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Posted by Fay Arfa | Mar 12, 2019 | 0 Comments

MIZRAHI-TEFAHOT BANK LTD. ADMITS ITS EMPLOYEES HELPED U.S.TAXPAYERS CONCEAL INCOME AND ASSETS Bank Admits for Years It Opened and Maintained Customer Accounts in Violation of Agreement with the Internal Revenue Service; Agrees to Pay $195 Million as Part of a Deferred Prosecution Agreement with the Justice Department

WASHINGTON – Mizrahi-Tefahot Bank Ltd., (Mizrahi-Tefahot) and its subsidiaries, United Mizrahi Bank (Switzerland) Ltd. (UMBS) and Mizrahi Tefahot Trust Company Ltd.  (Mizrahi Trust Company), entered into a deferred prosecution agreement (DPA) with the Department of Justice filed today in the U.S. District Court for the Central District of California, announced Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Department of Justice's Tax Division, First Assistant United States Attorney Tracy L. Wilkison, and Chief Don Fort for Internal Revenue Service-Criminal Investigation.  As part of the agreement, Mizrahi-Tefahot will pay $195 million to the United States.

Mizrahi-Tefahot is one of Israel's largest banks, with more than 4,000 employees, and is publicly traded on the Tel-Aviv Stock Exchange. During the relevant period of criminal activity, Mizrahi-Tefahot had branches in Los Angeles, California, the Cayman Islands, and London, England. In 2014, the Cayman Islands branch surrendered its license and was closed. UMBS, a subsidiary of Mizrahi-Tefahot, had one branch in Zurich, Switzerland. Mizrahi Trust Company, a fully owned subsidiary of Mizrahi-Tefahot, operated under the regulatory authority of the Bank of Israel. Collectively, Mizrahi-Tefahot, UMBS, and Mizrahi Trust Company provided private banking, wealth management, and financial services to high-net-worth individuals and entities around the world, including U.S. citizens, resident aliens and permanent residents.

“Mizrahi-Tefahot's admission of guilt and agreement with the United States to pay significant penalties and pay over the fees earned from knowingly assisting tax evading Americans reflects the continuing efforts of the Tax Division to end the criminal role of international financial institutions in perpetuating offshore tax fraud,” said Principal Deputy Assistant Attorney General Zuckerman. “A financial institution is not a faceless entity, but is the embodiment of the acts of its bankers, relationship managers and all employees. When a bank's employees, at any level, facilitate U.S. tax fraud, the bank facilitates tax fraud and will be held responsible.”

“For over a decade, this Israeli bank, through its employees, engaged in conduct designed to hide its clients' funds so they could avoid paying U.S. income taxes,” said First Assistant United States Attorney Tracy L. Wilkison, “Mizrahi-Tefahot solicited customers in Los Angeles and other U.S. cities to open offshore accounts with the hope they would never be linked to the American clients. As a result of this criminal conduct, the bank will surrender fees it earned, repay the United States for lost tax revenue, and pay a substantial fine.”

“Today's announcement sends a clear message that banks, who promote the use of offshore tax schemes against the United States, will be held accountable and face substantial fines and penalties,” said Don Fort, Chief, IRS-Criminal Investigation. “Any financial institution – no matter where it operates – will be held accountable if it helps U.S. residents dodge their tax responsibilities. This agreement with Mizrahi-Tefahot is the latest notice to American taxpayers, who might flout the law, that we can and will uncover your hidden assets.”

In the DPA and related court documents, Mizrahi-Tefahot admitted that from 2002 until 2012 the actions of its bankers, relationship managers, and other employees defrauded the United States and specifically the Internal Revenue Service (IRS) with respect to taxes by conspiring with U.S. taxpayer-customers and others. Mizrahi-Tefahot employees' acts of opening and maintaining bank accounts in Israel and elsewhere around the world and violating Mizrahi-Tefahot's Qualified Intermediary Agreement (QI Agreement) with the IRS enabled U.S. taxpayers to hide income and assets from the IRS.

According to the filed statement of facts and the DPA, these employees took steps to assist U.S. customers in concealing their ownership and control of assets and funds held at Mizrahi-Tefahot, Mizrahi Trust Company and UMBS, which enabled those U.S. customer-taxpayers to evade their U.S. tax obligations, including:

  • Assisting and referring U.S. customers to professionals to open and maintain accounts at Mizrahi-Tefahot and UMBS in the names of pseudonyms, code names, Mizrahi Trust, and foreign nominee entities in offshore locations, such as St. Kitts and Nevis (Nevis), Liberia, Turks & Caicos, and the British Virgin Islands (BVI), and thereby enabling those U.S. taxpayers to conceal their beneficial ownership in the accounts and maintain undeclared accounts;
  • Opening customer accounts at Mizrahi-Tefahot and UMBS for known U.S. customers using non-U.S. forms of identification, and failing to maintain copies of required identification and account opening documents;
  • Opening and maintaining foreign nominee bank accounts for certain U.S. clients holding U.S. securities, enabling those U.S. taxpayers to evade U.S reporting requirements on securities' earnings in violation of Mizrahi-Tefahot's QI Agreement with the IRS;
  • Entering into “hold mail” agreements with U.S. customers whereby Mizrahi-Tefahot and UMBS employees held bank statements and other account-related mail in their offices in Israel and Switzerland, and by doing so enabling documents reflecting the existence of the offshore accounts to remain outside the U.S.;
  • Until 2008, providing U.S. customers at Mizrahi-Tefahot's Los Angeles branch use of their funds held in offshore Mizrahi-Tefahot and UMBS accounts (pledge accounts) through back-to-back loans, while excluding any record of the offshore pledge account at its Los Angeles branch to take advantage of Israeli and Swiss privacy laws and prevent disclosure of the funds to U.S tax authorities;
  • Failing to adhere to the requirements of Mizrahi-Tefahot's QI Agreement by (i) permitting U.S. customers who refused to provide the bank with the proper IRS Forms W-8BEN and/or W-9 to continue trading in accounts holding U.S. securities, (ii) transferring assets to foreign entity accounts controlled by U.S. customers to avoid the proper QI reporting requirements, and (iii) failing to timely address compliance deficiencies in U.S. customer accounts holding U.S. securities; and
  • Until 2008, periodically sending “Roving Representatives,” to the United States to solicit new customers and to meet with existing U.S. customers in Los Angeles, California, New York, and other locations in the U.S. for the purposes of opening accounts and surreptitiously reviewing and managing existing customers' offshore accounts.

According to the terms of the DPA, Mizrahi-Tefahot, UMBS, and Mizrahi Trust Company will cooperate fully, subject to applicable laws and regulations, with the United States, the IRS, and other U.S. authorities.  The DPA provides that Mizrahi-Tefahot will ensure that all of its overseas branches and other companies under its control that provide financial services to customers covered by the Foreign Account Tax Compliance Act, 26 U.S.C. §§ 1471-1474 (FATCA), will continue to implement and maintain an effective program of internal controls with respect to compliance with FATCA in their affiliates and subsidiaries.  The DPA also requires Mizrahi-Tefahot and its subsidiaries affirmatively to disclose certain material information it may later uncover regarding U.S.-related accounts, as well as to disclose certain information consistent with the Department's Swiss Bank Program with respect to accounts closed between Jan. 1, 2009, and October 2017.  Under the DPA, prosecution against the bank for conspiracy will be deferred for an initial period of two years to allow Mizrahi-Tefahot, UMBS, and Mizrahi Trust Company to comply with the DPA's terms. 

The $195 million payment consists of: 1) restitution in the amount of $53 million, representing the approximate unpaid pecuniary loss to the United States as a result of the criminal conduct; 2) disgorgement in the amount of $24 million, representing the approximate gross fees paid to the bank by U.S. taxpayers with undeclared accounts at the bank from 2002 through 2012; and 3) a fine of $118 million.

This agreement marks the second time an Israeli bank has admitted to similar criminal conduct.  In December 2014, the Bank Leumi Group entered into a DPA with the Department of Justice admitting that it conspired to aid and assist U.S. taxpayers to prepare and present false tax returns to the IRS by hiding income and assets in offshore bank accounts in Israel and elsewhere around the world. 

About the Author

Fay Arfa

Fay Arfa has the distinction of being Certified as a Specialist in two separate areas of law – Criminal Law as well as Appellate Law – by the California State Bar, Board of Specialization. The National Board of Trial Advocacy has also awarded her a board Certification in Criminal Trial Advocacy. ...


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