The tax evasion tricks at Mizrahi Tefahot

Mizrahi Tefahot

US Justice Department: When a bank's employees facilitate tax fraud, the bank will be held responsible.

Customers of Mizrahi Tefahot Bank (TASE:MZTF) received false names. Communications with them was by code, meetings with them were concealed, and the bank's employees ignored its policies and rules. Mizrahi Tefahot Bank's employees used these methods to cheat the US authorities and help the bank's customers evade taxes, according to the settlement ending an investigation of over five years by the US authorities. Mizrahi Tefahot Bank, managed by CEO Eldad Fresher, will pay a $195 million fine in the settlement, after the original $342 million fine imposed by the US authorities was reduced by 40%.

The settlement concerns offenses committed by Mizrahi Tefahot Bank's employees, not the bank itself, but the bank had to take responsibility and pay the penalty. A press release by the US Department of Justice, signed by tax division principal Deputy Assistant Attorney General Richard Zuckerman, stated, "A financial institution is not a faceless entity, but is the embodiment of the acts of its bankers, relationship managers and all employees. When a bank’s employees, at any level, facilitate US tax fraud, the bank facilitates tax fraud and will be held responsible." IRS criminal investigation chief Don Fort added, "This agreement with Mizrahi Tefahot is the latest notice to American taxpayers, who might flout the law, that we can and will uncover your hidden assets.”

The settlement reached with the Department of Justice exposes the method used by the bank's employees. This method included concealing the US customer's connection to the account in order to facilitate tax evasion. The employees first allowed US customers to open accounts under false names and code names in tax shelters, such as Liberia and the Virgin Islands. Another method was opening accounts for US residents while concealing their US identity and not obtaining signatures on the required forms.

The bank also facilitated a delay in mail that should have been sent to the customer's home, thereby preventing the arrival in the US of documents proving the existence of the account.

Communications between the banks and the customers was also sometimes in code in order to conceal the fact that the bank was talking to a customer. For example, it was said during a conversation, "I sent the shoes to the right box." The use of such language shows intent to conceal information from the beginning.

Bankers also used a back-to-back method for loans aimed at enabling US customers to use funds concealed outside the country in the US. The bank used this method to grant a loan to a customer in its branch in Los Angeles, against which a deposit was made in Switzerland or Israel. According to the settlement, the bank used this method until 2008.

Mizrahi Tefahot Bank demanded very little financial information from a borrower asking for a back to back loan. US customers asking for such a loan did not disclose the existence of other accounts, including the account attached for the loan. The bank's employees also prepared documents for the branch's credit committee without identifying the attached account. Following an audit of this matter at a branch in Los Angeles, the bank stopped offering this to its customers, and liquidated this activity.

In other cases, bankers advised US customers not to invest in US securities in order to avoid exposure to the US authorities. This indicates that the bankers instructed the customers on how to conceal their accounts from the US authorities.

The settlement states that the group in question consisted of private bankers, customer relations managers, and other employees who behaved illegally. It does not say that senior managers were involved, or that the bank set a policy in these matters. Nevertheless, it appears that the main failing of Mizrahi Tefahot Bank was not properly supervising implementation of the ban on money laundering, thereby enabling its employees to breach it.

The settlement adds that Mizrahi Tefahot Bank misbehaved in a number of cases involving the compliance rules ("know your customer" policy - rules for identifying the customers in order to comply with the rules forbidding money laundering). It also states that even after illegal activity at the bank was exposed, and a former Mizrahi Tefahot Bank employee (Yossi Roth) was convicted in court, the bank did not properly investigate what had been done in the relevant accounts. The settlement goes on to say that the bank's compliance failures resulted in the Bank of Israel fining it $975,000.

The settlement also comments on a number of exceptional specific cases discovered at Mizrahi Tefahot Bank. One of these cases involved Roth, a former bank employee convicted in 2008 of abetting tax evasion by customers. Five of Roth's customers were also convicted in 2013-2014. The complaint against the bank is that even after Roth and the US customers were convicted, it did not properly investigate what was done in the accounts, and did not examine all of the accounts handled by Roth.

Another specific case mentioned in the settlement concerns an especially large bank account that contained $74 million at its peak. This account was opened 30 years ago by a foreign company in Liberia that moved to the Marshall Islands. Mizrahi Tefahot Bank's employees allowed the account to be used to invest in US shares, in violation of the rules and laws, including failure to have the customer sign certain documents.

Penalty element higher than in Bank Leumi case

Mizrahi Tefahot Bank announced on Tuesday that the fine imposed by the US authorities was $195 million. The bank has already provided $162 million for the investigation, so it will now have to make an additional $33 million provision in its upcoming financial statements, which will be published in two weeks. Expenses related to the investigation are believed to amount to at least tens of millions of shekels. In addition to the bank's lawyers in Israel and the US, Mizrahi Tefahot Bank also hired accountants KPMG to help prepare the complicated database given to the US authorities.

Mizrahi Tefahot Bank is exposed to two regulators in the US: the Department of Justice and the California state financial regulator. Bank Leumi (TASE: LUMI) was exposed to the Department of Justice and the New York state regulator, which levied fines of $270 million and $130 million against it. Mizrahi Tefahot Bank's current fine comes only from the Department of Justice, but it can be stated with caution that the local California state regulator will probably not levy an additional fine against the bank.

The fact that Mizrahi Tefahot Bank is not active in New York saved it from having to assign a monitor - a US supervisor to closely follows the bank's activity, while Bank Leumi had to assign such a monitor at the demand of the New York state regulator.

The fine imposed on Mizrahi Tefahot Bank is nevertheless relatively higher than Bank Leumi's fine, considering that the volume of illegal activity by Bank Leumi's US customers was significantly larger than that of Mizrahi Tefahot Bank's customers.

The fine consists of three elements: a $53 million unpaid tax refund, the bank's profits from illegal activity in the assets amounting to $24 million, and a fairly high $118 million penalty element. Bank Leumi's penalty element was $41 million. As time passes, the US is making tougher fine demands against banks (Bank Leumi reached a settlement four years ago).

Published by Globes, Israel business news - en.globes.co.il - on March 14, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

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