Days after Israel Police made the stunning declaration that established crime syndicates are behind Israel’s binary options industry and described the industry as a “vast criminal enterprise,” the Knesset Reforms Committee will vote Monday on watered-down legislation to ban it.
As the vote loomed, it was far from clear how it would turn out, with only three members of the 13-member panel confirming that they would attend the session.
A spokesman for Oded Forer of the Israel Beitenu party, one of only three MKs who attended the committee’s previous meetings last week, told The Times of Israel that he had not yet decided how he would vote on the proposed law, which would make it illegal to operate binary options companies in Israel, whether they target Israelis or customers abroad.
Forer’s spokesman told The Times of Israel that committee chairperson Rachel Azaria (Kulanu) would likely hold additional discussions and deliver a summary before the vote on Monday. The spokesman also noted that Knesset members who are not on the Reforms Committee may show up to voice their opinion.
Of the 13 committee members, only Forer and Haim Jelin of Yesh Atid, in addition to committee chairwoman Azaria, attended either of last week’s panel sessions in which proponents and opponents of the binary options industry aired their views. (Forer’s spokesman said it is not unusual for committee members to show up during the final committee session just to vote.)
The Times of Israel contacted every member of the Reforms Committee — Azaria (Kulanu), David Bitan (Likud), Yousef Jabareen (Joint Arab List), Yigal Guetta (Shas), Yossi Yona (Zionist Union), Haim Jelin (Yesh Atid), Shuli Moalem-Refaeli (Jewish Home), Uri Maklev (United Torah Judaism), Roey Folkman (Kulanu), Forer (Yisrael Beitenu), Issawi Frej (Meretz), Yoav Kish (Likud) and Itzik Shmuli (Zionist Union) — to ask them if they planned to attend and vote in Monday’s meeting.
Most did not reply. Yossi Yona and Yoav Kish told The Times of Israel they did not plan to attend. Rachel Azaria said she would likely vote for the bill, which is a watered-down version of the original draft law. The current version bans binary options but it does not require Israeli forex, CFD (Contracts for Differences) and other online trading companies to obtain a license from each overseas country where they offer wares. The original draft had included this requirement.
MK Uri Maklev (United Torah Judaism), an ordained rabbi, said he planned to attend Monday’s session and would vote in favor of the binary options ban.
“Binary options are a tempting product that is marketed aggressively and fraudulently and can cause people to become addicted,” he told The Times of Israel in a statement on Sunday.
He added, “In Israel, binary options are against the law for Israeli investors. Even if other countries allow binary options, Israel must not be a country that hosts this kind of thing. I plan to attend the panel and vote in favor of the proposed law.”
As reported, on June 18 Israel’s cabinet overwhelmingly voted in favor of the bill. The Times of Israel later learned that the proposed law approved by the cabinet was a truncated version of the original draft law, introduced in February by the Israel Securities Authority together with the Justice Ministry and the attorney general’s office, that banned binary options but would also have required Israeli online trading companies to obtain licenses in the countries where they operate. The bill approved by the cabinet would ban binary options companies only and would allow the finance minister to add additional financial products to the ban in consultation with the Israel Securities Authority and subject to the approval of the Knesset Finance Committee.
At the June 18 cabinet meeting, a handful of ministers reportedly did not vote for even the truncated version of the law.
The widely fraudulent binary options industry is estimated to generate between $5 billion and $10 billion a year and to largely emanate from Israel. It has been estimated to number well over 100 companies, and to employ between 5,000 and tens of thousands of employees.
The Times of Israel began exposing the widely fraudulent industry in a March 2016 article entitled “The wolves of Tel Aviv: Israel’s vast, amoral binary options scam exposed.” The fraudulent firms ostensibly offer customers worldwide a potentially profitable short-term investment. But in reality — through rigged trading platforms, refusal to pay out, and other ruses — these companies fleece the vast majority of customers of most or all of their money. The fraudulent salespeople routinely conceal where they are located, misrepresent what they are selling and use false identities.
Israel Police Superintendent Gabi Biton told the Knesset Reforms Committee on August 2 that Israeli crime kingpins are behind the binary options industry and that organized crime in the country has been massively enriched and strengthened as a result of law enforcement’s failure for many years to grasp the vastness of the problem.
“Our eyes have been opened,” said Biton, who investigates financial fraud and money laundering. “What we’re seeing here is a massive organized criminal enterprise. We are talking about criminals at various levels of crime organizations, up to the very top.”
Journalists David Leask and Richard Smith of the Herald (Scotland) have discovered that more than 40 binary options and forex companies, many of them Israeli, have incorporated themselves in Scotland as Scottish Limited Partnerships (SLPs) a company structure that until recently allowed owners to hide their identities.
Who weakened the law?
During the August 2 committee meeting, some of those in attendance argued that the watered-down bill would allow binary options fraudsters to re-brand their product, offering forex or CFDs or other products instead, and continue to defraud customers abroad with impunity.
A source involved in the legislation told The Times of Israel, “The expanded bill would have been ideal but I do not think it would be able to pass a final Knesset vote, even if the committee approved it. You cannot imagine the amount of pressure being exerted on Knesset members to weaken this bill. The industry has vast amounts of money and is exerting massive pressure.”
The Times of Israel asked the Israel Securities Authority who had changed the bill and was told that the changes had been made in consultation with Israel’s online trading industry by representatives of the Israel Securities Authority, the Finance Ministry, and the Justice Ministry. Asked what had been said during these meetings, a spokeswoman for the ISA said that the deliberations were secret.
Among those with whom the bill was discussed, she said, were “representatives of the legitimate online trading industry, the six Israeli companies that have licenses to operate in Israel.” (In December 2016, the Israel Securities Authority published a list of six forex and CFD companies that are allowed to operate in Israel and offer their product to Israeli customers.)
A spokesman for Finance Minister Moshe Kahlon denied he was involved in making changes to the bill.
A spokesperson for Justice Minister Ayelet Shaked, however, took responsibility for the changes.
“The bill will address binary options only,” her spokesperson wrote in a statement to The Times of Israel. “The clause concerning forex was deleted following consultations between representatives of the Justice Ministry and representatives of the Israel Securities Authority. The reason for the change was because forex is a different kind of financial instrument than binary options and investment in forex is longer-term and not for seconds or minutes.”
“In addition, financial products offered by banks behave very similarly to retail forex and in addition, forex can be used to hedge risk,” the statement continued.
For these reasons, concluded Shaked’s spokesperson, “it was decided to remove the clause pertaining to forex and to fight the phenomenon of binary options, which resembles gambling, creates a fraudulent industry and gives Israel a bad name throughout the world.”
Why forex and CFDs are problematic as well
Critics of the removal of the clauses in the bill relating to forex and CFDs argue that the real challenge is not binary options per se but that complex derivatives like binary options, forex and CFDs are being used by Israeli companies to break laws all over the world.
Jacob Ma-Weaver, an investment adviser from the United States, praised the bill’s ban on binary options but said it was “scandalous” that an Israeli minister had removed clauses of the original bill pertaining to forex and CFDs. “As a Jewish American, I have been personally dismayed to see the large number of Israeli companies brazenly violating international law.”
Ma-Weaver said that some Israeli forex and CFD companies “use actual market prices and allow customers to withdraw,” while others sell aggressively and engage in additional highly questionable practices.
Ma-Weaver argued that what can make a retail forex or CFD platform dangerous is high leverage, combined with the company taking the other side of a customer’s trade — in other words, making money when the customer loses.
“High leverage means a random price movement can cause a customer to run out of capital against the position and allow the broker to just keep the deposit,” he said.
Asked last October whether he thinks the so-called bucket shop business model that characterizes many Israeli forex and CFD firms, in which the “investor” is in effect betting against the company, is good for investors, Itzik Shurki, the ISA’s director of the Stock Exchange and Trading Platforms Supervision Department replied: “That is the nature of the industry. You have a dealer who takes the other side of a trade. Our regulation was designed with the understanding that this is the industry and there is a severe conflict of interest here. The purpose of the regulation is to reduce the conflict of interest, but you can’t eliminate it.”
The ISA’s regulation only applies to Israeli customers, and the truncated new bill will continue to leave overseas customers of Israeli forex and CFD companies without such protection.
“I don’t buy that a company is legitimate if it adheres to some arbitrary code of rules that they’ve created themselves. Even in many so-called ‘fair’ bucket shops, 90 percent of customers lose their deposits,”
Ma-Weaver said. He argued that the proposed law as it currently stands amounts to a license for unscrupulous Israelis to continue to violate the law abroad.
At the same time, he stressed, banning binary options is a positive step. “Banning binary options is such is an important signal,” he said, “and even if the industry is able to circumvent the law, it’s still progress. I would like to see more, but it’s a step in the right direction.”
Other observers were less sanguine. Ronen Bar-el, an economist who lectures about corruption, said he was deeply troubled that thousands, perhaps tens of thousands of Israelis, have been going to work each day in an industry where police have now highlighted the involvement of organized crime syndicates. “When organized crime starts to take over your country, it’s not a good thing,” he said.
If Israel’s current trajectory is not reversed, he said, over time the country will become less Western, poorer, less pleasant and more violent.
He set out a bleak vision for Israel if the phenomenon is not firmly confronted, “It’s not that life will be the same as now, but more corrupt. Life will get much, much worse. Taxes will be higher, public services will be terrible, housing prices will go up, everything will be more expensive, especially if you’re not a criminal. Crime families will get even stronger and their tentacles will reach into every corner of the government, the Knesset, the police,” he warned. “Eventually, the police will become so corrupt they will stop fighting other crimes like burglary or rape, the rule of law will break down, property rights won’t be protected and foreigners will stop investing here. Eventually, if a country does not reverse the corruption, its ends up like Brazil or Russia.”