Bank Leumi will pay $130 million to the New York State Department of Financial Services (DFS), move to terminate and ban individual senior employees who engaged in misconduct, and admit its violations of law for conducting an illegal cross-border scheme to assist U.S. clients in evading federal and state taxes. Bank Leumi will also install an independent monitor, selected by DFS, to conduct a comprehensive review of the Bank's compliance programs, policies, and procedures.
Press release from the New York State Department of Financial Services:
NYDFS ANNOUNCES BANK LEUMI TO PAY $130 MILLION; TERMINATE AND BAN INDIVIDUAL EMPLOYEES, ADMIT VIOLATIONS OF BANKING LAW FOR ASSISTING TAX EVASION BY U.S. CLIENTS
Bank Leumi Employee Wrote that 2008 U.S. Investigations of Swiss Banks for Facilitating Tax Evasion Was a "Golden Opportunity" to Pick up New Business
Benjamin M. Lawsky, Superintendent of Financial Services, announced today that Bank Leumi will pay $130 million to the New York State Department of Financial Services (DFS), move to terminate and ban individual senior employees who engaged in misconduct, and admit its violations of law for conducting an illegal cross-border scheme to assist U.S. clients in evading federal and state taxes. Bank Leumi will also install an independent monitor, selected by DFS, to conduct a comprehensive review of the Bank's compliance programs, policies, and procedures.
Superintendent Lawsky said: "Tax evasion unfairly hits every other New Yorker who works hard, plays by the rules, and meets their obligations. Bank Leumi employees engaged in a series of egregious schemes – including creating complex, sham loan arrangements – to help its U.S. clients shirk their responsibility to pay taxes. What's worse, when certain Swiss banks began to put the brakes on this type of misconduct, Bank Leumi instead hit the accelerator even harder – viewing it as a 'golden opportunity' to pick up new business. "
Tax Evasion Scheme
From at least 2000 through 2011, Bank Leumi-Israel and its subsidiaries, including Bank Leumi USA, a New York State-chartered bank, knowingly and willfully aided and assisted U.S. clients, including New York clients, in opening and maintaining undeclared accounts in a foreign country, concealing their offshore assets and income from the Internal Revenue Service and other federal and state authorities, and filing false tax returns and other documents with such authorities.
Bank Leumi-Israel assisted U.S. clients in concealing accounts through, among other schemes:
- "Hold mail" service for approximately 2,450 U.S. accounts, whereby every statement of account, notice, or other document associated with the account would be held abroad at the foreign bank and would not be sent to the customer's address in the United States;
- "Assumed name" and "numbered" accounts, where the name of the account holder would not appear on any correspondence or account statements, and the Bank would accept wire transfers using these assumed names or numbers in lieu of actual customer names;
- Referring U.S. clients to outside lawyers and consultants who would establish and maintain offshore corporations in jurisdictions like the British Virgin Islands, Panama, and Belize, to nominally hold the undeclared accounts and hide their true tax status from U.S. authorities; and
- Suggesting to U.S. clients to open accounts through Bank Leumi Trust in order to add an "extra level of secrecy" to the account.
Sham Loan Scheme
In an effort to facilitate this tax evasion scheme, Bank Leumi offered several products to U.S. clients who maintained funds in undeclared accounts abroad, which enabled the customers to gain access to the funds without repatriating the funds or creating a paper trail that would disclose the existence of the undeclared accounts to the U.S. authorities.
For example, Bank Leumi USA also offered, marketed, and serviced standby letter of credit-backed loans ("SBLC loans") that were secured or collateralized by a letter of credit from Bank Leumi-Israel or a foreign affiliate, which letter of credit was in turn backed by funds in the customer's undeclared account at Bank Leumi-Israel or a foreign affiliate.
Bank Leumi USA received interest payments on the SBLC loans and the foreign affiliate separately collected a "guaranty fee" or "commission" for the issuance of the letters of credit, which together amounted to approximately 1% of the loan amount.
From approximately 2002 to 2011, Bank Leumi USA issued one or more SBLC loans to approximately 234 borrowers who were U.S. customers, including 54 customers in New York, and the average value of each loan was approximately $1.2 million; therefore, the total aggregate value of the undeclared assets backing the loans was at least $280 million. The Bank earned profits on the SBLC loan activity of approximately $23 million over the relevant time period.
Solicitation of Customers Exiting Swiss Banks
Certain executives in the Bank viewed the public investigation of several Swiss banks, and their subsequent exit from the U.S. cross-border banking business, as an opportunity to attract new customers whose accounts the Swiss banks had stopped servicing. For example, when the U.S. Department of Justice investigation of UBS became public in May 2008, several senior executives at the Bank considered UBS's exit from the U.S. cross-border business as a "golden opportunity to contact customers" and urged bankers "to suggest [to prospective clients] that they transfer their accounts to here (the reasons are understood)." Subsequently, Bank Leumi-Israel and its foreign affiliates opened accounts for 263 U.S. taxpayers, increasing assets under management by approximately $401 million.
Individual Employee Terminations/Resignations/Bans
Various Bank senior operations, compliance, and legal staff knew of the Bank's wrongful conduct, and, rather than report the conduct to the Bank's regulators, actively supported it.
For example, a private banker employed by Bank Leumi-Israel for over 25 years wrote to a supervisor in 2011, "Nearly every client who has an account with us has used the bank as a tax haven, and is aware that by not declaring his account in the US is committing an offense, [and] we have by virtue of the services we provided assisted the clients with what they wished to achieve."
Additionally, in 2008, in the midst of the SBLC loan scheme, the Bank Leumi USA Chief Executive Officer appointed an employee, who had no compliance experience, to the position of Chief Compliance Officer. This Chief Compliance Officer approved the continued practice of not requiring applicant names on Bank Leumi USA files. The employee remained in this position until 2010.
While certain employees have already left the bank, Bank Leumi will take all steps necessary to terminate the current Head of Bank Leumi Trust, who served as a Regional Manager during the relevant time period.
In light of NYDFS' investigation, two individuals who played a central role in the improper conduct have also recently resigned: a former Branch Manager, who remained employed by Bank Leumi-Israel as a credit officer in the workout unit; and a former Senior Relationship Manager, who remained employed by Bank Leumi-Israel as an operation officer in the private banking branch.
The Bank shall also ban its former Bank Leumi USA Chief Compliance Officer, who is currently Chief Administrative Officer, from conducting any activities related to compliance.
To view a copy of the consent order, please visit, link.