Do You Own Crypto? AML Order Also Applies to Digital Currencies

For the first time, companies providing virtual currency services will be required to comply with Israeli anti-money laundering provisions. This follows an amendment to the Prohibition of Money Laundering Order that recently came into effect. The amendment will apply to financial asset service providers obligated to hold a license under the Control of Financial Services Law.

The Order aims to enable the safe use of virtual currencies while providing tools to service providers. It will also help the relevant regulatory authorities (the Money Laundering and Terrorism Financing Prohibition Authority and the Capital Market, Insurance and Savings Authority) differentiate between legitimate uses of virtual currencies and prohibited uses, such as for the purposes of money laundering or terrorism financing. The Order underwent various adjustments following an international review performed by the Financial Action Task Force (FATF), which is leading the global war against money laundering and terrorism financing.

Highlights of the amendments and the new guidelines:

1. New definitions – The amendment defines for the first time terms used in the virtual currency market: “virtual currency,” “transaction sum” in a virtual currency, and “virtual currency wallet address.” In addition, several virtual currency-related activities were added to the list of activities that may be deemed “unusual activities” pursuant to the Order. These include the use of types of virtual currencies that cannot be tracked using customary means, the receipt or transfer of virtual currencies when a concern exists that they originated in criminal activity (including on a “dark market” platform), and more.

2. KYC obligation and obligation to document identification details – Financial asset service providers are now required for the first time to perform a “know your customer” (KYC) process, prior to providing service to service recipients who are other than “occasional service recipients.” For example, virtual currency service providers are required to perform a KYC process for every incidental transaction exceeding ILS 5,000. The KYC process includes, inter alia, the obligation to clarify the source of the financial assets for which the services are being provided, the occupation of the service recipient, and the purpose of the credit or financial asset service.

3. Documenting identification details, performing verifications, and document requirements – Service providers must document service recipients’ identification details and are specifically obligated to retain documents for a period of five years, apart from particular obligations listed in the Order. Service providers must also verify a service recipient’s identification details (apart from an occasional service recipient), according to the type of service recipient, through an identity card or notarized copy thereof and, in particular instances, through the Population Registry.

4. Electronic transfers – In order to meet the criteria set by the FATF, the amended Order contains a clause related to electronic transfers and virtual currency transfers. Inter alia, the clause includes an obligation to record parties’ details in transfer documents. For activities with virtual currencies, it adds an obligation to record the wallet addresses involved in the transfer in the transfer documents.

5. Control obligations – A requirement was added to the routine controls, whereby, in instances when a concern arises of money laundering or terrorist financing in relation to activities carried out by a service recipient, the service provider must ask to receive information and explanations from the service recipient about those activities. If necessary, the service provider must also ask for evidence supporting the information and explanations provided. The service provider must then update the KYC records accordingly.

   Additionally, as part of the control procedures applying to service providers, the amended Order makes it compulsory to check the identity of the person requesting or receiving service against the list of declared terrorists and terrorist organizations and against the list of entities declared as entities aiding the proliferation and financing of weapons of mass destruction.

6. Visual identification – Service providers must identify a regular service recipient via visual identification. The service provider or any party on its behalf, a lawyer, a diplomatic or consular representative overseas, or an apostille certification agency may perform the identification. The amendment allows service providers to fulfill their visual identification obligation through the use of remote technological means (online identification), including to identify a service recipient outside of Israel.

We note the amended Order includes reliefs for the visual identification obligation when a transaction is performed in a “closed system” or a “semi-closed system.”

Closed/Semi-Closed Systems

A transaction in a “closed system” is a transaction in which financial assets are transferred from a service recipient’s account in a banking corporation or postal bank, where the service recipient is the sole holder of that account (“original account”), and back to that same original account.

A transaction in a “semi-closed system” is a transaction in which financial assets that were transferred using a credit card or bank card attributed to an account in a banking corporation, in a bank outside of Israel or in a postal bank, having no other account holders apart from the service recipient (“another account”) are returned to that same service recipient through the credit card or bank card from which the assets were initially transferred or to another account, or vice versa, and a transaction in which financial assets that were transferred from another account are returned to another account of the service recipient, and vice versa.

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Barnea is one of the leading law firms in Israel in the cryptocurrency and white-collar practice areas. We provide legal service to all entities affected by this new order, including fintech companies, credit providers, and crypto companies. We are at your service if you require more information.

Source: barlaw.co.il