Israel’s banking watchdog has issued a draft directive requiring local lenders to “re-examine and redefine” their strategy for banking activity abroad and if necessary reduce it to a smaller number of countries and main foreign banking offices.
The draft directive also requires local banks to use risk management mechanisms and external audits to manage risk and other aspects of compliance.
“In recent years, banks worldwide have sharpened their focus and reduced their activity in foreign countries, with the understanding that broad deployment exposes them to risks of noncompliance with local laws and regulation,” the supervisor of banks at the Bank of Israel, Hedva Ber, said in a statement announcing the draft directive. “The materializing of such risks led to investigations and large fines, and in Israel it was reflected in investigations of three banks by US authorities with regard to tax evasion by customers. As such, and against the background of supervisory measures, Israeli banks markedly reduced their activities abroad in recent years.”
In 2014, Bank Leumi agreed to pay some $400 million to US regulators to settle a criminal probe after admitting to helping US taxpayers hide assets. Investigations by US regulators into Bank Hapoalim Ltd. and Bank Mizrahi-Tefahot Ltd. are ongoing.
Israeli banks have already significantly cut back on their foreign activities, with Bank Leumi Le-Israel closing down units in Switzerland, Luxembourg, and Latin America, for example, and Hapoalim closing units in London and Latin America, among others.
“As a complementary measure to this decrease, we are requiring the banks to reexamine their remaining activity abroad, to reduce it to a smaller number of countries and main foreign banking offices, in a manner that will allow the appropriate allocation of resources — in terms of quality and quantity — for proper management of risks and other aspects of compliance,” Ber said in the statement.
Hapoalim still has branches in Miami and New York and banking subsidiaries in Switzerland and Luxembourg, among others, while Leumi still has subsidiaries in the US, the UK and Romania. Israel Discount Bank Ltd. has extensive activities abroad via its New York unit, but has cut back on its subsidiaries in Switzerland and London.
The new draft directive complements the Banking Supervision Department’s directive from 2015, which has already led to improved risk management at banks’ foreign banking offices and vis-à-vis nonresidents holding accounts at banks in Israel, the Bank of Israel said in a statement. The 2015 directive also contributed to the closure of subsidiaries and “a marked contraction of Israeli banks’ activities abroad,” the statement said.
The new draft directive requires banks to redefine their strategy for activity via foreign banking offices and their appetite for risk that derives from such activity. Within this framework, banks will need to decide in which countries they want to operate, which activities will be carried out at each foreign banking office, and what the minimum size of a subsidiary is that will allow risk management in an adequate manner while complying with local laws and regulations.
“Where the current activity is not in line with the strategy, the banking corporation is to define an exit plan,” the statement said.
In addition, banks are required to tighten and improve their supervision over subsidiaries by hiring external auditors with relevant local expertise in the country of activity and also to pay particular attention to compliance risk management and money laundering, the statement said.