Analysis

Sexual Assault, Hush Money and Billions Wasted – and Still the Bank of Israel Did Nothing

The central bank just released a limp report into the ‘Bank Hapoalim affair,’ in which it mildly chastised the bank for a scandalous cover-up after an employee claimed she had been harassed by the CEO. It’s indicative of its attitude toward big banks in an era of corruption and cronyism

From left, Hedva Bar, Danny Dankner and Shari Arison.
Emil Salman, Oren Nahshon and Tomer Appelbaum

A senior employee at a major Israeli bank claimed that the bank’s CEO sexually assaulted her. What did the bank do? It hired lawyers, who suggested the bank pay her 6 million shekels ($1.75 million) to shut her up and keep her from telling the story to the public and even to the board of directors.

The bank’s chairman did hear the story in full, but hid it from the board of directors. Nor did he advise the banks supervisor at the Bank of Israel, thereby breaking the banks’ rules of corporate governance. The chairman was warned repeatedly by his bank’s legal counsel that he had to tell the board and supervisor about the case. The chairman ignored him.

Ultimately, the story broke in the press, the chairman had to quit, the bank’s owner had to accept his resignation, and howls from the public forced the Bank of Israel to publish a report on the story. Not one single bank director or manager was fired.

These revelations about Bank Hapoalim’s ex-CEO, Zion Kenan, who allegedly harassed the senior employee while on a business visit to Kazakhstan, and Hapoalim’s ex-chairman, Yair Seroussi, are no surprise to anyone who can read.

The affair begs a look at the organizational culture at the bank. But if anybody is responsible for the rotten conduct of Israel’s top bankers over the last decade, it is the central bank’s Banking Supervision Department.

The smoking gun isn’t the complaint about sexual assault, the millions spent to silence the complainer or even the billions of shekels Bank Hapoalim lent to tycoons with political clout and ties to its top people. No, the smoking gun is an internal audit dated September 3, 2009, by the Bank of Israel’s Banking Supervision Department on “Credit to associates at Bank Hapoalim and the functioning of the credit committee.”

Parts of the report were revealed by Haaretz in 2013 and by Doron Tsabari and myself on network television about six months ago. Now let’s look at other parts and see how it incriminates not only the top bankers but the Bank of Israel too.

The probe lasted from May to June 2009. It looked at the work of the board committee on inside transactions and associates, and also at the processes involved in lending to people associated with other borrowers. The central bank also checked credit at other banks: The credit Bank Leumi gave for the acquisition of the controlling interest in the Arison group, and the credit Mizrahi-Tefahot Bank and the First International Bank of Israel gave to companies owned by Danny Dankner, formerly the chairman of Bank Hapoalim.

The central bank team involved all the auditors in the credit department and others. Here are some of their findings.

* Discussions by the board credit committee in 2005 and 2008 regarding Bank Hapoalim’s investment in the Turkish BankPozitif included Danny Dankner and Prof. Ronen Israel, though neither disclosed their personal interests.

* In February 2008, the Hapoalim board agreed to pay $25 million to a fund called RP for agreeing to waive its option to buy a piece of Turkey’s BankPozitif, which Hapoalim was acquiring. The one who set the sum at $25 million was Dankner, who neglected to divulge that RP did business with Elran, a company he controlled with relatives.

* On May 1, 2008, Zion Kenan, then head of Bank Hapoalim’s commercial department, approved a 2.7-million-shekel loan to Ofer Glazer at an interest spread of 1%, without collateral. Glazer was the then-husband of Shari Arison, controlling shareholder of Bank Hapoalim. A spread of 1% is practically nothing and isn’t the norm for bank customers with no collateral and no obvious source to return the money.

* In September 2008, Kenan approved rolling over a 2.6-million-shekel personal loan given to Danny Dankner that bore an interest spread of 1.25%. The loan was extended without collateral, though Dankner’s account had “administrative alerts” – a sort of warning sign about his credit status, based on information the bank had. His credit rating moved between B and CCC, “and no documentation was found that when the request to roll over the credit was submitted, the borrower’s creditworthiness was examined,” the Bank of Israel report stated.

* The central bank audit found that the loan to Dankner had not been reported in Bank Hapoalim’s financial statement for 2007 under “Wages and benefits for officers.” “The audit fails to understand how the chairman of the board, who approves the bank’s financial statements, did not see fit to announce the existence of the loan and comment on its noninclusion in the 2007 financial statement.”

* On October 27, 2008, Dankner’s request for a $3.4 million loan without collateral was discussed. The request did not disclose the purpose of the loan or sources to repay. Kenan told the “associated persons” committee at the bank that “Danny Dankner said the sources of repayment were not only options and bonuses, but personal sources too.” The committee received no information about Dankner’s creditworthiness and settled for Kenan’s statements such as “the sources to repay the loan will be current or other income Mr. Dankner receives.” They saw no sign that the bank checked Dankner’s creditworthiness, the auditors wrote.

When asked about this by director Moshe Koren, Kenan told the committee Danny Dankner had provided a personal wealth statement. He couldn’t remember the exact amount, but the personal wealth certainly exceeded the requested loan amount. “In any case, the personal wealth according to the report will be examined,” Kenan said. The committee did not ask to see the personal wealth statement and did not even ask for its verification, the auditor wrote.

But the personal wealth statement was unreliable, the audit report stated, because Dankner had personally prepared it, without adding proofs. The bank did not receive an evaluation of shares Dankner owned, which constituted a major part of the personal wealth statement. The bank did not inquire into the surplus value ascribed to shares Dankner owned in Elran Investments – which were worth 813,000 shekels on the market but which he valued at 91 million shekels in his personal wealth statement.

In other words, Kenan pushed for a loan for his boss based on a wealth statement that any novice accountant would have realized was unacceptable and duplicitous.

The personal wealth statement didn’t mention other money Dankner owed. But the audit was told Dankner declared a 15-million-shekel loan from his cousin Nochi Dankner, owner of the IDB group that owed Bank Hapoalim around 10 billion shekels all told and was its biggest borrower.

The bank credit committee didn’t ask for information on Dankner’s creditworthiness, but the audit found that on September 29, 2008, he received a B credit rating, reflecting “moderate-low ability to repay principal and interest on time.” Approving the loan in October 2008 conflicted with the credit policy of the bank’s commercial department, headed by Kenan. Also, BB-rated customers were charged 3.5% interest, while Dankner was charged 1.5%. Nor did the committee look into the warning attached to Dankner’s bank account, that he had signatory rights at a company called Sanora Ltd., which was in arrears and had bailiffs on its case.

* Irregular loans were also given to Bnei Izakson Investments, a company associated with Hapoalim board member Irit Izakson.

* B. Dror, a company owned by the parents of Ofer Dror, husband of Iris Dror, who worked at Arison Investments, received a 300,000 shekel loan on February 2, 2009, even though the company was running a working capital deficit, owed the bank 1.4 million shekels, the purpose of the loan was unknown and the source of repayment not given.

* Irregularities were discovered in loans given to Ofer Glazer’s group of companies, as well as the Israel Petrochemical Enterprises Group, the Nimrodi family (owners of Israel Land Development Company) and the Maariv news group.

* We can’t go into all the deficiencies the audit found in the Hapoalim commercial department that handled loans to people associated with the bank’s directors. But the most interesting part touches on another bank entirely, First International Bank of Israel (FIBI). It appears in the report’s Appendix 8, describing loans FIBI made to Danran and Shamdar – two companies owned by the families of Avraham Dankner and Shmuel Dankner. Danny Dankner owned 40% of Danran. In 2000 and 2001, each of the companies borrowed 65 million shekels from FIBI to buy the controlling interest in Elran Investments.

FIBI began trying to reschedule the loan in 2004, the audit found. In May 2009, after a biannual interest payment was missed (from January), the account was kicked over to the problem debts committee, since the guarantors Gadi and Danny Dankner were not standing by the company. The committee increased its doubtful debt provisioning by 8.3 million shekels, bringing it to 28.6 million shekels. The audit noted that FIBI had made concerted efforts to regain its money, especially from 2006, in vain.

By hook or by crook

In short, in the summer of 2009, the Bank of Israel discovered that the commercial department of Israel’s biggest bank was being run negligently, corruptly or both, and was lending to the chairman of the board, to businesses and people associated with directors, and to a newspaper that granted fawning coverage to the bank. (Quick recap: The bank enabled the IDB group headed by Danny Dankner’s cousin, Nochi, to buy Maariv, which lost about 400 million shekels of the public’s money in less than two years.)

The central bank also discovered that the man named chairman of the bank two years earlier was in effect a bankrupt, failing to repay giant personal loans taken from FIBI since 2004 (and which FIBI had categorized as doubtful debt).

So, the Banking Supervision Division discovered that the Bank of Israel itself had categorically failed in its duty when approving the appointment of Danny Dankner as chairman of Israel’s biggest bank in March 2007.

Note that three weeks before this report was finalized, the Bank Hapoalim board approved Kenan’s appointment as CEO. The same Kenan who, as head of the commercial department, approved the clearly irregular and negligent loans.

Any bank CEO in Israel must meet the criterion known as “fit and proper,” let alone the CEO of the country’s biggest bank. Yet in August 2009, the banks supervisor approved Kenan’s appointment.

In other words, after an internal Bank of Israel report reveals in detail how a bank flubbed in naming a corrupt manager who had been embroiled in financial difficulties as early as 2004 as its chairman, the banks supervisor approves the appointment of this person’s right-hand man as CEO, despite knowing about the loans.

Instead of cleaning out Bank Hapoalim, the central bank gave its corrupt culture the green light.

Kenan’s appointment was greeted by rave reviews by papers owned by companies that owed Bank Hapoalim billions. They failed to mention the reports presenting the new CEO as negligent or corrupt.

Now it is easier to see why Bank Hapoalim chairman Seroussi would ignore the rules of proper governance and hide the sexual assault complaint against Kenan from the board of directors and central bank, and the 6 million shekels the complainant received. If the Bank of Israel approved Kenan’s appointment as CEO after that biting report on the commercial department, why wouldn’t Seroussi hide information inconvenient to Kenan?

The Bank of Israel knew about the sweetheart loans throughout Kenan’s term as CEO. For almost a decade, the central bank let the former manager of that commercial department, and associate of Danny Dankner, run the biggest bank in Israel.

The limp report the banks supervisor delivered last month about Seroussi, Kenan and the complainant who went home with 6 million shekels, is a direct continuation of the Bank of Israel’s attitude toward big banks in an era of corruption and cronyism.

Under the Bank of Israel’s watchful eye, billions of shekels of bad loans were lent to tycoons with political power, control over media and relationships with bankers – Eliezer Fishman and Nochi Dankner, to name but two. Before the Bank of Israel’s very eyes, Bank Leumi engaged in massive criminal activity and helped U.S. tax dodgers. Under the Bank of Israel’s gaze, banks Hapoalim and Leumi spent 2.5 billion shekels of public funds on legal expenses and fines in order to spare their managers from legal proceedings. Before the Bank of Israel’s eyes, the banks continued to pay hundreds of superfluous managers salaries as much as 150,000 shekels a month over the past decade.

A Knesset committee headed by Eitan Cabel on how banks give credit to their wealthiest customers was supposed to convene last year, but never did. The governing coalition is busy passing antidemocratic laws, preserving the incumbent government and giving jobs to the boys. The opposition only cares about corruption when it directly touches Prime Minister Benjamin Netanyahu or political rivals. They don’t want to mess with structural corruption in Israel’s biggest economic systems. Note that the opposition didn’t peep when the corrupt natural gas plan enabled Netanyahu to give the gas monopoly billions two years ago. If it couldn’t be used to bring down Netanyahu, then who cares?

The Bank of Israel is not right, left, secular, religious, liberal or nationalist. It is a regulator that lives, except in extreme cases, in symbiosis with the bodies it supervises – even when their corruption, legal or criminal, stinks to high heaven.