Bank Hapoalim's (LSE: BKHD; TASE: POLI) branch number 535 on Hayarkon St., Tel Aviv, is called a "private and international banking center". Today, however, the branch was depicted by senior Israel Police officials and the Supervisor of Banks as something more suitably titled "center of money laundering." Allegedly, of course.
The senior police officials mentioned several numbers: 80 separate cases of money laundering; 200 customers involved in the affair; 22 branch employees arrested; 18 impoundment orders on bank accounts at the branch; and, the crowning figure of hundreds of millions of shekels laundered by the branch. Taken together, the numbers describe an investigation broad in scope, causing an upheaval at Bank Hapoalim and Israel's entire banking system.
Involvement in money laundering is a deep, dark blot upon the bank's escutcheon. Five years ago, Israel had the dubious honor of being included on a list of countries with widespread money laundering. Only when the Prohibition on Money Laundering Law (5760-2000) came into effect in August 2000 was Israel able to get off the list.
Today's huge scandal at Bank Hapoalim will hurt not only the bank, whose heads are particularly embarrassed today, but also the entire Israeli banking system and economy. This is also why competing commercial banks restrained their reactions in the face of Bank Hapoalim's shame.
Everyone said that the affair would greatly harm Israel's banks as they try to expand overseas, in an effort to improve profitability. Even Bank Leumi (TASE: LUMI), which has been red-faced for several months over the Israel Securities Authority investigation into suspected breaches of the Regulation of Investment Advice and Investment Portfolio Management Law (1995), did not utter a single gleeful word today for this very reason.
Despite the flood of information, a number of critical questions remain unanswered. The first is what motivated the Bank Hapoalim officers to commit the crimes. Maybe some of them did so unknowingly, or only out of negligence, implying that only a smaller number of bank officers cooperated with those laundering money, in exchange for bribes.
A second open question is what was the source of money needing laundering. Rumors in the capital market mentioned several businessmen of Eastern European extraction well-known to the Israeli market. At least one name is that of a senior executive of a large TASE-listed company. This morning, the police declined to comment on the names mentioned, merely saying that that the money came from overseas.
The most important question is: how far up did the alleged illegal activity go in the Bank Hapoalim hierarchy. Were top bank executives aware of this activity, or was it conducted right under their noses? Whatever the case, Bank Hapoalim will have to refresh its officers' memories about money laundering laws, so that the events at its Hayarkon branch are not repeated elsewhere.
The police will also have to decide whether there was high-level collusion, or merely systemic negligence. This is also a critical question for the image of Bank Hapoalim's top executives, caught in the most embarrassing scandal at the bank in years.
The affair might end with a bang - an investigation into Bank Hapoalim's top executives, and even arrests. On the other hand, it could end with a whimper, exactly as the investigation into fixers at the National Insurance Institute ended a year ago. A member of Bank Hapoalim's board of managers was arrested in that case, but in the end, the police cleared the bank of any involvement in the affair.
Published by Globes [online], Israel business news - www.globes.co.il - on March 6, 2005