Hapoalim ordered to provide more information on US probe

Arik Pinto  photo: Tamar Matsafi

The Bank of Israel has asked for more information on the investigation in the US about allegedly assisting customers in evading taxes.

Will we soon know better the situation of Bank Hapoalim (TASE: POLI) in the investigation by the US authorities?

Sources inform "Globes" that the Bank of Israel recently sent a letter to Bank Hapoalim asking for more information in Bank Hapoalim's upcoming financial statements about the state of the investigation in the US. Bank Hapoalim is schedule to release its 2017 financial statements in six weeks.

A dialogue between Bank Hapoalim and the Bank of Israel Banking Supervision Department is supposed to ensue now in order to clarify what particulars the Banking Supervision Department wants added to the report. It is possible that expanding the disclosure will lead to an additional provision for the investigation in the US and to the closing down of Bank Hapoalim Switzerland's activity. Bank Hapoalim, managed by CEO Arik Pinto, finished the first nine months of 2017 with a NIS 2.01 billion net profit, reflecting a 7.8% return on equity, compared with 9.9% in the corresponding period in 2016.

Bank Hapoalim's recent reports (for the third quarter of 2017, published in November) included an entire page about the US investigation into aid provided by Bank Hapoalim to its US customers in tax evasion. Despite the relatively extensive text in the report, it is difficult to really understand the state and extent of the investigation, because the descriptions are rather general. For example, Bank Hapolim writes, "Within the investigation of the Bank Group being conducted by the United States authorities in connection with suspicions that the Bank Group assisted American clients in evading taxes of the American tax authorities, the Bank Group, through external legal counsel from the United States, Switzerland, and Israel, is conducting an internal investigation regarding the activity of the Bank Group with American clients, and transferring information and materials that emerge from the internal investigation, to the extent possible and within the bounds of the law, to the Department of Justice (DOJ), the New York Department of Financial Services (NYDFS), and the Federal Reserve in New York."

Bank Hapoalim also wrote, "The Bank Group has recently continued more intensive discussions with the American authorities regarding the findings that emerged during the investigation and examinations, and in particular, the findings related to the activity of Bank Hapoalim Switzerland with its American clients, as well as with regard to the extent of the responsibility that Bank Hapoalim and Bank Hapoalim Switzerland will undertake within an agreed resolution or resolutions (if achieved) and with regard to the format and nature thereof, with the aim of reaching a resolution, or resolutions, within the coming months."

Concerning the explanation of the amount of the provision (the last report included an $80 million provision), Bank Hapoalim stated, "Based on data collected and processed during this period by the Bank Group, and further to the aforesaid meetings and talks, and in view of the fact that no agreement has been reached yet with the DOJ, and that all of the possible components of the payment which the Bank Group will be required to pay have not yet been discussed, such as a fine that cannot be estimated at this stage and in respect of which no provision was included, the Bank increased the amount of the provision in these financial statements in connection with the exposure arising from the investigation by the American authorities by a total of approximately USD 80 million."

It should be noted that when Bank Leumi (TASE: LUMI) faced a similar investigation, the descriptions in its financial statements were not particularly detailed. It appears, however, that the prolonging and extending of the investigation into Bank Hapoalim by the US authorities have led the Bank of Israel to demand improvement of the information provided to the public.

Bank Hapoalim is scheduled to publish its yearly financial statements on March 26, while the other Israeli banks intend to publish their yearly financial statements in early March. Bank Hapoalim's decision to publish later than its competitors is probably due to the US investigation and the need to verify that the reports meet the Bank of Israel's requirements for both the explanation made and the amount of the provisions. When Bank Hapoalim published its reports in November 2017, it postponed the original date selected in order to complete its preparations for making a provision.

Bank Hapoalim's provisions are nearing those of Bank Leumi

The US authorities are conducting a similar investigation against Mizrahi Tefahot Bank (TASE:MZTF), but it appears that Mizrahi Tefahot Bank's exposure is lower; it has provided $45 million to date. Bank Leumi finished with the investigation against it by signing an arrangement with the US authorities three years ago that included a huge $400 million fine. Over the years, Bank Hapoalim has given the impression that its exposure to the US authorities was less significant, because it had less activity with US customers than Bank Leumi. At the same time, with the passage of time, it appears that Bank Hapoalim is "catching up" to Bank Leumi. It cannot be ruled out that Bank Hapoalim will end up with similar damage to that of Bank Leumi, and perhaps even more.

The US authorities' investigation has been a burden for Bank Hapoalim for a long time. The bank has been in talks with the US authorities for several years. In contrast to Bank Leumi and Mizrahi Tefahot Bank, which hired accounting firms to handling its transfer of information, Bank Hapoalim hired the services of Advocate Pinhas Rubin from the Gornitzky & Co. law firm and US lawyers to handle the enormous mass of data. The US authorities were not willing to settle for a list of relevant customers; it demanded transactions in an account and figures from the late 1990s. Last year, Bank Hapoalim had to also hire the Deloitte accounting firm to go over the methodology used in transferring the data and recheck them.

In addition to the round of appointments Pinto recently carried out at Bank Hapoalim, he also decided to appoint Yael Almog as the bank's legal advisor and make her responsible for handling the investigation. Almog has experience in regulation in Israel and overseas (among other things, she served in senior positions in the Israel Securities Authority), and she is expected to help expedite the processes that will make it possible to reach a settlement and conclude the investigation that has been threatening Bank Hapoalim since 2011.

Published by Globes [online], Israel Business News - www.globes-online.com - on February 8, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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Arik Pinto  photo: Tamar Matsafi
Arik Pinto photo: Tamar Matsafi
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