IASPS Op-Eds
Comments on the Decline of a Nation-State
June 23, 2000
Money Laundering and the Dirty Truth
by IASPS StaffAs widely reported today (Friday, June 23, 2000) in Ha'aretz, every other Israeli news outlet and in most international dispatches, Israel has been squarely identified as one of the world's leading havens for illegal international money laundering. Is this really news?
No. In 1994, everyone in Israel knew that Israel was a tax haven for Jews abroad, new immigrants, and criminal elements like South American drug kingpins. It works like this: Jews around the world (and savvy gentiles) deposit billions in foreign currency accounts in Israel; these accounts are converted to Shekel accounts earning interest of 15-20% because of Israel's double-digit inflation rates. Betting against devaluations or buying an insurance policy against such devaluations, still leaves an effective net return of 10%, a very nice, almost guaranteed return. These foreign depositors (or new immigrants, who may also hold foreign currency accounts), are not required to file any disclosures and their profits until recently have been tax free. Moreover, the profits can be sunk into Israeli real estate and other assets, thereby laundering any ill-gotten gains.
When the Russians came in 1992, the new Russian billionaires back in Moscow soon learned of this very convenient money laundering operation, effectively supported by the Bank of Israel (since of course the Bank was not unaware of these activities), and began funneling billions more into Israel's foreign currency accounts.
Why did the esteemed Bank of Israel, led at the time by the even more internationally respected Governor of the Bank, Yaacov Frankel, permit this state of affairs, if not promote it? More interesting still is the question: Why has this continued under the new leadership of Governor David Klein, who was previously the Bank's head of monetary policy?
The reason is policy -- the same policy that explains Israel's extraordinary reliance upon aid and loan guarantees, Israel Bonds and now the peace process: Israel desperately needs foreign currency to keep its statist system afloat. Let us be clear: When IASPS argues that "socialism doesn't work," we mean it can only "work" by wrongful means. "Socialism doesn't work" means Socialism is criminal.
To shut down this criminal partnership between foreigners, Israeli banks, and the Bank of Israel, would be disastrous for Israel because foreigners don't invest in Israel for the long haul (i.e., they move money in and out of the stock market and even that is coming to an end if the Treasury has its way and passes the Ben-Bassat tax on stock market gains).Israelis and everyone associated with Israel's banking establishment has known what is now being reported around the world: Israel ranks as one of the world's most friendly criminal havens for money laundering, rubbing shoulders with the likes of Liechtenstein, Lebanon, and the Dominican Republic.
So what exactly is the news?
That the Bank of Israel and the media in Israel, especially Ha'aretz, are co-conspirators in the whole affair. The real story begins in 1992.IASPS developed a policy that would, if successfully introduced, uproot Israel's statist system and begin a serious and substantive transformation to markets, economic freedom, and the rule of law. (For the full story, click here .) The instrument we devised for this was a proposal for a Free Processing Zones law that would have established a zone in Israel free of socialist red tape, criminal bureaucrats, and oppressive 70% effective tax rates. The law passed in 1994, but along the way, the most potent argument used by the opponents of economic freedom, including Governor Frankel and his cohorts at the Bank of Israel, was that the Zone would be an invitation for money laundering and thus ruin Israel's sterling international banking reputation.
The media, acting as operatives for those statist elements in the system that would lose out if real economic freedom were to be available to all of Israel's citizens, utilized every slander imaginable to kill the proposal. When Frankel and Klein ran to the media to declare that they feared for Israel's banking reputation should the FPZ law become a reality, the media took hold of this obvious lie and canvassed all of the news outlets, screaming: "Free Zone initiative: Money Laundering Scheme!"This of course was exactly what the bureaucrats, the fat cat Industrialists of the Manufacturers Association, and the Histadrut Labor Federation had been waiting for. They demanded the Zone be killed lest the Israeli banking system collapse under international sanctions.
So what then was the result of the outcry against the Zone as a money laundering scheme? This: then Finance Minister Avraham Shohat (also FM today), acting on behalf of his special constituents, appointed the now famous Blumberg Committee, named after the then head of Bank Mizrachi, David Blumberg. The committee consisted of the typical mix of state-owned bank representatives, treasury and Bank of Israel technocrats, and one or two academics, also on the State's payroll. Their mandate: save our banking system from the FPZ law.
Save they did. Ruling that the FPZ law would promote money laundering, although they never were able or expected to articulate how, the members of the Blumberg Committee dutifully ruled that the Zone law must prohibit any activities by financial companies, banking institutions and trading companies.
In other words, kill the Zone.
Indeed, the FPZ law was changed to reflect this defense of the State's banking system, and, as predicted, the Zone died (see, IASPS Quarterly, Spring 2000).
The media in Israel at the higher levels know the score -- the Arye Caspis (also of Ha'aretz) who write the communist-style copy about "capitalism" do not. Today's reports about money laundering does not threaten the top echelon or the drones. Sodden with information overload, the average Israeli or Jew hasn't much of way to know what the truth is. And when the state protects them by keeping out bad capitalists and other extremists of every kind including "anti-Semites," this Institute might even print, here on the internet, what the media, Israeli officials and bankers all know full well: that the banking system in Israel is corrupt. And they knew it full well in 1994 when they killed the FPZ initiative by accusing it of being a haven for money launderers.