Did Bank Leumi Le-Israel (LUMI) help Americans evade taxes? According to Benjamin Lawsky, head of New York’s Department of Financial Services, it did. New York’s banking regulator is asking for more than $300 million to settle an investigation.

Bank Leumi’s breach of New York’s banking laws is eerily reminiscent of an earlier brush that the bank had with the U.S. government. It was the target of a separate criminal investigation undertaken by the U.S. Department of Justice, which just recently settled. In what would make it the first Israeli bank to settle a tax investigation by the IRS, Bank Leumi agreed to pay a hefty fine in excess of two hundred million dollars to the U.S.

Unfortunately for Bank Leumi, the DOJ settlement and the one that may soon be on the horizon with the New York Department of Financial Services is poised to strike Israel’s second largest lender in an area where it will be felt the most: its wallet. Reaching a settlement agreement with the Department of Justice and regulators from the NY state government will not come cheap. Indeed, the New York Department of Financial Services is seeking more than what the bank has already set aside to resolve the federal matter: a whopping 950 million shekels or $ 254 million (USD).

Bank Leumi is not the only bank that has found itself embroiled in an investigation undertaken by Lawsky’s office. Just last May, CSGN, the main subsidiary of the Credit Suisse Group, entered into a plea agreement, with the condition that it pay a staggering penalty of $ 715 million to the New York Department of Financial Services.

“Lawsky has certainly raised the stakes,” said Bruce Zagaris, an attorney at Berliner, Corcoran & Rowe LLP who specializes in international tax matters. “It has complicated the effort to settle, because in some cases Lawsky’s office has different views than the feds.”

Just yesterday, Bank Leumi announced that it was in talks with Lawsky’s department on a settlement, according to a filing with the Tel-Aviv Stock Exchange. According to a bank spokesperson, “it’s too early to estimate if an accord may be reached.” However, if an agreement is reached, one thing is certain: it “may be ‘significantly higher’ than the provisions [that the bank has] already set aside to cover those costs.”

Leumi fell 2.1 percent on the Tel Aviv exchange to 13.82 shekels, the lowest since August 31.
Origin of Investigation

Origin of Investigation

According to an article that appeared in Bloomberg entitled, “Bank Leumi Said to Face $ 300 million in Tax case,” the Leumi investigation is “part of a seven-year U.S. crackdown on offshore tax evasion.” Almost one hundred Swiss banks are seeking immunity from prosecution at the hands of the U.S. government. It might be easier for a camel to pass through the eye of a needle than for a Swiss bank, or any foreign bank for that matter, to become veiled in the cloak of immunity.

A formidable barrier is the steam that would “blow the lid” off of Switzerland’s deeply-rooted bank secrecy laws. For example, Swiss banks must disclose how they helped Americans evade U.S. taxes, while eliciting consent from U.S. accountholders to report their names and account information to the U.S. government. It turns out that the terms of the much anticipated non-prosecution agreement fell woefully short of expectations. Very simply, the guarantee of immunity from prosecution that was at the heart of the non-prosecution agreement isn’t actually an iron-clad guarantee after all.

How did the U.S. government tiptoe around that? By inserting language in the NPA agreement that allows the Department of Justice to change its mind and prosecute anyway. The revelation that the guarantee of immunity from prosecution was nothing more than a hollow promise was nothing short of betrayal. Indeed, it so enraged the banks that it inspired more than seventy to unite and fire back at the Department of Justice with a loaded canon, by strenuously objecting to the terms of the proposed agreement.

Returning to the investigation surrounding Bank Leumi, Bloomberg reports that the investigation was aided by dozens of Americans who held undisclosed offshore accounts with the bank. Suffice to say, these individuals did not assist the government out of a sense of civic duty. Instead, they did so to escape the inevitable: a criminal indictment.

Others were not so lucky. Several U.S. persons with accounts at Bank Leumi were “prosecuted for using loans obtained in Los Angeles that were secured by accounts in Israel that weren’t declared to the Internal Revenue Service.”

Lawyers from Lawsky’s office have not shied away from speaking their mind when describing how the agency views the bank’s conduct, “it’s troubling because the loans allowed U.S. clients to avoid paying taxes while still giving them access to their funds.”

Leverage Over Leumi

What gives Mr. Lawsky the right to think that he can exert this much control over Leumi and insist upon such heavy-handed settlement terms? One word: Leverage. The agency has enormous leverage over Leumi because Leumi possesses a highly-cherished but extremely vulnerable commodity: a New York banking license. Such a license is by no means permanent. It can be revoked whenever a bank violates the law.

Mr. Lawsky has used the threat of revoking a banking license to induce other banks into reaching a settlement with the agency.

In August 2012, he obtained “a $340 million accord with Standard Chartered Plc (STAN) after threatening to pull its license.” STAN is a bank London-based bank that was accused of evading U.S. federal laws by concealing the names of Iranian clients that made billions of dollars in wire transfers. As part of the settlement agreement, the bank was forced “to hire an outside monitor to oversee” its transactions with other governments.

Similarly, the settlement agreement with Credit Suisse required that bank to hire a monitor.

What is the likely outcome for Bank Leumi?

According to Bloomberg, lawyers representing Bank Leumi and U.S. prosecutors have sat down at the bargaining table to discuss a deferred-prosecution agreement. Under a deferred-prosecution agreement, the Justice Department would file charges but dismiss them later on if certain conditions are met. It would be no different than if the bank had the sword of Damocles hanging over its head. Such agreements contain “a statement of facts outlining a corporation’s conduct.”

Legal Liability

In a statement made last June, Bank Leumi attempted to show how committed it was to “working towards a resolution” with the Department of Justice to resolve its liability for the role in played in helping U.S. taxpayers to evade taxes from 2002 to 2010.

More than 70 U.S. taxpayers and three dozen bankers, lawyers, and advisers have been prosecuted for their involvement in international tax evasion. The Offshore Voluntary Disclosure Program, an IRS-sponsored amnesty program, has netted “at least $6.5 billion in interest, taxes and penalties and prompted more than 45,000 Americans to reveal offshore holdings.”

The most recent target of criminal prosecution happens to be a banker by the name of Shokrollah Baravarian. Mr. Baravarian was indicted last April and his trial began just last week. According to James Cole, Deputy Attorney General, Mr. Baravarian’s indictment was the result of “an ongoing and extensive investigation into the use of undeclared bank accounts in Israel.”