Israeli Banks Said to Be Implicated in U.S. Tax Evasion

– Israeli Banks Said to Be Implicated in U.S. Tax Evasion (Bloomberg, Feb 17, 2013):

A California man born in Israel agreed to plead guilty to conspiring with people at Bank Leumi Le-Israel Ltd. and Mizrahi Tefahot Bank Ltd. to hide offshore accounts and income from the U.S. Internal Revenue Service, according to court filings and people familiar with the matter.Zvi Sperling was accused Feb. 14 by federal prosecutors in Los Angeles of conspiring with people at two Tel Aviv-based banks, identified only as Bank A and Bank B. The charging document and plea agreement didn’t identify the banks. Bank A is Mizrahi, according to a person who wasn’t authorized to speak publicly about the case. Bank B is Leumi, according to a second person, who similarly asked not to be identified.

Since 2008, U.S. prosecutors have cracked down on offshore tax evasion, charging at least 83 U.S. taxpayers or foreign bankers, lawyers or advisers with tax crimes. UBS AG, the largest Swiss bank, avoided prosecution in 2009 by admitting it aided tax evasion, paying $780 million and handing over account data on 250 clients. It later disclosed information on about 4,450 more accounts. Wegelin & Co., a Swiss bank, pleaded guilty last month. No Israeli bank has been charged.

“The bank has a long-standing policy of not discussing customer relationships,” Orit Reuveni, a spokeswoman for Bank Leumi in Tel Aviv, said in a Feb. 15 e-mail, declining further comment on the case. “We have previously stated that we are among the international banks within the scope of a U.S. inquiry into tax matters involving U.S. customers.”

Benny Shoukron, a spokesman for Mizrahi, said by phone today that the bank is looking into the matter.

China Account

The shares of Leumi advanced 0.2 percent at 11:50 a.m. in Tel Aviv today, while Mizrahi gained 0.6 percent. “It is known the banks are facing investigations and fines,” Terence Klingman, head of trading at Psagot Investment House Ltd. in Tel Aviv, said today by phone. “The market doesn’t know how to price this, there is not enough information.”

Sperling, who co-owns a wholesale goods company with his brother, had an account in China when he met Banker 1 from Bank A in 2001, according to the plea agreement. At that meeting, in Beverly Hills, California, Banker 1 persuaded Sperling to move his money from China, according to the plea deal.

“Sperling wanted to keep the money secret from the U.S. government and Banker 1 ensured that the money would be secret at Bank A in Israel,” according to the agreement. “Banker 1 also explained that Sperling would use the money by borrowing against the money at Bank A in the U.S.”

‘Routed Deposits’

Steven Toscher, Sperling’s lawyer, said in a telephone interview Feb. 14 that his client “recognizes the serious mistakes that he has made and he accepts full responsibility for his conduct.”

Sperling arranged so-called back-to-back loans, according to the charging document, known as an information. Banker 1 “solicited and routed deposits into undeclared bank accounts at Bank A in Israel from clients in the U.S., and offered loan products on behalf of Bank A and the Los Angeles branch” to U.S. clients.

Bank A had more than 100 branches worldwide, including one in Los Angeles, according to the information.

The account was opened under the name of an offshore company called Orot Investments Ltd., according to the plea deal. It was based in the Caribbean island of Nevis. An Israeli attorney opened the account and needed the approval of Sperling to “do anything with the account,” the plea deal said.

“The account was opened this way in order to keep it secret and make it harder to detect” by the U.S. government, according to the plea deal.

Back-to-Back Loans

The bank sent statements to Sperling’s lawyer, who faxed them to his client, according to the plea deal. Sperling, who was born in Israel and moved to the U.S. in 1990, also visited Bank A in Israel. He met there with Bankers 2, 3 and 4, the plea deal said. He holds an Israeli passport.

In 2003, Sperling and his brother started borrowing from Bank A through the back-to-back loans, using the Orot account as collateral, according to the plea deal.

Sperling had to move the money at Bank A in Israel into a certificate of deposit to use as collateral for the loans, which helped him expand his company, according to the plea agreement. Bankers 1 and 5 helped him arrange the loans in Los Angeles.

“There was about $4 million in the Orot account in Bank A in Israel,” according to the plea deal. “Sperling never reported the Israeli account on his federal income tax returns. Sperling never reported the interest earned on the Orot account.”

He also never filed required Reports of Foreign Bank and Financial Accounts, known as FBARs, according to the plea deal.

‘Premier Position’

In 2008, a Bank A loan officer told Sperling that the Los Angeles branch might close, and he needed to repay all his back- to-back loans, according to the plea deal. Sperling paid back the loans and moved his Israeli account to Bank B, which has 300 branches in 18 countries, according to the information.

Bank B describes itself as maintaining a “premier position in the world of international private banking,” with private bankers who will be a client’s “loyal and discreet consultant,” according to the information.

That language matches a description on Leumi’s website.

During a meeting at a Beverly Hills hotel, a banker at Bank B told Sperling that Bank B “was better able than Bank A to keep the accounts secret,” according to the plea deal. That banker then arranged for back-to-back loans.

“The trend among bank regulators is to give substantial fines if they find wrongdoing,” Klingman said. “We don’t know yet the extent, if any, of the wrongdoing.”

Didn’t Disclose

From 2003 through 2010, Sperling failed to disclose his offshore accounts to his tax return preparer, the information stated. He also filed tax returns from 2006 through 2010 that failed to report the existence of, or income from, his accounts at Bank A and Bank B, the charging document stated.

From 2005 through 2008, Sperling failed to report interest income of $381,563, according to the plea deal.

Sperling agreed to pay back taxes and civil penalties, including an FBAR penalty of half of the highest amount of his undeclared accounts from 2006 to 2011.

The case is U.S. v. Sperling, 13-cr-108, U.S. District Court, Central District of California (Los Angeles).