June 1994, Page 77

Israel and the Law

U.S. Federal Reserve Levies Fine Against Israeli Bank

By Kenneth R. Kahn

The U.S. Federal Reserve (Fed), along with the Federal Deposit Insurance Corporation (FDIC) and the superintendent of banks for the state of California, have announced a cease-and-desist order and the assessment of a $400,000 civil penalty against an Israeli bank for illegally laundering money in the United States. By accepting the order and agreeing to the fine, the bank has obviated the need for a public hearing that would have put its activities into the public record and given the media an opportunity to look into the source of the currency passing through the bank, and the use to which it eventually was put.

The cease-and-desist order was issued against the Los Angeles branch of the United Mizrahi Bank, Ltd. of Tel Aviv as a combined notice of charges and of hearing and notice of assessment of a civil money penalty.

Failure to Comply

The Federal Reserve accused the bank of failing to comply with the Currency and Foreign Transactions Act (31 U.S.C. 5311 et. seq.) and accompanying regulations issued by the Department of the Treasury (31 C. F. R. 103. 11 et. seq.), known as the Bank Secrecy Act. Specifically, the bank branch is charged with engaging "in practices related to their failure to develop and implement internal compliance procedures, their inadequate processing of cash transactions, the failure to maintain adequate records relating to such transactions and to report suspicious transactions to the appropriate law enforcement agencies, and management deficiencies."

On Sept. 12, 1993, the board of directors of Mizrahi adopted a resolution authorizing Yair Hacohen, vice president and general manager of the Los Angeles branch, to enter into the cease-and-desist order on behalf of the bank. The bank agreed to comply with each and every provision of the order. The bank also waived its right to an evidentiary hearing in order to prevent the taking of evidence which would have appeared on the public record. The bank also waived any rights to contest the order, a judicial review, and to challenge provisions of the order.

As in the ADL spy case in San Francisco, the federal authorities in Los Angeles clearly revealed their distaste for pursuing the matter by not bringing any criminal charges against the bank or its board of directors. Instead, they allowed the bank, without any admission or denial of wrongdoing, before the taking of testimony or the admission of evidence, to agree to the terms and provisions of the cease-and-desist order and pay the civil monetary penalty.

The slap on the wrist, ADL style, was accomplished by an agreement between the Fed, the FDIC and the California superintendent of banks.

Under the terms of the agreement, the bank, in effect, consented never to do again what it would not admit it had been doing in the first place.

Specifically, the bank stated it will not violate any provision or regulation issued under the Bank Secrecy Act (BSA). Both the Mizrahi Bank in Israel and its Los Angeles branch submitted a program to ensure compliance with all provisions of the BSA to the Federal Reserve Bank of San Francisco, the San Francisco regional office of the FDIC and the Los Angeles regional office of the superintendent of banks.

The Bank Secrecy Act (BSA) requires that all banks detect, monitor and report all currency transactions over $10,000 to be sure that such transactions are not conducted for illegal purposes, such as drug profiteering or arms smuggling. The bank was required to appoint a specific officer to ensure compliance and train tellers, customer service representatives, lending officers, private and personal banking officers and anyone having contact with the public. The order also required that an internal review process be implemented to ensure compliance, and that the compliance and internal review process be regularly and independently tested by third parties not affiliated with the bank.

The bank agreed to comply with all rules and regulations for record keeping for the purchases of bank checks and drafts, cashier's checks, money orders and traveler's checks. It also agreed to report to law enforcement authorities all known or suspected criminal activity.

The bank further agreed to establish a "know your customer" policy to confirm the identity of each customer, and to monitor, investigate and prohibit any suspicious transactions.

To ensure compliance, the bank is required to submit quarterly reports to the Federal Reserve's San Francisco office, the FDIC regional office and the superintendent's regional office.

In return for its compliance with the court orders, the Israeli bank and its Los Angeles ranch were exempted from named provisions of the international banking act and instead were fined a total of $400,000.

Kenneth R. Kahn is a Jewish peace activist and free-lance writer living in Washington, D.C.