Israel is a Paradise for Money Launderers

Yediot Ahronot, April 27, 1997

By Sever Plotzker
Translation and notes by Israel Shahak

Only in Israel can a person enter a bank with a suitcase that contains a million dollars and deposit the money without disclosing its source. The result: the estimate of the illicit capital coming from abroad into Israeli banks is some $45 billion.1

There is also the problem of laundered money from illicit deals within Israel. No competent estimates regarding dimensions of the illegal economy within Israel have been made for 10 years.

According to the estimate made in 1983, about 15 percent of the Israeli GNP is not reported to the tax authorities. Experts who have retired in the last years from the State Revenues Administration are convinced that the share of black-market economic activity has grown considerably since that time.

Suppose it is still 15 percent. Last year the Israeli budget was about 100 billion shekels [around $30 billion]. One may reasonably assume that the total output of the "black economy" reached 45 billion shekels last year. Tax loss for the Treasury: 15 billion shekels - more than the budgetary deficit last year.

Who are the principal tax evaders? Contrary to the prevailing view, these are not the richest citizens. They usually report all their income and then hire the services of the best auditors and tax consultants to legally avoid paying any taxes.

Many tax evasions are concentrated among the middle-level self-employed, or wage earners who work in their spare time as self-employed. But most of the taxes evaded come from all kinds of criminal activity.2 It is hard to chase medium and small tax evaders, especially when, as in Israel, the duty to report all sources of income apparently does not apply to all citizens.

An additional serious legal failure, characteristic of Israel, is the absence of any specific law that forbids the laundering of black capital. In Israel, an offender can always claim that he got his suitcase with money from a new Jewish immigrant. A more sophisticated tax evader can even point to a money transfer made from a foreign currency account of a new immigrant, exempted from tax so long as he is Jewish, to his own account.

In Israel a citizen who holds an immigrant certificate, issued on the basis of the "Law of Return," can enter a bank with a suitcase containing a million dollars and deposit the banknotes in a special account from which he is entitled to draw money for many years. A bank employee who might ask where the money comes from will be satisfied with the answer, "from where I immigrated." There is no need to prove that this is not laundered Israeli money originating from black business activity, or worse, from criminal activities.

In short, Israel is a paradise for black money laundering, local and international. To close this loophole a bill was prepared three years ago forbidding the laundering of capital. There were violent objections and the bill did not even reach the Knesset. Recently, under pressure from the U.S., which suspects that much of the money laundered in Israel originates in America, and on the initiative of the Ministry of Justice, the bill has returned to the headlines, but has not yet been submitted to the Knesset.

Jonathan Welner, U.S. assistant secretary of state for law enforcement, published an article on the issue a week ago. He claims that:

Lax bank laws and the exemption of deposits of foreigners from taxes have turned Israel into a paradise for illegal money.
Israel is lagging behind in legislation against financial crimes - not only behind Austria and Cyprus, but even behind Lebanon.3
A loophole calls for a thief, and in Israel the thief is attracted by several loopholes: The absence of a law against laundering black or criminal capital; the banks not being obliged to keep records on big money transfers; the total absence of agreements with other states for the exchange of information on laundered money; the absence of a control system on the flow of money crossing lsraeli borders or regulations on laundering of capital through other than banks. In short, the Israeli legal authorities have no tools to fight the laundering of black money.

The bill prohibiting capital laundering drafted in the state attorney's office would fill a large share of the loopholes. The Knesset must approve this bill which is backed by the U.S., which will assist Israel in its application. It should be observed that a state without laws that forbid laundering of black money is exposed to serious economic risks.

If the bill against laundering black money becomes a law, Israel must establish a center for tax investigations and financial offenses, common to all law enforcement authorities. The establishment of such a center was recommended by the "Shimron Commission" for the liqudation of serious criminality. The report of the commission was published at the beginning of 1978. In the summer of 1997, the time has come to implement it.4

NOTES (by Prof. Israel Shahak):

1. Laundered money reaching Israel is one of the important sources of investments in the Israeli economy.

2. The number of Israeli gangsters and their activity has been increasing at a rapid pace during the last 8 to 10 years.

3. Three countries notorious for laundering criminal funds.

4. There is no hope that any law against laundering black money will be passed because the religious parties will oppose it violently.