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From Banking and Finance Law Daily, December 23, 2014

Bank Leumi agrees to $130 million civil penalty by NY regulator

By Thomas G. Wolfe, J.D.

In keeping with a consent order executed by the New York State Department of Financial Services (NYDFS) with Bank Leumi USA, a New York State-chartered bank, and Bank Leumi Le-Israel, B.M. (collectively, Bank Leumi), Bank Leumi has agreed to pay a $130 million civil penalty to the NYDFS. In addition, the bank will terminate and ban certain senior bank employees who allegedly engaged in misconduct relating to an unlawful “cross-border scheme” to assist the bank’s clients in evading federal and state taxes. In a Dec. 22, 2014, release, NYDFS Superintendent Benjamin M. Lawsky stated, “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. According to the NYDFS, from 2000 through 2011, Bank Leumi “knowingly and willfully” assisted its U.S. clients, including its New York clients, in opening and maintaining undeclared accounts in a foreign country, “concealing their offshore assets and income” from the IRS and other federal and state authorities, and filing false tax returns and other documents with such authorities.

Sham loan scheme. As a vehicle for facilitating the tax evasion scheme, Bank Leumi offered several products to U.S. clients who maintained funds in undeclared accounts abroad. The NYDFS maintained that these bank products enabled the bank’s 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, the NYDFS pointed out that Bank Leumi offered, marketed, and serviced standby letter-of-credit-backed loans (SBLC loans). The SBLC loans were secured or collateralized by a letter of credit from a foreign affiliate of Bank Leumi.

According to the NYDFS, from approximately 2002 to 2011, Bank Leumi 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.”

Bank executives, senior employees. As a backdrop to the recent enforcement action and settlement, the NYDFS underscored the fact that when the U.S. Department of Justice’s investigation of another company, UBS, became public in 2008, several senior executives at Bank Leumi considered UBS's exit from the U.S. cross-border business as a “golden opportunity to contact customers,” urging bankers to suggest that prospective clients transfer their accounts to Bank Leumi. The NYDFS indicated that, as a result, Bank Leumi-Israel and its foreign affiliates “opened accounts for 263 U.S. taxpayers, increasing assets under management by approximately $401 million.”

Along these lines, the NYDFS contended that “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.” Consequently, while some of the pertinent bank executives and senior employees at Bank Leumi have already been removed or have left the bank, in keeping with Bank Leumi’s settlement and consent order with the NYDFS, Bank Leumi has agreed to take the necessary steps to terminate and ban certain others.

Consent order. In the Dec. 22, 2014, “Consent Order Pursuant to Banking Law §44 and 44-a,” Bank Leumi not only settled NYDFS’ charges of violations of New York State banking laws, Bank Leumi acknowledged that it “misled” the NYDFS about its “improper activities.” The NYDFS found that the bank’s conduct “raises serious safety and soundness concerns and constitutes violations of law and regulation.”

Notably, in the consent order, Bank Leumi further acknowledged that it “and other Leumi Group entities are entering into a Deferred Prosecution Agreement with the U.S. Department of Justice, in which the Bank admits that the Bank did unlawfully, voluntarily, intentionally, and knowingly agree together with others to willfully aid and assist in the preparation and presentation of false income tax returns and other documents to the Internal Revenue Service” in violation of federal law. According to the NYDFS consent order, the bank has agreed to pay “a resolution amount of $270 million” in this separate DoJ matter.

Bank’s comment. Although Bank Leumi could not be reached for comment, a posting on Bank Leumi USA’s website communicates, “The Leumi Group has reached an agreement with the U.S. Department of Justice and New York State Department of Financial Services. As has been previously disclosed, we have been cooperating with the authorities and are pleased to resolve this matter.”

Companies: Bank Leumi Le-Israel, B.M.; Bank Leumi USA

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