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Israeli banks have been ordered to pare back their foreign activities after three of the country’s largest lenders were snagged by U.S. tax evasion and money-laundering investigations.
“Activity in foreign countries” exposes banks to “risks of noncompliance with local laws and regulation” and the prospect of large fines, Hedva Ber, supervisor of banks at the Bank of Israel, said in an emailed statement Sep. 27. “We are requiring the banks to reexamine their remaining activity abroad, to reduce it to a smaller number of countries and main foreign banking offices, in a manner that will allow the appropriate allocation of resources—in terms of quality and quantity—for proper management of risks and other aspects of compliance.”
While she did not go so far as to demand the complete closure of Israeli banks’ foreign businesses, Ber ordered each lender to “redefine its strategy for activity via foreign banking offices and its risk appetite in such activity” and “tighten and improve its supervision over subsidiaries” with a series of requirements—including hiring external auditors, internal supervision of foreign operations, and a blanket “prohibition on opening and managing numbered accounts and accounts with a code or fictitious name.” The list of incidents occurring at subsidiaries requiring reporting to the Banking Supervision Department was expanded.
Israel’s largest lender, Bank Hapoalim, announced on Oct. 3 that it was selling its private banking portfolios in Switzerland and Luxembourg to Bank J. Safra Sarasin AG and Banque J. Safra Sarasin SA. The sale—understood to be between 27 million and 33 million Swiss francs ($27 million-$33 million)—which the company said had been in the works before the Bank of Israel directive, marks the end of Hapolaim’s foreign wealth management business following the sale of its Latin American operations to another Safra company. In December 2016, First International Bank of Israel sold its Swiss private banking business to CBH Bank.
“Regarding the investigation by U.S. authorities” into the bank and its Swiss subsidiary “on suspicion of aiding American clients to evade tax,” Hapoalim said in a warning to the Tel Aviv Stock Exchange that its third-quarter profits could be affected, “findings regarding certain actions of former executives at Bank Hapoalim Switzerland in a number of instances may have an adverse effect on the nature of any arrangement with Bank Hapoalim Switzerland and the extent of its responsibility.”
Israel’s attorney general announced in August a criminal probe into Bank Leumi, another of Israel’s five largest lenders, after it was slapped with a $400 million fine for helping American clients evade tax. Hapoalim and Mizrachi-Tefahot Bank are also under investigation and could face severe penalties.
Since a major crisis in the 1980s, Israel’s banks have been a haven of stability, famously weathering the 2008 financial crisis with hardly a ripple, said Harel Perlmutter, head of tax at Barnea and Company lawyers in Tel Aviv. “Tax is the big issue” that could threaten the stability of Israel’s banking system, Perlmutter told Bloomberg BNA Oct. 3.
“The Bank of Israel wants to keep the big banks stable,” he said. “If one of them cannot pay a fine imposed in the United States, that bank will collapse in Israel and the effect on the Israeli economy will be tremendous. The supervisor wants to keep the bank system strong even if she needs to cut some of the profitable portions the bank is making outside Israel.”
Israeli regulations that previously ignored its banks’ involvement with tax evasion and money laundering have been swept away by Israel’s compliance with the U.S. Foreign Account Tax Compliance Act, the OECD’s common reporting standard and its Action Plan on Base Erosion and Profit Shifting, he said.
“The compliance required by the banks is much more than what they were doing a year ago. It’s given individual account-holders a hard time. They can’t play the game they used to play in the past,” he said.
Many of the once-profitable operations of the banks’ foreign branches are no longer allowed by Israeli law. “It will be almost impossible to comply with the rules if they do the same activity, so they have no choice but to close these branches,” he said.
Israeli banks are now so risk-averse that they are discouraging foreigners, who they used to woo, from opening accounts, even at branches in Israel, said Itay Bracha, managing partner and head of tax at Bracha and Company law firm in Tel Aviv and an expert in anti-money laundering.
“The investigation in the United States did something here in Israel. Things are not the same as they were. Today the banks are really careful,” Bracha told Bloomberg BNA Oct. 2. “Now there is no advantage to put money in Israel for foreign clients. The thing that the United States did really reduced the activity here of all the tax evasion.”
“Today, as a lawyer, if a client comes to me and says he has money that he hasn’t declared and wants to deposit it in Israel, I tell him those days are gone. You can’t do it here any more,” he said.
“Israel is a small place and the banks hate risk,” he said. “They don’t want to do anything that will risk the bank. Bank Leumi paid a lot of money to the U.S. authorities. We have two more banks right now dealing with the tax authorities there. If you want me to describe in one word what’s going on with the banks in Israel I will say: ‘panic’.”
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