Gaza tunnels were 'worse than Madoff's pyramid'
October 11, 2009
By Jonathan Ferziger
She was one of about 4 000 Gazans who gave cash to middlemen and tunnel operators in 2008 as Israel blocked the overland passage of goods. Then Israeli warplanes bombed the tunnels before and during the December 27 to January 18 Gaza offensive and the investments collapsed.
Now investors, who lost as much as $500 million, want their money back from Hamas, which runs Gaza.
Hamas Economics Minister Ziad Zaza says about 200 people were taken into custody in connection with the tunnel investments - most have been released.
Hamas is offering a partial repayment of 16.5c on the dollar, using money recovered from Ihab al-Kurd, the biggest tunnel operator.
The imbroglio over the 800 to 1 000 tunnels has deepened the decline in public opinion of Hamas in Gaza and highlights the Wild West nature of the underground economy that supports this jammed enclave of 1.4 million people.
"When you compare the US economy with ours, and see how dependent we have become on the tunnels, I assure you our scandal is much worse than Madoff," said Omar Shaban, director of Pal-Think, an economic research institute in Gaza City. He was speaking of New York financier Bernard Madoff's $65-billion Ponzi scheme.
Madoff's sentence
Madoff, 71, is serving a 150-year prison sentence in North Carolina, after pleading guilty to defrauding investors by using money from new clients to pay off old ones.
In Gaza, tunnels were first dug under the border to smuggle weapons from Egypt when Israel controlled the territory before its pull-out in 2005.
Israel and Egypt sealed Gaza's borders in June 2007 after Hamas broke off its power-sharing arrangement with Palestinian Authority President Mahmoud Abbas.
Hamas seized power as its militiamen threw rival Fatah members from high-rise buildings and shot others in the street, said a report by New York-based Human Rights Watch.
Top Hamas leader Ismail Haniya has not commented publicly on the losses to tunnel investors.
"There is no transparency, no public records, no regulators, none of the mechanisms that would let you trace what happened to all the money people invested in the tunnels," said Samir Abdullah, former Palestinian Authority planning minister. "The smugglers provide essential revenue for Hamas."
Hamas - the US and EU classify it as a terrorist organisation - isn't offering enough to cover losses, said Ghabin, 43, whose husband is blind and who has five children.
She blames Hamas for encouraging the investments.
"The imam told us we wouldn't regret joining this blessed business," she said in her apartment in an unfinished 12-storey high-rise overlooking the Mediterranean as her husband played the lute. "This happened in mosques all over Gaza."
Support for Hamas has fallen amid dissatisfaction over its stewardship of Gaza, where the UN estimates three-quarters of the population have insufficient food and more than 40 percent are unemployed.
A poll, published by the Ramallah-based Palestinian Centre for Policy and Survey Research on August 17, said Hamas would get 28 percent of the vote if an election was held, down from 33 percent three months earlier. Support for rival Fatah rose to 44 percent from 41 percent in the same period, according to a survey of 1 270 Palestinians in the West Bank and Gaza Strip. The margin of error was 3 percent.
Hamas 'responsible'
"You can feel the frustration, because thousands of families lost their money and they hold Hamas responsible," Pal-Think's Shaban said.
In the absence of formal records of transactions, Shaban based his "educated-guess" estimate of losses to investors of $300 to $500 million on professional contacts as well as friends and relatives who lost money. He did not decide to invest.
Digging and operating a tunnel, typically about 15m deep and 76m long, costs as much as $100 000, Shaban said.
With Israel restricting the flow of goods into Gaza after Hamas took power in 2007, tunnel owners began seeking funds for more tunnels. They built under licence from Hamas.
Four operators, who declined to be identified, said they had each paid 11 000 shekels (R21 664) to Hamas for a digging licence.
Investors Ghabin, Mohamed Shurab and Shadi Qishawi said the financing had worked in the following way: in exchange for their money, investors were promised monthly dividends of 10 percent.
They were not owners of the tunnels. The returns came from the profits of smuggling as well as new investments, Shaban said. Ghabin invested $8 000 the first month and added $4 000 from her daughter the second month, coming away with a total return of $2 000 before the collapse.
Gaza City real-estate broker Shurab, who invested about $500 000 of his family's money, said he had received as much as $50 000 a month in three months.
Israel began three weeks of bombing in Gaza last December in an effort to stop the firing of Hamas rockets. Some of these were smuggled in through the tunnels at such southern population centres as Sderot, Ashkelon and Ashdod.
From September 12, 2005, when Israel completed its pull-out from Gaza, to the beginning of its bombing operations on December 27, 2008, Hamas and other Palestinian factions fired 5 ' rockets and mortar shells into Israeli territory, according to Israeli Army statistics.
In the conflict, 1 450 Palestinians were killed, the Hamas Health Ministry said. The Israeli Army said 13 Israelis and 1 166 Palestinians died.
Most of the 200 arrested on tunnel-related fraud charges were released after agreeing to co-operate with investigators, Economics Minister Zaza said. He estimated the losses at $60m, based on records he declined to reveal.
"Our people had no choice but to use these tunnels in order to survive," Zaza said in his office in Gaza City. "Corrupt people took advantage of the situation, but they are in our custody now. I don't blame people for being angry, but we hope to return more money."
Ghabin said her imam in Gaza City had recommended worshippers invest in the tunnels, saying he was acting under instructions from the Hamas Ministry of Religious Affairs. An imam pitched her daughter at the Al-Bureij refugee camp, where she lives.
Officials at the ministry declined to comment.
Some tunnels still operate. A tunnel collapse killed one worker and injured two others on September 27, Gaza chief of emergency medical services, Mo'aweya Hassanein, said.
Zaza said Hamas arrested and detained Al-Kurd for fraud and "stealing money from the Palestinian people". Zaza said Al-Kurd was the kingpin behind collecting tunnel investments, largely through middlemen who met potential customers at cafés, soccer fields and mosques.
About $10 million of Al-Kurd's assets were confiscated, he said.
Al-Kurd has since been released - Zaza provided no details on why. Al-Kurd could not be reached for comment.
Ihab al-Ghusin, a spokesman for the Hamas Interior Ministry, said losses from the tunnel investments were discovered when "thousands of people complained".
"After a quick investigation, we discovered a well-known businessman, identified as Ihab al-Kurd, is behind this scheme," he said.
"Al-Kurd was initially jailed, but later released after his property was confiscated."
The ministry declined to name others who have been arrested.
The bilked customers want more than the 16.5 percent they have received. Shurab said Hamas should return all of the $500 000 he invested for 25 relatives.
Qishawi, who plays the electric organ at weddings, said he needed the $6 000 he got from selling his wife's gold bracelet and their bedroom furniture.
The middleman, who invested their money in the tunnels, seemed trustworthy because he was a religious man, well known in the neighbourhood, he said.
"It's a complete insult, considering Hamas encouraged people to invest in the tunnels," said Qishawi in his Gaza City living room.
"Gaza is a desperate place. They took advantage of desperate people." - Bloomberg
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