How Israel Risks Turning Itself Into a 'Terror-financing State'

The failure to crack down on the cash transactions favored by criminals and terrorists makes Israel vulnerable to the designation

Mixed denomination Shekel currency banknotes sit on display in this arranged photograph at Israel's central bank in Jerusalem, Israel, on Monday, Aug. 19, 2013. Israel's shekel headed for the weakest level in almost a month on bets the Bank of Israel will continue to buy dollars to stem a rally in the best-performing major currency this year. Photographer: Ariel Jerozolimski/Bloomberg

Last week none other than Karnit Flug, governor of the Bank of Israel, was photographed in Jerusalem’s Mahane Yehuda market shopping for fresh produce and paying for it with the newly issued banknotes featuring the poets Rachel and Leah Goldberg.

When she handed them over to one of the grocers, he looked surprised, but he didn’t hesitate to take it: In Mahane Yehuda, like in Israel’s other open-air markets, cash remains king.

That’s not the case in other countries, like Sweden and China where even in traditional markets, advanced technology like electronic wallets are often used. In Israel it hasn’t caught on for two reasons. The first is that the lack of competition in the credit-card sector means the fees business pay for taking cards is high, and so on small transactions like fresh produce, merchants prefer to take cash.

The second reason is more nefarious, which is that paying in cash is a good way to evade taxes. It’s anonymous and lacks transparency.

Thus, in the same week that the Bank of Israel introduced the new notes, we learned the sordid details of alleged bribery in the Yisrael Beiteinu affair and how millions of shekels were allegedly paid by the tourism and agriculture ministries to advertising agencies, with intermediaries and official skimming off hundreds of thousands of shekels for themselves along the way.

Bigger is better? Money in circulation by value of notes and year

The payments were made in envelopes stuffed with 200-shekel bills. After all, if you’re going to pay big bribes in cash, the biggest notes available in shekels are the best medium.

Big bills are the currency of corruption in Israel and all over the world. By some estimates the black market accounts for 20-22% of the Israeli economy and underworld business another 5%. That costs the treasury some 50 billion shekels ($14.3 billion) in lost tax revenues, an amount almost equal to the defense budget.

That’s why governments all around the world are encouraging the switch to payment by credit card or by digital systems. Sweden has almost entirely eliminated cash transactions; people buy a pack of chewing gum with a credit card. China is skipping credit cards and moving directly to digital payment technology.

In Israel cash use continues to grow. Over the last decade it has expanded at an annual average of 11% and in 2015 jumped by 16%, although it fell back to just 3% last year. The growth is led by the 200-shekel note, the one with Natan Alterman’s visage. It now accounts for nearly half of all bills in circulation.

The amount of cash in circulation relative to gross domestic product in Israel is a relatively low 5.6%, but that figure belies that fact that Israel’s black market is much bigger than the average for countries belonging to the Organization for Economic Cooperation and Development, and the fact that other countries are undertaking serious campaigns to reduce cash usage.

MK Nissan Slomiansky at the Knesset, 2014.
Michal Fattal

Israel’s status as a country not suspected of being home to extensive money laundering or to terror finance hinges on it. The Financial Action Task Force, the international organization formed to combat money laundering, is due to send a delegation to Israel in another four months to consideration Israel’s application to join.

Dirty laundering

The centerpiece of official preparations for the visit is a survey conducted by the Israel Money Laundering and Terror Financing Prohibition Authority, which maps out the risks to Israel’s application. The two biggest are money changes, which only this year came under government supervision, and the second is the continued use of cash for transactions.

If Israel is found to be wanting, it will be exposed to international sanctions and the refusal of global financial institutions to work with it.

Israel has every reason to rein in the use of cash. Despite this, all efforts to advance legislation to limit cash have come to naught. A 2014 committee recommended measures and legislation was drafted two years ago. It was a modest proposal that would put a 10,000-shekel ceiling on cash transactions between businesses, a 50,000-shekel ceiling on private transaction and require checks be made out to a specific payee.

MK Moshe Gafni (United Torah Judaism)
Olivier Fitoussi

Now ask yourself, why would any ordinary person make a 50,000-shekel payment in cash, except possibly to buy a used car? In any case the law wouldn’t ban cash and would have no impact on day-to-day purchases, so that the only ones left to be affected by the law are likely up to something dubious.

Nevertheless, the law has been held up in the Knesset Constitution Committee for the last two years, an unmovable rock. The panel hasn’t had one discussion on it and efforts by the treasury to initiate one have fallen on the deaf ears of chairman Nissan Slomiansky (Habayit Hayehudi).

It seems that Slomiansky doesn’t want to upset the ultra-Orthodox, who the Israel tax Authority says are the biggest users of cash (along with Israeli Arabs) as a way of evading taxes.

In any event, a week ago he nearly succumbed to the treasury’s pressure and agreed to deliberations. That’s when MK Moshe Gafni (United Torah Judaism) suddenly demanded the bill be moved to the finance committee, which he chairs.

The measure is now stuck again between the warring committees, which leaves you with the sneaking suspicion that the entire affair was arranged by the two MKs to stall for time. Gafni denies that and says he has no objections to restricting cash and that the fact the finance committee wasn’t given the bill to begin with reflects am “anti-Semitic” assumption about Haredim favoring cash.

Regardless, the legislation limiting cash is now stuck just weeks before the Financial Action Task Force is due to arrive. Israel faces a major blow to its international standing, but try to explain that to Slomiansky and Gafni.