Hundreds of thousands of pounds were transferred from JNF UK to an Israeli organisation set up by its former leaders without being stated in the JNF accounts, it has emerged.
The activities of Nes Eretz Israel came to a light during an unsuccessful High Court action recently brought by the JNF's ex-chief executive, Simon Winters.
Nes Israel (as it was originally known) came under the scrutiny of the Charity Commission and its Israeli equivalent last year and has been under investigation this year by forensic accountants called in by the JNF's new leadership.
Its establishment was also cited by JNF as one reason for the decision to suspend Mr Winters, who resigned from the charity this summer.
A number of concerns were raised by the forensic accountants Smith & Williamson in their preliminary report produced this July and used in the trial.
They concluded there was evidence that a JNF car rally had been used to raise funds for Nes Israel; that donations from the JNF to Nes Israel had been used to buy a property costing around $1 million, which appears to be wholly owned by Nes Israel; and that a donor claimed gift aid on donations to Nes Israel
although its charitable activities may not qualify for it.
The accountants say £75,000-£175,000 was donated annually to Nes Israel between 2004 and 2006, rising apparently to £470,000 donated last year. In 2005, its entire income - and all its income the following year bar 5,000 shekels - resulted from donations from JNF UK.
Nes Israel was set up in 2004 by Gail Seal, the president of JNF UK until June, and Mr Winters, as an Israeli amutah (charity). Over the next few years, other JNF directors and their relatives joined the board. Its stated aims were to alleviate poverty, support education, strengthen Jewish values and protect the environment.
But in 2004 and 2005, two-thirds of the funds went on trips to Israel, while most of the rest went on public relations, aside from a large donation to the Israel Tennis Centre, according to Nes Israel's accounts.
JNF UK's accounts do not list Nes Israel among its subsidiaries or assisted charities and make no express mention of the transfers from the UK to it.
In 2007, the Israeli charity regulator, the Amutah Registrar, began asking questions following an anonymous complaint. The registrar ruled that the trips and PR spending, since they were for the purposes of fundraising, did not serve Nes Israel's original aims.
In March 2007, the UK's Charity Commission concluded that it was "satisfied" with the explanation for charitable donations of £376,441 made to Nes Israel. It added: "It is important, however, to ensure that where expenditure is for fundraising, then it should be reflected as such in the annual accounts."
Ms Seal said this week: "Nes Israel is an Israeli charity, which was set up legally and properly with legal advice in Israel and UK. It has a number of trustees and I am the chairman. We carried out proper transfers to proper charities. Obviously, when you set up a charity you have to take care of PR."
She explained that after the split between JNF and its former Israeli associate, Keren Kayemeth LeIsrael, JNF "didn't have a vehicle to forward on money, because in the past money was sent to KKL and they sent it on. When there was a breakaway, we were advised by the lawyers we had to set up another vehicle".
Asked whether the trustees of Nes Yisrael intended to transfer control of the organisation to JNF's current leadership, she said only: "Nes Israel is a separate Israeli charity. There is not only JNF money there, but also private donors money."
Mr Winters said that the question of why Nes Yisrael was set up should be directed to its advisers, including accountants and lawyers. "I was not party to the decision-making process and therefore cannot seek to explain it," he said.
"I should emphasise that I do not consider that there was anything improper, just that I do not know the answer to your question. As far as the alleged non-disclosure is concerned, that is again a question best directed to those who advised and acted at the time." Mr Winters last week lost a High Court action which sought to prevent JNF's lawyers Mishcon de Reya from acting for it in his legal dispute with the charity over his departure.
He is also engaged in litigation against the JC.