Banking and Finance Law Daily Multiple regulators announce action against Bank Hapoalim for tax violations
Friday, May 1, 2020

Multiple regulators announce action against Bank Hapoalim for tax violations

By Nicole D. Prysby, J.D.

Federal and state authorities announced that Bank Hapoalim, Israel’s largest bank, along with a Swiss subsidiary and New York branches, agreed to pay approximately $874.27 million for the bank’s practices that resulted in tax law violations.

On April 30, 2020, federal and New York state authorities announced a series of actions and settlements against Bank Hapoalim B.M. (BHBM), Israel’s largest bank; Bank Hapoalim (Switzerland) Ltd. (BHS), its Swiss subsidiary; and New York branches of BHBM. Authorities alleged that the bank conspired with U.S. taxpayers and others to hide more than $7.6 billion in more than 5,500 secret Swiss and Israeli bank accounts. At least four senior executives of the bank, including two former members of BHS’s board of directors, were directly involved in aiding and abetting tax evasion of U.S. taxpayers. The Bank agreed to pay approximately $874.27 million to the Department of Justice, Federal Reserve Board, and New York State Department of Financial Services (DFS).

The Fed announced that it fined BHBM, a foreign bank headquartered in Israel and operating in the U.S, $37.35 million for the firm's unsafe and unsound practices resulting in violations of U.S. tax laws. The consent order alleges that between 2002 and 2014, BHBM offered certain products and services that U.S. taxpayers used to conceal their assets from U.S. tax authorities, including back-to-back loans offered through BHBM’s U.S. branches. The back-to-back loans frequently involved a loan from the U.S. branches to a U.S. taxpayer that was secured by an undeclared offshore account owned or controlled by the same taxpayer at BHBM or BHS. These loans allowed U.S. taxpayers to access the economic value of the undeclared offshore funds without actually transferring them to the U.S., preventing a paper trail that could alert U.S. tax authorities to the funds. According to the Fed, BHBM lacked adequate enterprise-wide risk management and compliance policies and procedures sufficient to ensure that back-to-back lending compliance activities complied with safe and sound practices and applicable internal policies. The order requires a Management Oversight Plan to enhance compliance with U.S. laws, an internal audit program, enhanced document retention policies and training, a civil monetary penalty of $37.35 million, periodic progress reports, and accountability for employees involved in the misconduct.

The Fed’s action was taken in conjunction with action from the Department of Justice and the State of New York. The Department issued a press release announcing the guilty plea of BHS and filing of criminal charges against BHBM for conspiring with U.S. taxpayers and others to hide more than $7.6 billion in more than 5,500 secret Swiss and Israeli bank accounts and the income generated in these accounts from the Internal Revenue Service (IRS). The Plea Agreement with BHS sets forth the required restitution of $138.9 million to the IRS and a forfeiture of $124.6 million. BHS will also pay a fine to be imposed by the court. The Department signed a deferred prosecution agreement with BHBM, under which BHBM will pay restitution of $77.8 million, a forfeiture of $35.6 million, and a penalty of $100.8 million. In exchange for the payments and cooperation, prosecution of BHBM is deferred for three years and will be dismissed if BHBM remains in compliance with the terms of the agreement. Both the penalty and fine amounts take into consideration that the bank, after initially providing deficient cooperation through an inadequate internal investigation and the provision of incomplete and inaccurate information and data to the government, thereafter conducted a thorough internal investigation, provided client-identifying information, and cooperated in ongoing investigations and prosecutions. The bank further implemented remedial measures to protect against the use of its services for tax evasion in the future.

New York DFS Superintendent Linda A. Lacewell issued a press release announcing that BHBM and its New York branches will pay a $220 million penalty to the DFS for having knowingly facilitated U.S. clients’ evasion of state and federal taxes through its conduct of an illegal cross-border banking business. The consent order signed by DFS, BHBM, and BHBM’s New York branches explains that the bank provided its customers who were U.S. persons with several services that facilitated tax evasion by concealing the beneficial ownership of the account and/or that such owner was a U.S. person. For example, the bank offered its customers "coded" accounts, in which the name of the account holder would not appear on any correspondence or account statements and instead the customer’s name would be replaced with a code or a pseudonym. This practice continued until 2015 and involved approximately 1,100 accounts, including 246 accounts for New York residents. During the relevant period, the bank also provided "hold mail" service, whereby every document associated with the account would be held at the branch where the foreign account was maintained and would not be sent to the customer’s address. The bank provided this service, for which it charged a fee, with respect to approximately 3,091 accounts held by U.S. persons, including approximately 601 accounts held by New York residents.

Companies: Bank Hapoalim B.M.; Bank Hapoalim Ltd.

MainStory: TopStory BankingOperations CrimesOffenses EnforcementActions FederalReserveSystem NewYorkNews StateBankingLaws

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