Money Laundering Keeps ultra-Orthodox Families Afloat

The free-loan funds that play a central role in supplementing the incomes of ultra-Orthodox households rely on black market capital. Draft legislation cracking down on tax evasion could spell trouble for them.

Ultra-Orthodox Jews mourn for prominent Jewish Rabbi Yochanan Sofer of the Erlau dynasty during his funeral in Jerusalem, Monday, Feb. 22, 2016.
AP

The deliberations in the Knesset Finance Committee took a personal earlier this month when lawmakers raised the issue of giving the Israel Tax Authority the right to examine private bank accounts in its battle against money laundering and tax evasion.

The idea behind the draft legislation is that the tax collectors would be alerted to possible cases by unusual activity, for instance accounts in the name of minors that suddenly get a big deposit from an overseas tax shelter like the Cayman Islands.

The proposal has aroused strong opposition out of concern it would violate the privacy rights of Israelis, even though the law would restrict the Tax Authority’s rights to exceptional cases and requires that examinations be approved in advance by the Justice Ministry. In many countries, the tax authorities have this right.

But in the finance committee it wasn’t civil rights activists who decried the injustice of the legislation, but rather two Haredi MKs — Yaacov Litzman and Moshe Gafni of United Torah Judaism. “I wouldn’t do it to my worst enemies,” Gafni told MK Nissan Slomiansky (Habayit Hayehudi), the committee’s chairman.

When Slomiansky answered, “One day you’ll have to explain to the country why this law hurts you so much personally,” Gafni countered, “The day I’ll have to explain that, you’ll be flying to the Cayman Islands.”

What exactly Gafni meant by the remarks is unclear, although the innuendo was that one or both of them had bank accounts in the Caribbean island tax shelter. But there can be little doubt that few UTJ voters have an abiding interest in the proposed legislation. Far from being concerned with being ensnared in a tax investigation, the great majority of ultra-Orthodox have incomes far too low to be paying taxes at all.

The answer to that question comes from Eitan Regev, a researcher at the Taub Center for Social Policy Studies, who in a 2014 study asked how it was possible that Israeli Haredim — the poorest population in the country — can finance the purchase of a home. Ultra-Orthodox families are not only contending with rising prices but, because they have large families, need bigger houses than other Israelis and prefer to live in specific areas where there is a big Haredi population.

Regev found that the cost of housing has caused Haredi indebtedness to grow to unsustainable proportions. That isn’t a problem exclusive to the Haredi community; Regev found that inflating housing costs have pushed many Israelis’ monthly expenses above their income, but for Haredim the red is the deepest of them all.

Reported expenses by ultra-Orthodox households exceed reported income by 3,209 shekels ($833) a month, equal to a third of their reported income and four times the shortfall that non-Haredi Jews report. It’s also 50% more than Muslim Israelis report.

“The gap between expenses and income is so wide that it suggests there is significant under-reporting of income and a major element of black market labor going on,” Regev concludes in his study.

However, the shortfall is so big that Regev assumes off-the-books jobs aren’t enough to close it and that Haredi families are making use of a gamach, a free-loan fund that is a common fixture in the ultra-Orthodox world to help people in financial distress.

Gamachim are funded by charitable contributions. While they don’t collect interest, they are for other purposes a bank that makes loans backed by guarantors. Regev estimates that anywhere between 10% and 20% of a typical gamach’s loans are never repaid, which is a very high figure.

Gamachim have grown in importance in the Haredi world in recent years. Haredim raise funds from them to accumulate enough capital to qualify for a mortgage. Regev estimates that 9% of ultra-Orthodox families have borrowed from a gamach and among the poorest the rate is 15%.

As a religious institution sanctified by tradition, gamachim are widely supported in the ultra-Orthodoxy world from the funding side, too. Some 90% of Haredim have donated to one — 42% of them giving 1,000 shekels or more — a much higher rate of giving than the 10% by non-Haredi Israeli Jews.

But the rate of contributions has been going down as the community becomes poorer. The real source of donations to gamchim comes from wealthy Haredim overseas — although much of the money being transferred isn’t charitable, according to what Regev learned from Haredi sources while conducting his research.

“Most of the respondents agree that the bulk of the money comes from loans received under the guise of donations, and that gamachim are businesses in every respect,” said Regev. “They are engaged in extensive money laundering. Most of the funds channeled to them (that is, black money) comes as loans from Jews abroad or from Haredim who live in the country but have the status of foreign residents. They transfer the funds to charitable funds from foreign accounts. It’s very difficult to track the movement of these funds.”

Police and tax investigations over the years have highlighted the role of gamachim in laundering money. For instance, a 2009 U.S. Federal Bureau of Investigation probe of the Syrian Jewish community in New Jersey and Brooklyn also involved the heads of yeshivas and other Haredi institutions in Israel.

“Members of the Haredi network exploited their ability to move money through Haredi couriers who fly all over the world,” said Regev.

The method of raising money for gamachim is sophisticated. Funds from a wealthy Jew abroad will be divided between gamachim to hide its origin and the total amount involved. The money is loaned. Even if 10-20% is lost to bad loans, the cost of laundering money is relatively small.

The loans that are repaid are returned, the funds are transferred to the United Sates where they are again divided into small sums donated to local charities, which return the money to the original “donor” in the form of ruses such as inflated fees for services. “The systems works well thanks to Haredi collaboration and trust,” said Regev.

Apart from the legislation empowering the Tax Authority, the Knesset is weighing another bill that threatens to disrupt the illicit flow of money. The legislation would create a new supervisor for no-bank financial services, whose mandate would include the grey market for loans and gamachim.