Wednesday, March 11, 2015

Are money-laundering Israelis financing crime and terror?

Are money-laundering Israelis financing crime and terror?

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Are money-laundering Israelis really financing crime and terror?

The gray market is the Wild West of Israel's financial service industry, with thousands of players, billions of shekels changing hands and oversight by six clerks.

Feb. 12, 2015 |

Are Israel and Iran similar?
At least at first glance, they seem to be very similar. Iran is considered one of the leading state financiers of global terrorism, and Israel could soon find itself on the same list.
No, it’s not a joke. That was the clear warning that was issued this week in a report by Israel’s Justice Ministry.
“If it’s decided that the country has not demonstrated sufficient progress, Israel is liable to be subject to increased oversight and ultimately even to be added to the list of countries that are not cooperating with the international requirements in the field of the prevention of money laundering and the financing of terrorism.” That, in black and white, appears in a current official Israeli government document.
How did we become financiers of terrorism?
As usual, it is due to the criminal negligence with which the state is run. In short, shoddily. In the current instance, it’s a case of particularly shocking shoddiness and not just because Israel could become a sort of outcast nation in the view of the international community. It’s shocking shoddiness because it involves the primary infrastructure that finances all the organized crime in Israel, and the Israel Police have known this for years. It’s the main weak spot exploited by tax evaders, and the Israel Tax Authority has known this for years. It’s a market that attracts the most disadvantaged segments of Israeli society, those invisible people whom the state has neglected and abandoned to the less-than-tender mercies of the country’s family-run organized crime rings.
The government is aware of this, but simply doesn’t care. That is, until international agencies threatened to declare Israel a country that finances terrorism.
The market that I am referring to is the “gray market” — that unregulated segment of the financial sector. This week’s Justice Ministry recommendations were released by a team, headed by Deputy Attorney General Avi Licht, that was appointed to examine the regulation of currency service providers.
According to one estimate, Israel’s gray market has an annual turnover of 150 billion shekels ($39 billion).
That is equal to more than 10% of Israeli banking activity. But while the Bank of Israel oversees every little step the country’s banks make, the gray market gets no oversight. None.
Pretense of oversight
Okay, there is a pretense of oversight. There are six clerks in the Finance Ministry who are responsible for the money changing sector, as it concerns money changers and deals with suspected cases of money laundering. These six oversee at least 2,200 registered money changers. But there are also hundreds of other money changers who have not bothered to register, as required by law.
As industrious as they may be, the six carry out 30 audits a year on average. Licht’s team calculated that at this rate, every money changer in the country would be audited once every 70 years.
Furthermore, this pitiful oversight focuses only on the duty to report large deposits of money. There is no oversight of gray market lending. There is no enforcement when it comes to money changers working without a license. There are no requirements that they demonstrate any level of financial adequacy or account for the source of their capital. No one checks to see if the person registered as the owner of a currency exchange establishment is not a straw man. There is also no consideration given to fair consumer practices at these places.
In short, there is nothing that even makes enforcement of money laundering prevention provisions effective, which explains why we may very soon get tripped up by international organizations that deal with the fight against money laundering and the financing of terrorism.
This negligent reality prevails even though all of Israel’s investigative agencies know that the gray market is at the very heart of criminal activity in the country.
Police estimate that when it comes to just about every organized crime case there is a money changer providing the crime organization’s financial base. And in 14% of the Tax Authority’s tax evasion investigations, there was major involvement on the part of a money changer.
Nearly one in five of known money changers have been the subject of Tax Authority investigations. Eleven percent of the warnings provided to the police by the country’s money laundering prevention authority — warnings of clear suspicions of laundering — related to money changers’ activities.
The oversight conducted by our six trusty clerks has revealed that money changers have concealed deposits amounting to 70 billion shekels.
For the past 17 years, the government has been letting the financial base of the crime organizations, which is also the main source of tax evasion in the country, to flourish unimpeded. Why?
Simply because there is no regulatory agency that feels like getting its hands dirty in the tough battle that would be required to clean up the gray market.
All of them invoke lofty rhetoric about the need to fight the underground economy and to boost government coffers in the process of combatting the black market. In practice, however, none of them are taking the necessary practical steps, which would require cleaning up the main weak spot.
What’s especially sad is that the gray market is important and legitimate, a financial market in every sense of the word, which could provide the only competition to that intimidating group, the country’s five largest banks.
 for the banks
Licht’s team estimates that the gray market provides 30 billion shekels in loans to individual households and to small- and medium-sized businesses every year. The scope of this credit could have been even much larger, and the gray market could have provided significant competition to the banks. It already provides important competition in the money changing, is the only activity in which the banks are exposed to competition.
Becoming real competition to the banks, however, would require the gray market to be regulated rather than a market controlled by crime organizations. People turn to it only when they have no other source of credit.Rejected by the banking sector, these borrowers find themselves in a market in which there is no oversight .
There is in fact a law regulating the maximum rate of interest that can be charged on the gray market, but in the absence of oversight, there has never been a way of enforcing it. And although the law bars interest charges above about 12% or 13%, in practice gray market rates range between 100% and 150%.
The state has also not taken a look at the improper practices used on the gray market in collecting loan payments from those who run into trouble paying back the principal and 150% interest. These improper practices are also thought to include the use of threats and violence. While the country’s corporate business tycoons get to sip Diet Coke in cafes with Israel’s bank CEOs, even if they too have trouble repaying their loans, the weakest members of society are more likely to have to meet up with thugs who threaten their family members in the dead of night.
“Regulatory neglect,” Licht’s team wrote, “is preventing an important market from developing and is leaving consumers of the services, many of whom are from weak populations and small businesses, without protection from the government. ... In the absence of oversight of nonbank loans, problematic practices have developed in the sector and as a result, the wider and weak members of the public are not being protected and are facing these improper phenomena alone.”
While the strong get maximal protection from the Bank of Israel, with its strict oversight of banking activity, the weak don’t get even the most minimal protection. The government itself is pushing them into the arms of organized crime, and then the politicians roll their eyes and talk about those “invisible people,” even though those same invisible people have been subject to threats from the gray market for decades without any politicians caring.
Finally, Licht’s team is proposing that this horrible distortion be corrected by establishing a new regulatory unit within the Finance Ministry that would oversee the gray market, both with respect to its criminal aspects and from a consumer finance perspective. The Finance Ministry has committed to implement the recommendation. If the parties now campaigning in the election really intend to protect those invisible people, they need to put the recommendation at the top of their party platforms.

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