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Bad News for Israeli Bankers: The U.S. Has a New Policy on Corporate Crime

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U.S. Deputy Attorney General Rod Rosenstein speaks at the Justice Department's Computer Crime and Intellectual Property Section, November 29, 2018.
U.S. Deputy Attorney General Rod Rosenstein speaks at the Justice Department's Computer Crime and Intellectual Property Section, November 29, 2018. Credit: Nicholas Kamm/AFP

A speech by Rod Rosenstein — the U.S. deputy attorney general is best known for his role in the Mueller investigation, but his purview also includes corporate crime — could spell bad news for Bank Hapoalim and Mizrahi Tefahot Bank.

The two lenders are the subjects of a lengthy investigation by the U.S. Justice Department into their alleged roles in helping American citizens evade U.S. taxes from 2000 to 2011. Both banks have already set aside hundreds of millions of shekels in expectation of penalties.

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In a speech to the 35th International Conference on the Foreign Corrupt Practices Act in Washington on Thursday, Rosenstein outlined a new policy regarding steps companies will be required to take in order to win the cooperation of the Justice Department and negotiate a settlement.

The main message Rosenstein relayed was that agreements would be difficult to reach unless the executives involved are required to personally pay fines and even be forced to resign if they are still in their jobs.

“It is important to impose penalties on corporations that engage in misconduct. Cases against corporate entities allow us to recover fraudulent proceeds, reimburse victims, and deter future wrongdoing,” he said.

But Rosenstein went on to say: “The most effective deterrent to corporate criminal misconduct is identifying and punishing the people who committed the crimes. So we revised our policy to make clear that absent extrao rdinary circumstances, a corporate resolution should not protect individuals from criminal liability.

Our revised policy also makes clear that any company seeking cooperation credit in criminal cases must identify every individual who was substantially involved in or responsible for the criminal conduct.”

Among Israeli bankers, the new policy is most relevant to Eldad Fresher, the CEO of Mizrahi since 2013. Before and during the year the alleged tax violations occurred, he was chairman of the bank’s Swiss unit and head of its financial division, responsible for international activities. Dan Lubasch, Mizrahi Switzerland’s CEO since 2011, may also be affected.

Most of the senior Hapoalim executives connected with the alleged affair have left the bank, but a number of middle managers who remained now find themselves in the Justice Department’s crosshairs.

Of the three Israeli banks that have been investigated, only Bank Leumi has settled — agreeing to pay a $400 million penalty four years ago. That, however, may not be a good barometer for what Hapoalim will have to pay, on top of the threat that individual executives will also face penalties.

In August, the Justice Department offered Mizrahi — Israel’s third-largest bank, but much smaller than Leumi and Hapoalim — a settlement that included a $342 million fine.

Mizrahi rejected it, but also opted to set aside another $116.5 million in its second-quarter financial report, in expectation of a future penalty. Until then, its provisions had amounted to just $162 million. Meantime, the two sides are negotiating.

At Hapoalim, the provisions connected with the probe have reached $365 million, with total costs, including legal fees, of 2 billion shekels ($540 million). It’s not clear when the bank will settle with U.S. authorities.

In any event, Rosenstein made clear that the U.S. would not pursue every employee of a company that committed offenses, especially if their role was insubstantial and is unlikely to lead to prosecution.

“We want to focus on the individuals who play significant roles in setting a company on a course of criminal conduct. We want to know who authorized the misconduct, and what they knew about it,” he said.

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