The UK head of Israel’s biggest bank has been arrested on suspicion of taking part in a plot to embezzle nearly £5 million.

Menahem Friedman, who worked for Bank Leumi in Tel Aviv before being made chief executive of its UK branch last year, is being held in Israel with 13 other businessmen.

Fraud-squad detectives told the Tel Aviv Peace Court that furniture-company owner Meir Ovadya and his son Rafi had acted as intermediaries for the group who, in 2006 and 2007, allegedly received fictitious loans from the bank without offering collateral.

Mr Friedman, known to friends and colleagues as Miki, was alleged to have given his authorisation while in post in Israel. Each loan was for between one and three million shekels (£160,000-£480,000). The money was then transferred to the Ovadyas with the businessmen pocketing a commission. No arrangements were made for their repayment.

A bank spokesperson said the incident “has no connection whatsoever with Bank Leumi UK or its customers”.

According to the bank, the investigation began two months ago, after an internal audit committee found irregularities in the main branch’s cash-flow.

When suspicions were raised, the bank called in police. After a month of discreet inquiries, officers told the bank’s management to order Mr Friedman to return to Israel to answer questions. He returned on Sunday and on Monday was questioned by the bank’s auditors over two of the loans. He was arrested on Tuesday.

A Bank Leumi insider has told the JC that “the bank will do everything in its power to prove that the suspicions against Friedman arose only after he was appointed to his new post and that the London posting wasn’t just an attempt to pack him off abroad before the scandal broke”.

Bank Leumi in Israel has appointed Mr Friedman’s two UK deputies, Collin Cumberland, director of commercial and corporate banking, and Lesley Secretan, director of finance and operations, as temporary acting CEOs.In a statement released this week, a Bank Leumi spokesperson said: “A routine audit by the internal-audit division of Bank Leumi le-Israel BM during the past few months has disclosed irregularities in the approval of loans by Menahem Friedman, while he served as manager of a branch of Bank Leumi.

“The audit indicates an exceptional occurrence, but this will not affect the bank’s customers in any way. Further, it should be noted that, to the best of the knowledge of the bank, material losses have not been caused to the bank.

“The audit indicated, inter alia, matters which the bank was unable to examine by itself, and it was therefore decided to contact the police so that they could examine these aspects. In addition, Mr Friedman was immediately sent on leave until the matter can be clarified and decisions taken in his regard.”

Shmuel Ben-Tovim, economics minister at the Israeli embassy in London, said: “We are shocked at the news. We learned to appreciate Miki’s work in London very soon after he arrived.

“We wish that all the allegations will prove to be untrue and hope he can come back to his job in the UK very soon.

“He has our deepest sympathy and, on a personal level, we support him.”