Bank Leumi, Mizrahi Accounts Used for Back-to-Back Loans

A Los Angeles businesswoman charged with conspiring to defraud the Internal Revenue Service used accounts at two Israeli banks, Bank Leumi Le-Israel Ltd. (LUMI) and Mizrahi Tefahot Bank Ltd. (MZTF), to hide assets, her attorney said.

Guity Kashfi will plead guilty in federal court in California, where prosecutors filed her plea agreement, the Justice Department said yesterday in a statement. Kashfi went to the Los Angeles branches of both banks to obtain so-called back-to-back loans secured by accounts she set up offshore and didn’t declare to the IRS, according to the Justice Department.

Kashfi first set up an undeclared account at Mizrahi and then opened one at Leumi, said her attorney, Ed Robbins. The court documents refer to Mizrahi as Bank A and Leumi as Bank B. The highest balance in Kashfi’s undeclared accounts was $2.5 million, the Justice Department said.

“These back-to-back loans were part of the bank’s service,” Robbins said. “She’s cooperating with the government in what’s obviously an investigation of the banks and its principals. She’s been cooperating for quite a while.”

Orit Reuveni, a spokesman for Leumi, declined to comment. Benny Shoukron, a spokesman for Misrahi, didn’t immediately respond to an e-mail seeking comment.

March Plea

On March 29, Zvi Sperling of Beverly Hills, California, pleaded guilty to conspiracy for using back-to-back loans obtained in Los Angeles that were secured by undeclared accounts at Israeli banks. The banks were Leumi and Mizrahi, two people familiar with the matter said.

Dozens of U.S. citizens who used offshore accounts to avoid taxes have helped the federal government in a criminal investigation of those banks, said the people, who asked not to be identified because the matter wasn’t public.

The probe, which the people said involves a federal grand jury, comes amid a U.S. crackdown on offshore tax evasion that has widened since UBS AG (UBSN), the largest Swiss bank, avoided prosecution in February 2009. Zurich-based UBS paid $780 million, admitted it helped clients evade taxes, and later turned over data on thousands of accounts.

Kashfi, who was born in Iran, came to the U.S. in 1980 and became a U.S. citizen about 15 years ago, according to a statement of facts filed in her case. She started a clothing business called Countess of California.

Needed Collateral

By about 1982, her business had a $2.5 million line of credit with Mizrahi secured by her inventory. Her banker said she needed more collateral and asked if she had any Persian money to secure the loan. She said she had offshore funds that she wanted to keep overseas, according to the statement of facts.

The banker recommended that she open an account in Israel and transfer her funds to use as collateral for a back-to-back loan. He said “everyone in their community” of Persian Jews in Los Angeles was “using back-to-back loans to access their offshore funds,” according to the statement of facts.

While she initially opened the account in her name, she put it in a different name in 2001 “to prevent the U.S. government from finding the account,” according to the statement. He said the interest paid in Israel would be tax free “because it would not be reported to the IRS so no one would know about her Israeli account.”

Banker Arrested

In 2008, Kashfi was told that one of Mizrahi’s bankers had been arrested and the bank would use money in her Israeli accounts to pay off her back-to-back loans, according to Robbins and the statement. She then transferred the money to a Leumi account in Luxembourg “because she did not want to bring her money back” to the U.S., according to Robbins and the statement.

Kashfi grew concerned in 2009 and went to Luxembourg to close her account. She went to dinner with two bankers “who told her she would have issues if she closed her account and sent the funds” to the U.S., according to the statement.

“One of the bankers told Kashfi that her money was safe in Luxembourg” because “no one could get information relating to bank accounts” there, according to the statement.

The bankers “gave Kashfi a German cell phone to use with both bankers’ numbers preprogrammed in the phone, and told her to use the phone” to call them, according to the statement. “If the bankers needed to talk to Kashfi, they would call her on her personal phone and tell her to call them back on the German cell phone.”

After she closed her account in Los Angeles in 2011, “the bankers in Luxembourg told Kashfi to return the German cell phone, which she did,” according to the statement.

She failed to report interest income of $211,306 on the accounts from 2005 to 2011, according to court papers.

The case is U.S. v. Kashfi, U.S. District Court, Central District of California.

To contact the reporter on this story: David Voreacos in Newark, New Jersey, at dvoreacos@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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