A Finance Ministry official appeared at a Knesset panel last month to deliver a grave warning. Israel will be sanctioned, she said, and could even lose its status as a member of the OECD, if it fails to uphold a financial information-sharing treaty it has signed with governments around the world.

“The secretary-general of the OECD has sent personal letters to the finance minister and the prime minister saying that Israel is not complying with our commitments under the Common Reporting Standard,” Finance Ministry official Frida Israeli told the Knesset Finance Committee on June 25.

In the wake of the September 11, 2001, attacks and whistleblower revelations about secret Swiss bank accounts, the United States and other OECD countries began to crack down on international tax havens and money laundering. As a result, the United States enacted FATCA in 2010, a law requiring other countries to report bank accounts held by American citizens abroad. The OECD followed suit with the Common Reporting Standard in 2014, requiring that the treaty’s 109 signatory countries exchange financial information about each others’ citizens. Israel has signed on to the CRS but has yet to pass into law the regulations allowing it to implement it. The main sticking point preventing passage of the regulations is gemachim, or ultra Orthodox free-loan societies.

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A gemach is a free-loan society run by volunteers that allows members of the community to deposit money and and others to receive loans interest-free. There are thousands of such free-loan societies in Israel’s one-million strong ultra-Orthodox, or Haredi, community, with total deposits estimated by one economist to be between NIS 5 billion ($1.4 billion) and tens of billions of shekels.

Finance Committee chairman Moshe Gafni (United Torah Judaism) refuses to pass the CRS regulations without a promise that the activity of gemachim will be largely exempt from oversight. Under FATCA rules, Israeli banks have been demanding information about American depositors into gemachim that the gemachim cannot or will not provide, and many Israeli gemachim have had their bank accounts closed.

Israel’s anti-money laundering authority has warned that gemachim must be regulated because many are being used to evade taxes and for money laundering. But Gafni is adamant that they be regulated with a very light touch lest the fabric of this important Haredi social and cultural institution be torn.

Gafni’s spokesman told The Times of Israel in May that he found the CRS problematic after many Haredim were burned by the FATCA rules.

But several experts on the economy of the ultra-Orthodox community say that gemachim, even though they are nonprofit organizations, have become a multibillion dollar Israeli industry that poses unknown risks to the economy if it remains unmonitored and unregulated.

‘A broken fence calls out to a thief’

On July 23, 2009, the FBI arrested 44 people across New Jersey and Brooklyn in an international money laundering sting. Among those arrested were mayors of several New Jersey towns as well as five rabbis from Brooklyn and New Jersey.

The rabbis had been operating an international money laundering scheme that involved accepting tax-deductible donations to a gemach in the United States; taking a fee, usually 10 percent; then returning the remaining 90 percent of the donation to the donor, in cash. According to reports in the media, the cash for this scheme often came from Israel, where money laundering laws, until recently, were lax.

A detailed account of the FBI investigation appears in the 2011 book “The Jersey Sting: True Story of Crooked Pols, Money-Laundering Rabbis, Black Market Kidneys, and the Informant Who Brought It All Down” by Ted Sherman and Josh Margolin.

In one scene in the book, an Orthodox Jewish FBI informant meets a man named Levi Deutsch from Israel who suggests that he and the informant go into the money laundering business together.

Deutsch explains that when he gets money from a client, he opens several gemachim in the United States and puts a little bit of the money in each, so that no one transaction looks suspicious. He takes a commission of several percentage points on each deposit. Deutsch tells the informant that it’s not illegal to do such things in Israel.

“What if I put in one million dollars?” the informant asks.

“I could give it back cash to you,” Deutsch replies, explaining that he has people in the United States and people with money in Swiss banks who are part of his international network.

“You could handle one million dollars a month, no problem?” the informant asks. “Yes,” Deutsch replies.

Several experts told The Times of Israel that such blatant money laundering through gemachim is less prevalent than it was ten years ago as a consequence of anti-money laundering measures taken by the Israeli government, but that it still exists.

“There has been a lot of government pressure on the informal Haredi economy,” Neri Horowitz, a scholar of Haredi society, told The Times of Israel.

“The police recently got together with the state prosecutor and the Finance Ministry and drew up a strategic plan in which they decided to crack down on black money in the Haredi sector. They did it quietly. Every money service provider now has to report transactions over a certain amount, and banks in Haredi neighborhoods are being monitored more closely. It has become illegal to buy apartments in cash. And it’s much harder to carry suitcases of cash through customs.”

The reason for this crackdown, said Horowitz, is American pressure. Last year, at the behest of the FBI, a Haredi money laundering ring of about 20 people was arrested in Israel for allegedly laundering money for South American drug cartels. Two years ago, The Times of Israel was told, FBI agents paid a visit to Israel specifically to express their concerns about money laundering in the Haredi community.

“The way it works,” said Horowitz, “is a Colombian drug merchant comes to Monsey or Kiryas Yoel [towns in New York]. Let’s say he sold 4 million dollars worth of cocaine in the Bronx. He hands over the cash, and his contact puts it in a gemach. Everyone takes a cut and they return the money through a legal project like the construction of a new building.”

Ari Weisbrot, a New York-based lawyer who represents victims of fraud, told The Times of Israel that only a tiny minority of the Orthodox community engages in such crimes.

“Anecdotally I would say there is a lot more legitimate giving of charity in the Haredi community, but ironically some of these charities are the easiest places to hide money, especially in Israel, where books or records in the Haredi community are nonexistent or unreliable.”

“A broken fence calls out to a thief,” added a Haredi economist, who spoke to The Times of Israel on condition of anonymity due to the unpopularity of his opinion among the Haredi community. The economist cited this Talmudic phrase to make the point that even gemachim, which he views as the noblest of charities, can be abused if they are not regulated.

“When you have thousands of gemachim with deposits of billions of shekels and they are essentially unregulated, lots of things could go wrong,” he said.

Weisbrot said there are two reasons why criminals might like to launder money through the Haredi community in Israel.

“First of all, the reporting and tax obligations are much stricter in the United States than abroad.

“Second of all, let’s say I rob a bank and steal $1 million. I could use the money to buy a house in Florida but someone might trace the money to me. But if I buy an apartment in Jerusalem, that’s harder to track. If I then sell the apartment and buy several pizza parlors in Moscow and then sell those, eventually the trail will go cold. The money is further from where it started out and the money trail is more likely to disappear.”

The informal Haredi economy

Most of the experts The Times of Israel spoke to believe that money from foreign depositors is probably not the bulk of money in Israeli gemachim and that most gemachim are not, at least knowingly, laundering criminal money.

Rather, gemachim function as banks for the Haredi cash economy. If you’re not declaring income to the tax authorities, you might prefer to put it in a gemach than a bank.

Dr. Eitan Regev, an economist with the Israel Democracy Institute, believes that the network of thousands of gemachim stands between many Haredi families and destitution.

In a 2014 study he conducted for the Taub Center, Regev examined how Israeli families make ends meet. He found that all but the top 20 percent of families in terms of income were consistently spending more than they earned, month after month. Since such a situation is not sustainable in the long term, he offered two possible explanations for this finding: Either many of his study’s respondents had secret, undeclared sources of income, or they were rapidly spending their and their families’ savings.

In the Haredi community, Regev found, the overspending phenomenon was far more pronounced than among non-Haredi Jews, Christians, Druze and Muslims.

“When you look at income minus expenditures, the average Haredi family was 3,200 shekels in the red per month.”

This 3,200 ($880) monthly deficit can partly be explained, said Regev, by the fact that there is a large cash economy in the Haredi world, with people exchanging goods and services like house repairs, clothing sales, and even education off the books.

“Many educators in Haredi schools receive an NIS 6,000 salary on the books and then an extra NIS 3,000 or so in cash,” Horowitz told The Times of Israel.

But the other reason Haredi families can spend more than they earn, Regev believes, is the gemachim.

“In 1979, 84 percent of Haredim worked for a living. Parents put aside money for a rainy day or for when their kids got married. Savings were larger then. But among the Haredim coming of age today, many of their parents were Torah scholars and don’t have a lot of savings. We’re seeing a decade of transition where young people are being pushed into the labor market and academic studies to make ends meet.”

Today, only 50 percent of Haredi men work full-time.

Nevertheless, young Haredim have been buying apartments at rates significantly higher than those the general population. How do they do this?

“In the early 2000s, many Haredi parents could still help with cost of an apartment,” said Regev. “A decade later all of the financing comes from loans.”

What happens, said Regev, is the parents of a young bride- or groom-to-be come to a gemach.

“They raise about NIS 200,000 and then take that money to a bank and use it as a down payment for a mortgage on a cheap apartment in the north or south of the country or in Judea and Samaria.”

“It’s 100 percent leverage, everything is borrowed, similar to the NINJA loans extended to borrowers in the United States that precipitated the 2008 financial crisis.”

Regev is worried that many Haredi families are on the verge of financial crisis but stave off ruin by borrowing from one gemach to pay off their loan to another gemach. He is worried that this house of cards could collapse at any time.

“This is something we’re studying at the Israel Democracy Institute,” said Regev. “We want to understand the scale of economic distress in Haredi society. How many people are at or on the verge of bankruptcy or losing their apartment and what are the ramifications?”

Can ‘gemachim’ exist if they are regulated?

But why do people deposit money in gemachim for others to borrow?

For many, said Regev, it’s a mitzvah, a way to help the needy in their community.

But for an unknown number of others, gemachim are a good place to keep undeclared income. For those individuals, regulating gemachim would make them less likely to deposit, and, this, said Regev, is something that worries people in the Haredi community.

“Even if all the gemachim are honest, regulation might cripple their ability to raise more funds because some donors might be put off.”

Advocates of gemachim see them as not just economic institutions, but as communal and religious ones as well.

“The privatization and reduction of social and public services in recent decades has created a vacuum with regards to welfare services to citizens, and this vacuum has been filled by the third sector [nonprofits] and to a large extent by gemachim,” MK Gafni told the Knesset Finance Committee last year.

“Even if we want to regulate them, we must not under any circumstances detract from this very important social project of communal mutual responsibility. We do not have a Jewish state if we are not responsible for each other,” Gafni said.

Some in the Haredi community warn that regulation could cause the entire institution of gemachim to collapse.

Tel Aviv University Law Professor Yoram Margaliot, an advocate of extremely light regulation for gemachim, has written that “Gemachim are philanthropic institutions. They must be treated differently from banks or money service providers which are financial institutions.”

Without this gentle treatment, Margaliot has warned, “regulation could cause the collapse of the institution whose stability it is meant to protect.”

“The Haredim are right in a sense,” said Neri Horowitz. “If they are regulated as nonprofit organizations or financial institutions, they won’t be able to continue to exist. On the other hand, the government is right that this is a huge source of economic irregularity.”

Asked who would win in the end, MK Gafni or the Israeli Justice and Finance ministries, Horowitz replied: “It depends on the Americans, among others. If there is pressure from the US government, that is stronger than Gafni.

“If it’s an election year and no one wants to anger [Gafni], he might receive an interim arrangement,” allowed Horowitz. “But if the United States or the OECD put their foot down, Gafni will have to capitulate.”