Tax Authority director Jackie Matza and his predecessor, Eitan Rub, were arrested on Tuesday on suspicion of widespread bribery and fraud at the authority.

Police suspect that the two appointed to key positions people who would be acceptable to the two businessmen, Yoram Karashi and Kobi Ben-Gur. The allegations are that the appointees then helped Karashi, Ben-Gur and their associates to obtain tax breaks. Police also suspect that Matza and Rub accepted or mediated bribes in exchange for pressuring their subordinates to grant tax breaks to various businessmen. However, it is not clear what kind of bribes were involved, as senior police officials declined to say whether they consisted of cash or other benefits.

Shula Zaken, Prime Minister Ehud Olmert's office manager, was also questioned Tuesday in the affair on suspicion that she was behind Matza's appointment to the job. Olmert was finance minister at the time, and Zaken, who is Karashi's sister, served as office manager for Olmert at the time. Police also suspect that after Matza's appointment, Zaken utilized his good offices to help her brother, a Judaica merchant and Jerusalem city councilman for the Likud Party.

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Matza and Rub were remanded on Tuesday for six and three days, respectively, while Karashi and Ben-Gur were remanded for eight days each. Zaken was put under house arrest for 10 days.

Senior police officers claimed Tuesday that "many" Tax Authority officials were appointed at the request of Karashi and Ben-Gur, first and foremost the authority's deputy director for human resources, Shmuel Bobarov. Police suspect that Ben-Gur, an accountant, worked to get Bobarov appointed, after which Bobarov appointed many other compliant people to key positions.

"This affair is the clearest imaginable case of a corrupt connection between business and government," a senior legal official said Tuesday, adding that the case had "strategic importance for the rule of law in Israel."

The investigation had been kept under wraps for the last 10 months, during which time the police wiretapped phone calls among the various suspects. Police say these wiretaps are incriminating.

The probe was revealed on Channel 10 television Monday night, and on Tuesday morning, police conducted a massive raid on the homes and offices of 20 suspects, confiscating many documents. The suspects were also taken in for questioning for the first time.

Law enforcement officials said they hoped Channel 10's disclosure had not damaged the probe. However, they noted, that report gave the suspects several hours to destroy evidence before the police could mount their raid.

According to the police, businessmen influenced decisions at the Tax Authority for years, and this continued until very recently. Ben-Gur, for instance, was close to Rub for many years, and he allegedly used this connection in order to further his business with the authority.

Police suspect that Rub, who left his post as head of the authority a year ago, continued to press Matza and his former subordinates to help favored businessmen even after his departure. Rub is suspected of fraud and mediating bribes.

Another suspect is the authority's deputy director for professional matters, Gidi Bar Zakai, who is said to have had a "give and take" relationship with various businessmen in which he helped them with their tax assessments.

The suspects also include Jerusalem businessman Simo Toubol and contractor Yoram Ela, who are suspected of receiving tax breaks or other assistance from the "planted" officials. Toubol, who owns a building materials company and two prestigious restaurants, is suspected of payingbribes in order to obtain undeserved breaks in an investigation conducted against him by the Tax Authority. Police believe that, with Zaken's help, he got Matza to pressure the investigating team to go easy on him.

Matza is suspected of both giving and receiving bribes, as well as fraud and breach of trust.

In another case, police said, a Tax Authority employee who wanted a promotion is suspected of having gone for an "interview" with businessmen whom he knew had influence in the authority.

State Prosecutor Eran Shendar has been kept abreast of the investigation, and attorneys from the prosecution's economic department have been involved in it from the start.

Wiretaps of Zaken in this case resulted in the police overhearing a conversation related to their sexual harassment investigation against former justice minister Haim Ramon. It was this conversation that in turn led to their controversial decision to wiretap Zaken and two other people in Ramon's case.

The Movement for Quality Government in Israel Tuesday urged Attorney General Menachem Mazuz and Civil Service Commissioner Shmuel Hollander to consider suspending Zaken, Matza and other Tax Authority officials under suspicion until the investigation is completed.