Government watchdog claims some Israeli nonprofits used for money laundering
Claim included in the explanatory notes to a bill that would give the registrar new powers to regulate nonprofits and impose administrative sanctions.
Nonprofit organizations are increasingly serving as a vehicle for money laundering, the Registrar of Associations asserts.
This claim was included in the explanatory notes to a draft bill that would give the registrar new powers to regulate nonprofits and impose administrative sanctions on those that break the rules. The bill will be submitted to the Knesset next month as part of the Economic Arrangements Bill accompanying the budget.
In its notes, the registrar wrote that since 2005, the number of registered charities has ballooned from about 5,000 to 31,136. Some of these, it said, are being used to launder money.
The registrar is seeking new regulatory powers in response to the massive fraud discovered earlier this year at the Hazon Yeshaya charity. In April, 10 employees of the charity, including its director and founder, were arrested on suspicion of perpetrating a multimillion-dollar fraud. Specifically, the charity allegedly sold food for cash instead of distributing it to needy Holocaust survivors as it told both its donors and the registrar it was doing.
The subsequent police investigation found that about two-thirds of the organization's income stemmed from selling food to other organizations, with no supervision, though such activity wasn't authorized by the organization's bylaws. The millions of shekels it thereby earned from other Israeli organizations were then listed in its financial statements as donations from abroad to hide the fact that it was selling food.
Altogether, Hazon Yeshaya had a turnover of more than NIS 40 million a year, including grants of NIS 2 million from the government and NIS 250,000 from the Jerusalem municipality.
The registrar suspects that Hazon Yeshaya isn't the only organization involved in such shenanigans. "There are organizations that exploit the benefits given to the third sector for the purpose of money laundering," the explanatory notes assert.
If the bill passes, the registrar would be given the power to overturn the decisions of an organization's General Assembly, if they were made improperly. It would also be able to replace an organization's officers or senior employees, bar an officer from founding or becoming an officer of another organization for a specified period of time, and assign supervisors to an organization from among the staff of the Israel Corporations Authority (of which the registrar is a branch ). Authority staffers would be given investigative powers, and the registrar would be able to impose financial sanctions on both errant organizations and their officers.
Yet the registrar already has fairly substantial powers that go largely unutilized. It can strip organizations of their certificate of good governance, which is necessary for tax-exempt status; force them to institute a recovery program; assign an accountant to oversee them; or even order them liquidated. But it rarely does so.
In 2007, for instance, its accountant general published a scathing audit report on Elad, the nonprofit that runs Jerusalem's City of David national park and also works to settle Jews in East Jerusalem. Among other things, the report said that Elad had failed to correct the problems noted in the previous audit, and continued to transfer money to other associations, or to companies owned by other associations. It also found that the organization had no internal auditor, despite the large scale of its activities. Yet Elad continues to receive government funding and good governance certificate to this day.
Also in 2007, police launched an investigation into the Chabad youth organization. After receiving the findings of this probe, the registrar demanded that the organization correct numerous problems and prepared a recovery program for it. Nevertheless, it did not withhold the organization's good governance certificate.
Yet another example was published in Haaretz just this week: Senior officials at Bank Hapoalim approved donations by the bank's charity, Poalim Bakehila, to other organizations in which those same senior officials, or members of their family, were involved. That creates a clear risk of conflicts of interest. Yet once again, the registrar declined to withhold the organization's good governance certificate, accepting its assurances that all this was in the past, and that the problem wouldn't recur.
But regardless of whether or not the new powers will actually be used, charities are planning to fight their enactment, said Uriel Lederberg, director of an umbrella organization of nonprofits called the Israeli Civic Leadership Association.
"There are a handful of organizations that stray; this isn't the norm," he said. "Thieves should be dealt with by the police, not the Registrar of Associations. The explanatory notes to the bill are outrageous. They view the third sector with suspicion. This isn't a trend; it's a few isolated cases.
"There are more thieves and criminals in the business sector," he added. "The third sector is the most moral sector of all, and its human capital is the most moral and modest. What's the basis for the claim that nonprofits have become a pipeline for money laundering? Why do they think nonprofits can launder money better than the business sector?
"In our view, this is a law that bypasses the legal system, and which they're planning to discuss in a blink as part of the Arrangements Bill. The Registrar of Associations has enough powers today, yet it's seeking police powers for itself. If they have suspicions, let them go to the police."
The Finance Ministry decided to include the registrar's clause in the Arrangements Bill as part of its broader war on the underground economy and money laundering, declared in part in an effort to reduce the government's budget deficit.
The registrar said it is "not interested in commenting" on the matter. The treasury said that work on drafting the 2013 budget "is currently at its height, so we aren't commenting at this stage."
Clarification: The Hazon Yeshaya charity is not headed by Rabbi Yoshiyahu Pinto. His name was erroneously mentioned in the original article.