By William Hoke

Reproduced with permission from Tax Notes International, Oct. 9, 2017, pp. 136-137. Copyright 2017 by Tax Notes (https://www.taxnotes.com/)

Five days after Israel’s central bank told banks under its supervision to scale back their foreign activities following investigations by U.S. authorities, Bank Hapoalim Ltd. said its board of directors has authorized the termination of its Swiss subsidiary and the sale of the unit’s assets.

In an October 3 statement to the Tel Aviv Stock Exchange, Hapoalim said that while it is attempting to reach “within the coming months” a resolution with the U.S. Department of Justice over the bank’s alleged role in assisting U.S. customers evade federal tax, certain findings could “adversely affect the nature of a resolution with respect to Bank Hapoalim Switzerland and the degree of its responsibility.”

In October 2016 Hapoalim said its Swiss unit was not eligible to participate as a Category 2 bank in the DOJ’s Swiss bank program, which allowed qualifying financial institutions to enter into non-prosecution agreements in exchange for the payment of a fine and promises of future cooperation in identifying account holders and parties that had enabled their evasion of U.S. taxes. In March, Hapoalim said it would increase by $25 million an existing provision of $120 million for a settlement with the DOJ over the bank’s alleged efforts in helping customers evade U.S. taxes.

The bank said it had been ordered to increase its financial statement provision for non-DOJ settlements to $43.5 million. Hapoalim also said October 3 that it is continuing negotiations with the New York Department of Financial Services over another, unspecified matter.

In its latest statement to the Tel Aviv Stock Exchange, Hapoalim said that while it can’t reasonably estimate the scope of its exposure related to the investigations by U.S. authorities, if a settlement is ultimately reached, it could be significantly higher than the amounts reserved on its financial statements.

On September 29 the Bank of Israel issued a directive requiring banking corporations to reexamine and define their strategies for activity abroad and to clarify and strengthen control over subsidiaries by using risk management mechanisms and internal and external audits. It’s not clear whether Hapoalim’s decision to shut down its Swiss unit was influenced by the central bank directive.

Hapoalim said that once its Swiss unit is closed, the bank will not have any significant global private banking activities outside of Israel. Shutting down Bank Hapoalim Switzerland will result in a third-quarter charge of approximately ILS 110 million (around $31.2 million), stemming primarily from severance payments and obligations related to a long-term lease, the bank said.

According to Hapoalim, Bank Hapoalim Switzerland signed a binding term sheet October 2 with Safra Bank for the sale of its portfolio of international private banking customers with accounts at its Swiss and Luxembourg branches. The sale is expected to generate between CHF 27 million ($27 million) and CHF 33 million in revenue for the bank, subject to adjustment. Dave Wolf, a tax attorney with offices in Israel
and New York, said he doesn’t think Hapoalim’s decision to shut down its Swiss operation was a direct result of the central bank’s directive. “I think it was just not worth [it] anymore for the bank to maintain the bank there, with all the added expenses in compliance, rent, and workforce,” Wolf said. “I think the bank in Zurich was too small.”

Wolf said it’s difficult to predict when Hapoalim will reach an agreement with the DOJ. “We have been waiting for this settlement a long time, and the feeling among practitioners is that the DOJ has lost some steam and interest in closing individual deals,” Wolf said. “It for sure is taking much longer than expected.” Wolf said it’s unlikely Hapoalim will fail to come to terms with U.S. authorities. “I don’t think
that the bank will refuse to settle,” he said. “I don’t think they have a choice. I think they are just very patient and not pushing it hard and that DOJ is also not really running after enablers so fast anymore.”