After more than seven years of negotiations, Bank Hapoalim announced on Thursday it had finally reached a settlement ending a U.S. investigation into how the Israeli lender allegedly helped American clients evade taxes, mainly from 2002 to 2014.
Hapoalim agreed to pay nearly $875 million to the U.S. government to resolve charges it conspired to hide more than $7.6 billion in Swiss and Israeli accounts. The U.S. Department of Justice said in a statement on Thursday that the bank and its Swiss unit admitted to helping their U.S. customers set up more than 5,500 secret accounts and shelter assets to evade taxes.
“Israel’s largest bank, Bank Hapoalim, and its Swiss subsidiary have admitted not only failing to prevent but actively assisting U.S. customers to set up secret accounts, to shelter assets and income, and to evade taxes,” said U.S. Attorney Geoffrey S. Berman of the Southern District of New York in a statement.
“The combined payment approaching $1 billion reflects the magnitude of the tax evasion by the bank’s U.S. customers, the size of the fees the bank collected to provide this illegal service, and the gravity of the illegal conduct,” he said.
The agreement marks the second-largest recovery by the DOJ in connection with its investigations since 2008 into facilitation of offshore U.S. tax evasion by foreign banks, the agency’s statement said.
As part of the settlement, Hapoalim will be paying the U.S. Treasury, the Federal Reserve and the New York State Department of Financial Services. In exchange, the U.S. agreed not to prosecute the bank for three years. At the end of the period, so long as Hapoalim has met the terms of the settlement, all criminal charges will be dropped. If it fails to pay, the DOJ could give the bank another year to fall into line or cancel the so-called Deferred Prosecution Agreement, and file criminal charges.
Vis a vis Hapoalim Switzerland the two sides signed a plea agreement in connection with the unit’s American business and clients and will pay U.S. authorities $402.5 million, almost half the total. The Swiss unit admitted guilt and will be convicted of violating U.S. law for aiding American citizens to evade taxes.
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Hapoalim signed the same agreement with the New York State Department of Financial Services, as other banks undergoing the same process and will pay $220 million. It will also pay the U.S. Federal Reserve $32.3 million.
It was also announced on Thursday that Hapoalim and its Swiss subsidiary had agreed to pay the U.S. government another $30 million for their role in a money laundering conspiracy involving FIFA, the world soccer authority. The bank said its Swiss unit would not be prosecuted.
The direct cost of the investigation and settlement for Hapoalim amounts to 3.1 billion shekels ($880 million), a much larger sum than spent by either of the other two Israeli banks that reached settlements with the United States over the same allegations. Bank Leumi, the No. 2 Israeli lender, agreed to pay just $393 million when it settled in December 2014 and No. 3 Mizrahi Tefahot Bank paid just $195 million.
Hapoalim also ran up bills of 1.2 billion shekels (around $340 million) in expenses for lawyers, accountants and consultants during the investigation. The firms they hired included the Tel Aviv law firm Gornitzky & Company, headed by the superlawyer Pini Rubin. The entire cost of the affair to Hapoalim is therefore in the order of 4.5 billion shekels (around $1.272 billion).
That amount is worth 12% of Hapoalim’s shareholders’ equity and is higher than the 1 billion shekel loss it recorded at the height of the global financial crisis in 2008. But almost the entire cost of the affair had been set aside over the years of investigation. Hapoalim shares rose 1.2% to 22.75 shekels in Tel Aviv Stock Exchange trading.
The agreements reached with U.S. regulators include a commitment by Hapoalim and its Swiss unit to continue to fully cooperate with U.S. investigators on matters relating to the tax probe. That means, the bank will have to prepare periodic reports on loans made by its U.S. branches secured through accounts held at branches outside the U.S.
“The bank is required to cooperate fully with ongoing investigations and affirmatively disclose any information it may later uncover regarding U.S.-related accounts,” the Justice Department said, including information relating to Swiss accounts closed between January 1, 2009 and December 31, 2019. “The agreements provide no protection from criminal or civil prosecution for any individuals,” it added.
Under directives issued by Hedva Ber, the previous banks supervisor in Israel, Hapoalim will have to form an independent committee chaired by former Supreme Court Justice Yoram Danziger to examine the affair. Leumi and Mizrah Tefahit did the same in the wake of their settlements.
The committee is expected to review the failure of the bank’s internal controls which enabled these violations.