Israeli Capital Market Authority Tightens Anti-Money Laundering Rules for Interest-Free Loan Funds
The Israeli Capital Market Authority (CMA) published a comprehensive draft regulation on Sunday imposing anti-money laundering and counter-terrorism financing risk management requirements on providers of interest-free deposit and credit services, specifically targeting financial gemachim (community loan funds). These new rules align gemachim with FATF international standards, aiming to enhance monitoring, risk management, and reporting practices.
Amir Gal, the CMA Commissioner, emphasized that financial gemachim serve as a unique social and economic pillar, and the regulatory measures are designed to ensure their professional and transparent management, safeguarding the financial stability of these institutions and protecting depositors' and donors' funds over time. The rules will take effect 18 months after final publication, with a public consultation period open until the end of August.
This regulatory framework complements the 2019 law that first subjected community financial institutions to CMA supervision and a dedicated anti-money laundering directive. Gemachim operate on a nonprofit basis, mainly serving the Haredi community by providing interest-free loans funded by community deposits and donations. The CMA's move responds to concerns that poor risk management, operational failures, or expanding credit without real repayment capacity could lead to institutional collapse and jeopardize thousands of savers and donors.
Under the draft, each gemach must develop a written risk management policy suited to its activity's complexity. For gemachim organized as associations or public benefit companies, boards or management committees must oversee policy implementation, while sole-managed gemachim place full responsibility on the individual manager. A key operational change requires appointing a "responsible officer" with functional independence and unrestricted access to financial records.
Enhanced "know your customer" procedures will apply to high-risk clients, including foreign residents without clear Israeli ties, clients linked to high-risk countries, and local or foreign public officials, who must sign specific declarations. Providing services to entities requiring a financial license without holding one will be prohibited and must be reported immediately. Reporting obligations include automated, detailed annual submissions to the CMA and the Ministry of Justice's anti-money laundering authority, covering regular and suspicious transactions, credit in arrears, and external expert assessments of economic viability. The CMA's online system will reject noncompliant data files to prevent circumvention or unauthorized data alterations.
