United States: Bank Leumi Agreement With Department Of Justice Results In Disclosure Of Identities Of 1,500 U.S. Account Holders

Last Updated: January 13 2015
Article by Thomas W. Ostrander

Is Offshore Voluntary Disclosure Still Available for Some Leumi Customers?

On December 22, 2014, the Bank Leumi Group reached agreements with the United States Department of Justice (DoJ) and the New York Department of Financial Services (DFS), respectively, which bring to an end investigations into allegations that the Bank Leumi Group assisted certain U.S. customers with evading taxes during the years 2002 through 2010. Leumi reported that it is the first Israeli bank to reach a settlement with U.S. authorities. The agreement with the DoJ requires the Bank Leumi Group to pay a fine of $270 million. The agreement with the DFS requires the Bank Leumi Group to pay a fine of $130 million. As part of the DoJ agreement, the Bank Leumi Group has provided to the Internal Revenue Service (IRS) the names of more than 1,500 U.S. account holders.

Highlights of the Bank Leumi Agreements

In addition to the fines and the disclosure of the identities of certain customers, Bank Leumi has:

  • Agreed that Bank Leumi Luxembourg and Leumi Private Bank will not provide banking and investment services for U.S. persons;
  • Agreed to provide additional information on its cross-border business;
  • Produced more than 481,000 pages of documents to the DoJ relevant to the government's investigation;
  • Conducted more than 40 interviews in the course of its internal investigation and has provided the substance of those interviews to the DoJ;
  • Provided data regarding outgoing transfers during the period between June 1, 2008, and December 31, 2012, which includes the value of the transfers, the number of accounts engaging in transfers and the name of the financial institutions to which the transfers were made; and
  • Assisted the DoJ in securing additional information from the Duchy of Luxembourg.

Potential Impacts on U.S. Persons with Undisclosed Bank Leumi Accounts

These developments raise many significant issues for U.S. persons with undisclosed accounts at Bank Leumi with respect to potential criminal prosecution, civil examinations and the availability of the Offshore Voluntary Disclosure Program and the Streamlined Programs for residents and nonresidents.

Criminal Prosecution

Criminal prosecutions of some of the 1,500 U.S. persons whose accounts have already been disclosed are likely. Voluntary disclosure and its promise of no criminal prosecution are not available where the government is already in possession of information of a taxpayer's specific non-compliance with the tax laws. If the past is a good predictor of the future, those prosecutions, if successful, could lead to significant FBAR penalties (likely at least 50 percent of the highest balance in the undisclosed account), along with restitution of the unpaid tax, interest and penalties associated with not reporting the income from the account, in addition to the risk of incarceration. Options may be available to these individuals, such as approaching the government with respect to a resolution before the government reaches out to them. What may be the biggest dilemma faced by these taxpayers and all other Bank Leumi depositors is whether they are among the 1,500 now known to the U.S. government. It is likely that the DoJ in its negotiations with the Bank sought information on the most easily prosecutable cases. That criteria would appear to suggest that the 1,500 accounts disclosed to the U.S. government probably are those that have one or more of the following criteria:

  1. Previous account holders at Swiss banks who sought "undisclosed" status at another bank, here Bank Leumi;
  2. Accounts held in structures (corporations, trusts, Stiftung, etc.);
  3. Large value accounts (perhaps more than $1M USD); and
  4. Accounts in the process of "decanting" (in the process of emptying the account through transfers to accounts in other jurisdictions, through large cash withdrawals and withdrawals to vendors of expensive products—art, cars or jewelry).

Civil Examinations

Taxpayers among the 1,500 disclosed to the U.S. government will likely be exposed to civil income tax and FBAR examinations. (Some among the 1,500 will first face criminal prosecution followed by or in conjunction with a civil examination.) The IRS will be focused on asserting the 75-percent civil fraud penalty in the income tax examination and the 50-percent willful penalty in the FBAR examination. The results of the examination may result in tax, penalties and interest well in excess of the value of the accounts under examination.

Offshore Voluntary Disclosure Program (OVDP)

Those account holders whose accounts have not been disclosed to the IRS may avail themselves of the OVDP. However, these applicants will be subject to the enhanced 50-percent penalty on the highest value in the account. A potential risk to these account holders is they will not know for certain if their disclosure is "timely." But that can be answered fairly quickly by making an application for "pre-clearance." Please see an earlier Duane Morris Alert for more information on the 2012 OVDP. If pre-cleared, then they are "presumably" not among the 1,500 already disclosed to the U.S. government. (Mistakes have been made in giving pre-clearance to taxpayers who after submitting the disclosure package are told that the disclosure is "untimely.") An "untimely" response to a pre-clearance, thereby denying the availability of OVDP, may cause additional problems unrelated to Bank Leumi. The request for pre-clearance requires the disclosure of all undisclosed accounts (not just those at Bank Leumi). Consequently, a Bank Leumi customer with undisclosed accounts in other foreign banks may have given the government information about those other accounts that otherwise would not have been disclosed. Also, there would be no way to know if the "untimely" response was with respect to Bank Leumi or another bank.

Streamlined Disclosure

The Streamlined Disclosure process announced in June 2014 provides significantly reduced penalties for taxpayers who can "certify" that their failure to disclose the foreign account was not due to willful conduct. Please see an earlier Duane Morris Alert for more information on Streamlined Disclosure. Just because Bank Leumi has admitted criminal conduct with respect to certain U.S. accounts does not mean that all U.S. customers of the bank engaged in willful conduct in not disclosing their Bank Leumi accounts. Nonetheless, taxpayers with undisclosed Bank Leumi accounts who apply to either the domestic or nonresident streamlined program can anticipate that their certifications are likely to come under considerable scrutiny and should consider developing "non-willful" positions.

The Agreement with the Department of Justice

A deferred prosecution agreement (DPA) between the Bank Leumi Group and the DoJ was filed in the Central District of California on December 22, 2014, that defers prosecution on a criminal information charging the bank with conspiracy to aid in the preparation and filing of false tax returns with the IRS. The DoJ reported that this "unprecedented agreement" marks the first time an Israeli bank has admitted to such criminal conduct, which spanned over a 10-year period and included an array of services designed to keep U.S. taxpayer accounts concealed at Bank Leumi Group's locations in Israel, Switzerland, Luxembourg and the United States.

The DoJ agreement further provides that Bank Leumi Luxembourg and Leumi Private Bank will cease to provide banking and investment services for all accounts held or beneficially owned by U.S. taxpayers.

According to the DoJ, from at least 2000 until early 2011, the Bank Leumi Group took affirmative and extensive steps to assist U.S. clients in concealing their assets offshore, including:

  • surreptitiously sending private bankers from throughout the world to the U.S. to meet secretly with U.S. clients to discuss their offshore account activity;
  • referring U.S. beneficial owners of accounts to outside advisors to set up offshore corporations in Belize and other countries to act as nominee account holders;
  • using the Bank Leumi le-Israel Trust Company as a nominee account holder for U.S. clients;
  • maintaining U.S. clients' undeclared offshore accounts under assumed names or numbered accounts;
  • providing "hold mail" services so that correspondence and other account information would not go directly to the U.S. client;
  • extending loans to U.S. clients from Bank Leumi USA that were collateralized by the assets in those clients' offshore accounts, so that the clients could leverage their offshore assets to obtain and use capital in the U.S.;
  • instructing clients to never call the Bank Leumi bankers on the clients' personal cell phones;
  • providing clients with cellular phones, pre-programmed with the bankers' phone numbers, for purposes of communicating with the bankers; and
  • opening accounts for U.S. customers who had left other Swiss banks after the DoJ investigation of the Swiss banks became public.

Disclosure of Customer Information and Other Data

As part of the DoJ agreement, the Bank Leumi Group has provided the names of more than 1,500 of its U.S. account holders.

In addition, the Israeli bank:

  • provided more than 481,000 pages of documents to the government;
  • conducted over 40 internal interviews and has proffered the substance of the internal interviews to the DoJ;
  • replaced senior officers and managers that were in place at the time of the relevant conduct;
  • cooperated with U.S. investigators by providing information in connection with requests by the U.S. to the Duchy of Luxembourg that resulted in the production of additional information relevant to the government's investigation;
  • provided data regarding outgoing transfers during the period between June 1, 2008, and December 31, 2012, which includes the value of the transfers, the number of accounts engaging in transfers and the financial institutions to which such transfers were made.

The DPA requires the bank to:

  • continue to develop and implement enhanced controls to identify, prevent, detect and correct any material failures regarding the Bank's compliance with the Foreign Account Tax Compliance Act (FATCA);
  • close any and all accounts of "recalcitrant account holders" (typically account holders who are U.S. persons who refuse to provide identifying information such as Social Security numbers);
  • not assist recalcitrant account holders in acts of further concealment of assets and income in connection with closing any account or transferring any funds;
  • not open any U.S. accounts except on conditions that ensure that the account will be declared to the United States;
  • provide the DoJ periodic reports that identify any loan issued by Bank Leumi USA that is collateralized by a letter of credit issued by any Foreign Leumi Group Entity, or any foreign affiliate of the Bank Leumi Group.

The Agreement with the New York State Department of Financial Services

On December 22, 2014, the New York State Department of Financial Services (DFS), Bank Leumi USA and Bank Leumi Le-Israel, B.M. ("Bank Leumi-Israel") entered into an agreement ("the Agreement") resolving DFS's investigation of the Bank. The Agreement concerns much of the same conduct described in the DoJ agreement but provides more detail regarding the bank's conduct of its cross-border banking business. The Bank has agreed to pay a penalty of $130 million, to discipline employees and to institute procedures to ensure the avoidance of similar conduct in the future.

Background

Bank Leumi-Israel:

  • provided financial services to high net worth individuals and entities around the world, including clients in the United States and New York, and had approximately $313 billion in assets under management as of December 31, 2013;
  • has more than 13,000 employees and subsidiaries in seven countries, including Leumi Le-Israel Trust Company Ltd. ("Bank Leumi Trust"), Leumi Private Bank Ltd. (formerly Bank Leumi Switzerland Ltd.) ("Bank Leumi-Switzerland") and Bank Leumi Luxembourg S.A. ("Bank Leumi-Luxembourg") (collectively, "foreign affiliates"); and Bank Leumi USA (collectively, "the Bank");
  • has operated an agency in New York since 1959;
  • has operated a wholly-owned subsidiary, Bank Leumi USA, a full-service commercial bank, with 443 employees, and $5.19 billion in assets under management as of December 31, 2013;
  • operated a wrongful cross-border banking business to assist U.S. clients in concealing assets offshore and evading U.S. tax obligations; and
  • misled the DFS about the Bank's improper activities.

The Agreement provides that the Bank engaged in "wrongful cross-border banking business" by engaging in a variety of activities.

From at least 2000 through 2011, the Bank aided U.S. clients, including New York clients, in opening and maintaining undeclared foreign accounts, 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.

From at least 2000 through April 2009, Bank Leumi-Israel regularly sent private bankers to the U.S., including to New York, to conduct activities in furtherance of the tax evasion scheme, including:

  • Falsely claiming, upon entry into the U.S., that the primary purpose of their trip to the U.S. was not business, when in fact, the travel was paid for by Bank Leumi-Israel and approved by relevant senior executives who knew that the purpose was to recruit and service U.S. clients;
  • Meeting prospective customers to discuss opening undeclared accounts;
  • Meeting existing customers to discuss undeclared accounts held with Bank Leumi-Israel; and
  • Bringing bank statements to the U.S. for review by U.S. clients and disposing of such bank statements after they were reviewed so as to conceal the beneficial owner of the undeclared account and reduce the risk of disclosure to U.S. authorities.

Bank Leumi-Israel assisted U.S. clients in concealing accounts through the use of certain practices, including:

  • Providing "hold mail" services for approximately 2,450 U.S. accounts, for which the Bank charged a total of approximately $1.5 million in fees to the U.S. clients;
  • Providing "assumed name" and "numbered" accounts, where the name of the account holder would not appear on any correspondence or account statements;
  • Accepting 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, including the British Virgin Islands, Panama and Belize, to nominally hold the undeclared accounts; 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.

Bank Leumi USA assisted Bank Leumi-Israel and foreign affiliates in the cross-border banking scheme.

  • In 2001, a Bank Leumi USA executive introduced to Bank Leumi-Luxembourg executives a U.S. tax return preparer, who had clients that sought to open undeclared accounts. The parties negotiated a draft referral agreement for the purpose of providing compensation to the tax preparer for referring U.S. taxpayers to Bank Leumi-Luxembourg to open accounts. The tax preparer referred at least 23 customers to Bank Leumi-Luxembourg;
  • Bank Leumi USA provided other support to Bank Leumi-Israel by providing U.S. clients with loan products that enabled them to access their undeclared funds;
    • Bank Leumi USA offered participation loans, wherein Bank Leumi-Israel or a foreign affiliate purchased 100-percent funded participation in the loan, and the U.S. client executed a set-off letter securing all debts and obligations in favor of the foreign bank;
    • Bank Leumi USA offered 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;
      • The SBLC loans could be renewed annually;
      • Some loans were issued in the 1990s and renewed annually for a 20-year period, up to as recently as February 2012;
      • Bank Leumi USA took efforts not to identify the U.S. taxpayer who applied for the SBLC loan on any paperwork that remained in the U.S., for example, by:
        • Referring to the applicant as "you" or "the applicant" in SWIFT payment messages;
        • Not reviewing records concerning the collateral pledged by the client;
        • Not documenting the existence of the foreign account in memoranda for review by Bank Leumi USA's credit committee; and
        • Providing instructions from management to employees, such as: "Remember the bottom line – I don't want to know who the customer is, what the account number or the conditions are for credit or securities. All I want to know is what we need to know on this side of the ocean. As you know, the security I receive is security from the central branch in Tel Aviv, and this does not include any traces of the above details."
      • Around approximately 2000, the Bank shifted from offering participation loans to offering SBLC loans, which required less information to be kept on file at Bank Leumi USA that might disclose the existence and identity of U.S. clients who maintained undeclared accounts.
        • According to some senior executives, this created greater separation between Bank Leumi USA and foreign affiliates and avoided regulatory scrutiny.
        • For example, in a memorandum dated January 29, 2002, a Bank Leumi USA executive updated Bank Leumi USA's Chief Executive Officer on the conversion effort, explaining that the customer's credit file is now "empty ... in order to create the impression that this is part of normal business procedure." The next day, the Bank Leumi USA executive wrote to a Bank Leumi-Israel executive that "the authorities could claim that in a participation sale we cooperate with the client in 'hiding' loans," but with SBLC loans, the Bank remains "clean." He also stated that the conversion was the Chief Executive Officer's idea.
      • From approximately 2002 to 2011, Bank Leumi USA issued SBLC loans to approximately 234 U.S. customers, including 54 customers in New York. The average value of each loan was approximately $1.2 million; making the total aggregate value of the undeclared assets backing the loans at least $280 million.
      • The Bank earned profits on the SBLC loan activity of approximately $23 million.

Bank Leumi USA assured U.S. clients that their names did not appear on documentation that may disclose their undeclared accounts to U.S. authorities, and at least one banker permitted clients to review the documents themselves to ensure that their names were not included in the records.

  • In October 2008, when Bank Leumi USA notified foreign affiliates that, effective immediately, SBLC loans issued must include the applicant's full name and address, a Bank Leumi-Luxembourg advisor replied that, "[c]ustomers do not want their names to appear on official documents, such as an SBLC," and the change "will have a major impact on our business."
  • After "extensive internal discussions," Bank Leumi USA's Chief Compliance Officer rescinded the policy change.
  • Bank Leumi USA continued to accept and maintain files in the United States that did not contain customer names, as long as the foreign affiliates maintained applicant names and current KYC information in their files.

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 DoJ investigation of Swiss banks became public in May 2008, senior executives at the Bank considered the Swiss banks' exit from the U.S. cross-border business 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)."
  • Bank Leumi-Israel and its foreign affiliates opened accounts for 263 U.S. taxpayers, increasing assets under management by approximately $401 million.

The Agreement reports that 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."
  • 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 is the Chief Compliance Officer who approved the continued practice of not requiring applicant names on Bank Leumi USA files. The employee remained in this position until 2010.

The Agreement provides for a monetary penalty in the amount of $130 million and certain employee discipline, including taking all steps necessary in accordance with Israeli law, to terminate "the current Head of Bank Leumi Trust, who served as a Regional Manager during the relevant time period."

The Agreement reported that the investigation has resulted in the resignation from the Bank of:

  • 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.

Summary

U.S. persons with undisclosed accounts at Bank Leumi (and others) face potentially stiff financial consequences and, in some cases, the risk of prison. There are many unknowns in this new environment (e.g., which individuals are among the 1,500 disclosed accounts, who will be exposed to criminal prosecution, what the civil penalties will be in the civil examinations, will the streamlined programs be available, etc.). However, one thing is apparent: The U.S. government will likely be relentless in its pursuit of U.S. persons with undisclosed accounts, and those who defer disclosure may face ever-increasing adverse consequences.

"Those institutions (and their depositors) that have engaged, or continue to engage, in conduct similar to that of Bank Leumi Group (and their depositors) are well advised that the Tax Division will continue to extend its global reach in enforcing this nation's criminal tax laws." – Tax Division's Acting Deputy Assistant Attorney General Larry J. Wszalek

For Further Information

If you would like more information about voluntary disclosure for offshore accounts, please contact Thomas W. Ostrander, the author of this Alert; Hope P. Krebs or James J. Holman in Philadelphia; Jon Grouf or Megan R. Worrell in New York; Anthony D. Martin in Boston; any member of the International Practice Group; Michael A. Gillen of the Tax Accounting Group; or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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