August/September 1992, Page 14, 82

What They Said: The Dotan Affair

Another Israeli "Rogue Operation" Targeted Against the United States

Following is the opening statement of Rep. John Dingell (D-MI) at the July 29 hearing of the oversight and investigations subcommittee of the House Energy and Commerce Committee. The committee was investigating illegal diversions of U.S. military aid to Israel by Israeli Air Force General Rami Dotan, General Electric Sales Manager for Israel Herbert Steindler, and U.S.-Israeli dual national and Israeli Defense Ministry official Harold Katz, previously implicated in Israeli espionage in the United States.

For over eight years, this subcommittee has been investigating the activities of major defense contractors, including the adequacy of their financial disclosures to the Securities and Exchange Commission, the integrity of corporate management, and compliance with the Foreign Corrupt Practices Act. Today's hearing addresses corporate wrongdoing involving foreign military assistance programs, in particular, the role of the General Electric company in what has become known as the Dotan affair.

The Congress annually authorizes and appropriates about $5 billion for foreign military assistance in the form of loans and grants to selected allies around the world to further the security interests of the United States. These funds can only be spent on the acquisition of weapons systems and support equipment that is authorized by the United States government, and most of the funds are required to be spent in the United States on U.S.-manufactured equipment. In addition, each country receiving foreign military assistance funding is required to sign a loan or grant agreement. This stipulates that if fraud is suspected in the use of these funds, that the nation must cooperate fully in any U.S. investigations, including making current and former government officials available for interviews by U.S. investigators.

Israel, one of this nation's closest allies, receives about $1.8 billion in foreign military assistance annually. Each year since 1988, the government of Israel has signed the required loan agreement. In the spring of 1990, the subcommittee became aware that there may have been an improper diversion of some foreign military sales funds in Israel. In October of 1990, a top Israeli air force general, Rami Dotan, was arrested for diverting tens of millions of dollars of U.S. military assistance funds in a conspiracy with a top GE corporate manager, Mr. Herbert Steindler.

Like many other major defense contractors, General Electric has its share of procurement problems. But, in this instance, the company has cooperated fully with the Department of Defense, the Department of Justice, and the subcommittee to uncover the facts. It has become clear that this scandal goes well beyond the company.

A series of shell companies, European bank accounts, and Israeli subcontractors are involved. Several other major U.S. defense contractors, including Pratt & Whitney, Textron Lycoming, General Motors, Allison, and other smaller defense contractors may be involved to greater or lesser degrees. For example, this subcommittee has been investigating Pratt & Whitney since last August.

Several weeks ago, Mr. Benjamin Sonnenschein pleaded guilty to several felonies involving his activities in a similar scheme concerning General Dotan's relationship with Pratt & Whitney. Mr. Sonnenschein was a figurehead manager of a shell company that General Dotan had directed Pratt & Whitney to use as a subcontractor.

The subcommittee is still continuing its investigation of Pratt & Whitney, Textron, Allison, and other engine contractors who dealt with the General Dotan. These companies and Ellis A.G., a Swiss trading company, will be the subject of future hearings.

"What We Know at Present"

What we know at present regarding the diversion of funds involving General Electric is as follows:

One, beginning in 1984, General Dotan and Mr. Steindler laundered approximately $40 million of U.S. military assistance funds through General Electric by creating thousands of false vouchers to fund military equipment that was never produced and by inflating the price of other equipment.

Two, approximately $35 million of these funds were then funneled through a small company in New Jersey, run by a friend of Mr. Steindler.

Three, most of the laundered funds were transferred to Israel, where, according to General Electric, they were used for projects on military bases of the state of Israel that were not authorized by the United States government.

Four, more than $11 million of the laundered funds were transferred to various European bank accounts where cash was literally carried physically from bank to bank in an effort to mask the transactions.

Five, in 1989, Opher P'ail, a former Ministry of Defense employee in New York, wrote the first of two letters to the Ministry of Defense in Israel claiming General Dotan and others were involved in procurement irregularities. General Dotan and his associates, Yoram Ingbir and Harold Katz, denied the allegations and claimed that they did not know Mr. P'ail, who in fact had been associated with all three. In September 1989, Mr. P'ail sent his second letter to the director general of the Ministry of Defense in Israel. This letter led to several investigations of General Dotan and finally to his arrest in October of 1990. In April of 1990, General Dotan had delivered $50,000 to a hit man in the United States to surveil, kidnap, beat and possibly kill Mr. P'ail.

"Mr. Katz was also involved in the Jonathan Pollard espionage case."

In the spring-this is item seven-in the spring of 1990, Chuck Walsh, a GE employee who had been amassing evidence of General Dotan's diversion of U.S. funds, contacted the subcommittee. Several weeks after Mr. Dotan's arrest, Mr. Walsh filed his false claim suit against the company that was recently settled for $69 million. Also, General Electric pleaded guilty last week to four felonies, including money laundering and violation of the Foreign Corrupt Practices Act.

Eight, the government of Israel has claimed throughout this investigation that General Dotan was engaged in a rogue operation without the knowledge of his superiors in the Ministry of Defense. However, it is not clear how General Dotan was laundering tens of millions of dollars in U.S. funds and making this scarce currency available for unauthorized purposes on various military bases without top Ministry of Defense officials questioning where the money was coming from.

Nine, the more than $11 million that was stolen by General Dotan and Mr. Steindler was handed over to Harold Katz and ended up in European bank accounts. Harold Katz, who holds dual U.S. and Israeli citizenship, is a former counsel to the Ministry of Defense in Israel and may have been a consultant to Pratt & Whitney.

We understand that Mr. Katz is a recognized expert in transferring funds and in obfuscating the trail of these funds. Interestingly, Mr. Katz was also involved in the Jonathan Pollard espionage case in the mid-1980s. For example, Mr. Katz provided the apartment near the Israeli embassy in Washington where Mr. Pollard's stolen documents were copied.

Ten, Mr. Katz appears to have engineered the scheme to transfer funds laundered through both General Electric and Pratt & Whitney to European bank accounts. In Europe, both he and his daughters and others physically transferred cash from one bank to another in an attempt to cover the trail. European bank records and documents that the subcommittee has just received reveal that Mr. Katz transferred most of these laundered funds to an obscure trading company in Switzerland, Ellis A.G. Ellis invested 10 million Deutschemarks of these funds in a series of U.S. and foreign stocks. Ironically, according to the records, Ellis invested some of the money from General Electric in General Electric stock.

Eleven, Ellis A.G. may be obscure and unknown to some people, but not to this subcommittee.

Ellis A.G. and Insider Trading

Ellis has been the focus of one of the longest-running, most complicated, and most intriguing insider-trading cases in SEC history. Throughout the 1980s, Ellis hit on over 100 of the major U.S. and European takeover stocks before public announcements. The subcommittee has been investigating those activities and some of the officials involved in Ellis for over five years. Now, curiously, we find these two subcommittee investigations coming together with Harold Katz as a key figure in both as well as Ellis A.G.

But there is much we do not know. For example, how many other American companies were involved in the diversion of military assistance funds? What weaknesses in their systems allowed this rip-off of taxpayers' dollars? How many taxpayers' dollars were stolen or diverted? Where did the taxpayer dollars ultimately go? A major reason that we do not know is that Israel has flatly denied requests of the Department of Justice, of this subcommittee, and of others to interview General Dotan, Mr. Katz, and other central figures in this scandal.

This lack of cooperation by the government of Israel is a continuing concern. The Department of Defense has informed this subcommittee that the United States government is going to make it clear at the highest levels of the Israeli government that full cooperation was expected or the military assistance agreement referred to earlier would be enforced. But no significant progress has been made for over a year. I would note, however, that the morning papers report that the new government of Israel may be changing its stance. If so, this is a hopeful sign.

What started out innocently as aid to a valued and respected ally seems to have turned into a sordid tale of theft, bribery, money laundering, and attempted kidnapping or murder. Today, we will seek to begin to unravel this mystery. We will find out what went wrong at General Electric. We will also find out how and why the Defense Security Assistance Agency, which is charged with oversight responsibility for the military sales program, failed to uncover the schemes. But more will need to be done. The taxpayers and investors have been swindled. And for the public good, we need to get to the bottom of these matters.

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