Regulation and Strengthening Oversight of Currency Exchange Offices in Israel

 

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Regulation and Strengthening Oversight of Currency Exchange Offices in Israel – Legal Requirement for a License for Financial Activities

Currency exchange offices, officially known as financial service providers or currency service providers, offer a variety of financial services: currency exchange, international money transfers, marketing of prepaid debit cards, check discounting, and loans. The volume of activity in this sector has been estimated in recent years at about 150 billion shekels per year.

The currency exchange sector has significant social and economic value. The Money Laundering Prohibition Authority states: "This sector provides competition to banking corporations and offers services to populations that, for various reasons, do not receive sufficient services from the banking sector."

However, alongside the importance of currency exchange offices to populations struggling to receive assistance from banks, the high volume of cash transactions and relatively loose regulation have turned them into money laundering hotspots and a "lifeline" for criminal organizations. This does not apply to the entire sector, but enough to highlight it as a risk area by the authorities.

In order to tighten oversight on the currency exchange sector, they were required to register with the state at the beginning of the 2000s, and in 2017, they were also required by law to submit a formal application for a license. Financial service providers had to submit detailed reports on the types and volume of their activities, customer types, unusual reports about them, operational procedures, data protection, compliance with orders and laws, capital reserves (at least 300,000 to 1 million shekels, depending on activity size), a report on corporate governance requirements (such as appointing directors, etc.). The application document must be signed and approved by a lawyer, and it must be submitted within the designated time frame, awaiting a response.

According to information provided by the state to the court, as of January 2020, 2,700 licensing requests were submitted to the Capital Market Authority; hundreds of those applicants were found to have criminal records or raised doubts about their reliability. As of early January, 336 license applications were approved (I-CHANGE is one of them), 220 requests were rejected, and of those, 90 were rejected due to criminal information or reliability concerns. No decision has yet been made regarding the remaining applications. Those whose licenses were revoked receive a revocation letter with a single sentence: "The Israel Police have confidential information linking the subject to involvement in money laundering offenses. Therefore, the police recommendation is negative."

The Capital Market Authority is responsible for granting or rejecting licenses according to the Financial Services Supervision Law (Regulated Financial Services), 2016. The law is the result of an inter-ministerial team ("Licht Team") that examined the results of the lack of oversight on the non-bank financial services market, which was reflected, among other things, in significant activities by illegitimate entities under the rule of law. As part of the effort to create a proper market, regulated by a financial regulator, that benefits the consumer, the Authority was granted the power to reject license applications for reasons of public safety or security.

In order to combat the black economy, the state refuses to allow hundreds of currency exchange office owners to continue operating, for various reasons, including a special provision stating that the police have classified intelligence against them. The Capital Market Authority and the former Head of the Anti-Money Laundering Authority stated: "We must not allow them to provide a lifeline to criminal organizations."

According to the law, the Supervisor of the Capital Market has the authority not to grant a license to someone convicted of certain offenses or to someone who has been charged with such an offense and whose trial has not yet concluded. Additionally, the law allows the Supervisor to consider circumstances that, in their opinion, "cast doubt on the applicant’s honesty and integrity." It should be emphasized that the use of intelligence and investigative information has been approved by the Attorney General, and such information regarding license applicants is submitted to the Authority for decision-making by the relevant intelligence and enforcement agencies according to established work procedures.

The courts have approved the Authority’s method of operation. In cases where an appeal is filed against the decision not to grant a license, judges request to see the intelligence material themselves. In most cases, they have approved the Capital Market Authority's decision, but even when they have overturned it, they have not opposed the practice of relying on intelligence information.

Attorney Yehuda Shefer, former head of the Anti-Money Laundering Authority and Deputy State Attorney for Economic Affairs, supports the use of intelligence information. "Imagine that a person has been arrested three times on suspicion of being a sex offender, but has not been convicted," says Shefer. "Would you give him a license to open a kindergarten? Intelligence information is definitely legitimate. There's a conflict with the citizen’s right, but that's why there's a right to appeal to the court, and the judges look at the classified material. You can't turn that information into evidence in order not to burn the source, and therefore the person doesn’t go to jail. On the other hand, giving him the ability to open a currency exchange is like providing a lifeline to criminal organizations."

The reality shows that the currency exchange service sector is sometimes portrayed negatively. Currency exchange providers are classified by banks as high-risk clients, and service providers often have to deal with the various restrictions imposed on them from time to time by the banks.

It is no secret that the banking system is not enthusiastic about opening accounts or even providing services to non-bank customers, due to the Money Laundering Prohibition Law of 2000, and the publication of the guidelines in the Standard Banking Procedure 411 concerning the prevention of money laundering and terrorism financing, and customer identification.

Of course, not all players in this sector should be stigmatized, as there are legitimate players, some of whom are large financial institutions competing with banks. But on the other hand, currency exchanges do not have the same regulation as banks, which opens a door for money laundering.

The Capital Market, Insurance, and Savings Authority responded by stating: "The Authority operates according to the law, exercising its powers, and rejecting licenses for those who do not meet the criteria set forth by the law. This is done in full cooperation with other enforcement agencies, including the Israel Police and the State Attorney’s Office, to protect and ensure the interests of customers while creating a reliable, safe, and transparent environment in the regulated financial services market for the benefit of the entire Israeli public."

In conclusion, it is important to note that every currency exchange office that is open and operating from November 2021 onwards has a license and has undergone regulation, meeting all the requirements of the relevant authorities. Therefore, you can use its services with confidence.