JERUSALEM -- Prime Minister Ehud Barak became embroiled in his first scandal yesterday, as Israel's attorney general launched a criminal investigation into campaign financing of his landslide election victory last year.
The investigation, coming as Barak pursues critical Mideast peace talks, was announced after the state comptroller issued a damning report stating that Israel's election laws had been trampled. He fined Barak's One Israel party $3.2 million.
The alleged offenses involved illegal use of foreign and corporate money -- funneled through groups in Israel -- to skirt limits on campaign contributions.
At a news conference, Barak said he did not know of any illegal practices and complained that the law was unclear. But the prime minister said he had no problem with the inquiry.
"I did not know the associations," he said. "I did not engage in fund raising. I was not up-to-date on the details. I was not specifically involved in any of the activities described in the report."
But State Comptroller Eliezer Goldberg said in his report that Barak should have kept a close watch. He said a candidate "does not do his duty by instructing his people to follow the law, but must show an interest in what is done in the field" to make sure his order is carried out.
While it's too soon to predict the impact on Barak's tenure in office, the scandal has tarnished his reputation.
"It hits exactly at the point where he was most untouchable -- his credibility. It hurts him in a very sensitive spot," said Menachem Hofnung, a political science professor at Hebrew University. He said Goldberg had presented "the most severe report ever handed by a state comptroller on political finance."
This is a bad time for Barak to lose credibility. He is engaged in a difficult, and currently stalled, peace process with Syria and needs to eventually persuade the Israeli public in a referendum to relinquish the strategic Golan Heights to Syria. He is also in the final stages of peace negotiations with the Palestinians.
The investigation could preoccupy Barak and make his government appear weaker in the eyes of the Syrians and Palestinians during negotiations.
The immediate effect on the peace process was the cancellation of a tour of the northern border with Lebanon. Barak had planned to spend the day promoting his peace efforts on Israel's last active front line.
Attorney General Elyakim Rubinstein said he had "no alternative" but to order the criminal investigation, which will delve into possible fraud and attempts to disguise sources and transfers of funds.
He said Goldberg's report presented "a serious picture of forming and using a web of associations to direct funds" into the campaign by the Labor Party-dominated One Israel coalition.
Asked by reporters if Barak would be questioned, Rubinstein said, "You can't rule out the possibility that anybody who is relevant will be investigated."
The extent of the campaign-finance affair may not yet be known. Goldberg said he has not had time to get to the bottom of it.
The money came largely from two sources, according to his report. One was the Camelia trust, set up by the late Swiss millionaire Octav Botnar to fund various charities. The other was the Israeli branch of a Canadian social welfare charity.
Yitzhak Herzog, a lawyer who led Barak's campaign and who is now the Cabinet's secretary, had a large measure of control over both funds, according to the comptroller's report. The money, about $1.3 million, was funneled through a number of organizations in Israel, some of them newly created, that used it for surveys, campaign material and recruiting, the report said. In one case, an Israeli corporation registered by a drug addict was used to disburse money, it said.
Israeli law limits individual campaign contributions to about $400 and bars receiving money from corporations or from someone who is not eligible to vote in Israel.
The scandal is the third to grip Israel in recent months.
This month, President Ezer Weizman was accused of acting improperly by accepting money from a French businessman while a member of Israel's parliament. Weizman has denied any wrongdoing in receiving money described by his lawyers as a gift from a friend.
Last summer, former Prime Minister Benjamin Netanyahu and his wife, Sara, came under investigation over allegations that they kept thousands of dollars worth of official gifts and received free home-repair services from a contractor. Both have proclaimed their innocence.