Former finance minister Moshe Kahlon is set to admit that he failed to ensure that serious financial irregularities at UnetCredit were properly reported to the public while he served as chairman of the company, as part of a plea agreement filed with the Tel Aviv District Court’s Economic Department.
The agreement was filed alongside a broader indictment in the UnetCredit case, one of the major corporate collapse cases to emerge from Israel’s non-bank credit sector in recent years.
UnetCredit was a public company that provided non-bank credit and whose shares were traded on the Tel Aviv Stock Exchange. The case centers on what prosecutors describe as a pattern of concealment, circular financing, and misuse of the public company’s funds by controlling shareholders and other senior figures.
Under Kahlon’s plea agreement, he will admit to violating reporting duties under the Securities Law. The sides will ask the court to sentence him to a suspended prison term, a NIS 180,000 fine, and an 18-month restriction on serving as an officer in a public company.
The plea agreement remains subject to court approval.
Kahlon, who previously served as finance minister, served as chairman of UnetCredit Financial Services from June 2021 until his resignation in June 2022.
The main indictment was filed against Tzachi Azar, Shlomo Aizik, Shai Penso, compliance officer Yoav Tzabar, financial adviser David Ben-Naim, attorney Ido Malin, Nazareth branch operator Yitzhak Avitar, and the public and private UnetCredit companies.
The charges, each according to the defendant’s alleged role, include fraud and breach of trust in a corporation, aggravated fraud, and violations of reporting duties under the Securities Law.
The 2020 share allocation deal
At the center of the case is a 2020 share allocation deal. According to the indictment, UnetCredit’s public company allocated two million shares, worth NIS 50 million, to the private company held by its controlling shareholders and to several advisers.
The deal was presented to the company’s institutions as if the money used to buy the shares would come from outside sources connected to the controlling shareholders. Prosecutors allege that this was not what happened.
Instead, according to the indictment, the public company’s own money was routed through a circular transaction, creating the appearance that the private company had paid for the shares. In effect, prosecutors allege, the public company funded the purchase of its own shares, and the controlling shareholders and others fraudulently obtained shares worth tens of millions of shekels.
The indictment says the affair reflected the mixing of the controlling shareholders’ private business interests with the affairs of the public company, while concealing critical information from the company’s board, committees, and shareholders.
A separate part of the case concerns serious alleged irregularities at UnetCredit’s Nazareth branch, where a substantial part of the company’s activity took place.
According to the indictment, the irregularities included missing checks worth millions of shekels, suspected fictitious check-discounting transactions, and conflicting claims about where the missing funds had gone.
Prosecutors say those problems were known to several company officials before they were brought to Kahlon’s attention in early 2022.
The indictment against Kahlon focuses on what happened after he was allegedly told about the Nazareth branch.
According to the indictment, Kahlon was told in January 2022 about a NIS 10 million shortfall at the branch, including two missing checks worth NIS 5 million. He was also told about further claims of missing funds and competing explanations over who was responsible.
In March 2022, while the company was preparing its financial reports, Kahlon was allegedly told additional details about the missing funds. Prosecutors allege that he asked whether the matter should be brought to the board, but instructed that the report not be rushed.
Despite that, prosecutors say, when the board approved the company’s 2021 financial statements, Kahlon did not disclose the information he had about the missing funds and irregularities at the Nazareth branch, even though the information was material.
He also signed the financial statements without those details being included, according to the indictment.
The issue surfaced more fully on May 29, 2022, after the board approved UnetCredit’s first-quarter financial statements. Tzabar then told the board that checks at the Nazareth branch had found NIS 22 million in shortfalls. He estimated that NIS 10 million could not be collected, said some of the missing money may have been transferred to the private UnetCredit company, and noted that checks worth around NIS 5 million had disappeared.
Following that disclosure, the company’s auditors withdrew their approval of the first-quarter financial statements. The next day, the board appointed accountant Ofer Alkalay as an external examiner.
The company later reported suspected financial discrepancies at one of its branches, initially estimated at NIS 5 million to NIS 7.6 million. It also reported Kahlon’s resignation on June 16, 2022, following the financial exposure that had been discovered.
As the affairs became public, trading in UnetCredit’s shares was suspended, the company was removed from stock exchange indexes, its credit rating was downgraded, and its auditors withdrew their approvals of the company’s financial statements for 2020-2022.
The indictment also attributes personal withdrawals of around NIS 400,000 from the public company to Azar.