Israel Banking Watchdog Says Leumi Execs May Have to Return Bonuses

Regulator demands Bank Leumi investigate top management in wake of U.S. tax-evasion settlement.

Eyal Toueg

Bank Leumi should take back bonuses it paid three former senior executives after the lender was forced to pay a huge penalty to the United States for tax violations that occurred under their watch, Banks Supervisor David Zaken said Thursday.

In a stinging report, Zaken took Leumi to task for negligent corporate governance during the three’s tenure. Leumi, Israel’s second-largest lender, agreed in December to pay $400 million to settle two separate investigations into whether the bank helped American clients, largely at its Swiss unit, evade taxes.

The report did not name the three executives, but in the years cited by the report, Leumi’s CEO was Galia Maor, its chairman was Eitan Raff and its international private banking chief was Zvi Itzkovich. In a statement Thursday, the three rejected the findings.

Zaken said Leumi did not recognize and react in time to the risks involved with its U.S. clients, even after U.S. authorities opened a probe in 2008 of Swiss bank UBS for similar practices. Leumi’s chairman failed to order detailed information on the bank’s relations with U.S. clients and never brought the issue up at board meetings until January 2010, the report said.

“Naturally, the bonuses the bank paid to the officeholders during the period of the [U.S.] investigation, in particular the chairman, the CEO and the head of international private banking during the period for which the penalties were imposed did not take into account the heavy damage done to the bank,” the report said.

It concluded: “Our stance is that the bank should set up a framework under which the bonus money is recalculated.”

Leumi responded by hinting that even Zaken, who is shortly stepping down after five years in office, was not aware of the significance of the U.S. probe when it began.

The banking system as a whole misunderstood the severity of the issues and even lawyers it had hired did not understand fully understand the risks, it said.

“Not just Bank Leumi failed to understand in real time the risk of helping American clients in tax avoidance, but it was a misunderstanding shared by most of the banking system and the global and Israeli regulatory system,” the bank said in a statement.

Leumi noted that other banks in Israel and other countries have been accused of the same practice. Two other Israeli banks — Bank Hapoalim, the country’s biggest, and Mizrahi Tefahot, the No. 4 — are also under investigation for allegedly helping American citizens dodge taxes.

Maor, Raff and Itzkovich said in a statement that the Bank of Israel report “does not reflect the reality as it was and amounts to wisdom in hindsight” and fails to take into account their understanding of what had occurred.

“The report is based on agreements reached between the bank and the American authorities,” the three said. “The executives were not involved in reaching the agreements, and as the report states, were not party to it.”

Apart from the bonus issue, Zaken demanded that Leumi set up an independent committee to examine the conduct of its board and senior officers from 2008 to 2010.