Israeli banks got a rude reminder this week about their role in helping American clients evade taxes during the early 2000s.
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A Bloomberg News report published Monday detailed the testimony of Iranian-American businessman Masud Sarshar, who agreed to plead guilty to hiding more than $21 million through accounts at Bank Leumi and two other Israeli banks.
Court papers alleged that in order to hide assets from the Internal Revenue Service, an unidentified Israeli banker carried Sarshar’s account statements into the United States on a USB flash drive concealed in her necklace. She would secretly meet him in his car to show him the statements.
Sarshar’s Israeli bankers also offered him so-called back-to-back loans, which allowed him to access money he held in Israel through loans taken out at Los Angeles branches, the U.S. said. The system enabled him to move some $19 million to the U.S. without the knowledge of the IRS.
News of the guilty plea comes as Bank Hapoalim and Mizrahi-Tefahot Bank weigh how they will respond to a U.S. investigation into how they aided tax evasion. Leumi settled in 2014 with U.S. and New York State authorities, agreeing to a hefty $400 million penalty.
But Leumi’s troubles aren’t over. Unlike banks from Britain, France and Switzerland, whose home countries opted not to follow up the U.S. investigation of their banks with probes of their own, Leumi and the senior executives who were behind the tax evasion affair now face a possible criminal investigation.
As part of the settlement with the state of New York, Leumi agreed to strict monitoring by financial regulators over the next several years to ensure it is in compliance with U.S. regulations.
Leumi executives said, however, that on the regulators' most recent trip to the bank's Tel Aviv headquarters, the atmosphere was tense and the questions made the visit seem more like an investigation than an examination. Afterwards, Miri Rubino, the head of Leumi’s works committee, decided that employees would no longer be allowed to meet with regulators.
Leumi faces other problems from Judge Khaled Kabub of the Tel Aviv District Court’s economic division.
Kabub is examining an agreement the bank reached with three senior executives at the time of the tax-evasion affair — former CEO Galia Maor, former chairman Eitan Raff and former Private Banking head Zvi Itskovich — under which they would repay 5.1 million shekels ($1.3 million) from what they received in bonuses. In addition, the insurance company covering them for liability agreed to pay the bank $92 million to help cover the cost of the penalty.
But in a hearing at the end of June, Kabub appeared to question the terms of the settlement, asking why only three executives were party to the agreement and what would happen if other were found to be involved if the attorney general goes ahead with a criminal investigation.
Hapolaim and Mizrahi-Tefahot are carefully watching developments at Leumi and Kabub’s decision, say sources in the banking industry. The two banks are now under investigation by U.S. authorities, but they are likely to wait until all the smoke clears around Leumi before the reach any agreement with U.S. authorities.
The sources said that if Kabub decides not to close the case, Hapoalim and Mizrahi-Tefahot will probably opt to let the charges go to trial in the U.S.
The risk of a trial is that the penalties may end up being significantly higher, and it would expose the banks to civil suits in the U.S. In any case, regulators would prefer to wind up their investigation and collect the penalties.
Hapoalim has claimed that its violations are of a different order than Leumi’s and that any penalty it suffers will be much smaller. The bank has only put aside $50 million against any future settlement.
In any case, Hapoalim may prefer to hold out until after the U.S. elections on the assumption that a Republican-controlled White House will be so preoccupied with appointing new officials that any settlement will be delayed.
On the other hand, the bank wants to expand its U.S. business and its new CEO, Arik Pinto, believes the best way to do that is by buying an American lender. But, with the ongoing tax investigation and the likelihood it will face future monitoring like Leumi, any acquisition will be met with resistance from U.S. bank regulators.
Mizrahi-Tefahot is likely to reach an agreement with American authorities before Hapoalim. The bank boosted its provision for any future settlement by $3 million in the first quarter, bringing the total to $39 million.