Israel Stalls on Monitoring ultra-Orthodox Charities, Exposing Them to U.S. Sanctions

Ultra-Orthodox charities are considered high-risk for money laundering, as all their operations are in cash and they lack all monitoring

Moshe Gafni, Member of the Knesset for the Haredi party United Torah Judaism. December 19, 2017.
Olivier Fitoussi

After years of foot-dragging the Knesset is being asked yet again to debate the sensitive issue surrounding money laundering and tax evasion risks involved in the work of religious charities.

The debate is being run by the most senior Haredi figure in the Knesset, Finance Committee chairman Moshe Gafni (United Torah Judaism), so it is doubtful whether we’ll see any substantial progress soon on the issue.

It’s been two years since a bill was introduced to monitor the charities that provide loans without interest to the needy. Gafni has taken some steps with regard to the legislation but hasn’t really advanced it.

Tuesday’s debate will focus on the question of which organization would monitor these charities. It’s a strange question considering the fact that the bill says it should be the body that monitors non-banking credit institutions in Israel, the treasury’s Capital Markets Authority.

But Gafni is unhappy with this organization, especially since the authority has insisted on full control and Gafni would prefer to see an easier approach.

At first he tried to advance a strange proposal to establish a new financial monitoring body in the welfare ministry. When the state objected, Gafni checked out other possibilities. Several weeks ago he checked out the prospect of the bank monitors though they are no less strict than the capital markets unit. The Bank of Israel did indeed rejected that idea. But Gafni’s idea gave the impression that the main reason for his coming up with the alternative was so as not to look like he was dragging his feet on the legislation.

Gafni has invited a fourth government agency to the meeting, the Justice Ministry’s Corporations Authority, to see whether they would be willing to oversee the charities, via a more lenient approach than other authorities.

This appeal will also prove futile, as the Corporations Authority will not be able to undertake this job so long as the state sticks to its position that it’s a task that belongs to the Capital Markets Authority.

Time is running out for the charities and the country. The fact that they are not being monitored, hence their operations run a significant risk of money laundering crimes, exposes them to the risk that American banks will stop working with them. This is a threat that can be carried out at any time. The charities got a two-year extension from the Americans to be monitored. The deadline expired in August, and that means at any moment a Haredi charity may find itself rejected by the American financial system.

It’s all stuck

Time is also running out for the state because of Gafni’s complications – holding the legislation hostage to approving an international charter to reveal tax evaders’ identities. Some 100 nations that are signatories to the Common Reporting Standard, meant to fight tax evasion, have signed a commitment to provide information about the deposits of citizens of other countries in its banks. The charter means that the option of using the best known tax shelter in the world, depositing money in some unknown bank overseas, has ceased to exist. In other words it has ceased to exist for all countries signed onto the CRS.

Israel has signed the charter but because of Gafni, who demands a compromise on the religious charters it hasn’t yet gone into effect. Even in this case the last deadline for Israel validating the charter was in September. This means Israel is missing a potentially critical opportunity to expose tax evaders abroad and is also violating an international charter it has signed. On the way yet another deadline has passed – to appoint a replacement for Capital Markets Authority chief Moshe Barkat.

Gafni demands an easing of charity restrictions even though the anti-money laundering authority has given these charities a mid to high risk rating, simply because the charities aren’t being monitored and all their operations are in cash. To the charities’ credit is the fact that they are philanthropic organizations and don’t charge any interest and most are small establishments so of them even run by volunteers.

Gafni’s claims do not fall on deaf ears. Dorit Schlesinger the previous head of the capital markets authority refused to compromise on the issue but her replacement may be more moderate. It may be possible to ease financial sanctions imposed on charities caught violating the law.

In any case, Gafni is seeking another extension before subjecting the charities to American oversight after a two years extension which expired without achieving any agreement on CRS monitoring. The state is not enthusiastic about asking for further extensions but let’s just guess as to what the state may be willing to compromise. In the end achieving oversight of the charities is up to Gafni’s good will and without his approval there will be no such monitoring.

No compromise seems on the horizon, but the state’s ability to withstand the pressure is also eroding. It looks more possible than ever that some deal can be achieved to continue the debates while approving the CRS and ensuring the charities aren’t sanctioned by the Americans, as well as a compromise over the extent of control that the Capital Markets Authority would exercise over the charities. In the meantime there is no monitoring of money laundering and when any sort of monitoring will be in place, it will apparently be soft.

Gafni said in response that he is holding a debate at the Knesset on the issue and he would continue to advance the legislation for oversight of the charities.