Vernon Silver: Bowling for Palestine 

In 35 years as Palestinian leader, Yasser Arafat raised billions of dollars. He spent the fortune to wield power, to allegedly pay militants who attacked Israel and to invest in the United States and the Middle East.

Arafat, who died on November 11 at 75, disclosed US$799 million of investments in documents the Palestinian Authority has released that show he did not just invest in building basic services in the West Bank and Gaza.

Arafat used a holding company to buy stakes that ranged from US$285 million ($400 million) in Egyptian cellphone company Orascom and its affiliates to some US$30 million in private equity, mostly in the US.

These included American software companies such as Simplexity (US$3.2 million), Vaultus (US$2.1 million) and US$1.3 million in Strike Holdings, which owns the Bowlmor Lanes bowling alley in Manhattan's Greenwich Village.

At a time when the authority was starved for funds, Arafat's money managers placed bets from Tel Aviv to Silicon Valley on venture capital funds, software start-ups and telecoms companies.

"Arafat was notoriously secretive, and he spread the money all over," says Rachel Ehrenfeld, author of "Funding Evil: How Terrorism Is Financed and How to Stop It".

"He didn't give the public a view of the investments until the donor community protested about corruption."

Arafat and his money managers invested abroad through Palestine Commercial Services, a Ramallah-based holding company owned by the Palestinian Authority and known by its initials, PCSC. Arafat controlled PCSC through his financial adviser, Mohamed Rachid, according to Palestinian legislators Hanan Ashrawi and Azmi Shuaibi. Arafat appointed Rachid as PCSC's chairman, a June 2004 World Bank report shows.

One PCSC subsidiary started investing US$25 million in venture capital funds and internet startups on April 4, 2000 - three weeks after the Nasdaq Composite Index peaked. The funds have since lost about two-thirds of their value.

Arafat made the investments abroad with tax money that he "diverted" from the Palestinian finance ministry, says a September 2003 International Monetary Fund report on the Palestinian economy. Israel collected import taxes for goods destined for the territories and then passed the funds to the authority.

Israel halted the payments after violence erupted in the West Bank and Gaza in September 2000. By the end of 2002, the Palestinian Authority owed its ministries and suppliers as much as US$531 million, or 10 per cent of gross domestic product, the IMF report says.

"A political crisis occurred in May 2002," the IMF report says. "Intense discussion within the Cabinet, political factions and the Palestinian legislative branch, coupled with external pressures, prompted Arafat to take action towards a broad-based effort at institutional reform."

In 2002, Arafat handed control of PCSC to a new Palestine Investment Fund, which then hired US-based Standard & Poor's to value the investments.

In May 2004, the fund released its first annual report, which covered 2003 and was audited by Ernst & Young International.

It showed the fund had net income of US$40.1 million in 2003 on revenue of US$85.1 million.

It also showed PCSC held a US$6.8 million account of venture capital investments at New York-based Citigroup, the world's biggest bank. Something promptly denied by the bank in question. "Citigroup does not have any accounts for Yasser Arafat and we never have," a company spokeswoman said on November 19.

As chairman since 1969 of the Palestine Liberation Organisation, Arafat controlled another set of investments and bank accounts, valued in 2002 at US$500 million by Israeli Army intelligence.

The number today is probably lower because the Palestinian Authority gets much of the money that once went to the PLO in the form of donations from Arab Governments, says Mohammad Shtayyeh, managing director of the West Bank-based Palestinian Economic Council for Development and Reconstruction, which administers aid money the Palestinian Authority spends.

He said the US$799 million now in the fund was the bulk of the assets that were under Arafat's control. "All the Palestinian money has been consolidated in the fund," says Shtayyeh, who is also an economics professor at Birzeit University in the West Bank.

The IMF report says Arafat's main source of cash for PCSC's investments was Palestinian Authority tax money that he and Rachid collected yet never deposited into the authority's budget.

Getting Arafat to hand over the holdings was like pulling teeth, says Ashrawi, 58, a former member of his cabinet. Arafat gave in to pressure from aid donors such as the European Union and from his finance minister, Salam Fayyad, the IMF's former representative in the territories, she says. They demanded that Arafat turn over the investments as a condition of further aid.

Until then, there had been little transparency, said Joel Toujas-Bernate, Washington-based IMF mission chief for the West Bank and Gaza. "Since then, many reforms have been implemented."

Most of the bigger investments held by the fund are in the West Bank and Gaza, such as the wholly owned Cement Co, valued at US$54 million, which Arafat ran as a local monopoly until 1996; a US$71 million stake in the Palestinian Authority's joint venture with BG Group, the UK's third-largest natural gas producer, to explore for gas off the Gaza Strip's Mediterranean shore; and a 35 per cent stake in Palestine Cellular Communications, the only cellphone service based in the territories, valued at US$36.9 million.

Arafat also invested around the world through PCSC. The fund owns a quarter of Algiers-based Orascom Telecom, valued at US$185 million, and 22 per cent of Tunis-based Orascom Telecom, worth US$75 million.

In the US, Arafat's money managers set up Delaware holding companies for the sole purpose of making investments for PCSC, said Zeid Masri, 38, an American of Palestinian heritage who handled some of the investments and is managing partner of SilverHaze Partners.

SilverHaze manages an undisclosed amount of money for wealthy families, says Masri, who is related to two of the seven directors on the fund's board.

To invest in Strike Holdings, which owns Bowlmor Lanes in Greenwich Village and bowling alleys in Miami; Bethesda, Maryland; and New Hyde Park on New York's Long Island, Masri says he created a holding company called Onyx Funds. Onyx, which is 100 per cent owned by PCSC, was incorporated on June 1, 2002, in Delaware. Its only holding is the US$1.3 million of Strike Holding shares.

Masri said the investment came about because he was a classmate of Strike Holdings founder Thomas Shannon at the University of Virginia's Darden Graduate School of Business Administration, where he earned an MBA in 1992.

Masri also managed Chalcedony for PCSC, which set aside US$25 million for it to make investments starting on April 4, 2000, when the internet bubble was popping. It invested US$9.9 million - which had shrunk in value to US$3.9 million by January 1, 2003. PCSC came to Masri to invest around 2000, based on word of mouth, he says. "This came through somebody that was recommended to us and that's how that relationship began," he said. "We manage money for families, ourselves and small institutions."

During the past two years, the fund has been weighing which assets should be sold in order to keep it in line with the primary aim of its charter: developing the Palestinian economy within a democratic process.

One investment that might not meet that goal is the bowling alley. Bowlmor Lanes does brisk business with Wall Street and also promotes bar mitzvah parties and offers a kosher caterer.

To Masri, such investments are not necessarily incongruous. "At the end of the day, we all do business together," he said. "It's just business."

As records of Arafat's investments show, such business didn't always yield profits. The Palestinian leader had the same mixed record as an investor that he had as a peacemaker.

- BLOOMBERG