Bank Leumi Investors Decry Shady Dealings

MANHATTAN (CN) - Israel's largest bank helped procure sham loans for clients and advised them to dodge taxes in other ways, a shareholder class action says.

Michael Porat, a citizen of Israel, filed the 57-page complaint against Bank Leumi and various international subsidiaries in New York County Supreme Court. Sixty-one individuals allegedly associated with those entities are also named as defendants.

The March 3 complaint comes just months after Bank Leumi paid the U.S. government $270 million in fines under a nonprosecution agreement.

Uncle Sam had charged the bank with "conspiring to aid and assist in filing false tax returns and other documents with the IRS," in a scheme that the government claimed went on for over 10 years at the bank's branches in Switzerland, Luxembourg and the United States.

Porat's case fleshes out how this conduct allegedly occurred between 2000 and 2011.

The "illegal cross-border banking business" in question willfully aided and assisted U.S. clients "in opening and maintaining undeclared accounts in a foreign country, concealing their offshore assets and income from the Internal Revenue Service and other governmental authorities, and filing false tax returns and other documents with such authorities," according to the complaint.

Approximately 2,450 U.S. accounts received a "hold mail" service from Leumi, "whereby every statement of account, notice, or other document associated with the account would be held abroad at the foreign bank and would not be sent to the customer's address in the United States," Porat says.

Leumi also had a practice of "referring U.S. clients to outside lawyers and consultants who would establish and maintain offshore corporations in jurisdictions like the British Virgin Islands, Panama, and Belize, to nominally hold the undeclared accounts and hide their true tax status from U.S. authorities," the complaint states.

Sham-loan transactions allegedly served to facilitate the illicit banking practices as well, letting U.S. taxpayers access "their funds while simultaneously concealing their assets and evading their U.S. tax obligations."

Porat says Leumi always routed its so-called participation loans trough one of its international outfits, usually in Switzerland or Luxembourg.

Leumi eventually evolved these participation loans into "standby letter-of-credit loans" after an executive at their bank called them "cleaner" in a memo and said that the loans "did not require Bank Leumi USA and the foreign affiliate to correspond regarding the profits generated from the loan or to transfer money to the foreign affiliate to compensate it for participating in the loan," the complaint states.

Two Leumi executives allegedly touched upon in the conversion effort in an email. Porat says one executive justified the switch by writing that "the authorities could claim that in a participation sale we cooperate with the client in 'hiding' loans," but with SBLC loans the bank remains "clean."

"Private bankers and managers at Bank Leumi USA and Bank Leumi were aware that the SBLC Loans allowed the U.S. taxpayers receive the economic benefits of the funds in the undeclared accounts without directly repatriating the funds or creating a paper trail that could potentially disclose the existence of the undeclared accounts to U.S. authorities," the class alleges.

Leumi continued issuing these shame loans despite the FDIC crackdown in 2008 targeting UBS and Mizrahi Bank, Porat says.

After Leumi received a cease-and-desist order for these types of loans, Bank Leumi USA took steps to require applicants full names and addresses on the loans, according to the complaint.

An adviser to Bank Leumi-Luxembourg allegedly argued against the policy change, however, stating that "[c]ustomers do not want their names to appear on official documents, such as an SBLC" and the change "will have a major impact on our business."

In trying to obtain customers formerly with UBS and Mizrahi, Leumi circulated an email about a "golden opportunity to contact customers who you know have accounts in banks in Europe," Porat says.

The email also allegedly suggested that Leumi "urge the private bankers to 'suggest that [clients] transfer their accounts' to Bank Leumi for 'understood' reasons."

Porat says that one of the bank's longtime private banker "wrote to a supervisor in 2011 that 'nearly every client who has an account with us has used the bank as a tax haven, and is aware that by not declaring his account in the US is committing an offense, [and] we have by virtue of the services we provided assisted the clients with what they wished to achieve.'"

Insisting that Bank Leumi USA and its executives "facilitated and played a central role in the illegal tax evasion scheme," Porat says the evidence "conclusively" demonstrates a continuation or expansion of such practices "despite receiving knowledge of improper and deceptive practices involving the cross-border tax evasion scheme."

The class seeks damages for breach of fiduciary duty. It is represented by Richard Spiers with Cohen, Milstein, Sellers and Toll.

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