Cooperation With US Authorities Paid Off for Leumi

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Full cooperation with the US tax evasion probe limited Bank Leumi’s damage, but leaves customers and employees exposed.

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Bank Leumi (TASE: LUMI) and the US authorities this week signed a settlement concerning the affair in which Bank Leumi abetted tax evasion by its US customers in 2000-2010, when the bank was managed by Galia Maor. Leumi is expected to pay a $400 million fine to the US authorities. The bank’s heavy legal costs bring its total damage in the affair to NIS 1.7 billion.

The revealing of the settlement particulars included interesting and embarrassing details about the way Bank Leumi operated, including secret meetings with customers at parks and coffee shops in the US and maintaining accounts under assumed names. A considerable proportion of these piquant details, however, was revealed as a result of Bank Leumi’s decision to cooperate with the US authorities, and to provide them with information about its customers and the correspondence of its employees.

This decision caused a reduction in the fine, but it was no simple matter, and was accompanied by a fair amount of hesitation. The bank’s board of directors even asked for an external opinion from Prof. Edward Rock and Prof. Sharon Hannes about the bank’s behavior in the process of reaching and approving the settlement. In their report, Rock and Hannes state that the Bank Leumi board of directors and management behaved well during the investigation, and acted for the good of the bank, even if it was at the expense of the bank’s customers and employees. They wrote that a perusal of the result of the internal clarification process was enough to realize the magnitude of the danger that the investigation posed for the bank. Their report, which “Globes” has obtained, reveals what went on behind the scenes of the four-year investigation. The events occurred as follows:

1. The affair originated in rumors

In January 2011, Scott Anenberg from the Meyer Brown law firm, which worked with Bank Leumi, reported to the bank rumors of an US Department of Justice investigation involving the bank. The situation regarding the bank – on what the investigation was focusing and whether the bank constituted an important target, or was being examined in the context of an investigation against its customers – was unclear.

Within a few months, it was realized that an investigation against the bank was involved, and the board of directors formed a special committee to handle the affair in June 2011, called the “Overseas Customers Committee.” As the affair become more extensive, the committee’s authority was expanded with the board of directors’ approval, and it held 50 meetings. At the same time, the bank conducted interviews to select a US law firm to advise it in the affair.

The bank retained the services of the Davis Polk & Wardwell law firm, while hiring another law firm, Skadden, Arps, Slate, Meagher & Flom, to represent its employees. This separation was ordered by Maor, although a legal opinion stated that there was no obligation to do so.

2. A fateful decision

In November 2011, the board of directors committee decided in principle that the bank would adopt a strategy of active and voluntary cooperation with the US authorities. This critical decision greatly affected subsequent events. Cooperation was expressed by setting up an internal committee and delivering the findings of its inquiry to the authorities, which was in effect a preliminary condition for opening up a channel of communication and negotiation with the US authorities.

A representative of the Department of Justice, Adv. Strauss, told the bank, “Let’s see the material first; then we’ll be ready to talk.” This statement and others made it clear to the bank that the authorities would be unwilling to reach a settlement without first being presented with all the facts.

The bank considered in depth whether it was worthwhile to put itself so completely in the hands of the US authorities. They examined how the authorities had acted with other banks in similar cases. Senior bank executives, including Maor, chairman David Brodet, and current CEO Rakefet Russak-Aminoach, held meetings with senior UBS officers, including chairman Kaspar Villiger, who had already been through such an investigation. In the meetings, UBS representatives said that it was essential to disclose customers’ names, and that it was preferable to reach a settlement as soon as possible, since the Department of Justice raises the price of a settlement as time passes. The UBS representatives also mentioned that Swiss bank Wegelin, which had not cooperated, had been indicted, other banks had refrained from working with it, and it had in effect ceased to exist.

Additional recommendations to cooperate with the authorities were received from other sources. Russak-Aminoach spoke with Supervisor of Bank David Zaken, who said that the only right way was cooperation with the authorities.

3. Deloitte engaged

In the end, Bank Leumi decided to cooperate with the Americans completely. The bank was asked to prepare a database of US customers with assets of over $500, 000, including the balances in their accounts and their sources, the bank’s income from those accounts, and a calculation of the damage done to the US tax authorities from the customers’ avoidance of tax payments.

As well as this, “red flags” were defined in the examination, that is, accounts of customers who came to Leumi from UBS and Credit Suisse after an investigation was opened into those banks. There were also red flags over accounts at Leumi USA that received SBLC loans (with collateral deposited in accounts outside the US), and customers whose accounts were designated with internal codes. It was also decided that the check would relate to customers in the Private and International Banking Division in Israel only, as well as customers of Leumi USA, Switzerland, and Luxemburg.

Leumi was asked to hire an international firm to advise on the check and the preparation of the data, and the bank selected Deloitte. Deloitte clocked up 27, 000 hours of work over 16 months, aided by dozens of bank employees.

The report indicates that the comprehensive internal check, the results of which were sent to the US authorities, contributed to the relationship formed with the US Department of Justice, and represented a basis for communication between the sides and for structuring the eventual settlement.

4. Assistance from Israeli regulators

The cooperation with the US authorities also took the form of handing over names of customers and details of employees. This was done in close consultation with regulators in Israel: the Ministry of Justice, the Ministry of Finance, the Tax Authority, and the Data Protection Commissioner. Then Governor of the Bank of Israel Stanley Fischer and Tax Authority Director Moshe Asher were kept informed.

Transferring information about the bank’s customers is not a simple matter from a legal point of view. It was made possible by the Double Tax Prevention Treaty between Israel and the US. The process was as follows: the US authorities approached the Israel Tax Authority, which applied to the court for an order, on the basis of which Bank Leumi handed over the details. As mentioned, data was handed over concerning more than 1, 500 customers.In addition, the bank was required to retrieve e-mail messages of bank employees without their knowledge, and to transfer documents that included employees’ names. This too was done after a legal opinion was informed from experts on employment law.

At the same time, Leumi also cooperated with the Americans by encouraging its US customers to join a program of voluntary disclosure to the US tax authorities.

The bank’s decision to cooperate led Christopher S. Strauss of the US Department of Justice to say that the Americans would take this cooperation into account in deciding the amount of the fine. As far as is known, the decision led to a substantial reduction of parts of the fine, both thanks to the encouragement of the voluntary disclosure program, which mitigated that part of the fine relating to loss of tax revenue, and a reduction in the penal element. In addition, the formula for calculating part of the fine excluded accounts at Bankspedia, which Leumi Switzerland acquired.

Apart from a reduction in the fine, Leumi managed to obtain other leniencies. For example, the US Department of Justice’s original demand was that the bank should admit fraud and conspiracy against the tax authorities. This was changed to an admission of assisting customers in avoiding tax.

Ultimately, Bank Leumi paid a heavy price in this affair, but it seems that in relation to the material uncovered and the determination of the US regulators, it emerged from it not too badly damaged. Those who are liable to pay the price of Leumi’s cooperation with the US authorities are the customers, and former employees and officers, who will be exposed to lawsuits in the US, among other things because of the information on them supplied by the bank.

Published by Globes [online], Israel business news – www.globes-online.com