How an Israeli Bank Stiffed Washington

Bank Leumi is one of a vast number of banks that helped Americans dodge tax. Why did its case particularly vex the American authorities?

Tal Cohen

To many, Israeli bank branches abroad are tiny outposts of the Jewish state, just like the local falafel joint. But if anything, the banks have been more like outposts of Switzerland, a country famed for bank secrecy and, as a corollary, tax evasion.

In December 2014, Israel’s second-largest lender, Bank Leumi, admitted that it had helped thousands of its American clients conceal money overseas. It agreed to pay $400 million in penalties to U.S. and New York State authorities, to fire involved employees, and to turn over the details of some 1,500 accounts to investigators.

Two other Israeli banks – Bank Hapoalim, the country’s biggest, and No. 4, Mizrahi Tefahot – are also under investigation for allegedly helping American citizens dodge taxes. They have been reluctantly setting aside funds in expectation of also having to pay huge fines to the miffed Americans.

Israeli banks are hardly the exception in abetting tax evasion by American citizens. Over the years much of the banking world developed a casual attitude toward aiding and abetting tax dodgers.  

“I don’t want to cover up anything, but we were portrayed with some degree of injustice, as if we were the only ones who did just that. You know that this is not so, that these practices were common in those years all over the world, including Israel, with some private banking clients,” David Brodet, who became Leumi’s chairman in 2010, said in April.

But of all the world's banks, Leumi's behavior was arguably more egregious, because it was actively wooing wannabe American tax dodgers just as other banks were retreating from the business.

You've got hidden mail

Among the world’s wealthy, when legal tax loopholes weren’t enough, there was a world of numbered accounts and “hold mail” services (where bank statements aren’t delivered to the account holder’s address). These and other mechanisms enabled the rich to conceal their money from the tax authorities, launder ill-gotten gains, or even hide money from an ex-spouse seeking a share of assets.

The wall of secrecy was blown open in 2008 by whistleblower Bradley Birkenfeld, an American who had worked for UBS. He revealed how the giant Swiss bank encouraged its American clients to evade taxes.

Former UBS banker Bradley Birkenfeld speaks during an interview at prison in Minersville, Pennsylvania, U.S. (April 27, 2009)

From there, a wide-ranging probe resulted in massive fines, of $780 million for UBS and an even nastier $2.5 billion for Credit Suisse, for instance, and the story is far from over. Lots of other banks remain under investigation, including in Switzerland itself, where its No. 3 private bank, Julius Baer, is now under scrutiny.

In 2010, two years after Birkenfeld's revelations, the U.S. enacted the Foreign Account Tax Compliance Act, requiring foreign financial institutions to disclose their American clients, or face penalties. Also, banks around the world, including about 100 in Switzerland alone, are signing onto a U.S. program where they can escape criminal prosecution in exchange for a fine and revealing all about their clients and activities.

Leumi leaps onto the bandwagon

The U.S. probe into the Israeli banks’ role in tax evasion began a year after FATCA's enactment, in 2011.

In the case of Leumi, the bank sent representatives to the U.S. to meet with potential clients, advising them to set up front companies in the Central American country of Belize and elsewhere, and deposit funds in Leumi accounts abroad. Leumi would accept the deposits under an assumed name or number, and provide hold mail services.

In terms of fines paid and extent of activity, Leumi's case may seem relatively small. But the Israeli bank may have stood out in the minds of American authorities thanks to the brazen manner in which the bank broke the rules.

Far from taking precautions as investigators began closing in on Swiss banks, Leumi pursued the tax-evasion business in the final years with gusto, according to Benjamin Lawsky, who was the New York State superintendent of financial services when the Leumi settlement was reached.

“When certain Swiss banks began to put the brakes on this type of misconduct, Bank Leumi instead hit the accelerator even harder — viewing it as a 'golden opportunity' to pick up new business," he told the press.

In one particular case going back to the early 2000s, revealed by Bloomberg News last February, an Israeli-American, Zvi Sperling, told a U.S. federal court that he deposited profits earned from his Chinese business in a Mizrahi account whose existence was never reported to U.S. authorities. He then used the money in the account as collateral for loans he took from Mizrahi in America. Later he moved his money to Leumi and arranged similar back-to-back loans. Both banks not only were aware of what he was doing but helped him, according to the Bloomberg report.

The tax affair is not quite over for Leumi. As a result of the probe, the bank has exited from private banking entirely, selling its Swiss and Luxembourg units last July to Julius Baer. Shareholders have filed a 475 million-shekel ($$122 million) suit against the bank, saying its misconduct has cost investors dearly. Israel’s attorney general is examining whether when helping Americans evade tax, Bank Leumi violated Israeli civil or criminal law. Other regulators are also looking into the affair.

Ironically during the years the bank has admitted to aiding tax evasion, Leumi was owned by the Israeli government, although the government had no say in the affairs of the bank (in order to protect it from political interference). Still, the Israeli government finds itself in the position of taking $3 billion a year in aid from the American taxpayer on the one hand while helping other Americans avoid pay taxes.

Gotta find a new job

Anyway, the tax-evasion business looks like it is going the way of the blacksmith as the U.S. leads a global crackdown on tax evasion. Switzerland is introducing legislation to end bank secrecy, and Israel is taking measures, too.

Although it’s not as famous as, say, the Cayman Islands, Israel has developed into something of a tax shelter, with real estate the favored method of holding assets (after the law was amended in the early 2000s that made new immigrants and returning Israelis exempt from taxes on foreign assets for 10 years with the aim of encouraging immigration).

Lately, however, Israel tax authorities have thought better of it. Among other things, under an agreement signed a year ago, Israel has begun turning over to the U.S. Internal Revenue Service information on all American citizens holding accounts in Israeli banks.

To its credit, Leumi acted quickly to resolve its problems with the U.S. authorities and says it has now cleaned up its act.

“I can say with confidence — and I’m not sure every Israeli bank chairman say this with the same certainty — that today the Leumi group operates according to the highest standards in the sector, both in the Israeli and international banking system,” Brodet said in April. But the nexus between big money, high tax rates and an increasingly borderless world will make it a tough for Israeli banks to keep it that way.