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The Supervisor of the Banks is not to be faulted for failing to uncover earlier the huge embezzlement that wrecked Trade Bank, according to the state comptroller's report published yesterday.

Trade Bank collapsed in April 2002 after the Bank of Israel found that employee Esther Alon had stolen NIS 254 million from a bank with an equity of NIS 50 million. The fraud was uncovered in a special audit carried out by the Supervisor of the Banks to try to work out why the bank had run into liquidity problems.

The state comptroller backed the view of the supervisor and his team in explaining that the department's role is to make sure commercial banks avoid unacceptable credit, indexation, interest and market risks. The department says it cannot allocate resources to ensure there is no embezzling , because in most cases embezzlements are not large, and in any case the bank's board of directors and management try to curb embezzlement. The comptroller described this view as "reasonable."

The supervisor's team told the comptroller the embezzlement that remained undiscovered for so long pointed to serious defects in the performance of the bank's board and executives, and its internal auditing and control mechanisms.

"Despite enforcement and sanctions imposed by the supervisor in these fields, the detailed demands we have made to rectify the defects, with which the board of directors was expressly charged, and although the directors have confirmed that the defects had been amended, in reality many of them were not fixed. This enabled the embezzlement," the supervisor's team wrote to the comptroller in May 2002.

The team further noted that in some cases special reports submitted by Trade Bank at the request of the supervisor were wrong and even distorted.

The state comptroller noted in his report that the supervisor of banks should reconsider the conditions under which he monitors delinquent commercial banks and make sure they comply with his instructions. In some cases, the comptroller said, statements by the bank's management that defects have been fixed are not enough.

The comptroller further recommended passing laws that authorize the Bank of Israel to fine banks that fail to comply with proper banking procedures or with an instruction of the supervisor to amend defects or that falsely report they have amended defects.

The comptroller also advises more frequent audits to minimize the risk of embezzlement, although he accepts the supervisor's position that the fact that he had not taken any measures that may have curbed the embezzlement does not constitute malpractice.

The comptroller lists various defects that the supervisor of the banks had found in Trade Bank over the last few years, such as splitting up loans and distorting reports to circumvent the limit on the size of a loan to a single borrower. In 1999 the bank did not mention two of its three largest borrowers in a report about major loans. At the time, the supervisor of the banks cautioned Trade Bank that this was "inexplicable, to say the least." The state comptroller said this understatement was out of line.

Although the supervisor and his team recognized that Trade Bank was repeatedly violating proper banking procedures, Tal did not impose any of the sanctions he was authorized by law to implement, the comptroller noted. Furthermore, the supervisor and his staff did not impose any sanctions - such as suspension or removal - against officers and directors at the bank.