ANALYSIS/ ONE EXPERT PUT ISRAEL’S
OFF-THE-BOOKS ECONOMY AT 28% OF GDP
Is Israel becoming a mafia state?
Some 25% of the revenue of Israel’s
lauded high-tech sector comes from shady or fraudulent
industries; three-quarters of MKs are said to be in thrall to
special interest groups
Israel has become one of the world’s
leading exporters of investment scams, with fraudsters stealing
an
estimated $5 billion to $10 billion per year from victims
worldwide. (Illustrative photo: iStock)
The other day, I was sitting at a picnic with several friends
when someone referred to Vladimir Putin’s Russia as a “mafia
state.”
A Russian-born woman objected: “That is really offensive. Russia
is a country of 140 million people. It is wrong to say they are
all mafia.”
“I am not referring to the people,” said the first speaker. “The
majority of Russians are good people. Most are victims of the
regime they live under. But it is a fact that there is an
overlapping corrupt elite that permeates the entire political
and economic system as well as all major centers of
decision-making. And this elite is connected to organized crime
groups.”
With striking similarity, on a recent vacation in Washington,
DC, I found myself talking to a Jewish woman who works in the US
government. “I don’t understand,” she said with dismay. “In
America, Jewish people are upstanding citizens. What is
happening in Israel?”
The woman was referring to the massive growth of organized crime
in Israel over the past ten years, as well as the fact that
Israel has become one of the world’sleading
exporters of investment scams,stealing an
estimated $5 billion to $10 billion per year from victims
worldwide.
Despite the fact that Israeli police recently announced that
these investment scams arelargely
run by organized crime, which has grown to “monstrous
proportions” as a consequence of little to no law enforcement
for years, the Israeli government, parliament and authorities
have to date proved unwilling or unable to shut them down, in
part because these fraudulent industries have a powerful lobby
in the Knesset.
“Most Israelis are good people,” I told the Washington woman in
Israel’s defense. “It’s just the system that is broken.”
Police Superintendent Gabi Biton,
left, at an August 2, 2017 Knesset panel devoted to a proposed
law to ban
Israel’s binary options industry. Biton told the panel that
organized crime in Israel had grown to ‘monstrous
proportions’ as a result of online investment fraud. (Simona Weinglass/Times of Israel)
Indeed, Israel’s democratic system has become riddled with
corruption of late. Analysts who study Israel’s high-tech sector
(and who were unwilling to talk on the record for fear of
angering their colleagues) told The Times of Israel last year
that an estimated 25 percent of the revenue of Israel’s lauded
high-tech sector comes from shady or fraudulent industries,
including online gambling, binary options, forex,
downloaders/injectors (companies that put malevolent software on
your computer without your knowledge), and the payment,
affiliate marketing and adtech companies that service these
industries.
Israel’s Finance Ministry recently issued a report showing that
the cost of nearly every consumer product, with the exception of
education and produce, is significantly higher in Israel than
the OECD average.Analysts
attribute this high costto monopolists and
rent seekers who pull strings and lobby the government to block
competition in industry after industry.
Meanwhile, apartment prices have risen 118% in the last ten
years, for reasons economists cannot fully explain. Recently,
the sale of new apartments has slowed, which areportin
The Marker by Nimrod Bousso attributes to a recent crackdown on
money laundering in Israeli banks ordered by the Bank of
Israel’s Supervisor of the Banks. The report suggests that
rampant money laundering was a significant factor in the rise of
apartment prices in the first place.
The average price of a three-bedroom
apartment in Tel Aviv is close to $1 million (Miriam Alster/Flash90)
Dr. Avichai Snir, an economist at Bar-Ilan University, published
a paper on theimpact
of money laundering on rising apartment pricesin
October 2014. He used the modified cash-deposits ratio method —
an approach employed by economists to assess the size of a
country’s shadow economy, based on how much cash is in
circulation — and calculated that between the years 2008 and
2014, Israel’s off-the-books economy soared from approximately
22% to 28% of the country’s GDP. This is an astounding jump. The
first figure puts Israel in the company of countries like Italy
and Spain; the second resembles economies like those of Romania
and Bulgaria.
Snir has yet to calculate percentages for the years 2014 to
2017, but told The Times of Israel he intends to explore new
methods of measuring money laundering that has its origins
online.
On a separate but related note, a Knesset member recently told
The Times of Israel that three-quarters of the 120
parliamentarians here are in thrall to special interest groups,
whose lobbyists and PR flaks crowd the halls of the Knesset, and
are relentlessly pressured to the point where the public
interest, this MK lamented, becomes a weak voice in the back of
their heads. The Times of Israel’s editor, sitting next to me as
the MK in question delivered this shattering assessment of 90
colleagues, was so horrified that he asked for it be repeated,
to be sure he had heard correctly.
Tzvika Graiver, a lawyer for theKeep
Olim in Israel Movement, told The Times of Israel recently
that when he attends Knesset panels to advocate on behalf of
steps that would ease life for new immigrants, he invariably
finds himself seated alone amid an army of lobbyists and
indifferent government bureaucrats.
For instance, in November 2016 there was a Knesset panel on the
“black market” of driving instructors who demanded hefty sums of
money from new immigrants before agreeing to set a date for a
driver’s test. “It was our non-profit against an array of
lobbyists for the driving teacher’s association, the licensing
bureau and others.”
Tzvika Graiver, lawyer and advocate for new
immigrants from the Keep Olim in Israel movement
(Photo credit: Facebook)
Graiver actually won that battle against the driving instructors’ lobby, but his
accumulated experience has left him with a feeling that the deck is stacked
against the public interest in Israel’s parliament.
“Lobbyists control the Knesset; they set the agenda and they
usually win,” he said. “There is no question that the majority
of Knesset members today work on behalf of lobbyists and not the
people.”
Earlier this year, draft legislation that would have banned all
of Israel’s fraudulent online trading companies, and not just
the part of the industry called “binary options,”was
watered downin the course of behind-the-scenes
consultations among the Israel Securities Authority, the Justice
Ministry and the online trading industry itself. Anti-fraud
advocates were stunned to arrive at the Reforms Committee
meeting where the legislation was being debated to discover that
the bill had been constricted and truncated without their
knowledge, as a direct consequence of input from the very
industries it was originally formulated to target.
Asked how this happened, one Israeli forex company owner told
The Times of Israel, “You have no idea who you are dealing with.
This is an industry that has way too much money and influence.
Do not concern yourself over such things.”
Moises Naim, a Washington DC-based thinker who penned the
watershed essay “Mafia
States,” has delineated several stages through which a state
descends into mafia statehood. The first is called “criminal
penetration,” when a criminal organization is able to place “one
of its own” in the state structure. The second is “criminal
infiltration,” which Naim defines as “when the infection has
spread throughout the state apparatus within the given country,
and the linkages to external illicit networks proliferate.”
Finally, there is a stage called “criminal capture” which is
defined as “the condition of dysfunctional governance in which
criminal agents are so sufficiently prominent in positions of
state authority that their criminal actions cannot effectively be
restrained by the state. At some point, it may become part of
state or substate institutional doctrine to engage in illicit
activity.”
One notorious example of alleged criminal penetration occurred
in Israel in 2003, when Inbal Gavrieli was elected to the
Knesset for the Likud party. In a2009
cableleaked by Wikileaks, the US ambassador to
Israel wrote, “The election of Inbal Gavrieli to the Knesset in
2003 as a member of Likud raised concerns about organized crime
influence in the party’s Central Committee. Gavrieli is the
daughter of a suspected crime boss, and she attempted to use her
parliamentary immunity to block investigations into her father’s
business.”
A Rolls Royce car parked at the Tel
Aviv-Jaffa port, on November 15, 2014. (Nati SHohat/Flash90)
Naim cites Russia and Venezuela as examples of countries with
criminal infiltration, while Guinea-Bissau is an example of
complete state capture.
It is unclear where Israel falls on this spectrum. In 2009, the
US Embassy wrote of a “growing problem” of organized crime
elements “penetrating the Israeli establishment and corrupting
public officials.”
In his book “Rock,
Paper, Scissors: Game Theory in Everyday Life,” Len Fisher
describes the problem of corruption as akin to the “Stag Hunt”
scenario in game theory: A group of people set out to hunt a
stag. If they all cooperate, they are likely to be successful.
But if a few decide not to hunt stag but to hunt hares, which
are easier to catch, for their own personal benefit, the entire
enterprise fails and more and more stag hunters decide they are
better off looking out only for themselves and hunting hares.
Once you have a society where most people are hunting hares, it
is very difficult to evolve back to the stag hunting
(non-corrupt) scenario. Even if a few hare hunters stop being
selfish and decide to cooperate, the group dynamic quickly
reverts back to the default of hare hunting. But not all hope is
lost, because societies of stag hunters have in fact
spontaneously emerged in history, and this, said Fisher, is
often because many individuals change their minds about what
other members of society will do and begin to trust each other.
It is clearly in Israel’s interest to enforce the rule of law
and uproot criminality, among other reasons because corrupt
states suffer dire economic consequences. (Russia’s economy is
shrinking, despite the constant supply of income from oil.) But
there appear to be too many hare hunters in today’s Israel,
looking after their own interests, and not enough stag hunters.
This could change if more ordinary Israelis got involved in the
battle to fight corruption. While the system shows signs of
being broken, most Israelis are decent people, emphatically
deserving of a society in which the rule of law is enforced and
criminality is relentlessly faced down and uprooted.
