Analysis / A Watershed Moment in Israeli Banking History

Bank Hapoalim employees are so embarrassed. Until Sunday morning, they worked at the country's largest, most profitable and most professional bank. But since the money-laundering affair at the Hayarkon branch erupted, they work at the bank where Israel's most serious money-laundering operation was discovered.

Employees at Bank Hapoalim and banks in general are accustomed to local scandals of fraud, embezzlement or tales of a lone employee gone bad. The current case exceeds every instance of the sort since dozens of people are involved, and the suspicions against them are particularly grave.

The investigation, which has been taking place overtly for four straight days, is a hot topic, and many employees are exchanging messages and phone calls in an attempt to get information on the affair and a handle on its significance. There have been rumors that senior officials were arrested or questioned, and it appears that at least some of the rumors shortly will prove to be true.

Bank Hapoalim CEO Zvi Ziv visited the Hayarkon branch Monday to take a close look at its efforts to resume activity, but headquarters also understands it will take a long time to get back to business as usual.

Ziv and his aides face several immediate tasks brought about by the new situation, the first being to examine the bank's control mechanism. Reason has it that Ziv and senior management didn't know about the branch's extensive money-laundering, and had solid information about it been at their disposal, they would have done something to stop it. But ignorance doesn't absolve responsibility, and Ziv obviously will have to reexamine the bank's control arrangements. The probe suggests this was not a one-time occurrence, but rather systematic activity over a long period. If that is the case, then the bank's control mechanism failed to spot money-laundering, or perhaps shut its eyes to the findings.

Bank Hapoalim operates a system of branch objectives that turns branch clerks and managers into salespeople. Management assigns achievement goals for deposits, loans and financial products marketed to customers, which are measured daily, weekly and monthly. Successful branches are rewarded accordingly, so employees are highly motivated to meet objectives. However, it appears that the Hayarkon branch was especially goal-oriented, which raises suspicions that other incentives, other than those promised by management, beckoned those involved in the case.

Ziv also is charged to calm the bank's customers and investors, particularly after its controlling shareholders diluted their holdings in the bank from 46 to 31.5 percent in a series of deals that raise questions about their connection to the money-laundering scandal. Ziv seems to be doing well on that front: the bank's shares rose by 0.8 percent yesterday, and its worth is nearing NIS 20 billion.

Even if the bank's value is unharmed and there are no indictments, the investigation is a watershed moment in Israeli banking, akin to the cartel exposed in the insurance industry in the early 1990s: The investigation's effect is meant to be so powerful and traumatic that from this point on, banks will make fighting money-laundering their top priority.