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

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.