Proper Oversight at Trade Bank Would Have Exposed Embezzlement

Small bank's collapse should have been avoided, accountant's report says

On April 25, 2002, accountant Tzvi Itzik was at the Central District fraud unit of the Israel Police. Itzik, a partner at the Barlev accounting firm, which for years has handled investigative audits, was there on office business.

"I was sitting with one of the investigators," recalls Itzik, "when the deputy commander, Superintendent Aryeh Edelman, came in and said that a bank clerk was outside and had come to report the theft of NIS 200 million from the Trade Bank. Edelman asked the investigator to take her testimony.

"I told the investigator that from my experience it did not sound logical that such a small bank - whose equity was a few tens of millions of shekels at best - could be robbed of NIS 200 million," continued Itzik. "I told him that we would finish our business, because the story sounded concocted. The clerk, Etti Alon, waited on the bench until we finished, and then the investigator interviewed her. The following morning Yehuda Barlev phoned me and told me that it had been announced on the news that the Trade Bank had collapsed due to embezzlement by a clerk."

A month after the affair hit the headlines, Barlev was appointed as one of two external managers for the collapsed bank and began the process of dismantling it. In the three years since then, Itzik has learned every aspect of embezzlement: how assistant investment manager Etti Alon managed to suck the bank dry, unhindered, for five years, and transfer some NIS 280 million to gray market dealers like Benny Ravizada - all to pay her brother Ofer Maximov's massive gambling debts.

About two weeks ago, Itzik completed his 400-page draft report on the results of his investigation and sent it to the two external managers and the official receiver. If they do not request any changes, the report will become official and will be used to draw up civil suits for embezzlement damages.

So how did the embezzlement start?

"Etti Alon's activities began even before 1997," says Itzik. "At first she would give her brother money from her personal account at the bank - in the form of blank checks. He would fill in the amounts and the payee's details and the checks would serve as security for his loans from gray market dealers. When it came time to pay up, he would use the checks. Sometimes they were cashed at Etti's branch.

"By March 1997, Etti's account could no longer bear the cost of the checks. She decided to steal from the customers' accounts. Most of these accounts were not current accounts, but rather closed deposits or savings plans. The customers would deposit money and not check its status regularly."

From whom did she steal the first time?

"It was a customer who spent most of her time abroad. Alon broke the deposit and issued a bank check in the customer's name, and the check was cashed in the gray market. Alon then deposited the cash in her account."

Are the banks not obligated to check their workers' accounts?

"It is common practice for internal auditors to check the activity in bank workers' accounts, and irregular activity should be exposed quickly. One of the things we checked was whether Etti Alon's account was checked, by whom, and what the findings were."

Could Alon issue bank checks at that time?

"Not by herself. At that time she was not a signatory. She needed the signatories' signatures. She would issue checks from the accounts of customers who had money, so she had no problem because the signatories saw that the checks were covered. Later she changed her methods and began using fictitious accounts."

How did that work?

"Instead of breaking a customer's deposit and stealing the money, she would open a new account in the same customer's name and take a loan from the fictitious account, with the real account serving as security for the loan. The two accounts would be combined under one main account, so that the bank was not ostensibly exposed to a credit risk because there was a deposit as security."

How many fictitious accounts were there?

"The bank had 1,300 customers. Alon opened fictitious accounts for over 100 of them."

Did the bank's supervisory bodies have no way of knowing about these?

"Of course they had."

So the embezzlement could have been discovered much earlier?

"If the chain of management had been functioning properly from a supervisory point of view, the embezzlement would have been discovered years before the bank collapsed."

What should the management have done?

"It should have known how to analyze the data it had. The reports clearly pointed to irregular activity at the bank."

What is the Bank of Israel's responsibility in the affair?

"Over 15 reports were prepared by the Bank of Israel during the period of the embezzlement on various banking matters, so there was plenty of data on the bank's activities. The question of responsibility for not discovering the embezzlement will be examined by the legal adviser to the bank's dismantling."

When Itzik's report becomes official indictments will be prepared against Alon, Maximov, anyone who received embezzled funds - and to the bank's directors, officials and accountants, who should have identified the problem and prevented the embezzlement.