As a result of the serving of charges recently against five diamantaires from the Israel Diamond Exchange and the earlier conviction regarding a diamond trader in the case of the so-called 'Underground Bank' at the bourse which operated between 2005 and 2011, more complete details have been revealed about the scale of its operations and the dark areas in which much trade took place away from the prying eyes of the tax authorities. The investigation of the bank came about after police and tax inspectors launched a raid at the exchange in early 2011, much to the embarrassment of the management and leadership of the exchange at the time.
Media reports say the pirate bank provided a secretive setting for financial trading, the ease with which goods were smuggled and hidden, fake invoices submitted as genuine transactions in order to secure tax benefits, tax planning, and difficulties for the tax authorities in monitoring the reported value of inventories which made the Israeli diamond sector a productive area for tax evasion.
Four months ago the first conviction was obtained in the case. The scale of the affair is seen in the fact that there was brokering of false diamond purchase notes and fictitious invoices worth hundreds of millions of dollars by many Israeli diamantaires. The bank was established by Menahem Magen and Doron Elad.
While Magen was sentenced to four years in prison, Elad's trial is continuing. A Tel Aviv court heard that the bank acted as a sort of foreign currency exchange operation without the required license to do so under the guise of a diamond-selling business while also managing fictitious accounts.
It did not make the required reports to the anti-money laundering authorities as it converted diamantaires' buying notes for goods and checks into cash. The five diamantaires charged are named as Zion Bezalel, Meir Anavi, Yurai Borochov, and Gabriel and Miriam Yosifov.
The Magen case found that the bank carried out almost $320 million of such business, with the state losing tens and possibly hundreds of millions of shekels of tax income. The bank typically charged 2.75 percent for transactions, of which it kept 0.75 percent for its services while transferring 2 percent to suppliers' fictitious accounts.
Transactions books were allegedly deleted every two weeks in order to blur the evidence, and invoices were not issued by the bank for transactions.
The problem for the tax authorities is that the diamond sector differs from the taxation that is applicable to ordinary taxpayers and therefore there has been a simplified tax system that takes a small percentage of sales turnover. There are unique difficulties in carrying out tax assessment of the diamond industry beyond that due to the easy mobility of stones, the difficulty of accurately determining the value of diamonds, tracking the value of diamond inventories held by diamond dealers, and other associated issues.
Why were false invoices and other fraudulent methods used? They helped clients reduce their reported earnings and thus reduce their tax bill. On the other hand, such invoices worked as a boosting the supposed volume of transactions reported by the diamond merchant to make it easier for the jeweler to secure credit from banks.
Another factor put forward by some observers for the success of the pirate bank's operations is due to the recession suffered by the global diamond industry from 2008 onwards and the difficulties faced by the diamond industry as a result.
"These charges were laid against these individuals, but many people at the exchange were using these services," said one diamantaire. "Everyone knew what was happening, but it was very useful to use the bank. It was extremely convenient and saved us a lot of time. It was a bit more expensive, but you could get financial transactions sorted out in a relatively short time," he added.
The pirate bank case is not only bad news for the Israeli diamond industry, but for the global trade. At a time when the diamond business worldwide is trying to show banks and financial bodies that it is transparent and working in a way that enables its books to be checked and that the era of funny business is over, the case shows that there are still many diamantaires who are willing to work under the table.
And if that is the case in Israel, then it seems fairly safe to assume that it is happening at the other diamond centers. This case has done no favors to any of the diamond centers because it raises suspicions among financiers that although diamantaires have promised to clean out the stables, the horse has already bolted in many situations.
By our Israel correspondent Abraham Dayan
