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Washington Report on Middle East Affairs, January/February 1997, p. 27

Defense and Intelligence

Retired Israeli General Investigated for Embezzling $10 Million in U.S. Aid Funds

by Shawn L. Twing

A retired Israeli general is under investigation for allegedly embezzling an estimated $10 million of U.S. foreign military aid. Brig. Gen. (res.) Alex Eyal, a former head of naval procurement in Israel’s Ministry of Defense, allegedly overcharged Israel’s U.S. foreign military aid account in a contract for Panther helicopters supplied to the Israeli navy by the American Eurocopter Corporation (AEC), a wholly-owned U.S. subsidiary of the Eurocopter France firm.

The investigation began in the United States when the Internal Revenue Service found inconsistencies in AEC’s financial records related to the contract with Israel. The IRS alerted the Department of Justice, which then began an inquiry with the Federal Bureau of Investigation. At the request of the FBI, Israel began an investigation of its own which it has not yet concluded.

Also under investigation by Israeli officials is Uri Edelsburg, who is thought to have facilitated the embezzlement scheme and, according to some sources, may have been an equal partner with Eyal in the scheme to overstate the helicopter prices.

Perhaps the most disturbing aspect of the case to both American and Israeli officials is that this is not the first time America’s generous foreign aid relationship with Israel has been abused. In 1991, retired Israeli general Rami Dotan was indicted for embezzling some $40 million in U.S. foreign military aid with the assistance of Herbert Steindler, an official of the American Pratt & Whitney aircraft engine manufacturer. Dotan was imprisoned for his actions, and in July 1992 General Electric paid $59 million in civil damages and $9.5 million in criminal penalties in a settlement with the U.S. Department of Justice.

The weaknesses in the U.S.-Israeli aid relationship that led to the “Dotan Affair,” as the embezzlement scheme became known in the U.S. and Israel, remain unclear primarily because of Israel’s refusal to allow U.S. investigators access to Rami Dotan. This was not for lack of trying on the part of the United States.

General Accounting Office Director of Special Investigations Richard C. Stiener commented in testimony before the House of Repesentatives subcommittee on Oversight and Investigations that the GAO “requested to meet with government of Israel officials to discuss information they have regarding the diversion of U.S. funds and other abuses of the assistance program. However, the government of Israel declined to discuss the issues or allow our investigators to question Israeli personnel.”

Israel’s intransigence on this matter has led to speculation as to whether Rami Dotan was motivated simply by personal greed, or was part of a larger operation to divert U.S. aid money for purposes not allowed under U.S. law.

This is not the first time America’s foreign aid relationship with Israel has been abused.

In any case, the U.S. government is considering ways to prevent similar incidents in the future. If the investigations of Eyal and Edelsburg prove the guilt of either or both of them, it appears U.S. attempts to prevent “Dotan II” have failed.

The most recent allegations also have called attention to Israel’s purchase of foreign military equipment with U.S. assistance funds. The intent of the U.S. foreign military sales program is to provide customers for American defense firms by stipulating that U.S. aid be used only to purchase American-made defense items. Although American Eurocopter is a U.S. corporation with some 250 employees at its facility in Grand Prairie, TX, the Panther helicopter is not American-made. It is assembled and flight-tested in the United States, but the components were designed and made in France.

Despite the apparent contradiction between the intent of the foreign military sales program and Israel’s purchase of a European defense product via a subsidiary in the United States, American Eurocopter and the government of Israel say they haven’t violated U.S. law in this case. Fifty-one percent of a product purchased with U.S. military assistance funds must be manufactured in the U.S. and it must be assembled in the United States, according to regulations published by the Defense Security Assistance Agency (DSAA), the principal U.S. agency responsible for overseeing U.S. foreign military-financed defense products. American Eurocopter President David O. Smith told the Washington Report on Middle East Affairs, that his company is responsible for the Panther’s construction, systems development and integration and flight testing, which ensures that its sale of the Panther conforms at least to the letter of U.S. foreign military aid regulations.

The obvious question that arises from the allegations about Alex Eyal and Uri Edeslburg is, how could this happen again? To answer this question it first is necessary to understand the procedures governing U.S. military aid, of which Israel is the largest recipient in the world.

Obtaining U.S. Products

Military aid recipients can obtain U.S. defense products two different ways. The first is a government-to-government contract whereby the Pentagon, at the request of the recipient nation, purchases the desired item. In this arrangement the U.S. government serves as the contracting agent.

The second and more controversial method involves direct purchases by the foreign aid recipient from a U.S. contractor, without direct U.S. government involvement in the process. When U.S. defense contractors sell products directly to recipient nations, they must follow guidelines developed by DSAA in 1984 which are updated periodically. Other U.S. agencies monitoring these transactions include the Defense Criminal Investigative Service and the Defense Contract Audit Agency.

The problems with Israeli purchases arise with exceptions that are not available to any other country. These exceptions are detailed in a July 1993 report by the U.S. government’s General Accounting Office entitled Military Sales to Israel and Egypt: DOD Needs Stronger Controls Over U.S.-Financed Procurement. Four such exceptions include:

  • All countries except Israel require prior approval for all commercial contracts. In the case of Israel, only contracts worth more than $1 million require prior approval from DSAA. Contracts valued between $50,000 and $1 million are submitted monthly after the fact to DSAA for approval. Contracts worth less than $50,000 are merely kept on file at Israel’s purchasing mission in New York.
  • Countries requesting government-to-government, foreign military-financed purchases can do so only on contracts with values in excess of $1 million. However, Israel can utilize this procedure, which in general is a less costly option, for any purchase no matter what the value.
  • All countries in the Foreign Military Sales program must submit signed compliance certifications along with every contract purchase. However, Israel need do so only with contracts valued at $500,000 or more. For lower priced contracts, Israel retains a modified version of the signed certification at its New York purchasing mission.
  • For all countries except Israel, contractors submit invoices to the Defense Security Assistance Agency for repayment by the Pentagon directly to the contractor. However, in the case of Israel, contractors submit invoices directly to Israel’s purchasing mission which Israel then pays with its own funds. DSAAthen reimburses Israel from its interest-bearing foreign military aid account kept in the U.S. Federal Reserve.

The U.S. has been attempting for some time to close loopholes that led to the Dotan Affair. In a letter dated June 8, 1993, DSAA announced to both contractors and foreign military aid recipients that direct commercial contracts would be terminated effective Jan. 1, 1994, with the exception of pending commercial contracts. Israel, for its part, increased individual accountability within its New York purchasing mission, which has 200 employees, and in procurement offices in Israel. The move was intended to make its employees more likely to scrutinize contract accuracy for which they now are indirectly responsible.

Israeli officials have repeatedly suggested that Congress waive the annual $35 million surcharge applied to Israel’s annual $1.8 billion FMS account. The fees are intended to offset Pentagon costs for managing Israel’s massive military aid program. Israeli attempts to make the U.S. absorb these costs have been severely criticized by current and former Pentagon officials who accuse Israel of “nickle and diming” the U.S. government.

The sheer volume of contracts made possible with U.S. aid money creates an environment that is difficult to manage. Compounding those difficulties are the exceptions, available only to Israel, that dilute U.S. government oversight of the program and the massive bureacracy that accompanies it. Congressional investigators have been seeking, in vain, to interview Dotan in order to forestall future thefts. A better way, however, might be to put a moratorium on exceptions for Israel to the regulations applied to all other recipients of U.S. foreign aid.