International companies and individuals looking to expand into a new area of business or expand their international business in Israel should understand the relevant legal landscape and how it may shape their operations. In this article, we will focus on international fintech companies considering offering services in Israel or to Israeli clients.
We will highlight the issues that generally need to be addressed in a preliminary legal opinion, and thus allow a company to decide if and how to operate in Israel.
regulatory requirement; Licensing, supervision and other requirements
Israel is currently ranked 35e in the ease of doing business index. Part of the basis for this rating is a country’s regulatory regime. In Israel, the regulatory regime is extensive and sometimes complex.
Financial services in Israel, as in many countries, are regulated. Fintech solutions often fall under the different regulated categories: banking, lending, insurance, payments, e-money, wallets and other financial services.
The most comprehensive regulation for non-banking financial services is the Financial Services (Regulated Financial Services) Act 2016 (the “FSRL“). The FSRL imposes the obligation of license for several financial services, among othersproviding credit, financial asset services (including digital/virtual currency, cryptocurrency, etc.), deposit and credit services, and operating a credit brokerage system.
Thus, a business engaged in payments, remittances, lending, or e-wallets, and planning to provide services in Israel, should consider the FSRL and the regulations promulgated thereunder, as well as the possibility and conditions of being exempted from certain requirements. In this regard, please note that the license requirement depends on the services provided by the company. For example, the provision of software and the lack of interface with customers or users may escape the licensing requirement. An effective legal memorandum would examine the different scenarios and suggest measures to reduce the regulatory burden where possible.
Therefore, the circumstances under which the activity could be considered to be subject to the licensing requirement, i.e. the exact service provided, the location of the parties to the contract, the location where the services are to be provided and the means of communication to potential customers, must be addressed, since all these, among otherscan determine whether the activity is subject to Israeli law.
Moreover, even in the case of an exemption from the licensing requirement, essential obligations may still apply. For example, under certain circumstances, foreign financial service providers may be exempt from the licensing requirement. However, these providers may still be subject to certain obligations arising from the FSRL and other legislation dealing with relevant aspects of their services.
We note that a legal review should not be limited only to the foreign company carrying out the activity, but should also include the possibility and the advantages and disadvantages of carrying on a business through an SPE or a local subcontractor.
Anti-Money Laundering, Anti-Kickback, Anti-Corruption and Sanctions Laws
Anti-money laundering and other related regulations are an example of core obligations that may still apply, independent of the licensing requirement. These should also be reviewed in a legal note. This includes certain AML procedures that a business or individual may have to follow.
Although Israel’s anti-money laundering regime is based primarily on common international principles – above all, the principles established by the FATF – as a sovereign state, Israel has the power to make its own adjustments, for example, high-risk jurisdictions and other supervised jurisdictions.
In this context, we note that the AML regime in Israel is regulated in accordance with the Anti-Money Laundering Law of 2000, which provides the legal framework for different ordinances, each applying to different financial service providers. Thus, each financial activity may be subject to a different order, and therefore to different obligations, mainly concerning the reporting threshold.
In addition, Israel has extensive legislation regarding the prohibition of doing business with enemy states, primarily Iran, but also Syria and Lebanon. With respect to Iran, it is also prohibited to do business with sanctioned Iranian entities, which have been declared by the Israeli Ministry of Defense as entities assisting Iran in advancing its nuclear program or obtaining weapons of mass destruction or means of transporting mass weapons. destruction.
An effective legal adviser would deal with both the legal obligations and the practical implications of complying with Israel’s anti-money laundering obligations.
Recognition of Choice of Law, Submission to Jurisdiction and Enforcement of Judgments
While this issue is not unique to the fintech industry, it is of particular importance when undertaking cross-border business.
As many contracts are subject to other jurisdictions, it is important to understand the extent to which non-Israeli choice of law and venue is recognized by Israeli courts. The companies’ ability to target Israeli customers using the Internet has led to a number of important Israeli court rulings limiting the companies’ ability to force Israeli users to sue outside of Israel.
Recent decisions by Israeli courts, dealing with PayPal and Booking.com, have specifically referred to standard contract law as a means of circumventing applicable law and jurisdictional provisions of PayPal’s Terms of Service, where these are seen as unfairly limiting access to legal remedies. Courts have distinguished between place and applicable law, allowing foreign law to govern the relationship.
Contractual provisions, consumer protection
In Israel, according to the principle of “freedom of contract” in force, the parties are free to agree on almost any conditions and to bind themselves to any commitment and obligation agreed upon. However, we recommend that you address questions regarding restrictions or requirements applicable to the nature of the specific contract, as such restrictions or requirements may apply, depending on the nature and subject matter of the contract and the parties thereto, as well as to discuss any regulations supervising it. .
However, Israel has strong and detailed consumer protection legislation, granting substantive protections and rights to consumers, especially when it comes to online transactions. Therefore, an effective legal adviser would highlight the implications of these provisions on the business model being considered, as this may apply even in a cross-border scenario.
Data Protection and Privacy
Data protection and privacy issues are issues that need to be addressed when designing your business in Israel, especially given that privacy legislation in Israel has become top speed.
Israel’s privacy regime follows GDPR but has its own unique features, which should be addressed, even if the organization is already GDPR compliant. This is the case, for example, of international transfers and the use of subcontractors. Additionally, having Israeli employees raises privacy issues. Note that Israel has database registration requirements that are easily triggered.
No good legal counsel is complete without considering the tax implications of activities. There are a number of new developments associated with the taxation of online activities, and bespoke legal advice is essential to guide any business.
Finally, to get the full range of advice, effective legal advisers will ask you whether you intend to have employees or hire independent contractors, so there are no surprises.
In summary, an effective legal note allowing a company to make the relevant business decisions would touch on the following points:
- What regulatory fields does the economic model trigger? In the fintech sector, it is often more than one.
- Is there a way to minimize regulatory exposure?
- What does it mean to comply, with anti-money laundering being the biggest compliance issue?
- Privacy issues. Regardless of the model, you will likely need to address Israeli privacy issues.
- Consumer protection is a major issue for online services and imposes obligations that affect business models for pure consumer services as well as SMEs in some cases.
- Taxation and employment should not be outdone.