The external committee appointed by the Bank Leumi (TASE: LUMI) board of directors to examine senior managers' responsibility for the bank's entanglement with the US authorities over its role in facilitating tax evasion by US citizens submitted its recommendations today. The main recommendation is to demand that former senior bank officers should return millions of shekels that they received as bonuses.
Former CEO Galia Maor and former chairman Eitan Raff are the main focus of the report. The report also states that former head of the bank's International and Private Banking Division Zvi Itskovich should return bonuses.
In the US tax evasion affair, Bank Leumi was accused of systematically assisting customers to evade taxes and to launder money, and it paid the US authorities fines amounting to NIS 1.5 billion.
Altogether, the three are supposed to repay the bank NIS 5.1 million, representing 11% of the bonuses paid to them (gross) during the period of the affair involving the US customers. This amounts to 22% of the bonuses net. The three former senior managers have already notified the committee that they will return the NIS 5.1 million.
In addition, the committee recommends adopting a precedent-setting settlement whereby the bank will receive about NIS 360 million from its insurance company. It says that prolonged litigation involving close examination of the bank's behavior vis-a-vis its US customers would be liable to harm its reputation, and that a lawsuit against former employees for actions that they considered to be legitimate and for the good of the bank "could in the future suppress initiative and reasonable risk taking that are part of any bank's business."
The committee acknowledges that the NIS 5.1 million that Raff, Maor and Itskovich are being asked to repay isnot a large sum in absolute terms, but stresses that the ability to demand more is limited, mainly because the settlement with the insurance company is conditional on the agreement of the three former managers to forego any further claim on the company.
The committee finds that Maor, Raff and Itskovich were not in breach of their fiduciary duty to the bank, and that they acted for its benefit. The report dismisses allegations made in derivative actions against the three managers that they were motivated by the desire to boost their bonuses, pointing out that the activity vis-a-vis the US customers was a very small part of the Leumi group's business, and that bonuses were paid on the basis of the group's general performance. Nevertheless, the report states that the managers could possibly be considered to have acted negligently, in that they took insufficient notice of the foreseeable impact of the action taken by the US authorities against UBS in similar circumstances and of "the change in the global banking landscape originating in the UBS case."
The committee also criticizes the bank's auditors, KPMG Somekh Chaikin and Kost Forer Gabbay & Kasierer (Ernst & Young), for relying on the understanding of the bank's officers that the UBS affair was not relevant to Bank Leumi and its subsidiaries "without the auditors examining the matter independently in depth." The committee says that it lacked the time to examine all the relevant facts and therefore made no recommendations against the auditors, but is does recommend that the bank's board should consider their role in the affair before extending their terms.
Maor, Raff and Itskovich said in a statement in response to the report, "The officers served the bank faithfully for over fifteen years, and led it successfully even during difficult periods, including the time of the economic crisis in 2008-2009, when other banks in Israel and around the world sustained huge losses.
"The officers believe that in their conduct at the bank in relation to the management of the accounts of US customers, they acted in accordance with the law and with accepted banking practice in Israel and around the world. The officers acted honestly and with their best efforts for the good of the bank, and indeed the committee explicitly stated that the officers were not in breach of their fiduciary duty to the bank. Nevertheless, and despite the fact that the committee stated in its report that there was no legal liability justifying the return of bonuses, the officers agreed, in order to bring the whole matter to a rapid, full and final conclusion and to avoid further proceedings that might harm the bank, to accede to the committee's request and to relinquish certain sums.
"The officers point out that the attribution to them of damage that occurred after the end of their employment at the bank is on the basis of the wisdom of hindsight, and does not take into account substantial profits that accrued to the bank after the end of their employment there from transactions carried out by the officers during their periods at their posts. Nevertheless, at this stage in their lives, and in order to bring the matter to a complete and final conclusion, in all its aspects, the officers have expressed their agreement to the committee's request."
The report has been approved by the bank's board of directors, which will submit it to Tel Aviv District Court judge Khaled Kabub, who will examine it in the context of two derivative actions filed against Bank Leumi over the tax evasion affair. The report does not however bind the court.
Published by Globes [online], Israel business news - www.globes-online.com - on October 12, 2015
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