Gov’t Probing Banks’ Failure to Assess Cost of U.S. Tax Probe

Israel Securities Authority requests clarifications after Hapoalim, Mizrahi fail to make provisions against U.S. investigation.

Tomer Appelbaum

In an unusual step, the Israel Securities Authority has begun examining the financial reports of Bank Hapoalim and Mizrahi Tefahot Bank, amid concerns that the two lenders may not have fully disclosed the extent of their financial exposure to a U.S. investigation into their alleged roles in helping clients evade taxes.

The ISA examination is unusual because it implies that the Bank of Israel’s Banks Supervisor, David Zaken, was remiss in allowing Hapoalim and Mizrahi to insufficiently disclose their potential liabilities.

The banks — Israel’s biggest and fourth-biggest lenders, respectively — have both said they did not make provisions in their financial reports for the costs of fines and legal expenses the investigation could entail because they cannot fully assess their exposure. Zaken has accepted their position.

The lenders could face heavy penalties if they are found to have helped customers evade taxes in the United States. for their alleged role.

Bank Leumi reached a controversial settlement in December with the U.S. federal government and New York state, paying 1.8 billion shekels ($450 million), an amount equivalent to 6% of its shareholders equity, in fines and legal costs.

Unlike Hapoalim and Mizrahi, whose CEOs are Zion Kenan and Eldad Freusher, Leumi began making provisions two years ago, beginning with one for 340 million shekels and increasing the amount as the investigations progressed.

Ironically, Leumi said on Sunday that a class action had been filed against it, claiming that the bank hurt its stock price when it announced in 2012 that it was setting aside money for a possible settlement with the U.S. authorities over tax evasion.

As publicly traded companies, Israel’s banks are subject to regulatory scrutiny by the ISA, which is led by Shmuel Hauser. But the agency generally refrains from interfering in banks’ financial reporting, on the assumption that lenders comply with the standards that are set and enforced by the banks supervisor.

The ISA said on Monday it would not comment on specific cases. But sources, speaking on condition of anonymity, said the agency asked both Hapoalim and Mizrahi last week to explain their claim of being unable to assess their exposure.

The sources said the ISA took action after Shlomi Shuv, the deputy dean of accounting at IDC Herzilya’s Arison School of Business, said in a column he writes for TheMarker that the banks could at least estimate the penalties they are liable to face.

Shuv said the settlement Leumi signed with U.S. and New York regulators in December should be sufficient to serve as a guideline for Hapoalim and Mizrahi. All three banks were designated Category 1 banks by the U.S., meaning that they are under criminal investigation and ineligible for amnesty.

The United States set up graduated levels of penalties, depending on the time period when Leumi helped clients evade taxes: before the United States revealed it was investigating the Swiss bank UBS, the first of a series of overseas banks to probed for aiding tax evasion, in August 2008; after authorities announced UBS had agreed to pay a fine, in February 2009; and the period in between.

“Hapoalim and Mizrahi Tefahot have reported that they have collected statistical data in recent years on dealings with American clients in order to submit them to the U.S. authorities, so the figures they need in order to calculate [their exposure] are available,” Shuv said.

In a response, Bank Hapoalim said it has received “no significant demands from American authorities and there have been no substantive contacts. The bank will disclose any as required by regulations.” Mizrahi did not respond to requests for comments.