In October, the Israel Securities Authority (ISA) published a directive to Tel Aviv Stock Exchange (TASE) members and trading exchanges regarding the voluntary disclosure procedure announced by the Israel Tax Authority (ITA). The directive clarifies to all entities operating in the capital market that Voluntary Disclosure Certificates (ITA-issued) do not constitute proof that the source of funds is legitimate. Its purpose is to curb the erroneous practice among some capital market entities of treating Voluntary Disclosure Certificates as sufficient evidence of legitimate funds and relying on them to assess a client’s activity.
Limited Immunity Does Not Exempt from Non-Tax Liabilities or Further Examinations
The voluntary disclosure procedure enables taxpayers to report previously undisclosed income and receive limited immunity from tax offenses. However, this immunity applies only to tax offenses and does not protect against other criminal offenses, such as source-of-funds violations, terrorism financing, or money laundering. Even if a client presents an official Voluntary Disclosure Certificate, this does not automatically transform the funds into “white” money or relieve supervised entities of their obligation to ascertain the funds’ source, flow, and ultimate beneficiaries. In other words, a Voluntary Disclosure Certificate is not a substitute for due diligence, is not evidence of legitimate funds, and does not exempt financial entities from their compliance obligations.
The ISA cautions that clients may exploit Voluntary Disclosure Certificates as “comfort letters” to circumvent control mechanisms. The ISA warns supervised entities not to rely on Voluntary Disclosure Certificates as proof of the source of funds and instructs them to continue implementing all statutory compliance mechanisms: know your customer procedures (KYC), review of supporting documents, understanding the nature of clients’ business activities, and individual risk assessment of each client and transaction.
The ISA’s Red Flags
To help detect potential abuses of the ITA’s voluntary disclosure procedure, the ISA’s directive also details the “red flags” list published by the Israel Money Laundering and Terror Financing Prohibition Authority (IMPA). These include, inter alia, large deposits without a reasonable source of funds, opening a new account shortly after receiving a Voluntary Disclosure Certificate, unusual international activity, or discrepancies between a client’s profile and the type of transactions it seeks to execute. The ISA recommends that financial entities integrate the red flag list into routine controls and increase reporting of unusual activity.
The ISA’s message is unequivocal: a Voluntary Disclosure Certificate is a tax document, not a regulatory anti-money laundering tool. Companies operating in the capital market cannot rely on Voluntary Disclosure Certificates to “check the box” for verifying the source of funds. Entities bear professional and regulatory obligations to conduct their own due diligence examinations, update internal policies, and ensure staff are trained to detect risks and anomalies. These steps are essential to avoid legal and regulatory exposure.
In summary, the ISA’s clarification is a strong reminder for anyone managing supervised financial activities: even funds voluntarily disclosed to the ITA require careful, meticulous review. Companies that fail to fully implement identification, verification, and reporting obligations may face regulatory and legal risks. Financial entities should review existing procedures, ensure risk assessments are adequate, and consider refreshing employee training.
****
Adv. Hadar Israeli is a partner in our firm’s Llitigation and White-Collar Department.
Barnea Jaffa Lande’s Llitigation and White-Collar Department brings unique experience and a sophisticated approach to white-collar issues, grounded in deep familiarity with the requirements of authorities in Israel and the United States, combined with legal and strategic creativity.