The Banking Supervision Department clarifies its requirements regarding banks’ activities abroad
Supervisor of Banks Dr. Hedva Ber said, “In recent years, banks worldwide have sharpened their focus and reduced their activity in foreign countries, with the understanding that broad deployment exposes them to risks of noncompliance with local laws and regulation. The materializing of such risks led to investigations and large fines, and in Israel it was reflected in investigations of three banks by US authorities with regard to tax evasion by customers. As such, and against the background of supervisory measures, Israeli banks markedly reduced their activities abroad in recent years. As a complementary measure to this decrease, we are requiring the banks to reexamine their remaining activity abroad, to reduce it to a smaller number of countries and main foreign banking offices, in a manner that will allow the appropriate allocation of resources—in terms of quality and quantity—for proper management of risks and other aspects of compliance.”
This directive complements the Banking Supervision Department’s directive from 2015 on “Managing risks deriving from customers’ cross border activity”, which has already led to improved risk management at banks’ foreign banking offices and vis-à-vis nonresidents holding accounts at banks in Israel, as well as closure of subsidiaries and a marked contraction of Israeli banks’ activities abroad. The Directive includes new requirements to focus activity abroad and strengthen risk management at subsidiaries, alongside gathering together and sharpening central principles related to group risk management and supervision of foreign banking offices, which appear in existing directives.
Main points of the new directive:
· A banking corporation is to redefine its strategy for activity via foreign banking offices and its risk appetite in such activity. Within this framework it is to establish in which countries it wants to operate, which activities will be carried out at each foreign banking office, and what is the minimum size of a subsidiary that will allow risk management in an adequate manner while complying with local laws and regulations. Where the current activity is not in line with the strategy, the banking corporation is to define an exit plan.
· A banking corporation is required to tighten and improve its supervision over subsidiaries. This will be done through existing tools for managing risk on a group basis, as well as by utilizing new tools. Among other things, the banking corporation is to:
o Hire external auditors with relevant local expertise in the country of activity who will conduct periodic audits on compliance and risk management at subsidiaries, and will check their compliance with standards required by local laws and regulation.
o Verify that the various functions at subsidiaries, including compliance and risk management, are staffed by professionals with relevant knowledge and experience.
o Define the function at the banking corporation in Israel that is responsible for concentrating and analyzing information on the subsidiaries, so that the banking corporation’s management and board of directors will have an up to date and complete picture of the subsidiaries and an assessment of their risks.
· A banking corporation is required to pay particularly close attention to the issue of compliance risk management and Anti-Money Laundering/Countering Financing of Terrorism risk management, with an emphasis on compliance risk management from the perspective of the required transparency in managing customers’ accounts, specifically: the prohibition on opening and managing numbered accounts and accounts with a code or fictitious name; as well as the manner of handling them: as a trustee account, through offshore companies, and in transactions in which credit is guaranteed by a related party’s deposit (“back to back”). The banking corporation is to ensure, at the individual banking office level, that activities of this type are carried out only after examining and understanding the economic or business reasoning of the customer’s manner of incorporation or execution of transactions, including receipt of supporting documentation, and after the required steps are taken at the subsidiary both on the basis of provisions of local regulation and laws as well as the directives of the Supervisor of Banks in Israel.
· The list of incidents occurring at subsidiaries, which require reporting to the Banking Supervision Department, was expanded.