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Exclusive: U.S. tax-evasion probe turns to Israeli banks

Sep 15, 2011, 8:38 p.m.
People stand beside a branch of Bank Hapoalim, Israel's second largest bank which is controlled by Shari Arison's Arison group, in the southern city of Ashkelon July 27, 2011. REUTERS/Amir Cohen

By Lynnley Browning

(Reuters) - The U.S. pursuit of offshore tax evaders is widening to include Israel, where U.S. authorities are scrutinizing three of Israel's largest banks over suspicions their Swiss outposts helped American clients evade taxes, people briefed on the matter said.

The banks under scrutiny by the U.S. Justice Department's criminal tax division are Bank Hapoalim, Bank Leumi le-Israel BM and Mizrahi-Tefahot, the sources said.

The shift to Israel from Switzerland, for years the main focus of the Justice Department's campaign against offshore private banking secrecy, signals the broadening of a landmark probe by the agency that began in 2007 with UBS AG, Switzerland's largest bank.

The shift also opens up a potential sore spot in the historically close relationship between the United States and Israel, a key diplomatic and military ally in the Middle East that is the biggest recipient of U.S. aid -- $3.1 billion last year.

U.S.-Israeli relations have come under strain in the past year, after U.S. President Barack Obama's drive to relaunch direct peace talks between Israel and the Palestinians collapsed, although both sides say their decades-old alliance remains unshaken.

The scrutiny of the three Swiss branches of the Israeli banks is at an early stage and has not reached the level of that of Credit Suisse, which received a target letter from the Justice Department in July, or of HSBC Holdings, a major European bank, and Basler Kantonalbank, a Swiss cantonal bank, said the people briefed on the matter.

U.S.-SWISS ARRANGEMENT CITED

Aviram Cohen, a spokesman for Bank Leumi in Tel Aviv, wrote in an e-mailed statement on Thursday that "the request was for general statistical data. It appears that this data was to serve as a basis for a comprehensive arrangement between the Swiss and American Authorities. Obviously, Bank Leumi Switzerland is cooperating fully with the Authorities, in accordance with Swiss Law and under legal advisement."

A spokesman for the Bank of Israel, the country's central bank, said on Thursday the agency "cannot comment on questions that refer to specific banking corporations." One person briefed on the matter said the U.S. Justice Department "tries to deal with the entity, not the government" in its crackdown on tax evasion.

The scrutiny comes during a wide-ranging campaign by the Justice Department to force nearly a dozen Swiss banks now under scrutiny to pay collectively billions of dollars in fines and admit to criminal wrongdoing.

The focus turned to Israel with a letter dated August 31 from the second-highest law enforcement official in the United States, Deputy Attorney General James Cole. Cole gave the three Israeli banks, along with seven Swiss banks, until September 23 to produce broad statistical information on their Swiss operations with U.S. clients.

The data requested, according to people briefed on the matter, cover the types of accounts disclosed by UBS in 2009 as part of a deal with the Justice Department to settle U.S. charges that it enabled scores of wealthy Americans to evade billions of dollars in taxes. It also covers other types of accounts, including those opened after the UBS settlement with the Justice Department in February 2009.

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