Madoff funds may have been used to evade taxes

Hundreds of Israelis who invested their money in the funds managed by Bernard Madoff and won't have nice returns to look forward to anymore, may soon be required to report to the Israel Tax Authority on where they got their money from.

The trustee appointed by the court in New York to protect the investors' money, Irving Picard, will likely reveal the complete list of investors in Madoff's funds, as well as the amounts they put in over the years, and the Israeli taxman may take a serious interest in the information.

Madoff is the Wall Street investment manager who recently admitted to a years-long Ponzi scheme fraud scam totaling some $50 billion.

The entry ticket to Madoff's investment fund was a minimum of $1 million, as well as complete control over the investments. Madoff's wide net of connections in Israel and worldwide Jewish communities drew quite a number of Israeli investors. Many of them saw Madoff as not only a way to earn a nice return on their money, but also as a way to avoid the income tax authority's watchful eye.

A number of quite worried clients have shown up at the doors of the best-known Israeli law firms specializing in tax law in the past few days asking for an urgent consultation. The fears that Picard will reveal the names and amounts, or be forced to reveal them as the result of a lawsuit, has caused the large number of requests.

"Already at this stage it is possible to say that large sums of money reached Madoff's funds from Swiss banks and various tax havens," said Dr. Avi Nov, a lawyer specializing in tax planning. "Usually the money there is not money that the owners are interested in reporting to the authorities.

"Here there was an excellent linkup of sophisticated investors who knew how to avoid paying taxes in Israel, and funds specializing in hiding their true purposes. Private investors in Israel always spoke about Madoff's returns. European banks recommended investing with him and when they heard the success stories, they asked to increase their investment," said Nov.

Even if the investors get back only a small part of their money from Madoff, the original sums and all profits still are taxable income, said attorney Jack Balanga.

"In many cases it is a criminal offense punishable by up to 10 years in prison. It is reasonable to assume that the wealthy will ask for a process of willing disclosure," he added.

The ITA was not willing to comment on the matter of a possible list of tax offenders being revealed in the case.

"The matter is not on the Authority's agenda. Nevertheless, if we receive concrete information, it will of course be examined," the Tax Authority's spokeswoman said.

However, since the shock that hit the ITA after the exposure of the serious corruption charges at top levels, the ITA no longer has a representative in the U.S. who can be in constant contact with the authorities in New York, and investigate the Israeli connections.

The previous representative in the U.S., Yigal Sa'ar, was returned home when the police investigations became public knowledge, after his appointment was suspected to be one of the "payoffs." In any case, Sa'ar would probably have had a hard time in dealing with the case, as he was appointed without a proper command of English.

Hadassah, the Women's Zionist Organization of America, said yesterday that it lost $90 million it invested with Madoff, though the exact amount is still being determined. A statement released by the organization on Wednesday confirmed the lost sum but said that while "falling victim to this unprecedented fraud will require us to make necessary adjustments... it has not in the slightest affected our commitment to our core Zionist mission."

In 2008, Hadassah gave about $100 million to its operations in Israel, 99% of which went for its two Jerusalem hospitals. "The situation is difficult, but not catastrophic, since donations are less than 10% of the medical center's operating budget," said an official in the Hadassah Medical Center. He said it did not threaten the existence of the hospitals, but they would have to find ways to save money.

In any event, Hadassah had already planned to cut its support for the hospitals by 40% next year and use its contributions only for development and not ongoing support. Now even this amount will likely be cut back.

Other hospitals are also facing cutbacks from some heavy donors who lost large sums to Madoff, as are the country's universities.