Israel, September 10, 2019, 7:23 pm. Channel 11 Breaking News.
“Several minutes ago, the United States Supreme Court ruled unanimously in favor of the US Internal Revenue Service, the IRS, in its claim against General Citizens Bank of Israel. According to the court’s decision, General Citizens Bank will pay a fine of US$4 billion for criminal violations committed against the American tax authority. The Supreme Court affirmed the decision of the New York State District Court finding General Citizens Bank guilty of conspiring with a leading international financial institution to knowingly and systematically provide misleading information to US tax authorities by initiating and leading measures designed to help American citizens evade their tax obligations estimated at hundreds of millions of dollars. In addition, the court urged prosecutors to pursue criminal and civil penalties against bank executives and directors for their involvement.
“Our economic correspondent, Joseph Davidi, reports that the bank refused to comment on the verdict. We will continue to follow and update as this story unfolds.”
Israel, September 10, 2019, 8:00 pm. Channel 11 Evening News Edition.
“At the top of our news this evening is the shocking report regarding the United States Supreme Court decision in the case of the American IRS against General Citizens Bank. ‘A financial earthquake with severe implications for the Israeli economy,’ said a senior official at the Bank of Israel who wished to remain anonymous. General Citizens Bank was ordered to pay fines of over $4 billion for committing tax fraud and failing to comply with US tax regulations.
“Our economic correspondent, Joseph Davidi, reports that the decision came following failed arbitration attempts in which General Citizens Bank offered to pay a fine of $500 million in return for waiving any claims against the bank and its directors. Our correspondent adds that Bank of Israel officials expressed deep concern over these reports, believing that the enforcement of this ruling could lead to GCB’s liquidation and criminal proceedings against its executives. Furthermore, officials fear that this ruling could very well lead the US tax authorities to tighten supervisory measures over other leading banks in Israel, impeding their ability to compete in international markets. Efforts to receive an official response from the bank’s spokesperson were unsuccessful. We will keep you updated on further developments.”
The federal ruling echoed across the financial markets and, within moments of the report, the bank’s share price plummeted. The news spread like wildfire, causing the bank to lose over a third of its value in what seemed to be a relentless downward spiral.
That morning in New York, a broker in a mid-size Manhattan investment firm received a phone call from an investor who had bought put up options earlier that week on General Citizens Bank and Israel’s financial sector index. With the collapse of the bank’s share price and the decline in Israel’s overall financial index, the investor’s portfolio grew from $200,000 to just over $2.5 million. The investor ordered the immediate divestment of all securities and remained on the line while the broker executed the order. Within moments, the transaction was complete and the investor’s account was credited with the full amount, over twelve times his initial investment.
The investor was operating illegally as his actions were based on insider information - information he had access to by virtue of his position at General Citizens Bank. But this did little to dissuade him. It was merely one more offense added to the list of more serious crimes he had committed already. The only thing that mattered right now was to empty his New York investment account and transfer the money to a clandestine offshore account.
But why settle for this when even more money was just waiting for him to reach out and grab? The thought made him smile to himself.
After completing the transfer order and transmitting the funds to his account in the Virgin Islands, he returned to studying the screen in front of him. GCB’s shares had lost 40% of their value. He was now expecting a trend reversal. He called his broker again, this time to buy GCB stock for a total of $200,000. The broker, used to dealing with all types of speculators, preferred not to comment and performed the purchase order as requested.
He was not acting on a whim or a hunch. He was certain that, within hours, the Israeli government would provide the bank with full monetary support and GCB’s shares, together with the Israeli financial sector index, would soar again, turning his new investment into another profitable venture.
By 6:00 am the next morning, two-and-a-half-hours before the bank’s official opening hours, long queues of disgruntled, confused, and desperate customers were forming in front of all 300 branches of General Citizens Bank. Rumors, each worse than the last, spewed panic. The pessimists were convinced that the bank would go under, taking all their money with it. They believed that the Supreme Court’s decision had just one connotation: GCB had ceased to exist, its branches becoming empty shells overnight.
A few clear optimists were waiting in the winding queues. They argued that GCB was so financially robust that four or even five billion in fines could not topple it. There were also those who claimed that the government would undoubtedly stand behind the bank and fully support it.
After thirty minutes of speculation and idle discussion meant mainly to settle their nerves, the lines turned gloomily quiet. The people counted the minutes to 8:30 am for the bank to open. Many feared the doors would not open at all. Quite a few stared at their phone screens searching for any updates, trying to gather bits of information from the various financial reporters who were all racing to release editorials and speculation on what was yet to come. Optimistic reports brought on cautious smiles of relief, while pessimistic editorials caused their readers to hurriedly scroll down the page as if they could wish them away.
The scene was reminiscent of the 1983 Israeli banks’ shares crisis, during which the stock of the four largest banks in Israel collapsed and the banks were subsequently nationalized by the State. But there was one small difference. Back then, those affected were mainly investors who saw their bank shares lose all value, while now, GCB’s ability to continue as a going concern was in question and its customers’ savings were in jeopardy.
By 7:00 am, the optimists were proven right.
The country’s leadership, with uncharacteristic efficiency, acted quickly and rolled out its heaviest cannons. This was evidence of the severity of the situation and the depth of the crisis and, of course, served to mitigate what could have resulted in uncontainable chaos.
The morning news began with the anchorman’s solemn announcement: “Stay tuned to a message from the Prime Minister regarding the recent financial events.” Several seconds later, the prime minister’s confident and reassuring voice echoed through the various media outlets.
“The government, under my leadership, is committed to General Citizens Bank, offering our fullest support through this matter involving our close ally, the United States. Israel maintains a strong economy, one of the strongest in the world, with a sound banking system - unlike many of its regional counterparts. I would first like to advise that today, each and every one of us should act with restraint, remain calm and refrain from making hasty financial decisions that we may later regret. I instructed the Minister of Finance and the Governor of the Bank of Israel to direct all bank branches to open as usual and allow any request from the public to withdraw funds. I would like to emphasize again that there is no need for any rash action and urge you all to simply continue with your normal routine.
“I would like to clarify that the Government of Israel intends to support General Citizens Bank in its upcoming appeal against the court’s decision, as an investigation conducted by the Bank of Israel indicates that illegal dealings, if any, were the private initiative of various individuals and not a part of the bank’s course of business. Clearly, if any illegal conduct is discovered, we will act to bring those responsible to justice. I would like to add that one of the bank’s directors suspected in this matter is currently being questioned under caution by police. However, I would like to emphasize that this person shall remain innocent until proven guilty. I wish us all a calm and pleasant day.”
The prime minister’s message proved a great success, especially given the general public’s usual distrust of politicians’ promises. Within a short while, the queues in front of GCB’s branches dispersed and most people went on with their daily affairs. A handful of those lacking in faith remained to test the credibility of the prime minister’s words. As promised, at 8:30 am, all GCB branches opened as usual. Anyone wishing to withdraw their funds was met with amicable service aside from a recommendation not to break a term deposit and irreversibly lose any interest accrued.
By 10:00 am, the matter had been brushed aside from the public agenda and returned to be the sole concern of the bank and the various financial regulatory institutions.
The exception was that one individual mentioned in the prime minister’s statement, who was being questioned under caution in the National Fraud Investigation Unit, Lahav 433. The investigators were now trying to understand how he had managed to create such chaos, entangling the country in a conflict with its closest ally.
Four years earlier, February 2015, C&S Banking Group, Basel, Switzerland
“I’m not quite sure…” John Howard, a New Yorker who looked to be in his mid-forties, sounded hesitant. His mouse-gray suit appeared brand new, as if it had been bought specifically for this meeting.
Shame he never bothered to button his suit jacket, Hermann, Director of Foreign Banking at C&S mused to himself. Howard’s deviation from the formal dress code vexed Hermann. After all, this was an important business meeting and a first impression. Hermann believed that a disregard for the norms of conduct may eventually cascade into more profound matters.
Under his jacket, Howard wore a dark-blue, fashionable dress shirt whose open collar betrayed the fact that ties were not his “cup of tea.” The silver Omega watch on his left wrist was designed to be conservatively chic, leaving an impression with those in the know. Hermann, who knew a thing or two about watches, both for their role in his national culture and as part of his daily business with men of wealth, recognized that this was one of the more expensive models, belonging to the premium series of the elite brand. Everything about Howard exuded money - a lot of it - down to his bespoke leather shoes.
Hermann sized him up: a businessman, relatively young but not too young to lack experience, a self-made man who appreciated the value of hard-earned money and was, therefore, cautious in his decisions. The new suit, the watch, and the fine shoes all suggested financial success (thus proving he understood the importance of making an impression among the international banking executives). On a personal level, Hermann deemed him as lacking in good taste. No wonder, he thought, considering the culture he came from. The man was an American, so-called “born and raised,” a man who knew and appreciated the benefits of money, yet was careful not to draw attention to his wealth.
Bottom line, for all intents and purposes - C&S would find this man’s money a worthy investment. Hermann was pleased to conclude that his precious time was well spent. He was determined to turn this potential client into an active account.
“Mr. Howard, I believe you met one of our relationship managers in New York?”
“Yes, Herr Hermann, it was your bank that first approached me suggesting you can provide an interesting investment opportunity generating returns that US investment firms were unable to deliver on a conservative portfolio -”
“Indeed, and then you met with my colleague.”
“Yes, it was rather odd...”
“You operate a branch in New York, don’t you?”
“Not exactly a branch. We have a representative office serving our East Coast clients.”
“Okay. So what I found odd was that your representative suggested we meet at a restaurant in Manhattan -”
“Ah, I see. You expected to meet in our office?”
“Yes, that’s customary, especially for an introductory meeting.”
“Well, let me share a little secret with you. We’re very protective of our clients’ privacy,” he lowered his voice in a conspiratorial tone, “even of our potential clients. I’m sure you understand what I mean.”
Howard wanted to ensure that he did, indeed, understand what the banker was alluding to. “You believe American citizens interested in your services are being followed? Is that what you’re implying?”
“Let’s just say - better safe than sorry,” the banker agreed without going into detail. “Privacy and confidentiality are key to our clients and therefore are our highest priority. Let me further add that the fact that you came here today reflects your appreciation of our methods and I can assure you that we will always protect your interests.”
“Well, I came to your beautiful city on another business matter and thought that, if I was already here, I might as well take the opportunity to meet with you.”
Yes, of course… still being careful... but not for long.
After exchanging these words, Howard fell silent and his eyes wandered toward the ceiling, waiting for the banker’s response.
Hermann did not disappoint. “I sense you are still hesitant, Mr. Howard.” His voice dropped to an intimate tone. “Let me reassure you that C&S Group’s absolute and uncompromising loyalty is entirely at your discretion. I highly recommended that you share your uncertainties with me. Feel at ease to communicate your expectations and any of your concerns. You are protected under Swiss banking secrecy laws, meaning that everything said in this room will never be repeated anywhere, nor to anyone. That is our pledge to you.”
Howard shook his head in disquiet, his eyes darting around the room as if he was worried someone might be listening to their conversation. But there was nothing to uncover. The conference room was bare except for a round glass table and two matching designer chairs in a minimalist style. The tabletop was bare and clear of any objects. The walls were painted white and devoid of any paintings or decoration. The massive door was closed, as if to clearly indicate that any conversations held in this room could not be overheard from the outside. This unique, understated design was certainly not coincidental and was intended for a very specific purpose. It was meant to discourage any thoughts that the conversations held in this room could leak out. Paintings and furniture, in general, had the potential for concealing surveillance cameras and recording devices and the best way to demonstrate that they did not exist was to present a bare, transparent room, lacking the capacity to conceal such devices.
“There’s one thing that concerns me, Herr Hermann,” Howard began hesitantly. “Suppose I open an account with your bank… must I report it in my country? I’m not familiar with the regulations.”
The banker smiled to himself without a trace of expression to betray his thoughts. He had heard this question before, in various forms.
“And to whom do you think you must report?” he asked casually.
The man hesitated for a moment. “Perhaps my accountant?”
“And, John - may I call you John?” Hermann lowered his voice and assumed a personal tone. “Do you want your accountant to know of this account?”
“Honestly?” A thin smile escaped Howard’s lips for the first time since he had entered the room. “Not particularly. Not if I’m not obligated to do so. And I suppose that if I do report it to my accountant, then he’ll be bound to declare the funds in this account when he files my statement of net worth, correct?”
Ah, the cat was finally out of the bag.
Hermann sat up in his chair and took on a practical expression. “Look, my friend,” he began, “allow me to be forthcoming. I’m sure you didn’t fly all the way from New York just so that various individuals, or authorities, could be privy to your financial affairs... I’m certain this topic was also discussed in your conversation with my colleague who advised you to contact us here.” He paused for a moment to let his words sink in. “I can assure you that your assets will be protected from inquisitive eyes and remain for your eyes only. Our first and only fiduciary duty is to you as our client. We can offer you a numbered account that does not disclose your personal information. In addition, we will provide you with guidelines for transferring any funds you wish to this account without leaving a paper trail or raising suspicion from anyone interested in such information - and this includes everyone, especially your local tax authorities. Have I made myself perfectly clear, John?”
Howard nodded in agreement and his posture indicated that the tension he was under had now largely dissipated.
“What figure did you have in mind?” the banker asked.
“A million dollars? At first, I mean...”
“A reasonable amount, but since you say ‘at first,’ then I gather that the potential is even greater?”
“Yes, but I’d rather take it in my stride, familiarize myself with the process, appraise the situation -”
“As far as the bank is concerned, that’s perfectly acceptable,” Hermann leaned forward, his gaze penetrating the eyes of the man in front of him. “But I must note that this sum falls in the range of our minimum threshold and therefore will not accrue any interest. Meaning that, despite our aspiration to uphold our capitalist values,” the banker’s lips curled bitterly as if taking personal offense on behalf of the ill-treated funds, “your money will not work for you. However, once you increase your investment to an excess of $5 million, we can offer you various options for graduated returns based on your balance.”
“What kind of returns? Let’s say for five million?”
“Three percent annually, a very handsome return at today’s rates, especially for a risk-free investment.”
“And if I wish to withdraw funds? What are the conditions?” Howard’s voice was now in negotiation mode, signaling Hermann that he was on the right track to achieving his goal.
“I suggest a revolving two-year term deposit. Of course, you will have an option to withdraw any sum before maturity, though the interest, unfortunately, will be deducted. But John, rest assured that withdrawing your money will not be necessary. In case of any need, we can provide you with an immediate loan of up to 25% of the amount accrued in your account at an interest rate as low as 1.5%. Therefore, whatever the circumstances, you will receive a positive return of at least 1.5%. Tax-free, of course.”
Howard mulled this over in his head.
“John, was I correct in suggesting a term deposit? Are we discussing a long- to medium-term investment?”
“Yes, you’re correct, Herr Hermann. This is, indeed, meant to be a long-term deposit, a savings account for a rainy day. In my sort of business, it’s easy to fall under the illusion that money will always be in abundance. Money always comes in and comes out, but if you don’t set something aside, you might wake up one day to find -”
“Well said,” Hermann was set to strike. “John, if we’re talking about a long-term commitment, and considering you’re relatively young, your $5 million investment, under the terms we offer, will be worth approximately $7.5 million in 20 years. A 50% return, at no risk, and a handsome sum toward your retirement.”
As always, the numbers sold the deal.
“Okay, Herr Hermann, what do I need to do?”
The banker smiled, “Excellent decision, John. Let’s proceed with the details. Where is the money currently held?”