Bank Leumi, Mizrahi Clients Said to Aid U.S. Tax Probe (2)

(Updates with lighting business in 13th undeclared foreign bank accounts on which paragraph.) income has been earned that has not been reported to the IRS.'' By David Voreacos Feb. 19 (Bloomberg) -- Dozens of U.S. U.S. Crackdown citizens who used offshore accounts to avoid taxes have helped the federal government in The probe, which the people said a criminal investigation of two Israeli banks, involves a U.S. grand jury, comes amid a Bank Leumi Le-Israel Ltd. and Mizrahi U.S. crackdown on offshore tax evasion that Tefahot Bank Ltd., two people familiar with has widened since UBS AG, the largest the matter said. Swiss bank, avoided prosecution in February Leumi and Mizrahi set up accounts in 2009. Zurich-based UBS paid $780 million, Israel that U.S. clients didn't declare to the admitted it helped clients evade taxes, and Internal Revenue Service, said the people, later turned over data on thousands of who asked not to be identified because they accounts. aren't authorized to speak publicly about the Since then, at least 11 banks have been probe. Those accounts served as collateral the subject of U.S. criminal investigators, on loans from U.S. branches that gave including Mizrahi; Leumi, Israel's biggest clients access to their money in Israel, bank; Credit Suisse AG, the second-largest according to the people and tax lawyers for Swiss bank; and HSBC Plc, Europe's largest the banks' clients. bank. Zvi Sperling, a Los Angeles businessman Wegelin & Co., Switzerland's oldest born in Israel who took such back-to-back private bank, pleaded guilty last month to loans from both Tel Aviv banks, was the helping American taxpayers hide assets first person charged by the Justice from the IRS. Department. Sperling agreed to admit he Orit Reuveni, a spokeswoman for Leumi, conspired with Leumi and Mizrahi bankers, said in an e-mail that the bank is ``within the according to a plea agreement filed Feb. 14 scope of a U.S. inquiry into tax matters in Los Angeles federal court. The filing involving U.S. customers,'' and that it is refers to the banks as Bank A and Bank B. cooperating with the probe. Calls and e- Mizrahi is Bank A and Bank B is Leumi, the mails seeking comment from a spokesman people said. Other clients will be charged in for Mizrahi weren't returned. Benny the coming weeks, the people and tax Shoukron, a spokesman for Mizrahi, said by lawyers said. phone last week that the bank is looking into ``Those two banks are under the Sperling matter. investigation for making loans to permit Charles Miller, a spokesman for the their depositors to repatriate undeclared, Justice Department, declined to comment. offshore assets to the U.S.,'' said Robert Fink, a tax attorney at Kostelanetz & Fink People Charged LLP in New York who represents clients who have come forward. ``The focus is on Since 2009, at least 83 people have been

1 charged by the U.S., including two dozen million as collateral. He never reported the offshore bankers, lawyers and advisers. account on his tax returns, nor did he report More than 38,000 Americans avoided the interest earned or file Reports of Foreign prosecution by entering an IRS amnesty Bank and Financial Accounts, known as program in which they paid back taxes and FBARs. penalties while disclosing the banks and bankers who helped them hide offshore Account Moved accounts. Dozens of former Leumi and Mizrahi In 2008, the bank told him that he had to clients who entered that voluntary disclosure pay off his loans, according to the plea program told the IRS and Justice agreement. Sperling then moved his Israeli Department about their back-to-back loans, account to Leumi, and one of its bankers according to tax lawyers who represent told him at a hotel in Beverly Hills, those coming forward. California, that it was better able than ``There's no question that the U.S. is Mizrahi to keep the account secret, mining all the data from voluntary according to court filings. disclosures to build cases against both the He also took a back-to-back loan from banks and the bankers,'' said William Sharp, Leumi, and failed to report the account to of Sharp Kemm PA of Tampa, Florida, who the IRS, the U.S. said. As in other such has clients involved in the probe. ``The arrangements, Sperling's account was held Israeli cases tend to have more dual passport in a certificate of deposit, and the bank holders than many of the other banks.'' charged a spread of 1 percent to 2 percent on the back-to-back loan, according to the Maxim Lighting criminal information filed against him. Sperling ``recognizes the serious Sperling, who was born and raised in Tel mistakes that he has made, and he accepts Aviv, moved to the U.S. to attend school, full responsibility for his conduct,'' said his according to his plea agreement. He later attorney, Steven Toscher, in an interview. became a U.S. citizen and still holds an Israeli passport. He joined his brother in Prosecution Prospects forming Maxim Lighting, which sells throughout the U.S. and has an office in ``Unfortunately, too many taxpayers got China, according to the company's website. involved with foreign bank accounts and The brothers used a Chinese account to those who have not taken advantage of the keep profits not reported to the U.S., voluntary disclosure program are facing the according to court filings. prospect of criminal prosecution,'' said A banker at Mizrahi persuaded Sperling Toscher, of Hochman, Salkin, Rettig, to move the money from China to Israel, Toscher & Perez in Beverly Hills. where it would be kept secret from the U.S. The Justice Department and IRS have government, according to the plea gone beyond the information gleaned from agreement. The account was set up in the taxpayers, he said. name of an offshore company, and Mizrahi ``Given the quality of information the only sent statements to an attorney. government has, it appears that they've Sperling began taking back-to-back loans gotten it from sources other than the in 2003 through the Los Angeles branch, voluntary disclosures,'' he said. pledging his Israeli account that grew to $4 Mizrahi has previously been implicated

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in a back-to-back loan scheme. A former Bail Review Mizrahi banker, Joseph Roth, pleaded guilty in federal court in Los Angeles in June 2008 At a bail review hearing for Roth on Jan. to aiding a tax evasion scheme that 8, 2008, Assistant U.S. Attorney Daniel J. prosecutors called ``an astonishingly O'Brien said Mizrahi gave clients access to complex and sinister enterprise'' involving secret accounts through back-to-back loans. Spinka, a religious group within Orthodox ``This is a product offered by the bank, Judaism. and the bank is essentially engaged in The Grand Rabbi of Spinka, Naftali Tzi money laundering operations for a Weisz, pleaded guilty to obstructing the IRS clientele,'' O'Brien told U.S. District Judge by soliciting donations to Spinka-related George Schiavelli. organizations with secret promises to refund All of the sentencing filings for Roth donors the vast majority of the money they were placed under court seal. Seven people donated. The refunding and laundering of pleaded guilty to conspiring to obstruct the charitable contributions resulted in hundreds IRS, and three donors admitted to tax of millions of dollars in unreported income, evasion. The bank wasn't charged. according to the U.S. Leumi also actively marketed the back- to-back loans to allow clients access to their Secret Accounts funds in Israel, said a former federal prosecutor who worked on the UBS case, Roth, who was sentenced to 14 months in Jeffrey Neiman. Leumi made millions of prison, helped contributors in the U.S. dollars in interest by arranging the back-to- secure loans from the Los Angeles branch back loans, he said. that were backed by funds in secret accounts in Israel, according to the government. `Significant Problem' In August 2008, the Federal Deposit Insurance Corp. and the California ``Leumi realizes that they have a Department of Financial Institutions issued a significant problem on their hands and is cease-and-desist order against Mizrahi's Los doing what they can to shift responsibility Angeles branch for alleged unsafe and from the bank to individual taxpayers,'' said unsound banking practices. Neiman, who practices in Fort Lauderdale, The agencies claimed the bank violated Florida. ``It's a particular problem for dual regulations requiring an anti-money citizens who innocently have bank accounts laundering compliance program, procedures in Israel and now find themselves in a for monitoring suspicious activities, and due compliance nightmare.'' diligence on foreign correspondent accounts. Pedram Ben-Cohen, a Los Angeles tax Mizrahi was ordered to stop back-to-back attorney, has consulted with hundreds of loans and beef up its compliance programs. clients holding Israeli accounts. Last year, In November 2010, the regulators he said, Leumi bankers personally notified imposed a $350,000 fine on Mizrahi for all of his Los Angeles clients with back-to- violating the August 2008 order, particularly back loans. for lacking an adequate program to monitor ``They went up to every client and told suspicious activity. them to enter the voluntary disclosure program and sign a document admitting they knew they had to report to the IRS their Israeli accounts securing back-to-back

3 loans,'' Ben-Cohen said. partner of Fink. ``The government would ``If they didn't sign the bank's document, like them to turn over client information, but Leumi would terminate their banking I don't know if that will be the ultimate relationship, which was upsetting to high result of the cooperation.'' net-worth individuals,'' he said. The Justice Department and IRS are ``hoping prosecutions like this one against `Acted Fast' Bank Leumi will cause more customers to make voluntary disclosures,'' Skarlatos said. ``My clients had relationships with their ``We're going to see more prosecutions and bankers for over 20 years,'' he said. ``They voluntary disclosures involving unreported didn't want to have to establish a new bank accounts in Israel.'' relationship with a new bank in this The case is U.S. v. Sperling, 13-cr-108, economy. Most of them entered the U.S. District Court, Central District of voluntary disclosure program and then California (Los Angeles). signed the bank's document. In the face of the government's investigation, Leumi has --With assistance from Robert Lakin in Tel acted fast.'' Aviv. Editors: Andrew Dunn, David E. Neiman and other lawyers said Rovella prosecutors will probably resolve the Leumi and Mizrahi investigations by filing charges To contact the reporter on this story: and agreeing to drop them if the banks meet David Voreacos in Newark, New Jersey, at certain conditions, as they did in the UBS +1-973-286-0016 or case. The Justice Department has filed [email protected] dozens of such deferred-prosecution agreements in corporate cases in the past To contact the editor responsible for this few years. story: Michael Hytha at +1-415-617-7137 or ``Those investigations will culminate in [email protected] separate deferred-prosecution agreements where each bank will pay a significant fine and agree to cooperate with the U.S. government,'' said Bryan Skarlatos, a law

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