For more than 20 years starting in 1961, the Israeli government required citizens to lend it money in times of crisis, when it suddenly was confronted with unexpected and costly crises like the 1973 Yom Kippur War.
But the loans were never repaid. Indeed, the state stopped paying interest and inflation-linkage on them in 2012, 15 years after the last of the loans, which were taken during the First Lebanon War in 1982, were supposed to have been repaid.
An estimated 300,000 Israelis who lent the state money in those years, a sum now estimated at 500 million shekels ($133 million), not only haven’t been repaid, but the value of the money is being constantly eroded.
Now a non-profit organization Tzedek Financi (Financial Justice) is seeking to get it back through a class action suit. What it has found out so far from the government’s response is that officials have done nothing to try to locate the lenders and return their money.
Government attorneys contend that it’s up to the lender to identify themselves if they want their money back.
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“The responsibility for redeeming the loans applies, under the lending laws, to those who made the loans, and the relevant legislative provisions set dates and ways of redeeming the loans that the lenders have to follow,” the government said in response to the lawsuit.
The claim is doubtful because the government requires private sector financial service companies, like banks and insurers, to find clients they have lost touch with over the years.
Indeed, the genesis of the Financial Justice lawsuit was the fact that two women, Ora Bar and Shoshana Viner, used a treasury program to help people find lost financial assets at banks and insurance companies. The treasury’s Har Hakesef (Money Mountain) website also included information on the compulsorily loans, which the two had made to the government during the years 1961-1982.
The two realized they were not the only ones who had forgotten about the loans and turned to Financial Justice for help with a class action suit.
In principle the Bank of Israel, which holds the money, has said it will seek to find 4% of the lenders every year, with the goal of finding all of them within 25 years. In practice, in the last 15 years it has issued no written appeals at all.
The loans came in two forms – one strictly compulsory in the form of deduction directly from paychecks that were invested in bearer bonds. The bonds were not negotiable. Other loans were somewhat more voluntary in the sense that the lender had the right to refuse – although he or she had to refuse rather than opt to lend the money.
In defending itself against the need to find the lender, the government is arguing that the compulsory nature of the loans means they aren’t really investments at all.
“These were not voluntary investments made by the public but an obligation made under the law and mandated by the state. ... There is no issue of investor protection or of a voluntary loan,” it told the court.
The government argues that the voluntary loans also don’t count as investment. “The voluntary loans were made out of generosity to the state in its hour of need … It should be noted that at the time a minority refused to volunteer their money,” it said.
Needless to say, Financial Justice doesn’t buy the argument. “You can’t call the situation anything but completely absurd,” it said in court documents.
“The state raised funds from the public and promised a return on the investment. This is a financial investment in every respect, which is essentially similar to a debenture (and as mentioned, the loan law is explicitly defined as a “bond”). The state certainly did not prove that the lenders did not expect to receive money in the future,” it said.
The two sides are due to meet in court this week to see whether Financial Justice class action suit will be recognized.