Meet Israel's 'money sheriff' fighting money laundering, terror funding

Shlomit Wagman has been tackling money laundering and terror financing for six years.

 WAGMAN SPEAKS during a press conference about the joining of Israel as a member of the Financial Action Task Force (FATF), in Tel Aviv in 2018. (photo credit: FLASH90)
WAGMAN SPEAKS during a press conference about the joining of Israel as a member of the Financial Action Task Force (FATF), in Tel Aviv in 2018.
(photo credit: FLASH90)

Shlomit Wagman has a strong smile and knows how to put those around her at ease.

That is, at least as long as you are not one of the criminal organization kingpins or arch terrorists whose lives she has made much more difficult over the last six years as the director-general of the Israel Money Laundering and Terror Financing Prohibition Authority (IMPA).

In a wide-ranging interview with The Jerusalem Post Magazine, Wagman recently discussed how her, and her unit’s, strategy of “follow the money” has led her to scare terrorists and kingpins more than they were scared of the police sending them to jail.

She also talked about new artificial intelligence technological tools with cutting-edge algorithms which could soon help her prevent crimes before they occur; her part in reducing the Israeli-Arab sector crime wave; fighting abuses of the crypto financial sphere; and transforming Israel from a blacklist country to a leading member of the Financial Action Task Force (FATF), a global group that sets financial standards to avoid and catch criminal abuses.

“Our methodology is follow the money... We seize funds or cut through the straw men to get to the real assets; we get to the heart of the network, and get to the professional money launderers assisting the terror and criminal organizations,” she said.

 SHLOMIT WAGMAN, director-general of the Israel Money Laundering and Terror Financing Prohibition Authority (IMPA). ‘Our methodology is follow the money.’ (credit: RAN YEHEZKEL) SHLOMIT WAGMAN, director-general of the Israel Money Laundering and Terror Financing Prohibition Authority (IMPA). ‘Our methodology is follow the money.’ (credit: RAN YEHEZKEL)

The authority probes all areas of financial investments, but is deep into issues behind the scenes long before suspects know they are a target of law enforcement.

By the time there is a criminal investigation and law enforcement is showing up at a suspect’s house to arrest them at 5 a.m., her authority has already “mapped all of the relevant assets, often already freezing a substantial part of them, and even remotely in other countries with international cooperation.

“Economic enforcement against them creates an astonishing phenomenon. They are worrying more that we will take their money than they do about sitting in jail,” she proclaimed proudly.

This includes getting top criminal lieutenants or other close associates of criminal kingpins to turn state’s witness, who might not have turned in an earlier time period when they faced only a limited jail sentence versus Wagman seizing all of their money.

HOW DID Wagman and her unit’s revolution start?

IMPA was established in 2002, and her predecessor, Paul Landes, had already started a process for Israel to join international organizations and to alter its conceptual approach to financial regulation and enforcement.

But it was only in December 2018, midway through Wagman’s term, that Israel was fully admitted to the FATF, which has said “Israel is one of the most effective. This shows a paradigm shift which Israel went through, a transformation,” said Wagman.

“Effectiveness means it is not just about passing laws,” but, rather, that Israel is actually enforcing the laws and getting results, she added.

There was a two-and-half-year process with a three-week visit by 10 evaluators who “interviewed literally the full range of key officials in the Israeli economy... the Shin Bet [Israel Security Agency] and even the Mossad,” to get the full picture of Israel’s progress.”

Working with the Police, the Shin Bet and other security agencies, the attorney-general, the Tax Authority and other agencies, “we closed the circle from the blacklist to very high effectiveness.”

At least partially due to this excellent cooperation among myriad agencies, Wagman noted that her agency won awards from the Egmont Group of Financial Intelligence Units in both 2016 and 2021 – which Wagman calls “the Olympics” for over 160 national financial enforcement agencies.

Next, she discussed IMPA’s progress in its fight against organized crime. “If you look at the list of top organized groups in Israel from a decade ago... we broke them... in the past five years; all of them are not functioning anymore... they are behind bars or dealing with their trials. They have fallen off the map.

“Now we are doing the second level – smaller gangs – before they get to be stronger,” she continued.

Wagman described one case of a top criminal player who was “directing money laundering while still in jail.” As always, her authority followed the money.

She explained that criminal organizations need lots of money. They need designated operatives to handle arms, real estate and protection-style business “taxes,” and broader mafia-style consigliere coordinators, to forge lots of documents and to establish fake trusts.

“It is very complex. Without economic backing, you are powerless to act,” she said.

Combating Israeli-Arab crime wave

Also, she noted IMPA’s role in combating the Israeli-Arab crime wave.

“There is never a vacuum,” she said, explaining that some Arab gangs had taken advantage of other larger Jewish gangs being taken apart, such that many in the Arab sector went from local to national. “Their enhanced power was very dramatic. It reached a climax in the last two years.”

However, she said that then the government started to hear very clearly from the Arab public that they wanted law enforcement to deal with the gangs powerfully.

At the early response stages, she described how the police did regular things like putting more police on the streets, but later the state and her agency started to more aggressively go after Arab sector funds.

Asked whether it was harder to trace the funds of smaller gangs which might use less digital and electronically traceable means, she said the authority worked hard at piecing together their tactics.

She noted there were lots of cash, gold and a very close-knit community whose silence it was tougher to penetrate to expose the schemes.

To take on this new challenge, “we went out of the box and started to focus on the special characteristics of Arab criminal organizations.

“After a couple of months, we had mapped a huge amount of predicate offenses, assets, illicit assets, property related to crimes, and we started to work in a very methodical manner” to crack down.

At one point, “[Israel] Police chief [Insp.-Gen.] Kobi Shabtai said to me, his experience shows that adding more police on the streets or conducting operations to collect weapons are not as helpful and effective to combat organized crime as using financial enforcement measures, which have an immediate impact and tremendous deterrence.”

What happened to these Arab gangs? “Some major ones were brought down, some left Israel,” she said.

She then revealed a spoiler of a future announcement, that the authority has done a new level of mapping out new criminal operations to crack down on, and is working on it with the police and Tax Authority. “In the coming months, the conditions for striking will ripen, and the police will seize [assets from] dozens of organized crime [organizations], based on the financial intelligence produced by my team.”

WAGMAN RECEIVED a master's and a doctorate in law from Yale Law School in 2003 and 2007, respectively, as well as two degrees in law and business management from the Hebrew University of Jerusalem in 2001. She clerked for former Supreme Court chief justice Aharon Barak.

Prior to entering government service, she worked for top law firms in the US, at Wachtell, Lipton, Rosen & Katz, and in Israel at GKH. In addition, she coedited a book on cybercrime, published by NYU Press in 2007, showing she was ahead of the times and familiar with the cybersphere long before much of the rest of the world started to pay attention.

Married and a mother to three children, Wagman served as the general counsel of IMPA from 2011 to 2015, after which she took over from Landes.

During her tenure, she succeeded in more than doubling the unit to 120 staff members, to whom she gives tremendous credit.

In addition to IMPA, from 2019 to 2021, Wagman also served as the acting director-general of the Israel Privacy Protection Authority, leading its activities during the COVID-19 crisis, as privacy has been at the heart of public discourse.

The Justice Ministry noted, “The Supreme Court adopted the PPA’s positions in two fundamental national cases, in limiting the monitoring of citizens by the Israel Security Agency during COVID-19 and striking down legislation to transfer health data on citizens to their local municipalities.”

Next, Wagman gave some examples of the challenges IMPA faces in the new digital financial world.

“For example, there could be six different countries involved in order to fully map what happens with funds before and after they are transferred outside of Israel or into Israel,” she said.

Cybercrime has increased so much that someone showed her an arbitration group for resolving differences between an organized crime group and its software ransomware provider.

To compete with these challenges, “We use artificial intelligence, algorithms and machine learning to find us the next appropriate investigation,” she explained, displaying a sanitized classified graph showing an insane map of connections which the human mind alone could not have caught on to.

“Sometimes it takes that level of sophisticated technology to make the connections to find terrorists’ or gangs’ tricks for hiding their funds, but they always leave a trace... even the best criminal makes mistakes – even if he works in cash. Money has a smell and it leaves the financial equivalent of footprints.”

In one incident, one analyst received a report from a financial institution of a weird transaction. John Doe made a request. The bank did not approve the investment, but still said “this looks fishy” and still reported it to her agency, since they are obligated to report even an attempt.”

Explaining further, she discussed how one of her analysts received the above bank report, looked at the contract attached to the report and saw that one of the pages had handwriting.

They then inputted the handwriting into their system and all of a sudden realized that one of that person’s immediate family members was the head of one of the most important criminal organizations in Israel.

After a short period, a different bank approved a deal, she said. When the materials were sent for the contract, the same name was not included. She noted that all prior attempts to get to the funds of this criminal organization had failed.

The fact that the authority has full visibility from constant financial reporting throughout the public and private sector – in addition to its hi-tech capabilities – helps it red-flag issues and connect dots where no one else could possibly see the connections.

Also, she emphasized the authority’s use of Hashtech information sharing.

She discussed a scenario where Bank Hapoalim and Bank Leumi might both be seeing potentially suspicious conduct from a client, but would not put the full picture together without knowing about each other’s separate concerns. Hashtech gives the government a “hit” that these banks have registered a potentially related suspicion.

Terrorism

Fighting terrorism is an entirely different challenge, which also involves working more with the Shin Bet and other security agencies, as opposed to just the police.

Wagman explained that criminal organizations change black market money to “white,” legitimate money. They hide the original source of the money, but the end point is often a legitimate business to launder the money into being clean. “In contrast, terror financing requires using a different set of glasses. The ‘white,’ legitimate money turns into black market money.”

She warned that there are legitimate people, such as philanthropists, or governments that are being fooled, who think they are helping orphans or society’s weaker sectors, but where the funds are going to terrorism. “So we don’t go for the sources of the funding, but their destinations,” she said.

She noted that the amount of funds being transferred may also often be smaller. “September 11 – the biggest global terror event ever – came at a cost of only $500,000.”

Wagman explained how the Police Counterterrorism Unit and the Police Anti-Corruption Unit have different mentalities and working procedures, and so she also split up the authority into separate units which work on terrorism funding versus criminal organization’s funding (in addition to working with the Shin Bet and other security agencies).

She said her anti-terrorism funding unit looks for strange small funding items, fictitious invoices and tax fraud, and that even the authority’s digital system and AI algorithm searches are tuned differently.

Tracing terrorism financing is extremely complicated and challenging. The recent evaluation conducted by the FATF reveals that Israel is very effective in identifying, investigating and prosecuting terrorism financing. In fact, Israel is among the very few countries that were recognized as having a highly effective system of enforcement, along with the US, UK and Russia.

A major tactic of terrorists for moving funds is TBTF (trade-based terrorism financing). She said that it is hard to get terrorism funds into Israel, but that one way is by legitimate financial trades camouflaging to whom (terrorists) the funds are going. Israel’s security agencies work with her authority on this.

For example, a supplier may buy toys or cocoa, but really the funds are destined for Hamas. The terrorists send a front man to deliver the legitimate goods, while on the side he clandestinely delivers terrorism funds.

“It is extremely difficult to detect,” she stated.

A unique issue here is that her authority needs much greater cooperation and alertness from the customs officers.

She explained that, globally speaking, most customs officers care only about whether you paid their special taxes. They are not looking at whether the price of the goods is reasonable or whether there are in fact toys being transferred in closed shipping containers.

Wagman gives an example of how Israel has become part of a sophisticated international network. Previously, it might have taken two to three years for the Justice Ministry to receive a response to their request for global financial evidence from another country. Now, her team gets direct responses from financial authorities in other countries within 24 hours.

She said, “All money leaves traces,” and that once it is discovered that the funds are linked to (as theoretical examples) Panama, Hong Kong or France, the loop can be closed without wasting any time.

The police themselves told Wagman that they would have needed to assign 10 officers to work on nabbing some of the terrorists’ assets for funding, and it would have taken them a long time, whereas one of Wagman’s financial analysts could handle it in an hour, followed by one officer showing up with a court order freezing the funds.

Virtual assets

On November 14, the authority announced that new regulations now apply to cryptocurrency, Bitcoin, fintech and a range of other digital financial products which have been less regulated to date.

Wagman said that the new rules were an opportunity to start cracking down on criminal abuses of these new financial products more systematically. The new rules also give them greater support and predictability for legal uses.

In recent years, there have been a number of scandals and mega frauds perpetrated in the cryptocurrency realm, where money can be moved around much faster than with traditional banks, but there was also little oversight.

Her authority has already discovered 300 different virtual coins and millions in suspicious funds.

According to Wagman, the new regulations are designed to step into that space to establish order and clear standards.

If, before, the authority had to invest serious resources to uncover fraud in an area where there was no official reporting, now all of the new financial products companies will need to make reports just like banks.

For example, certain transactions over NIS 50,000 will always require a series of reports, and in countries considered high-risk for terrorism financing, even transactions over NIS 5,000 will require reports.

If one of the benefits of new financial products like fintech has been that clients do not need to physically meet with the financial institution that is providing a loan or transferring their funds, now there will be higher and more set standards for clients to identify themselves.

The goal is to make it harder for terrorists and other criminals to hide behind forged documents, and to create greater digital paper trails that can more easily expose bad actors.

She noted that blockchain is all public, and that the real limits in discovering illegalities in the virtual sphere are that smaller institutions do not have sufficient analytical capabilities.

Wagman showed off a sanitized graph mapping out a byzantine maze of some crypto financing schemes, emphasizing that the blinking points at the end were what her team was targeting.

All of the regulations are based on a new set of standards established in 2018 by FATF.

Wagman said that one-third of the world’s countries have already started to apply the new FATF standards for digital transactions, and that Israel is joining this group.

She added that an additional one-third of the world’s countries are also in the process of coming up to speed with the new FATF rules.

In order to keep up with this world of increasingly new technological advances, Wagman said she has also been hiring a new flavor of cutting-edge tech analysts.

Other Israeli security agencies may be involved in assisting with collecting financial intelligence on some of Wagman’s targets beyond open-source information.

Meanwhile, on October 25, the authority asked for the private sector to work with it to increase awareness and accessibility to RegTech (Regulation Technology), in an effort to help the public and private sectors better cope with new challenges in the cybersphere.

Then, on December 28, the Ministerial Committee on Legislation approved a bill to direct the national asset collection agency to forward information to IMPA, after individual instances in the past have led to cracking open major cases.

Meetings to share RegTech solutions are set to start this month.

What else does Wagman have in mind for the future?

She talked about “a second stage: How to use technology to identify and prevent crimes even before they happen,” explaining that improvements in RegTech, fintech, machine learning and AI could eventually help her unit make this a reality, while still observing laws regarding privacy protection.

After six years, when Wagman and her unit talk about these moves, hiding somewhere are probably quite a few gangs and terrorism financiers sweating.