’s ability to provide them with competent analysis of suspicious financial information in a timely manner.”

In Israel the banks seem particularly close with their clients and, unlike for example Antwerp, there are instances in which the customer understands that his bank is “looking’ at certain aspects of the account. Even though the Israeli legal framework contains provisions prohibiting financial institutions from tipping-off customers when information is being reported to FIU, in some instances [says the IMF] “these provisions are limited in scope, and though the authorities believe its interpretations of the provisions would address the issue, the provisions nonetheless merit review for effectiveness.” The Bank of Israel is reviewing these measures.

On balance, the International Monetary Fund has concluded, in a recent review, that “for the actual implementation under Israel’s current AML/CFT criminal justice laws, Israel is to be congratulated for having obtained a relatively high level of AML/CFT criminal justice component implementation in a short period of time. However, Israel’s AML provisions are only two years old, and some changes to the provisions have yet to be enacted and fully implemented. Therefore, it is difficult to assess whether Israel has the capacity to fully implement all the criminal justice components of its AML/CFT regime until they are fully in use.” 

Multiple Supervision Authorities

The Israeli diamond industry is supervised by the Diamond Controller, who gets his authority directly from the relevant laws. The Diamond Controller operates in the framework of the Ministry of Industry Trade and Labor. It is an intriguing question as to who will investigate those instances within the diamond industry which the FIU finds require further investigation. Looking at other sectors in the economy, the Police and the Customs Service are authorized to investigate money laundering cases, with the Customs Service investigating only customs-related money laundering offenses.

Israel’s AML legislation presently applies to banking corporations, members of the stock exchange, portfolio managers, insurers and insurance agents, provident funds and companies managing provident funds, the postal bank, and providers of currency services. Seven orders were issued to each of the financial sectors that require customer identification, record keeping, and submission of UTRs and CTRs.

All relevant institutions have specified supervisory authorities such as the Bank of Israel (BOI) for banks; the Israel Securities Authority (ISA) for securities firms; and the Ministry of Finance (MOF) for insurance, currency service providers and provident funds. The supervisors for each financial sector are granted sufficient power to take actions against financial institutions who fail to fulfill their AML/CFT obligations under the anti-money laundering law and the associated orders as well as the various supervisory acts.

They have also been enhancing their supervisory oversight to ensure financial institutions’ compliance with PMLL by issuing regulations, circulars, and letters that require more details to comply with PMLL. The BOI, MOF, and ISA have initiated onsite inspections focusing on AML/CFT compliance using inspection manuals that were developed for AML/CFT compliance. According to the IMF, “in spite of the multiplicity of institutions that are responsible for AML/CFT, there appears to be a strategic level of coordination and effective implementation in the initial stages of AML/CFT enforcement. However, cooperation with supervisors in Israel, as well as with overseas supervisors, is currently constrained for BOI and MOF. Under current sector-specific laws, the governor of BOI and the Commissioner of Insurance of MOF may share only criminal information. The BOI, however, may share information with foreign supervisors with a letter of consent from banks and, in addition, plan amendments to legislation that will permit this same kind of cooperation with foreign supervisors.”

The IMF is urging Israel that consideration should be given to amendments to laws to widen the possibilities for sharing and cooperating with both domestic and foreign supervisory authorities regarding individual matters.

From a diamond industry perspective, international cooperation is of greatest importance. Israel is a small country and within the diamond industry all players know each other well --- “too well”, some might even say. Threats, if there are any, would come from abroad – making international cooperation on information exchange absolutely essential.

But who should be the “recipient” of this information? The Israeli diamond controller?

The IMF recognizes the complexity. “In a system such as Israel’s,” says the IMF, “where there are separate supervisory authorities for the various sectors and thus an ability to tailor approaches to the realities and particular issues presented in each sector, a divergence in supervisory approaches is expected and acceptable. However, as this relates to AML/CFT, divergences appear to go beyond what would be normal and expected. More consistency in the supervisory approach for AML/CFT issues between sectors could be achieved through closer coordination among the relevant authorities,” suggests the IMF.

The Israeli FIU has informed the International Monetary Fund that it does not believe that law-enforcement agencies should have direct access to the information of the FIU. “The choice of an appropriate model of FIU for a country naturally depends on the country’s specific environment and conditions. Israel has adopted an administrative FIU model, and has done so on the basis of a thorough study of different models offered by the international professional community, and in light of the specific circumstances and systems in Israel. The FIU model in Israel has several important advantages. Inter alia, this model allows for a balance between privacy protection of the public at large (especially since most CTRs contain innocent information, which is irrelevant to law-enforcement agencies), and the need to effectively combat money laundering and terrorism financing,” says the Israel Money Laundering Prohibition Authority. This model relies on the FIU’s specialization and professionalism in analyzing data and reports, and enables the FIU to disseminate selective valuable information to law-enforcement agencies and foreign FIUs.

The Israeli model promotes “a climate of trust” between various financial institutions and the FIU, thus improving the quality and quantity of the reports made. This should be comforting to the diamond industry. Diamonds are not yet part of the system. It would be very consistent with the overall approach followed by the Israeli authorities that AML/CFT concerns or cases arising in the industry need to be referred by the Financial Intelligence Unit to the Diamond Controller. That is only one out a few options which do not need to be discussed here. The reason for writing these lines - while the television in the background reports on the awful London explosions – is to stress that while the actual AML/CFT compliance rules that will be imposed on the Israeli diamond industry are clear, there is considerable maneuverability in the implementation of the rules. The Israeli Money Laundering Prohibition Authority should be complimented on having initiated a dialogue with the industry before promulgating any rules. This approach almost guarantees that the final rules will be workable – and respected by the industry. This makes it a truly win-win situation.

Have a nice weekend.