In brief
- 12.3.2019: Bank Mizrahi-Tefahot, its Swiss bank (UMBS) and its trust company signed a deferred prosecution agreement (DPA). It was filed in the federal court for the Central District of California, case 2:19-cr-00150.
- The period: according to the agreement, the conduct ran from 2002 to 2012.
- The amount: $195 million. $118 million fine, $53 million restitution of the estimated tax loss, and $24 million disgorgement of fees the bank charged those customers.
- The methods: pseudonyms and code names, shell companies on islands, mail held at the bank's offices in Israel and Switzerland, "back-to-back" loans at the Los Angeles branch, and representatives sent to the United States.
- The outcome: the bank was not convicted. In March 2021, at the end of the agreement period, the charge was dismissed.
The scene: a loan secured by the borrower's own money
An American customer walks into an Israeli bank's branch in Los Angeles and asks for a loan. He gets it. The collateral is a deposit in an account of the same customer, in Israel or Switzerland, that the IRS does not know about.
In the agreed facts attached to the agreement this is called a "back-to-back loan". According to the document, until 2008 the bank offered, marketed and serviced such loans. This let customers use the money in the offshore accounts while continuing to hide it. According to the Justice Department, the Los Angeles branch kept no record of the offshore pledge account, taking advantage of Israeli and Swiss bank secrecy laws to keep the funds from US tax authorities.
According to the agreed facts, five of the bank's US customers pleaded guilty to criminal tax offences in 2013 and 2014. All five opened an account in the name of a foreign entity to hide it, and all reached the money through such a loan at the Los Angeles branch.
What else the settlement documents describe
Code names
According to the Justice Department, bank employees helped American customers open and keep accounts under pseudonyms and code names, or in the name of the bank's trust company. The charging document attached to the agreement mentions two such code names: one account was renamed "G. Shad", and another was opened in 2001 as "Lulu".
Shell companies on islands
Other accounts were held in the names of companies set up in St. Kitts and Nevis, Liberia, the Turks and Caicos and the British Virgin Islands. According to the release, this let customers hide that they were the real owners.
"Hold mail"
According to the agreement, bank employees undertook to keep statements and other mail at the bank's offices in Israel and Switzerland. That way no document showing the accounts existed remained in the United States.
Representatives sent to the United States
Until 2008 the bank sent "roving representatives" to the United States. According to the release, they recruited new customers and met existing ones in Los Angeles, New York and elsewhere to open accounts and covertly manage offshore accounts.
"Client refuses to sign"
The agreed facts describe an account opened in 1989 for an American customer in the name of a company incorporated in Liberia, moved in 2001 to the Marshall Islands. Its year-end value peaked at about $75 million. Employees let the account trade US securities although the customer had not filled in the required tax forms. Several attempts to get him to sign were made until 2010, and employees noted: "client refuses to sign".
Another case, from 2004: a bank employee told an American customer it was dangerous to keep money in an undeclared account at the Cayman Islands branch, in the name of a British Virgin Islands company, "due to increased scrutiny". The employee suggested moving the money to another entity and helped open a new hold-mail account in the name of a Turks and Caicos company.
The amount and the terms
| Component | Amount |
|---|---|
| Fine | $118 million |
| Restitution: estimated tax loss to the United States | $53 million |
| Disgorgement of fees charged to customers with undeclared accounts, 2002 to 2012 | $24 million |
| Total | $195 million |
Under the agreement the bank undertook to cooperate with US authorities, disclose information on US-related accounts and maintain FATCA controls. Prosecution was deferred for an initial two years.
End of the case: according to the court docket, motions to dismiss were filed on 19 and 22 March 2021, and a judgment of discharge was entered on 23 March 2021. The bank was not convicted.
According to the Justice Department, this was the second Israeli bank to admit similar conduct. The first was Bank Leumi, which signed a similar agreement in December 2014.
Why it matters to us
This site documents Bank Mizrahi-Tefahot's conduct towards one customer in Israel. The US settlement concerns a completely different matter, but it shows clearly what a bank's responsibility for its employees' acts is. US Principal Deputy Assistant Attorney General Richard Zuckerman said in the release: "A financial institution is not a faceless entity". In other words, a financial institution is the sum of the acts of its bankers and employees.
All articles in the Mizrahi-Tefahot case
Sources
- U.S. v. Mizrahi-Tefahot Bank Ltd. et al., 2:19-cr-00150 (C.D. Cal.): the agreement, the information (Exhibit B) and the agreed statement of facts (Exhibit C), 61 pages. justice.gov
- US Justice Department release 19-215, 12.3.2019. justice.gov
- Docket entries: motions to dismiss 19.3.2021 and 22.3.2021, judgment of discharge 23.3.2021. CourtListener
- Globes: "The tax evasion tricks at Mizrahi Tefahot". en.globes.co.il
Based on official documents published in the United States. The case ended in a deferred prosecution agreement and dismissal of the charge, without a conviction of the bank. Primary sources, not legal advice.