What We Will Ask of You When We Open a File: Identification, Source of Funds, Conflict of Interest, Fee Agreement and Documents

1Why does the lawyer ask you where the money comes from?

Because the law requires it, not because there is any suspicion. Since 2015, lawyers and accountants in Israel have been subject to an anti-money laundering and terrorist financing regime when they provide a client with a “business service”. Buying and selling real estate, managing a client’s assets and setting up a corporation are part of the definition, and so is assisting with a transaction abroad on behalf of a client from Israel.

The framework is the Prohibition on Money Laundering Law 5760-2000, and the order issued under it for business service providers: the Prohibition on Money Laundering (Identification and Record-Keeping Obligations of a Business Service Provider for the Prevention of Money Laundering and Terrorist Financing) Order 5775-2014. Supervision of lawyers and accountants in this area is carried out by the Ministry of Justice, and a breach of the order may lead to disciplinary proceedings and a financial sanction.

2What does the “know your client” check include?

It includes identification, an understanding of the transaction and a check against lists. According to professional summaries of the order, these are the main components:

1. Identification by document: an identity card or passport, and for a corporation, incorporation documents and details of the controlling shareholders.
2. Know-your-client form: the client fills in details of his or her identity, occupation, the purpose of the service and the source of funds.
3. Beneficiary and controlling party: when someone else stands behind the transaction, that person is also specified, and when this is not known a declaration is required.
4. Check against lists: a comparison against the consolidated list of terrorist organisations and terrorist operatives, which is repeated from time to time for every active client.
5. Risk assessment: an enhanced check in situations such as a foreign public figure, a client from a country about which there are reservations regarding money laundering, or a transaction without an explained economic rationale.
6. Record-keeping: the documents are kept for at least five years after the service is provided.

3How do you prove the source of funds?

With a document that shows where the money used for the transaction came from, and not only that it is in the account today. A balance confirmation alone does not explain a source. What explains it is a chain: the income or transaction that created the money, and the way it reached the account from which you pay.

The same documents will usually also be required by the bank in Israel when transferring abroad, by the receiving bank in the country of the property, and in some cases also in a capital declaration to the Israel Tax Authority. If you prepare them once, in an organised form and translated as needed, you save delays at every stage.

4What is checked for conflict of interest?

That the lawyer can represent you with full loyalty. Rule 14 of the Israel Bar Association (Professional Ethics) Rules 5746-1986 prohibits representing a client when there is a real concern that the lawyer will not be able to fulfil his or her duty, because of a personal interest or a duty of loyalty to another. The rule also prohibits representing parties with conflicting interests in the same matter.

In a real estate transaction abroad, the meaning is practical: before opening a file, it is checked that the lawyer does not represent the developer, the seller or the agent in the same transaction, and that he or she has no business connection that may affect his or her judgment. The rule allows the lawyer and the client to agree in writing on a reasonable limitation of the scope of the service, and this is exactly one of the things a good fee agreement defines.

5What should the fee agreement contain?

The scope of the work, what is not included, how the fee is calculated and who pays the expenses. The ethics rules do not impose a general requirement for a fee agreement to be in writing, but a written agreement is the clear way to prevent misunderstandings, especially in a transaction involving professionals in several countries.

• Which stages the work includes: due diligence, contract, assistance at signing, registration, reporting.
• What is not included, for example the fees of the local notary, the local lawyer, translations, charges and taxes.
• The method of calculation: a fixed amount, by the hour or by stages, and when payment is made.
• What happens if the transaction does not go ahead, and what happens if the scope of the work changes.
• The language in which documents and reports will be received, and the means of communication.

6What happens to the money you deposit with a lawyer?

It is not the lawyer’s money. Under the ethics rules, funds that a lawyer holds in trust for a client are held in a separate bank account (rule 39). The lawyer notifies the client of funds received on his or her behalf and transfers them within a reasonable time (rule 40), requests instructions regarding funds held over time (rule 41), and gives an account of the funds on request or at the end of the matter (rule 42).

In transactions abroad, the money for the transaction itself often passes through a mechanism in the country of the property, such as a notary’s escrow account, escrow in the USA or a developer’s dedicated account in Romania. It is advisable to know in advance through which account each payment will pass, who is authorised to release it and on what conditions.

7Which documents should you prepare in advance?

Identification documents, source-of-funds documents and documents that will allow action to be taken remotely. An Israeli document that will be used in another country usually needs an apostille, which replaces consular legalisation in the countries that are party to the 1961 Hague Convention, and a certified translation into the language of the country. The order is the apostille first and the translation after it.

8Why does all this protect you?

Because a transaction that gets stuck halfway costs more than one prepared in advance. A bank that stops a transfer, a notary who refuses to sign because of a missing document, or a tax authority asking about the source of the money years after the purchase are scenarios these checks are meant to prevent. Identification also protects against impersonation: anyone trying to sell a property that is not theirs, or to buy in someone else’s name, faces the same requirements.

The conflict-of-interest check is meant to ensure that the person advising you is not also committed to the other side, and the separate account is meant to keep your money separate from other funds. A written agreement lets you know in advance what you are paying for.

9What to do before the first meeting and how we assist

Before the meeting, it is advisable to gather your passport, identity card and at least one document explaining the source of the money for the transaction, and to note briefly what the purpose is: residence, letting or development. When opening the file, we go through the know-your-client form with you, check for conflicts of interest, define the scope of the work in writing and prepare a list of documents tailored to the country of the property, so that the preparation in Israel progresses in parallel with the check of the property.

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