Class Action 24372-08-19 Yuval Amir: Mizrahi Tefahot's blanket refusal to deposit crypto funds was not reasonable

Background and facts: Yuval Amir v. Mizrahi Tefahot Bank, Class Action 24372-08-19

On August 12, 2019, Yuval Amir filed a claim against Mizrahi Tefahot Bank, together with a motion to certify it as a class action. The proceeding, Class Action 24372-08-19, was heard in the Tel Aviv-Jaffa District Court. At its center was the bank's policy of refusing across the board to deposit into customers' accounts funds originating from the sale of virtual currencies, without examining each request on its merits.

According to the motion, the applicant bought Bitcoin in 2014 and 2016 by transfer from his account at the bank. In February 2019 he converted the coins into shekels, and the money was credited to his account. About a day later he received a letter from the bank, according to which the bank refused to accept the funds and they were returned to the sender. His approach to the bank did not change the decision.

The class the applicant sought to represent was defined as follows: "Any person who sought to deposit at Mizrahi Tefahot Bank Ltd. funds he received from the sale of digital currencies and Mizrahi Tefahot Bank Ltd. refused to deposit these funds in his account, in the seven years preceding the filing of this motion". The applicant estimated the class at about 6,650 customers, and the damage at NIS 10,000 per class member. He also asked for an order requiring the bank to allow such deposits, after checks to prevent money laundering and terrorist financing.

The parties' arguments

According to the applicant, the bank breached section 2(a) of the Banking (Customer Service) Law, which prohibits a bank from unreasonably refusing to provide a service. He argued that even if there is a concern of money laundering, the bank must take steps to reduce the risk and not refuse across the board. He supported his motion with an expert opinion from the banking system, and with the position of the Attorney General filed in another proceeding (the Arav case). According to that position, a bank must carry out an individual examination before rejecting a request to deposit such funds.

The bank argued that services for transactions in virtual assets are not an essential service the law requires it to provide. According to the bank, the policy was set as part of its duty to manage money laundering risks under Proper Conduct of Banking Business Directive 411. The bank referred to the position of the Bank of Israel, according to which at that time banks should not be required to provide services related to virtual assets. It also argued that the policy was sent to the Supervisor of Banks and he did not object to it, so it is deemed reasonable under section 2(d) of the Law. The bank also argued that the applicant has no personal cause of action and that the proceeding is not suitable to be heard as a class action.

What the court decided: a blanket refusal is prima facie unreasonable, but the class action was not certified

Senior Judge Rachel Barkai examined the tension between two duties of the bank: the duty to fight money laundering and terrorist financing, and the duty not to unreasonably refuse to provide a service. She noted that the Bank of Israel's position was not a regulation of the field, but left the banks discretion. A policy set in the exercise of such discretion is subject to judicial review.

As part of the decision on the motion for certification, the court held that a policy of blanket refusal, without an individual "know your customer" examination and an examination of the source of the funds, is prima facie unreasonable and disproportionate. The court joined the findings in the Arav case, which adopted the Attorney General's position. It was held that a blanket refusal to provide a service is the most extreme sanction against a customer, and that the bank must act according to a policy that grades the risk.

Nevertheless, the motion to certify the class action was rejected, for three reasons. First, the main purpose of the claim had been exhausted. The court pointed to an amendment to the Prohibition on Money Laundering Order that imposed duties on providers of services in a financial asset, including providers of services in virtual currencies, published in March 2021, and to a draft amendment to Directive 411 published by the Bank of Israel in March 2022. Under the draft, banks will no longer be able to refuse across the board and without reasons, and will be required to assess the risk. Second, determining entitlement to compensation requires an individual examination of each customer, including the risk in the funds he sought to deposit. Third, the alleged personal damage was not proven and varies from customer to customer.

The court added, beyond what was necessary, that the applicant did not have a personal cause of action. It was held that he did not lay a foundation for proving damage and a causal link, and did not prove that there was no money laundering risk in the funds.

However, the court held that this was not a futile proceeding. It noted the possibility that the proceeding contributed to the regulator's awareness of the need for regulation, the risk taken by the applicant and his counsel, and the public importance of the questions. Therefore, under sections 22(c) and 23 of the Class Actions Law, a symbolic award of NIS 5,000 was awarded to the applicant and legal fees of NIS 35,000 to his counsel, attorneys Amir Katzenelson and Lior Lahav. The applicant was also exempted from paying the second half of the court fee.

Quotes from the judgment

"A policy of blanket refusal, without carrying out an individual "know your customer" examination including the source of the funds, in order to determine the risk rating involved in the activity, is unreasonable."

Paragraph 34 of the judgment (translated from Hebrew).

"The bank must provide services in this matter on the basis of a policy that grades the risk involved in this activity and adapts the risk reduction measures to the concrete risk."

Paragraph 34 of the judgment (translated from Hebrew).

"The decision not to certify the conduct of the claim as a class action for the above reasons does not mean that this was a futile proceeding."

Paragraph 46 of the judgment (translated from Hebrew).

What it means for Mizrahi Tefahot customers

The court held, as part of the decision on the motion for certification and without a full examination of the claim on its merits, that Mizrahi Tefahot's policy of blanket refusal to deposit funds from the sale of digital currency, as it was in the period discussed, is prima facie unreasonable. However, the class action was not certified, and no compensation was awarded to class members.

The court noted that since the motion was filed the regulatory framework has changed, and that the draft amendment to Directive 411 is intended to require banks to assess the risk in each request instead of refusing across the board. Another judgment on a related subject, on the closure of the account of a Bitcoin mining company, appears on the page Israminers v. Bank Igud. Further class actions are collected on the class actions page.

Sources

• The judgment in Class Action 24372-08-19 Yuval Amir v. Mizrahi Tefahot Bank (PDF, law.co.il website)

Frequently asked questions about court rulings against Mizrahi Tefahot Bank

Details according to a report, not yet verified against the text of the decision

How to cite

Class Action 24372-08-19 (Yuval Amir v. Mizrahi Tefahot Bank), Tel Aviv-Jaffa District Court, 18.09.2022. Source: Net HaMishpat (Israeli courts database), case Class Action 24372-08-19 (Yuval Amir v. Mizrahi Tefahot Bank).