BoI issues tough report on Leumi US tax evasion affair

Dudu Zaken

The Bank of Israel audit finds failures and negligence in oversight at Bank Leumi.

Failures, mistakes, negligence in oversight: these are only some of the terms used by Supervisor of Banks David Zaken to describe the findings of an audit conducted in recent months on the conduct of Bank Leumi (TASE: LUMI) in the affair of tax evasion by its US customers.

In recent weeks, the draft audit report has been sent for a response to Bank Leumi, its current executives, senior officeholders no longer with the bank, legal representatives, and additional parties affected by the severe report. These parties have until the end of next week to respond. Several of them asked for a postponement of the deadline for a response, but Zaken rejected their request.

A source close to former Bank Leumi CEO Galia Maor said that, contrary to media reports, she had no intention of voluntarily returning money to the bank, and that this decision in any case rested with the court and the external committee on the question set up by the bank.

Zaken plans to finish his handling of the matter and sign the final audit report by the time he leaves his position as Supervisor of Banks next month. His replacement will be Dr. Hedva Bar, currently Bank Leumi risk management division head. In recent days, the possibility has been raised that some of those criticized, mainly former managers angry about the audit findings, especially the Supervisor of Banks' attitude towards the US affair, will not send any response to the draft. They may prefer to wait to express their positions for the legal proceedings on the derivative lawsuit filed against the bank demanding the reimbursement of some of the bonuses received by former Bank Leumi executives, to offset the heavy fine imposed on the bank.

The draft report that was sent out includes all the findings that arose in the US investigation and that appear in the appendix to the settlement signed by Bank Leumi and the US law enforcement agencies. In this settlement, Bank Leumi admitted that it had assisted its US customers in income tax evasion, and paid a $400 million fine. To these were added findings from the investigation by the Supervisor of Bank's audit teams, which mainly concern Bank Leumi's conduct in Israel.

In December 2014, Zaken announced at the "Globes" Israel Business Conference, and afterwards in the Knesset Economics Committee, his intention of investigating how Bank Leumi had managed its risks during the years involved in the US investigation, in the preceding decade, and during the four-year investigation. He also said that he would probe the matter of the officeholders' liability.

The Supervisor of Banks' audit report is confidential, and both the Supervisor of Banks and Bank Leumi can ostensibly refrain from full disclosure concerning it. Nor are there any legal provisions explicitly establishing a duty of disclosure by the supervisor of a supervised entity. Nevertheless, since this is an issue of principle involving the duty to report to the shareholders, the bank and its executives have the duty to make the initial judgment whether to publish the final report, as long as the bank's business interests and stability are not jeopardized. In past major affairs at banks, when bankers claimed that the duty of disclosure did not apply to them, they used the especially broad and convenient clause of risk to the bank's stability. The matter then becomes subject to the judgment of the Israel Securities Authority. In the current case of Bank Leumi, if the bank's leaders - chairman David Brodet, the board of directors, and CEO Rakefet Russak-Aminoach, with all their legal advisors - refuse for any reason to publish the Supervisor of Banks' audit report, the ball will then be in the court of Israel Security Authority chairman Shmuel Hauser. Proper disclosure requires publishing all material information affecting the corporation, its financial results, and anything concerning its securities. In various incidents in the past, Israel Securities Authority chairmen have required the banks to publish the Supervisor of Banks' audit report.

In any case, the report itself, with its findings, like any audit report, is not admissible as evidence in court (the law stating this is aimed at ensuring effective willingness by the audited party to provide information to the auditor). In other words, the report cannot constitute proof in a class action filed by Bank Leumi shareholders against the bank - but it will certainly have a decisive effect on the legal developments, as well as on the position of the Attorney General if and when he should join the class action.

Meanwhile, Attorney General Yehuda Weinstein's probe is also making progress. In mid-January 2015, he announced he was beginning an investigation into Bank Leumi and the US affair. He formed a combined team of heads of law enforcement agencies: the Israel Police, the Israel Tax Authority, the Supervisor of Banks, the Israel Securities Authority, the State Prosecutor, and the Israel Money Laundering Prohibition Authority. It is not clear in which directions this investigation has developed. Talking to "Globes" today, a Ministry of Justice spokesman said, "The team's work is in the advanced stages. The team is now formulating its recommendations." <p>Another audit is currently being conducted by the office of State Comptroller Joseph Shapira. His office's economic division already announced at the beginning of January 2015 that it would examine the behavior of the Bank of Israel Banking Supervision Department in all matters pertaining to supervision of business activities by banks in Israel and overseas.

Published by Globes [online], Israel business news - www.globes-online.com - on June 11, 2015

© Copyright of Globes Publisher Itonut (1983) Ltd. 2015

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