Israel Holding Over $250m It Owes Iran for Oil in Secret Account

A secret government bank account holds funds Israel owes Iran for oil it received before the 1979 revolution. Israel refuses to reveal who has been depositing money into and withdrawing money from the account.

Aluf Benn
Aluf Benn
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Iranian Supreme Leader Ayatollah Ali Khamenei delivers speech during a meeting with air force commanders and officers in Tehran, Iran, Sunday, Feb. 8, 2015.
Iranian Supreme Leader Ayatollah Ali Khamenei delivers speech during a meeting with air force commanders and officers in Tehran, Iran, Sunday, Feb. 8, 2015.Credit: AP
Aluf Benn
Aluf Benn

Israel’s most mysterious bank account has been managed for 30 years in the Bank of Israel. It contains money that Israeli bodies owe to National Iranian Oil Co. for crude oil supplied before the Islamic revolution in January 1979.

The fate of these debts is being determined very slowly in international arbitration in Switzerland.

The funds are under the control of the accountant general in the Israeli Finance Ministry, Michal Abadi-Boiangiu. The Bank of Israel’s most recent financial report, from the end of 2013, shows the account balance is $256 million - about 1 billion shekels.

The Finance Ministry calls this a “special foreign-currency account,” while the Bank of Israel refers to it in its report as “a different deposit of the government in foreign currency.” But it is the same amount, whose annual balances are mentioned in the official reports of the accountant general, the State Comptroller and the Bank of Israel.

Fifteen years ago the government withdrew most of the funds from the account. It then was refilled with money whose source is not clear.

The most recent transactions in the account were recorded over the past three years, during Benjamin Netanyahu’s term as prime minister and while Abadi- Boiangiu has served as accountant general.

In 2012, $71 million was withdrawn from the account, and in 2013 $60 million was deposited. The Bank of Israel’s financial reports, which present the changes in the balances, do not explain the transactions.

The Finance Ministry declines to comment on questions about the debts to Iran or about the arbitration process NIOC is conducting against Israel. The ministry relates to the entire matter as a state secret.

Fall of the shah, rise of Khomeini

The fuel debt Israel owes to Iran was created toward the end of the era of the Shah, who was a close ally of Israel and for about two decades was the country’s main oil supplier.

Israel’s energy companies, Paz, Delek and Sonol, bought crude oil from NIOC through the Geneva-based Swiss shell company SPTM (Société des Pétroles et des Transports Maritimes), known as Sopetrol.

The Iranians granted the Israeli fuel companies trade credit of the current month plus three more months. The final five oil shipments left Iran before the revolution and arrived in full in Israel.

But when the time came to pay for them, the Islamic Republic of Ayatollah Ruhollah Khomeini was already in power in Tehran, which cut all relations with Israel, stopped oil shipments and came out in strong anti-Israeli rhetoric.

Israel debated long and hard before deciding not to pay the debt. The decision was made at a cabinet meeting on June 3, 1979, four months after the regime change in Iran.

Just a few weeks earlier, then-Prime Minister Menachem Begin had signed a peace treaty with Egypt and now found time to work diligently on his next mission: to expand the settlements on the West Bank.

The main issue the cabinet discussed that day was the establishment of Elon Moreh on private Palestinian land belonging to the residents of the village of Rujeib near Nablus. The land was expropriated for “security needs.”

The debate was intense. Agriculture Minister Ariel Sharon pushed to establish the settlement; opposing him were Defense Minister Ezer Weizmann, Foreign Minister Moshe Dayan and Deputy Prime Minister Yigael Yadin, who chaired the meeting in Begin’s absence.

The opposing explanations were rejected and the majority, made up of the ministers of the Herut and National Religious parties, including Begin who left an absentee vote in favor, voted to expropriate the land. The decision was later overruled by the High Court of Justice, which rejected the security justifications, and the settlement was built elsewhere.

But the cabinet’s agenda that day included another item: “The relations with the National Iranian Oil Co.”

The decision not to pay Iran was not mentioned in the following day’s Haaretz report on the bitter cabinet debate, and the debate itself has remained secret.

But its implementation was immediate: The Finance Ministry instructed the three energy companies to deposit the money due the Iranians in special deposits in three commercial banks. In return the ministry on June 22, 1979, granted the companies a letter of indemnification, in which the government took the debt and its management on itself.

An issue neglected

In October 1981, Haaretz reported for the first time that Iran intended to sue Israel for $1 billion over past deals between the two countries. The article stated that the money the Israeli fuel companies owed the Iranians was transferred into a special account of the accountant general.

The Iranians were in no rush to collect the debt from Israel, possibly because they were busy with matters like the war against Iraq. On July 27, 1985, NIOC started an arbitration procedure against Sopetrol, the shell company that was the formal purchaser of the crude oil.

In 1991 Paz, Sonol and Delek were named as parties in the arbitration, and in 1999 the arbitrators ruled that Israel must pay the debt to the Iranians, with interest.

Israel ignored the payment orders delivered to Sopetrol in Geneva, and the arbitration has been moving through the courts there ever since.

In January 2014, Switzerland’s Federal Supreme Court in Lausanne ruled in favor of NIOC. The collection of the full debt has been delayed until it becomes clear whether the payment would violate the Swiss sanctions against Iran.

Alongside the initial arbitration proceedings, Iran in the mid-1980s opened a different process, which seems connected to oil it supplied to Israel as an advance on the account of a joint Israel-Iran project. In this project, established in 1968 and halted after the Islamic Revolution, the two nations were transporting and selling Iranian oil to European customers via Israel.

The project was a joint venture of the State of Israel and NIOC. At its heart stood the construction of the Trans-Israel Pipeline from Eilat to Ashkelon, as well as two oil ports and storage facilities, and a fleet of tankers.

After the Islamic revolution in Iran in 1979, Iran turned from Israel’s ally into its enemy. Israel continued to operate the pipeline, after nationalizing it in practice using a legal trick. Iran sued Israel in international arbitration to receive its share of the project’s revenue.

The terms of the agreement have yet to be made fully public, but the Israeli government granted the project a 49-year concession, exemption from taxes and planning, and leeway to build. Press reports relating to the pipeline, its funding and its sources of fuel were censored.

The magazine Global Arbitration Review estimated the value of amounts under arbitration at $7 billion. This has been called the “big arbitration,” as opposed to the $1 billion “little arbitration” over the oil that was never paid for.

In these proceedings, which started in 1994, Israel appointed former Israeli Justice Minister Haim Zadok as its representative in the arbitration. After he died, in 2002, Israel appointed attorney Avigdor Klagsbald to represent it. He continues in the post.

Procedural delays, official silence

Through all the proceedings since then, Israel has prompted a number of procedural delays and has tried to postpone discussing the main issues, while Iran has stubbornly continued to demand its money. Israel lost a number of rounds in the arbitration and in French and Swiss courts, in which it tried to stop the arbitration process and avoid paying the money.

The two governments have officially kept silent about the proceedings and prefer to trade public threats and condemnations, without ever admitting in public that they are conducting drawn-out and proper legal proceedings against each other. The various legal decisions have been published openly in Europe and have raised quite a bit of interest in international legal circles.

The Israeli government has not only kept its silence at home. Senior U.S. and European officials, who have filled key roles in relations with Israel and in joint discussions for formulating the economic sanctions against Iran, told Haaretz that their Israeli partners never informed them of the arbitration proceedings and never asked to coordinate their legal strategy against the Iranians with them.

As an alternative, the Israeli government could have informed the public of the Iranian oil company’s financial claims, and perhaps academic-research institutions might have held professional conferences on the arbitration proceedings and their possible effects on Israel-Iran relations.

But this never happened. The handling of the debts was concentrated with the accountants general in the Finance Ministry and few people in the government even knew of the proceedings.

The Israeli media rediscovered the story every few years - mostly in articles written by the journalists Yossi Melman, Ronen Bergman and Avi Bar-Eli - and then it was left alone once again.

Covered by the official smokescreen and the media silence, Israel prepared for the arbitration and decided to transfer the money for the oil debts, which had been deposited in Bank Hapoalim, Bank Leumi and Mizrahi-Tefahot Bank, to a government account in the Bank of Israel.

The goal, it seems, was to better protect the money: The commercial banks, which have branches and subsidiaries overseas, are more exposed to seizure, liens and lawsuits than the central bank in Jerusalem.

The State Comptroller’s report from 1987 said that in the 1984 fiscal year, “the accountant general transferred from the accounts of the accountant general in other banks to the special account of the accountant general in the Bank of Israel the sum of $125 million.” The State Comptroller found a mistake in the listing and informed then accountant general Aryeh Shor of the error, and he corrected the wording. A year later another $200 million was added to this account.

Fuel companies indemnified

The cabinet decided in March 1988 to transfer the money owed to the Iranians to the government, Haaretz has learned. The fuel companies then received an official commitment from then-Finance Minister Moshe Nissim. The government said it would indemnify them for any damages or costs they would incur due to the nonpayment of the debts to the Iranian oil company, if the future payments required exceeded the amounts the companies had already deposited in the accounts in the banks (for example, because of interest payments or compensatory damages).

The government promise to cover the debts was conditioned on the full cooperation of the three fuel companies. The three were asked to immediately inform the Finance Ministry of any suit, claim or document they received concerning the Iranian oil company; to act according to the ministry’s instructions; and to receive legal representation from the lawyers appointed by the government.

The Israeli energy companies were represented in the legal proceedings in Switzerland by attorney Daniel Guggenheim, owner of a small law firm in Geneva, whose expertise lies in banking laws and commercial law.

Guggenheim also heads the Bona Terra philanthropic foundation, which provides grants for young Jews who want to work in agriculture. The foundation was established by a friend of the family, and Guggenheim inherited its management from his father, Paul Guggenheim, a world-renowned authority on international law.

The foundation donates hundreds of thousands of shekels a year to agricultural projects in the Negev and the Arava, such as “sheep breeding based on wastes” and “producing arak from date waste.”

In their financial reports, Paz, Delek and Sonol do not mention any claims against them concerning the Iranian oil debts, even though in the sections on legal liabilities and lawsuits they detail even very small sums they could possibly owe.

The fuel companies base this lack of reporting on the indemnification they received from the government, which guarantees full responsibility for any additional debts they might owe. So a loss in the arbitration proceedings would not affect their financial situations in any way.

The money deposited in the government’s special account at the Bank of Israel remained unchanged for some 15 years. In the official reports the identical balance was listed year after year: $8.349 million.

Withdrawal based on Mandate law

In 1999, when Ehud Barak was prime minister and Avraham Shochat was finance minister, it was decided to withdraw the money. The legal basis for the withdrawal seems to have been the Trading with the Enemy Act, dating to the time of the British Mandate before Israel was founded. This allows the finance minister to allocate to the Custodian of Enemy Property any assets belonging to the government of an “enemy state” and to citizens of or companies registered in an enemy state.

The legal validity of this confiscation is unclear since Israeli law never defined Iran as an enemy nation after the Islamic Revolution. The formal change in Iran’s status under Israeli law started only in 1998, when Nahum Manbar was convicted of “aiding the enemy in its war against Israel.” That year, Manbar was convicted of selling arms to the Iranians as well as collaborating with and providing information to an enemy. He was sentenced to 16 years in prison, and was released in October 2011.

The Tel Aviv District Court judges who convicted Manbar ruled that Iran was an enemy state, and the Supreme Court upheld their verdict in 2000.

Nonetheless, the Finance Ministry took its time updating the Trading with the Enemy Act, explaining in an official document from the end of 2001 that it was a “complex and sensitive issue.”

Only on July 31, 2011, was the official declaration of Iran as an enemy state completed, implemented in a regulation issued by then Finance Minister Yuval Steinitz. Pursuant to the international sanctions against Iran, the move classified Iran as an enemy state and cited a list of Iranian organizations and individuals involved in the country’s nuclear and missile projects. NIOC was not explicitly mentioned, but the ordinance prohibits all economic activity with enemy states.

Manbar effect on arbitration

Manbar’s conviction also affected the arbitration with Iran. In one of the bouts within the legal drama, NIOC tried to sue the Israeli government in an Israeli court. The court rejected the suit out of hand, ruling that Iran had been ruled an enemy state in the Manbar case and as an enemy of Israel it had no standing within and wasn’t entitled to protection from the Israeli legal system.

At the same time, the administrative procedures to withdraw the money owed to the Iranians from the Bank of Israel were completed. In November 1999, Shochat appointed Nir Gilad, the treasury’s accountant general at the time, as the Custodian of Enemy Property. After Gilad left the Finance Ministry, the appointment passed automatically to the accountants general who followed him.

Large withdrawals from the account with the Bank of Israel were made, until at the end of 2002 the balance was only $8 million.

A year later, the big change came: During Netanyahu’s term as finance minister with Yaron Zelikha as his accountant general, fresh funds were deposited in the account. The balance rose and fell until it reached its present level of about $250 million, due mostly to a large deposit in 2010.

Since then the Iranians have won the “little arbitration” case over the oil-company debts. In January 2014 in this case, Switzerland’s Federal Supreme Court ruled in favor of NIOC and ordered the Swiss shell company Sopetrol and the Israeli energy companies - and indirectly the Israeli government, which has indemnified the companies - to pay NIOC 100 million Swiss francs ($107 million) for the oil supplied before the revolution. The court’s decision also stated that part of the debt had been paid in March 2009.

The Supreme Court wrote in its ruling that it did not understand why a Swiss company’s debt to an Iranian company, stemming from unpaid invoices for oil deliveries made 34 years earlier, is relevant to Swiss foreign policy today. It rejected the appeal and ordered Israel to pay court costs.

But the Supreme Court also conditioned the payment to the Iranians on the approval of the Swiss State Secretariat for Economic Affairs in Bern.

The judges thus left the Israelis a small opening to avoid paying the debt, since transferring the money to the Iranians might clash with the international-sanctions regime, to which the Swiss government is committed.

Accordingly, the court sent a copy of the judgment to the Secretariat for Economic Affairs for its perusal. In this matter, the court indirectly accepted part of the Israeli case, which they had scornfully rejected in their decision.

Abadi-Boiangiu - who also holds the title of Custodian of Enemy Property - sent an official letter to Guggenheim, according to which the Geneva shell company, too, is prohibited from paying the debt to the Iranians because the company is “controlled by Israeli interests.”

A spokeswoman for the Economic Affairs Secretariat, Isabel Herkommer, told Haaretz that the sanctions policy requires any payment of 500,000 francs or more to an Iranian body to be approved in advance. She declined to say whether the Secretariat had received such a request concerning the Israeli debt to NIOC in the arbitration proceedings.

The judgment from a year ago hasn’t ended the dispute.

Israel and Iran are continuing with the “big arbitration” relating to the pipeline and oil tankers. It’s unclear how the Debt Collection Office in Geneva might collect the debt relating to the “little arbitration” from energy companies that are subject to the Israeli sanctions law, and these open questions in the larger arbitration case are even farther from resolution.

In a few weeks, the Bank of Israel will publish its financial report for 2014. It will be interesting to see whether the “special deposit” of the accountant general remains the same amount or once again will show mysterious transactions.

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