Israeli lawyers and accountants will have to start applying “Know Your Customer” (KYC) procedures before accepting certain assignments, from September 2, 2015.
This follows the passing of the Order For The Prohibition of Money Laundering (Duty of Identification and Recordkeeping by Business Service Providers to Prevent Money Laundering and the Finance of Terror), 2014, pursuant to Amendment 13 to the Anti-Money Laundering Law, 2000.
The amendment aims to prevent service providers who conduct financial transactions being exploited by money launderers or terrorists.
Similar legislation already applies in many other countries. The Israeli version is framed so as to avoid breaching the legal privilege of confidentiality between lawyers and their clients.
Legal and accounting professionals won’t need to report suspicions to any governmental or police body, instead they must assess risks and deny service in certain circumstances. Ethical codes will also be boosted and failure to apply KYC procedures may lead to disciplinary action by Israeli professional bodies.
When Is KYC Needed?
The Amendment applies to the following “business service” provided or requested from a lawyers or accountant (“service providers”) as part of their professional service by clients:
- Purchase, sale or long lease of real estate;
- Purchase or sale of a business;
- Handling assets of a client, including money, securities, real estate,
- Handling of account at a bank, investment manager, currency service provider, or the Post Office;
- Receipt, holding or transfer of money to form or manage a company;
- Formation or management of an entity, business or trust for another party.
No KYC is needed for service given to the State, government department or under court supervision. Limited KYC procedures apply to municipalities, the World Zionist Organization, the Jewish Agency and certain other national bodies.
What KYC Procedures Are Needed?
In applicable cases, the service provider must carry out detailed identity verification procedures, conduct KYC procedures on a prescribed form, assess the risk of money laundering or terror finance on the form, sign off, and keep a record of the identity details verified.
Also the client must sign a declaration he is acting for himself or name other beneficial owners or controlling shareholders. Control means the ability to steer the activity of the company other than as a director or office holder, and a holding of 50% or more of the voting power or power to appoint directors or the CEO.
The service provider must also check that their clients are not on an online blacklist at the outset and every six months.
Otherwise, the service provider cannot begin to provide the applicable service.
Identity verification takes the form of seeing and noting, among other things the client’s name, address and identity number on the Teudat Zehut, Teudat Oleh issued in the last 30 days, valid Israeli driving license, Israeli or foreign passport or travel permit, Israeli or foreign incorporation certificate, Israeli companies registry extract, relevant statute in the case of other foreign statutory bodies.
In the case of children under 16, identity document of an apotropus is needed.
The identity document must be originals or copies certified by: the competent authority concerned, a lawyer, an employee of the service provider that saw the original document, apostillization, or Israeli Consulate or diplomat. A lawyer may be qualified in Israel, an OECD country or other approved country.
The identity verification must be done face to face by the service provider or his employee, Israeli lawyer, apostillization, Israeli Consulate or diplomat, or other means approved by the Justice Ministry. If face to face verification is not reasonably possible, the service provider may use video conferencing.
In cases of doubt about a person’s identity, the service provider should request a second identity document with a photo.
It seems that utility bills are not relevant for these purposes, unlike other countries.
There is no need to repeat the KYC procedures in the case of a returning client, who was provided a similar business service at least once in the last year or twice in the last four years or any other client who the service provider designates as a returning client by notifying the client accordingly.
If the client provides identification details or documents that seem unreasonable, the service provider must repeat the KYC procedures or inquire into the matter with the client before giving any service.
The risk assessment will be based on, among other things, on: client characteristics, type of business service requested, source of money for the business service, reasonableness of the details on the form, and information on the website of the Business Service Controller at the Justice Ministry.
KYC records must be retained for at least 5 years.
As mentioned, these rules are effective from September 2, 2015. Existing cases at that date must undergo KYC procedures within one year from that date.
Most accountants (as opposed to auditors) help their clients or employers pay their Israeli taxes and national insurance on time each month. Otherwise, penalties are levied. Is this service to the State? Presumably not, in which case accountants must conduct KYC procedures for each such client or employer.
If service providers implement the KYC procedures before the September 2 commencement date, it is not clear whether this counts, or whether the process must be repeated after that date.
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.
As always, consult experienced tax advisors in each country at an early stage in specific cases.