Bank Hapoalim (TASE: POLI) and Mizrahi Tefahot Bank (TASE:MZTF) are expected to make provisions in their upcoming financial statements for the investigation by the authorities in the US. Discussions between the bank heads and Supervisor of Banks David Zaken are taking place in order to determine how much should be provided for the investigation of suspicions that the banks abetted tax evasion by their US customers. Bank Leumi (TASE: LUMI) paid a huge $400 million fine in the affair. The amount to be provided has not yet been decided, but estimates are that the initial provision will be over NIS 100 million at each bank.
In addition to the ongoing discussions, Israel Securities Authority chairman Shmuel Hauser has also decided to increase his involvement in the issue. Sources inform "Globes" that Hauser sent another letter in recent days on the question to Bank Hapoalim, Mizrahi-Tefahot, Israel Discount Bank (TASE: DSCT), and First International Bank of Israel (TASE: FTIN). Hauser sent a letter to the four banks asking for clarifications about their situation and exposure to American customers and the investigation by US authorities several weeks ago. The banks answered, after which Hauser sent another letter.
As far as is known, the answer received by Bank Hapoalim and Mizrahi Tefahot, against whom an investigation is being conducted, was quite sharp. The two banks were asked to provide a detailed list of their contacts with the US authorities, their considerations in handling the affair, and what they have done in the matter. These demands mean that the banks will have to make a provision in their reports.
These letters were sent at the same time as the talks being held with Zaken about the expected provision. The amount of the provision is expected to be determined by a formula set by the authorities in the US and Switzerland for all banks making a compromise with the US authorities. Bank Hapoalim and Mizrahi Tefahot are not among the banks entitled to join the compromise agreement; however, Bank Leumi was also not in this group, and part of the fine it paid was nevertheless based on this formula.
According to this mechanism, the bank pays a fine amounting to 20% of the volume of its US customers' assets. In addition, if the bank account was opened after August 1, 2008 (i.e. after the US authorities began to act in the matter), the rate of the fine for that account is raised to 30% of the volume of the assets. If the account was opened after February 2009, the rate jumps to 50%. Bank Hapoalim and Mizrahi Tefahot are in the process of mapping their US customers (Mizrahi Tefahot is at a more advanced stage, and has hired the KPMG firm to advise it), so that the formula can be used to estimate the amount of the provision. At the same time, the discussions with the Bank of Israel in recent days are on the question of whether to adhere to the formula in determining the provision, or to make a larger provision.
Bank Leumi paid a $400 million fine in the affair, $157 million of which (40%) was based on the formula. The provision based on the formula will not be the sole provision made by the banks in the affair; the other parts will become clearer when the discussions with the US authorities reach a more advanced stage.
Nevertheless, it is believed Bank Hapoalim and Mizrahi Tefahot's total fines will be lower than what Bank Leumi paid, given that their business with US customers was on a smaller scale than that of Bank Leumi. Another question being considered by the banks and the Bank of Israel Banking Supervision Department is how exactly the provision should be made: whether it should be defined as a special direct provision, or whether the Supervisor of Banks will allow it to be recognized as a kind of reserve fund that is not directly defined as a provision for the US investigation. Note that this issue involves the banks' concern that making such a provision constitutes a confession of wrongdoing to the US authorities, to which it is not clear how the authorities will respond.
Published by Globes [online], Israel business news - www.globes-online.com - on February 26, 2015
© Copyright of Globes Publisher Itonut (1983) Ltd. 2015