Analysis

Criminal Probe of Former Bank Execs Worries Other Israeli Bankers

Probe of Bank Leumi's has not gone unnoticed in Hapoalim, Tefahot, both still in midst of investigation by U.S. authorities on allegations that they, too, enabled customers to evade taxes

Galia Maor, former chief executive officer of Bank Leumi Le-Israel Ltd. Maor, alongside former executives Eitan Raff and Zvi Itskovitch, are to be questioned by the police over their role in a case involving alleged U.S. tax evasion
Ofer Vaknin

As former executives at Bank Leumi face criminal investigation over the bank’s alleged involvement in helping customers of its U.S. branch evade taxes, two other Israeli banks are looking on uneasily – Bank Hapoalim and Mizrahi Tefahot.

These two banks are still in the midst of an investigation by U.S. authorities amid allegations that they, too, enabled customers to evade taxes.

Attorney General Avichai Mendelblit announced this past weekend that he would be launching a criminal probe into former Leumi CEO Galia Maor, former chairman Eitan Raff, and former head of the bank’s international division Zvi Itzkovitch. Current executives at the bank are likely to be watching with concern, even though as far as is known, the investigation does not involve the bank itself or any current executives.

Over the past several years, U.S. authorities have been pursuing fines against foreign banks involved in such tax evasion affairs, and have been unwilling to come to compromise deals with banks without the banks admitting at least some guilt. Doing so enables the banks to come to a settlement with the authorities and also pay a lower fine. This is what Leumi did, admitting fault and signing an agreement stating that charges would be pressed for these misdeeds should they be repeated over the two years following the agreement. That two-year period has ended.

However, due to their admission of guilt in the deal with U.S. authorities, the bank’s former executives have now opened themselves up to a criminal probe in Israel.

Hapoalim and Mizrahi Tefahot are now in a quandary. Admitting some guilt to U.S. authorities would leave their executives vulnerable to potential criminal probes in Israel. Current Hapoalim CEO Arik Pinto was not in a position that would put him at risk of facing an investigation in Israel; Mizrahi CEO Eldad Frisher was responsible for the bank’s international operations during some of the years currently under investigation, so he could potentially face a probe at home.

If banks go to trial, risks are great

However, if the banks choose not to admit guilt and instead decide to face a judge in the United States, the legal process could take years and cost huge sums of money. It could also lead to their U.S. operations being shuttered entirely, or cut back, and they could find the financial services available to them limited in other parts of the world.

These possibilities are not currently reflected in the two banks’ share prices.
In most cases, when foreign banks – British, Swiss or otherwise – came to agreements with U.S. regulators, authorities in the banks’ home countries did not take criminal action against the banks. However when the Swiss bank Wegelin & Co. refused to sign an agreement with U.S. authorities, the Americans blocked the bank’s access to their country’s banking system, forbade the bank from holding U.S. stocks and blocked it from holding dollars.

The bank, formerly Switzerland’s oldest private bank, went bankrupt shortly afterward.

The probe by the Justice Ministry and New York State’s financial services department has cost Hapoalim 1 billion shekels (about $280 million) so far, including legal expenses, and sources speculate that the affair may end with Hapoalim being charged a fine similar to what Leumi paid.

A trial in the United States could wind up costing the bank another 500 million shekels, and jettison its dream of buying out a U.S. bank.

Mizrahi Tefahot has absorbed costs of $44 million due to the probe it faces in the U.S., and could still pay much more.

Therefore, banks regulator Hedva Bar needs to get involved and demand that Mendelblit end the uncertainty regarding the potential probe in the former Leumi executives. Otherwise, the affair could cause serious damage to Hapoalim and Mizrahi-Tefahot as well.