VZCZCXRO1663
PP RUEHROV
DE RUEHTV #0036/01 0080826
ZNR UUUUU ZZH
P 080826Z JAN 07
FM AMEMBASSY TEL AVIV
TO RUEHC/SECSTATE WASHDC PRIORITY 8575
INFO RUEHXK/ARAB ISRAELI COLLECTIVE
RHEHNSC/NSC WASH DC

UNCLAS SECTION 01 OF 03 TEL AVIV 000036 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PGOV PINR KJUS EFIN ECON KCRM IS
SUBJECT:  MAJOR CORRUPTION CASE INVOLVING STATE TAX COFFERS 
 
REF: 2006 TEL AVIV 4742 
 
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SUMMARY 
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¶1.  Significant new scandals marked the new calendar year in Israel. 
 Police detained some thirty individuals on allegations of 
involvement in influence-peddling and bribery within and around the 
Israel Tax Authority (ITA).  Unlike other recent scandals that have 
focused on sexual harassment cases, campaign finance irregularities 
or individual allegations of malfeasance, the ITA case promises to 
be the mother of all recent scandals in Israeli political life. 
Police investigators do not admit to possession of evidence linking 
PM Olmert directly to the current allegations against ITA personnel, 
although his office director is under house arrest.  Media reports 
insist, however, that Olmert may face police questioning along with 
Finance Minister Hirchson, whose testimony is also sought in 
connection with a separate investigation of embezzlement from a 
labor union he headed.  Olmert and Hirchson are scrambling to 
control the damage, and both have urged outgoing Ministry of Finance 
(MOF) Director General Yossi Bachar to take charge of the ITA on an 
interim basis. 
 
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ITA AFFAIR: THIRTY ARRESTS AND COUNTING 
--------------------------------------- 
 
¶2.  When the first arrests were made on the morning of January 2nd, 
the Israeli police went public with an investigation of the Israel 
Tax Authority that had been in progress for two years.  The ITA 
itself was established by government decision in September 2004, and 
falls under the authority of the Minister of Finance.  Initial press 
reports indicate that police have detained or placed under house 
arrest at least thirty persons, including ITA personnel and members 
of the business community.  The ITA's present director, Jackie 
Matza, was detained on suspicion of taking bribes; his predecessor, 
Eitan Rob, was detained and released under house arrest in 
connection with decisions taken while serving as ITA director; 
businessman Kobi Ben-Gur was detained and is under investigation for 
exerting influence over Rob regarding ITA appointments; Shula Zaken, 
manager of PM Olmert's bureau, was placed under house arrest under 
suspicion of using her influence to secure appointments of tax 
authority officials, specifically Jackie Matza as director; Yoram 
Karashi, a Jerusalem City Councilman and brother of Shula Zaken, is 
suspected of using his connections to senior officials to influence 
appointments.  In addition to those already detained or under house 
arrest, police investigators are quoted as saying the numbers of 
those facing questioning will run into the hundreds and that the 
investigation could extend to the Civil Service Commission which 
oversees all public sector appointments. 
 
--------------------------------------------- --- 
ACCUSATIONS OF PROMOTION PEDDLING FOR TAX BREAKS 
--------------------------------------------- --- 
 
¶3.  While hourly media updates seek to "advance the story" in 
classic investigative style, the plain facts of the case are hard to 
come by.  Police personnel have made it clear that the suspects 
themselves are not afforded access to all the evidence against them 
and that more is being concealed than revealed.  One media account 
of the initial remand hearing of Yoram Karashi reported that 
presiding Judge Mordechai Peled was of the opinion that the evidence 
submitted indicated that the ITA had been under the criminal 
influence of both Karashi and Kobi Ben-Gur. According to the same 
account, police investigators opined that Karashi and Ben-Gur had 
traded tax breaks for promotion within the ITA and that they knew 
very well to whom they owed their promotions. 
 
---------------------------------------- 
PRIME MINISTER'S AIDE UNDER HOUSE ARREST 
---------------------------------------- 
 
¶4.  The news of Shula Zaken's house arrest sent the Prime Minister's 
bureau into what the media called "crisis mode."  Shula Zaken has 
been Ehud Olmert's right-hand office administrator since the start 
of his career in the Knesset in 1973.  Even if released from house 
arrest, she may not be permitted to return to her post as head of 
the Prime Minister's bureau.  The Movement for Quality Government 
(MQG) has asked the Attorney General and the Civil Service 
Commissioner to suspend Zaken, along with that of the ITA directors 
and officials who are at the center of the current investigation. 
The MQG argued that a clause in the civil service law gives the 
commissioner the discretionary right to take such action after 
consultation with the attorney general.  For Olmert, however, the 
damage has already been done.  Zaken is indelibly associated in the 
public mind with him, and her image on TV screens will repeatedly 
evoke their association.  Olmert's predicament was amply conveyed by 
Israel Television when it reported that he had phoned Shula Zaken 
after her release into house arrest, thus demonstrating that he 
placed loyalty to a friend -- a character trait on which Israelis 
place a high value -- over the propriety required of him by his 
 
TEL AVIV 00000036  002 OF 003 
 
 
office. 
 
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OLMERT AND HIRCHSON HOPE BACHAR WILL BAIL OUT ITA 
--------------------------------------------- ---- 
 
¶5.  For PM Olmert, the immediate fall-out of the ITA investigation 
is two-fold.  At the local level, his own bureau is handicapped due 
to Zaken's house arrest.  At the national level, Treasury sources 
have expressed concern that since the ITA affair exploded into the 
public arena, the authority's employees have stopped working and are 
in a state of shock.  The Treasury sources say this could affect 
state revenues, though our Ministry of Finance contacts are not yet 
sounding alarms.  Finance Minister Avraham Hirchson, who bears 
ministerial responsibility for the conduct of the ITA and its 
detained director, Jackie Matza, appears unable to find a 
replacement for the man who was appointed by none other than Ehud 
Olmert, during his term at the Treasury in 2005.  Olmert and 
Hirchson have both reached out to outgoing, and well-respected, MOF 
Director-General Yossi Bachar to fill in at ITA, but Bachar has not 
yet committed to do so. 
 
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OLMERT AND HIRCHSON HAVE OTHER PROBLEMS TOO 
------------------------------------------- 
 
¶6.  Olmert and Hirchson have legal problems of their own. According 
to media reports, the Attorney General will decide, in the coming 
days, whether to launch a criminal investigation into Olmert's role 
in the sale of Bank Leumi, while the State Comptroller is to decide 
whether to recommend a criminal probe into political appointments 
Olmert is alleged to have made while serving as Minister of Industry 
and Trade.  Hirchson's problems are even more immediate.  Press 
reports say the National Fraud Squad is seeking to question him on 
suspicion of robbery, fraud and money laundering while serving as 
head of the National Workers Union.  Even the aggressive Israeli 
press corps has stopped short of speculating just when the Finance 
Minister will be investigated in regard to the ITA imbroglio, but 
there is no doubt that such an investigation is anticipated. 
 
----------------------- 
SHOOTING THE MESSENGERS 
----------------------- 
 
¶7.  As pundits, commentators and professional prophets of doom 
express profound amazement over the landslide of corruption cases 
and the depth of Israeli malaise, the  warning voice of Accountant 
General Yaron Zelekha reverberated once again this week.  Earlier 
this month, he launched an attack on corrupt practices in government 
circles that so angered Finance Minister Hirchson that he restricted 
Zelekha's authority to grant credit to local authorities in the 
crisis over funding the municipalities. Zelekha's broadside came 
amid much tension over changes he was making in the work of the 
Accountant General's office and which he claims triggered enmity and 
even threats against his person.  "We made changes that startled 
prehistoric beasts sucking the nation's blood," Zelekha declared, 
winning the opprobrium of many in the Treasury, but garnering praise 
from another maverick public servant in the person of State 
Comptroller Micha Lindenstrauss, who is currently engaged in 
scrutiny of several corruption allegations against the senior 
political echelon (reftel). 
 
¶8.  On January 2, Zelekha appeared before the Knesset Committee on 
State Control and his statement hinted that he knew of the 
investigation into the tax authority long before it reached public 
notice.  Certain officials within public service were trying to oust 
him, he claimed, so that they could steal the public's tax money: 
"It is my moral and legal duty to divulge their identities to the 
authorities, and that is what I did. We passed on all information to 
the relevant authorities immediately." 
 
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LIKUD CENTRAL COMMITTEE: CORRUPTION CENTRAL 
------------------------------------------- 
 
¶9.  Five days of media attention into the ITA imbroglio brought the 
usual slurry of in-depth dredging of the reservoirs of gossip and 
hearsay surrounding the investigation and its likely political 
fall-out.  One of the more thought-provoking, albeit provocative 
columns by Nadav Eyal in Ma'ariv cast readers' minds back to a 
forgotten institution: The once-powerful Likud Central Committee 
held sway over Israeli politics for most of the period between 1977 
when then-Prime Minister Begin of Likud wrested power from Labor's 
near 30-year monopoly, until 2005 when Ariel Sharon finally broke 
with Likud to establish the Kadima Party.  The Likud Central 
Committee has become a byword for corruption and the ties between 
business interests and government.  Nadav Eyal noted that all three 
central suspects in the ITA investigation are present or past 
members of the Likud Central Committee, which, in its heyday, 
claimed to be able to resolve just about any problem it chose, 
whether it involved VAT, income tax, government tenders or local 
authority business.  Eyal wrote that this explains why Likud is now 
 
TEL AVIV 00000036  003 OF 003 
 
 
silent on the ITA affair and why most of Kadima -- who are former 
Likud members -- are likewise keeping quiet. 
 
------------------------ 
LEADERSHIP IN THE WINGS? 
------------------------ 
 
¶10.  In Kadima, however, there is one notable exception.   Two 
opinion polls published as the initial shock waves of the Israel Tax 
Authority [ITA] investigation were still battering public opinion, 
brought unwelcome tidings to PM Olmert's already troubled bureau. 
While a Dachaf poll censured PM Olmert's performance in office, 
faulting him for lack of integrity, an Israel Radio survey of public 
opinion placed Foreign Minister Livni as the Kadima voters' favorite 
should the party leadership slot become available. Foreign Minister 
Tzipi Livni made it known December 29, in an extensive interview 
with Ha'aretz that she has her sights set on the premiership.  This 
week she scheduled an unusual meeting for a Foreign Minister -- with 
local authority heads -- one indication that she is preparing for a 
possible campaign in the future.  Another candidate is quietly 
preparing to contest the leadership of the Labor Party.  Israel 
Television showed Ofir Pines-Paz of Labor, who left his ministerial 
position in the current government over its decision to include 
Avigdor Lieberman, preparing to launch his campaign for the party 
leadership contest in late May. 
 
CRETZ