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Israeli arms dealers have negotiated and sold military equipment to a number of countries defined by Israeli law as enemy states in recent years with the full acknowledgment and approval of the Defense Ministry, Haaretz has learned.

The ministry has okayed negotiations and sales between Israeli dealers and several Arab states including Iraq, Libya and Yemen, say the sources.

Attorney General Menachem Mazuz recently approved the Tel Aviv District State Prosecutor's Office decision to close an investigation against dual Israel-U.S. citizen Shlomi Michaels, whose company, the Kurdistan Development Organization (KODO), was suspected of illegal arms deals with Iraq.

A police spokesman confirmed they had opened an investigation into Michaels dealings in 2006. Michael's company Kodo used to be partly owned by former MK Dani Yatom, who is also a former head of the Mossad secret service. The police spokesman stressed that at no point in the investigation was Yatom questioned or considered a suspect. Yatom said that he severed his ties to the company in 2002, when he was elected to the Knesset, and before the company began its dealings in Iraq. Michaels, a former member of the elite Yamam police unit, emigrated to the U.S., where he started Kodo, which is registered as a company in Switzerland.

The investigation began on the basis of information that equipment manufactured by Israeli companies like Magal Motorola and Tadiran were being used in the construction of an airport in the city of Arbil, in Kurdish-controlled northern Iraq, and that Kodo's security advisers were training local Kurdish militias. Laura Rozen wrote this week in Mother Jones, a U.S. weekly, that Kodo was vying for a 20 percent stake of a $300 million budget. Its activity in the Kurdish territory ended after it received information that Iranian agents might try to harm Israelis.

Police began investigating the company after it discovered it did not receive approval from the Defense Ministry to operate in Iraq, which is still technically in a state of war with Israel. The ministry's former director general, Amos Yaron, told police he had approved the company's dealings.

Haaretz recently learned that the Defense Ministry allowed Israeli dealers to sell flak jackets to Libya and weapons to Yemen. In the past, the ministry allowed the Israel Aerospace Industries to enter negotiations with Yemen over its Mig-fighter planes but the deal fell through.

According to a 1939 law drafted under the British Mandate as a way to supervise trade with Nazi Germany, the Finance Ministry is charged with defining countries as enemy states. However, any government ministry may de facto approve trade deals with enemy states based on its own definition of the term.

"International law or Israeli law is not clear over the definition of an enemy state," Ehud Keinan, the deputy legal adviser to the Foreign Ministry, admitted in 1999. Iraq's classification as an enemy state was removed after the U.S. invasion of the country in 2003. Since then Israeli companies have supplied the U.S. army in Iraq with drones and ammunition.

The Defense Ministry spokesman responded that "the Defense Ministry obeys the law but does not comment on defense industry trade."