Oct. 7 (Bloomberg) -- Investment opportunities are rare in the Gaza Strip. So when Nabila Ghabin saw one last year, she pawned her car and jewelry and put $12,000 into a network of tunnels that brought in supplies smuggled from Egypt.

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 Dec. 27 to Jan. 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 16.5 cents 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 Hamas’s decline in public opinion 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 U.S. economy with ours and see how dependent we have become on the tunnels, I assure you that our scandal is much worse than Madoff,” said Omar Shaban, director of Pal-Think, an economic research institute in Gaza City, 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 Butner, 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 pullout 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, according to 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 that people invested in the tunnels,” said Samir Abdullah, the Palestinian Authority’s former planning minister. “The smugglers provide essential revenue for Hamas.”

Not Enough

Hamas, classified by the U.S. and the European Union as a terrorist organization, 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 that we wouldn’t regret joining this blessed business,” she said in her apartment in an unfinished 12-story 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 United Nations estimates that three-quarters of the population has insufficient food and more than 40 percent are unemployed.

A poll published Aug. 17 by the Ramallah-based Palestinian Center for Policy and Survey Research said Hamas would get 28 percent of the vote if an election were held, down from 33 percent three months earlier. Rival Fatah’s support rose to 44 percent from 41 percent in the same period, according to the survey of 1,270 Palestinians in the West Bank and Gaza Strip. The margin of error was 3 percent.

Holding 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 million to $500 million on professional contacts as well as friends and relatives who lost money. He himself did not invest.

Digging and operating a tunnel, typically about 50 feet (15 meters) deep and 250 feet long, costs as much as $100,000, according to Shaban.

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 license from Hamas: Four operators who declined to be identified said they each paid 11,000 shekels ($2,950) to Hamas for a digging license.

According to investors Ghabin, Mohamed Shurab and Shadi Qishawi, the financing worked this 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.

Monthly Payments

Ghabin invested $8,000 the first month and added $4,000 from her daughter in 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 got 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 which were smuggled in through the tunnels, at such southern population centers as Sderot, Ashkelon and Ashdod.

From Sept. 12, 2005, when Israel completed its pullout from Gaza, to the beginning of its bombing operations on Dec. 27, 2008, Hamas and other Palestinian factions fired 5,180 rockets and mortar shells into Israeli territory, according to Israeli Army statistics.

In the conflict, 1,450 Palestinians were killed, according to the Hamas Health Ministry. The Israeli Army says that 13 Israelis and 1,166 Palestinians died.

Fraud Charges

Most of the 200 arrested on tunnel-related fraud charges were released after agreeing to cooperate with investigators, Economics Minister Zaza said. He estimated the losses at $60 million, 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 plum-curtained office in Gaza City. “There were corrupt people who 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 recommended that worshippers invest in the tunnels, saying he was acting under instructions from the Hamas Ministry of Religious Affairs. Her daughter was pitched by an imam 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 Sept. 27, Mo’aweya Hassanein, Gaza chief of emergency medical services, told reporters.

Soccer Fields and Mosques

Economics Minister 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 couldn’t be reached for comment.

Ihab al-Ghusin, a spokesman for the Hamas Ministry of Interior, said losses from the tunnel investments were discovered when “thousands of people complained.”

“After a quick investigation, we discovered that 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, the real-estate broker, says Hamas should return all of the $500,000 that he invested for 25 relatives.

Qishawi, who plays the electric organ at weddings, said he needs the $6,000 he got from selling his wife’s gold bracelets 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 neighborhood, he said.

“It’s a complete insult considering that Hamas encouraged people to invest in the tunnels,” said Qishawi, on a couch in his Gaza City living room near a vase of plastic flowers. “Gaza is a desperate place. They took advantage of desperate people.”

To contact the reporter on this story: Jonathan Ferziger at jferziger@bloomberg.net

Last Updated: October 6, 2009 18:01 EDT