Bank Leumi Said to Face $300 Million Demand in Tax Case

New York’s banking regulator will ask for more than $300 million to settle an investigation into whether Bank Leumi Le-Israel (LUMI) BM helped Americans evade taxes, a person familiar with the matter said.

Benjamin Lawsky, head of the state’s Department of Financial Services, is seeking more than what the bank set aside to resolve a separate criminal investigation by the U.S. Justice Department. In June, Leumi said it allotted 950 million shekels ($254 million) for the federal matter, which would make it the first Israeli bank to settle a tax probe with the U.S.

Lawsky has taken a similarly aggressive approach with other banks. As part of a guilty plea in May by Credit Suisse Group AG (CSGN)’s main bank subsidiary, his office secured $715 million of the $2.6 billion penalty.

“Lawsky has certainly raised the stakes,” said Bruce Zagaris, an attorney at Berliner, Corcoran & Rowe LLP who specializes in international tax matters. “It has complicated the effort to settle, because in some cases Lawsky’s office has different views than the feds.”

Bank Leumi, Israel’s second largest lender by assets, said today it’s in talks with Lawsky’s department on a settlement, according to a filing with the Tel-Aviv Stock Exchange. It’s too early to estimate if an accord may be reached and a final settlement may be “significantly higher” than the provisions it’s already set aside to cover those costs, the bank said.

Leumi fell 2.1 percent as of 1:21 p.m. in Tel Aviv to 13.82 shekels, the lowest since Aug. 31, making it the worst performer on the benchmark TA-25 index, which was down 0.3 percent.

Key Juncture

The Leumi probes are part of a seven-year U.S. crackdown on offshore tax evasion. About 100 Swiss banks are seeking to avoid prosecution by disclosing how they helped Americans dodge taxes, and 73 of those firms wrote to the Justice Department on Oct. 21 to object to terms of a proposed non-prosecution agreement.

Dozens of Americans who used offshore accounts to avoid taxes have helped the U.S. investigate Leumi and another Israeli institution, Mizrahi Tefahot Bank Ltd. (MZTF), according to court records. Several people with accounts at those banks have been prosecuted for using loans obtained in Los Angeles that were secured by accounts in Israel that weren’t declared to the Internal Revenue Service.

Benny Shoukron, a Mizrahi spokesman, declined to comment on the probe. Mizrahi shares were trading 1.2 percent lower in Tel Aviv today.

Lawsky’s lawyers have told representatives of Leumi that the bank’s conduct, while much smaller in scale than Credit Suisse’s, is troubling because the loans allowed U.S. clients to avoid paying taxes while still giving them access to their funds, according to the person, who asked not to be identified because the negotiations aren’t public.

Lawsky’s Leverage

Lawsky, the banking superintendent since 2011, has leverage over Leumi because it holds a New York banking license and he can threaten to revoke it for violations of the law. He has used that power to extract other settlements.

In August 2012, he struck a $340 million accord with Standard Chartered Plc (STAN) after threatening to pull its license. The London-based bank was accused of evading U.S. sanctions laws by stripping the names of Iranian clients from billions of dollars in wire transfers. Lawsky required the bank to hire an outside monitor to oversee the controls for handling transactions with sanctioned nations.

Lawsky’s settlement with Credit Suisse also required the bank to hire a monitor.

BNP Paribas

In settling a sanctions case this year, BNP Paribas SA (BNP) agreed to pay a total of $8.9 billion to the Justice Department and other regulators, including $2.24 billion to Lawsky’s Department of Financial Services.

“In trying to resolve parallel investigations, banks have to be able to navigate a complicated landscape involving not only criminal and civil issues, but administrative and regulatory ones as well,” said Nathan Hochman, a former assistant attorney general who oversaw the Justice Department’s tax division.

U.S. prosecutors and lawyers for Leumi are discussing a deferred-prosecution agreement, in which the Justice Department would file charges and later dismiss them if certain conditions are met, according to people familiar with the matter who requested anonymity because they weren’t authorized to discuss the case publicly. Such agreements involve a statement of facts outlining a corporation’s conduct.

Legal Liability

The bank said in June that it sought to resolve its legal liability for activities on behalf of U.S. taxpayers from 2002 to 2010. Leumi is “working towards a resolution” with the Justice Department “in accordance with the outline and the sum” proposed by the federal agency, according to its statement.

In the probe of offshore accounts, prosecutors have charged more than 70 U.S. taxpayers and three dozen bankers, lawyers and advisers. The IRS has sponsored offshore voluntary disclosure programs since 2009 that brought in at least $6.5 billion in interest, taxes and penalties and prompted more than 45,000 Americans to reveal offshore holdings.

When a Mizrahi banker was indicted in Los Angeles in April, Deputy Attorney General James M. Cole said it resulted from “an ongoing and extensive investigation into the use of undeclared bank accounts in Israel.”

That banker, Shokrollah Baravarian, went on trial this week.