Analysis |

Three Dirty Secrets of Israeli Banks' Foreign Operations

Their original purpose was to provide wealthy Jews with a convenient shelter for their money. Now that secret is out, along with others

Sami Peretz
Sami Peretz
A security guard stands outside the Leumi Private bank, a subsidiary of Israel's Bank Leumi, in Geneva, Switzerland, October 29, 2012.
A security guard stands outside the Leumi Private bank, a subsidiary of Israel's Bank Leumi, in Geneva, Switzerland, October 29, 2012.Credit: Bloomberg
Sami Peretz
Sami Peretz

The methodical closure of Israeli banks’ international branches over the past several years has exposed at least three uncomfortable secrets about the activity of these banks abroad. The period of greatest expansion was from the 1970s to the ‘90s, and it was always cast as a logical step in the banks' development, one that gave the impression that they were big enough to compete on the world stage.

That was a lie. In fact, it was their fuzzy policy of turning a blind eye to tax evasion and other illegal financial activity that allowed the banks to operate abroad. As soon as the U.S. authorities closed the loopholes and began battling international money laundering, mainly in order to fight terror and drug trafficking, the Israeli banks’ bluff was called.

This exposed the first secret of Israeli banking operations overseas, that its true purpose was to give rich Jews around the world a shelter for their money, part of which met the definition of the black economy: money on which taxes were not paid. As such, its owners found it convenient to park it in an Israeli bank. Over the years, the banks used this cash for their foreign-currency activity. But in the last decade, Israeli banks’ foreign operations ran into trouble, one after the other. Israel Discount Bank and Bank Leumi paid large fines, while Bank Hapoalim and Bank Mizrahi-Tefahot are still under investigation.

The second secret is related to the first, and it has to do with the banks’ ability to succeed abroad. Israeli companies succeed overseas as a function of their technological, logistical and marketing capabilities, or simply by having good products. But what can Israeli banks offer the international community, apart from a connection to world Jewry and their money? Israeli banks are not particularly innovative, nor have they developed a unique culture of service or management.

These ostensible deficiencies turned out to be an advantage during the 2008 global financial crisis, which tore apart the international banking system. After all, innovation was one of the factors that brought about the collapse of the banks. But one needn’t be an Israeli bank in order to comply with regulators and behave prudently.

Regulations are even tougher abroad

And that brings us to the third secret. Israel’s notoriously onerous oversight of banks is positively lax in comparison to its foreign counterparts. Israeli banks love to complain about their regulator, the Bank of Israel’s department of banking supervision — the over-interference, multiplicity of directives, increased use of legislation and rising anti-bank populism in the Knesset — but at the end of the day, they coexist with it fairly amicably.

Out in the wider world, however, it’s an entirely different ballgame. It’s scary out there, especially in the last decade. If an Israeli bank gets into trouble with authorities in the United States, it’s a horror show. Bank Leumi agreed to pay a penalty of $400 million to the U.S. Department of Justice and the New York State Department of Financial Services to settle claims of helping its U.S. clients evade taxes.

Hapoalim and Mizrahi-Tefahot could end up paying heavy fines over similar allegations. The penalty allowed Leumi executives to avoid criminal responsibility and restrictions on the bank’s activity in the U.S., but the affair still affects the bank’s conduct. Leumi’s CEO and chairman at the time, Galia Maor and Eitan Raff, respectively, were forced to repay a total of around 5 million shekels ($1.13 million) in bonuses. But it didn’t end there: The two, as well as the former head of the bank’s international division, Zvi Itskovitz, face an investigation in Israel, under the orders of the attorney general.

Had Bank Leumi not ventured into foreign waters, Maor, Raff and Itskovitz could now be enjoying comfortable retirement packages.

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