Financial legislation has inundated Israel over the past year. But one major bill, possibly the most sensitive, has slipped under the public’s radar.
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This bill passed a key legislative hurdle over the summer, being approved by the Ministerial Committee for Legislation, but ran into objections at a public hearing. The bill is also expected to hit heavy opposition in the Knesset, so it’s not at all clear if it has a future. The justice and finance ministries insist that dropping the legislation would be "to surrender to the state within a state that the ultra-Orthodox have built for themselves.”
The bill proposes oversight over the main financial institutions in the world of Israel’s ultra-Orthodox Jews: charitable funds (known in Hebrew as gemachim). Such funds have existed in the Jewish community for hundreds of years and are an integral part of ultra-Orthodox, or Haredi, society. In Israel, they have been the leading financial institutions in the Haredi community for 50 years.
Prof. Yoram Margalioth of Tel Aviv University’s law school is one of the charitable funds' biggest proponents. “This is a wonderful communal-philanthropic institution,” he says. “We can’t destroy it with excessive regulation.”
This alleged excessive regulation is the bill for oversight of Israel's financial services, which implements the recommendations made by a committee headed by Joel Brice, a former legal adviser to the Finance Ministry. The new rules are designed to put the entire non-bank credit market in order in the form of two bills.
The first bill dealt with non-bank credit providers and has already passed in the Knesset. The second bill concerns non-bank credit providers that also accept deposits, which basically makes them miniature banks.
Here the Brice committee found two types of institutions: charitable funds and credit unions, which don’t yet exist in Israel but after these changes are expected to blossom. The charitable funds, however, exist in a big way and are a significant financial power in Haredi society.
A few billion shekels annually
How important? No one knows exactly, and that’s the problem: The funds have been flying under regulators’ radar for decades without reporting to anyone – not to the regulators, not to the Tax Authority and certainly not to the anti-money-laundering authority.
Given this lack of reporting, no one really knows how many of these funds exist and how much money they have. Margalioth estimates the number of funds in the hundreds with most of them very small, but with a few providing loans in the hundreds of millions. Margalioth estimates the charitable funds’ turnover at a few billion shekels annually.
The funds are voluntary institutions – nonprofit groups that receive contributions and use the money to provide no-interest loans. Sometimes the donations are given in return for the right to receive a loan in the future, in which case it’s really a deposit in disguise.
Yes, the donors expect to receive their deposit back, and the donation component comes from not receiving any interest on the money. It seems this model, in which the donation is really a deposit, is the most common one in the Haredi community.
Being voluntary organizations, the funds aren’t incorporated or registered. Many are simply a person who runs the outfit without compensation or on a very low wage. The community’s faith in these people, who almost always operate with rabbis’ blessings, is what keeps the funds in business. Ultra-Orthodox Jews contribute to the funds because it’s considered a commandment, and because they believe in the ability and honesty of the fund’s manager.
One of the largest funds, which estimates its annual turnover at over 100 million shekels ($26.5 million), is the Cooperman Fund, run by Rabbi Hillel Cooperman.
The funds are also very important for poor Haredi families, which can receive interest-free loans from the funds without any collateral or guarantees, even families with very little income.
Eitan Regev of the Taub Center for Social Policy Studies in Israel says these funds are the main financing source for Haredi society today. Meanwhile, Haredim’s dependence on these institutions is growing in tandem with their financial straits, mostly due to the steep rise in housing prices.
Regev says some of the these funds’ activities are illegal; for example, the laundering of money from overseas. Meanwhile, the growing debts in Haredi society have put these institutions in danger of collapse.
U.S. Treasury’s long arm
In the Haredi community, many people admit the funds are growing very rapidly, and their swelling loan books are raising questions about their ability to survive. This too guided the Brice committee when it decided that funds that accept deposits, even if they don’t pay interest, are small banks – and therefore require supervision.
The Brice committee’s bill imposes oversight on funds with a turnover of at least 1 million shekels a year. The list of requirements it stipulates is pretty long; it includes a demand to report to the anti-money-laundering authority, hold a minimum capital of 200,000 shekels to 2.5 million shekels, as well as new standards for employees and managers.
“The charitable funds are simply operating outside the law,” the committee said. “They are not supervised – not from a consumer standpoint, not concerning stability and not concerning money laundering and taxes. It’s as if they don’t exist from the perspective of the law.”
So reporting requirements for the funds are indeed a necessity. This isn’t just because the anti-money-laundering law requires it, but because of the long arm of the Americans: their reporting requirements for donations or deposits by American ultra-Orthodox Jews. This comes under the FATCA reporting rules designed to enforce U.S. tax laws on accounts of U.S. citizens anywhere around the world.
The Brice committee was also worried about stability. For example, one of the large funds operates in an unusual way: It accepts deposits/donations with the depositor having the right to a loan 10 times the amount of the contribution. This is exceptional: Most of the funds provide loans based on their deposit levels, but this fund, which has hundreds of millions of shekels in turnover, has a multiplier of 10 times.
The Brice committee felt the government had to provide oversight to protect Haredi society lest the charitable funds get into financial trouble. Unlike the committee, Margalioth believes the funds are safe for the most part; it’s actually the Brice committee's regulations that will push them to the brink of collapse.