The clandestine bank affair at the Israel Diamond Exchange in Ramat Gan, in which five new indictments were filed last week, again puts the diamond industry in the spotlight as a sector in which a large proportion of trading takes place under the table. The culture of discretion in the sector; the nature of the merchandise, which is light and easy to smuggle and conceal; the aggressive tax planning; the difficulty experienced by the Israel Tax Authority in monitoring the value of the reported inventory; and the widespread forging of invoices, as indicated by the clandestine bank affair; make this sector fertile ground for tax evasion. Nevertheless, many sources in the sector speak of its prolonged decline, and dream of a new career in real estate or high tech.
Three and a half years after the exposure of the clandestine bank at the Diamond Exchange, and four months after the first convictions achieved in the affair that created a storm in the Israel diamond sector, very few realize its true dimensions.
To summarize what happened, a business was being conducted at the Diamond Exchange in Ramat Gan that was converting notes to cash, and mediating the sale of hundreds of millions of dollars in fictitious invoices.
This business, referred to as the "clandestine bank," was founded by Menachem Magen and Doron Elad in the mid-1980s. Magen was convicted according to his confession for his part in the affair, and sentenced to four years in prison, while Elad's trial is still in progress.
In the verdict convicting Magen as part of a plea bargain, the business is described as a type of money changing business that provided check discounting services without a license, camouflaged as a diamond trading business, without reporting to the Israel Money Laundering Prohibition Authority, and without fulfilling the obligation applying to money changers to report the identity of those receiving the service. The bank also dealt in fictitious invoices.
According to the court verdict, in 2005-2011, Magen and Elad's bank provided financial assets from all over the world and provided cash for checks and notes, while charging a commission. The business's transaction books were erased after two weeks in order to destroy evidence, without keeping accounts, as required by law, and without issuing invoices for the transactions conducted by the bank. The volume of transactions conducted under the radar was enormous - over NIS 1 billion.
Magen and Elad's bank discounted checks and buying notes (a type of note passing between diamond merchants) into cash, while transferring false VAT invoices for the amount of the check or buying note, referring to transactions that never took place. In other words, the bank provided two services: redemption of notes and mediation of false invoices. The parties redeeming the checks took the cash or financial assets sent from overseas, while reporting an expense for a fictitious transaction on the basis of the falsified invoice.
The clandestine bank charged a total commission of 2.75% for transactions, and gave 2% of it to the suppliers of the fictitious invoices. In other words, the bank retained a 0.75% commission for every discounting transaction and fictitious mediation invoice.
To sum up, at a cost of 2.75% of the redeemed notes, the bank's customers could redeem the note for cash (usually paid from an account in a foreign country), while reporting an expense to the Tax Authority for the redeemed amount for a transaction that never took place.
Magen's conviction shows that he conducted such transactions totaling at least $318 million in 2005-2011, meaning that for all this huge operation, which cost the state treasury tens, and perhaps hundreds, of millions of shekels in uncollected taxes, the clandestine bank earned less than $3 million during those years.
The five diamond merchants against whom the indictment was filed were "customers" of the clandestine bank, who sometimes also served as invoice suppliers for it. Diamond dealers Zion Betzalel, Meir Anavi, Yorai Borochov, and Miriam and Gabriel Yosefov are all accused of similar offenses. For example, Zion Betzalel is accused of have received false invoices from Magen and Elad totaling NIS $1.6 million, ad supplying $5.5 million in false invoices.
Published by Globes [online], Israel business news - www.globes-online.com - on October 25, 2015
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