Israeli banks have paid heavily in the past few years for their overseas operations. Hapoalim, Leumi and Mizrahi Tefahot all became ensnared in investigations by the U.S. authorities over allegations they had helped clients evade U.S. taxes.
Hapoalim to this day is seeking to extricate itself from its acquisition of Turkey’s Bank Positif by its former chairman, Danny Dankner. Israel Discount Bank is now involved in tax evasion issues in regard to one of its Australian clients.
Not surprisingly, Israel’s banks are continuing to close their overseas operations and focus on their home market, which remains highly profitable for them.
On Tuesday Discount revealed another 168 million-shekel ($50.6 million) charge in connection with lawsuits being pursued against it and its Mercantile Discount subsidiary in Australia.
The bank is being sued as part of tax fraud cases related to the Binetter family, the founders of the Nudie juice business and a former Discount client. The bank had already taken 240 million shekels in charges in relation to the case.
Brothers Andrew and Michael Binetter are accused of massive tax evasion via what Australian authorities allege were back-to-back loans.
That involves the client depositing money in a bank, then “borrowing” it back as a business loan. The bank charges “interest” on the loan, but channels all but a small commission back to the borrower, who claims the fictitious interest costs as a tax deduction.
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Australian authorities first grew suspicious more than a decade ago when they began examining Binetter group companies. They suspected that the brothers, and before them their parents, had been depositing money without reporting at Bank Hapoalim, Hapoalim’s Swiss unit, Discount and Mercantile Discount in Israel and Switzerland. In return, the banks made the Binetters loans of similar size, the authority alleged.
The case sat in court for many years until the Binetter group companies were put into liquidation. With the backing of Australian tax authorities, the liquidators then launched suits against those involved, asserting the Discount and Hapoalim were actively involved in the alleged evasion.
Hapoalim, whose alleged role in the affair was much smaller than Discount’s, put the matter behind it years ago. The executives involved, through their insurance coverage, paid out 4.3 million shekels in claims and the bank itself another 11 million.
Discount, however, opted to fight the suit in court, claiming it had never done anything illegal and seeking (unsuccessfully) to have the case moved to Israel. Discount’s total potential liability in the case could reach 450 million shekels and as it came to the realization that the odds of it avoiding any penalty were small it began making provisions.
“We believe that the Australian lawsuit will not require a lot more set-asides by Discount,” said Alon Glazer, banking analyst at Leader Capital Markets. “However, the Australian affair reminds us again that the risk with Discount is bigger than the baking system as a while, both because the big rise in its lending in recent years and because of the greater weighting of its overseas operations (mainly the United States), which has a much higher risk profile than Israel.”
Despite that, Discount managed to avoid being caught up in the U.S. tax evasion cases against Hapoalim, Leumi and Mizrahi. That affair cost the three banks a combined 7 billion shekels. Some of its executives were sued for their personal responsibility in the affair.
The Australian suit is a further reminder how risk-laden the overseas operations of Israeli banks are and how difficult it is for them to come out on top in legal disputes with foreign authorities. Nevertheless, Discount remains committed to its U.S. arm, Discount New York, which contributes 10% to 15% of its annual profits.
Mizrahi, on the other hand, announced when it released its third-quarter results that it was exploring selling its United Mizrahi Bank, Switzerland unit. This is a relatively small operation, which as of September 20 had assets of just 121 million Swiss francs ($132 million) and 47 million in loans outstanding to the public. It earned 400,000 francs in profit in the first nine months of 2020.
Mizrahi’s CEO, Moshe Lari had previously been responsible for the bank’s overseas operations. But after it agreed in a settlement with the U.S. to pay a 700 million shekel penalty, it began to have second thoughts about its overseas business, shutting its German and Mexican offices, though keeping its Los Angeles and London offices.’
Leumi earlier this year used the coronavirus crisis to close its office in China, leaving its international operations confined to the U.S. and Britain. Leumi has settled its case with the U.S. at a cost of 1.06 billion shekels in 2014.
Hapoalim, meanwhile, said in its third-quarter report that it had still not completed a deal to sell its 70% holding in Positif. Over the 14 years it owned the Turkish bank, Hapoalim has lost 900 million shekels.
Last April, it reached a deal with the U.S. over its role in the tax-evasion charges and agreed to pay a 4.5 billion shekel penalty, an amount equal to 11% of its shareholders’ equity. When it does divest Positif, Hapoalim’s overseas operations will comprise just a single branch in New York.