Senior executives who served at Bank Leumi (TASE: LUMI) between 2008 and 2010 will be required to hand back some of the bonuses they received, concludes a harshly critical report published by the Bank of Israel this morning. Singled out are former chairman Eitan Raff, former CEO Galia Maor and former head of the International Private Banking Division Zvi Itskovich.
The Bank of Israel criticizes the private banking activities of Bank Leumi that were conducted through three centers in its international private banking division and its branches in Switzerland and Luxembourg that specialize in private banking services. Following some of the services it provided to US customers, Bank Leumi was required to pay the US authorities fines of hundreds of millions of dollars, after negotiating an agreement with them. The fines hit Bank Leumi's financial results hard.
Following developments in the US in the approach to corporate governance and enforcement from 2008, Bank Leumi, which conducts overseas operations with US customers, was required to conduct a mapping of the operations and services it provided to US customers and examine what the US authorities considered as tax evasion, to assess the risks, including the legal risks entailed in these activities.
The Bank of Israel report points out that between 2008 and 2011, the bank identified and worked to reduce some of the risks but it did not carry out the required mapping and examination and therefore did not identify or assess the risks that later transpired and as a result did not monitor or manage them as required. The fact that the bank's overseas operations with US customers is negligible and has a marginal contribution to Bank Leumi's profits does not reduce the obligation to carry out thorough procedures for managing risks even of small operations, especially as those operations can create high exposure to risks for the bank.
The Bank of Israel's report also states that, "By Israeli law, tax offenses are a source offense in the Money Laundering Law. Even if there is no obligation to examine and report tax issues, this is not enough to release the bank from its duty to manage risks in a proper manner, and not allow its banking services to be exploited for tax evasion by this. This obligation falls on the bank, even more so for its US customers since the US authorities declared a campaign against tax evasion by US taxpayers holding accounts in overseas banks."
The Bank of Israel demands that Bank Leumi's management, among other things, set up an independent committee to draw conclusions from the event. "The procedure for drawing conclusions will include an examination of the conduct of senior executives and the board in 2008-2010, and the major damage caused to the bank, and outline a new calculation for bonuses paid to the executive officers on the basis of the committee's findings, in particular for the chairman, CEO, and head of the International Private Banking Division. This refers to the former chairman Eitan Raff, former CEO Galia Maor and former head of the International Private Banking Division Zvi Itskovich.
In response, Raff, Maor and Itskovich said that the Bank of Israel report does not reflect the reality and is trying to be clever in retrospect. The report is based on agreements between the Bank of Israel and the US authorities. Bank Leumi's executives were not party to drawing up those agreements, and they were not a party to the report.
They added, "This critical report states explicitly that the bank took steps in real time to reduce exposure to the risks entailed in its activities with US customers relying on leading overseas lawyers and legal advisors. Thus we reject the claim, which is the main point of this critical report, that the measures taken by the bank to assess the risks, entailed in US operations, were insufficient."
Published by Globes [online], Israel business news - www.globes-online.com - on August 27, 2015
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