And even now the banks are delaying returning the money to their heirs.
But unlike a similar scandal that hit European banks in the mid-90s, almost no pressure is being brought to bear on the Israeli banks by the Israeli government or by Jewish reparation organisations representing Holocaust families, who were the main critics of the European banks.
The Israeli government is believed to be keeping quiet because it is deeply involved in the local banking scandal itself, and the Jewish organisations are reported to be concerned that exposure of the story will damage Israel's international reputation.
Instead the Knesset committee which unearthed the shocking revelations has been forced to sit on its unpublished report for the past 18 months as the banks dictate terms to the inquiry, largely supported by the government.
One dissenting voice has been Tommy Lapid, who this month left his post as justice minister. He called Bank Leumi, the bank believed to hold the lion's share of the Holocaust accounts, "the last bank in the world that refuses to pay money to Shoah survivors".
Tommy Lapid has been a sole
voice speaking against the banks
The Knesset committee was established under the chairmanship of Colette Avital in February 2000, in the wake of a settlement in which the Swiss banks agreed to pay $1.25 billion to Holocaust survivors and Jewish organisations.
After the Swiss affair, questions were raised about the difficulties faced by Holocaust families in tracing money deposited in Israeli banks before the second world war.
At the time, the banks fiercely denied that they held any money from Holocaust victims but after three years of auditing the banks' accounts, led by a former police anti-corruption officer, Yehuda Bar-Lev, the committee found thousands of dormant accounts, estimated to be worth some $220 million.
Bar-Lev has said that he cannot be sure if there is more money because the banks have been obstructing his team's work. "There are still documents that the bank doesn't agree to show us," he said. "According to the bank, they'll not be shown to us as they are against the bank's interests."
Colette Avital chaired the
The banks have also refused fully to finance the audit. The Swiss had to pay about $400 million to finance the work of the investigating accountants, whereas the Israeli banks have agreed to pay only $3 million, less than half the amount demanded by the Knesset committee.
"We're in a bind," said committee chairman Avital in September when the banks contested the report's publication yet again. "The banks can keep delaying again and again and again."
The banks have defended their position on several grounds, including the claim that exposure will harm Israel's image.
At one closed meeting in December 2003 between the committee and Bank Leumi, the company's lawyer, Ram Caspi, warned that Israel would be painted as a hypocrite.
"The Wall Street Journal will say the Israeli banks also hide money, not just the Swiss"
Ram Caspi, company lawyer for Bank Leumi
"The Wall Street Journal will say the Israeli banks also hide money, not just the Swiss," he told the committee members.
More recently the bank has been citing its commercial interests and secrecy rules. "Bank Leumi is a publicly traded company," Caspi told the committee in November. "It has to answer to stockholders. It cannot simply pay as a result of a committee's recommendations."
His statement came during a meeting at which one woman identified only as "K" told the committee that her uncle, who lived in Bucharest, deposited £1000 in 1940 in the Anglo-Palestine Bank, which later became Leumi. When Leumi finally admitted it still held the money in 1979, she received a tiny fraction of the original deposit.
An Israeli lawyer, Roland Roth, said he was representing more than a dozen families with similar stories. He has threatened a class action against the Israeli banks in the US courts. An earlier legal campaign he waged in the Israeli courts was rejected.
Jewish groups which support Holocaust families, however, have mostly chosen to remain silent. Israel Singer, chief negotiator of the World Jewish Restitution Organisation, who campaigned against the European banks, said his group would not be publicising the case. Unlike the Swiss banks, which he called thieves, Israel's banks had got hold of the Holocaust accounts "incidentally", he said.
The bank's refusal to accept responsibility for the accounts is based on the murky period before and after Israel's founding in 1948.
It is known that thousands of wealthy European Jews stashed money away in the country during the 1920s and 1930s, as it was then Palestine and under British rule, in an attempt to hide it from the Nazis. They also invested heavily in land and property to bring nearer their dream of a Jewish state.
During the war, Britain confiscated all assets belonging to citizens of enemy territories, including Jews living under Nazi occupation. The assets were handed back after Israel's creation in 1948, with an official in the Israeli Justice Ministry known as the custodian-general charged with tracing the heirs.
However, the Knesset committee found that the banks, particularly Leumi, had managed to hide many of the accounts from British officials and so were able to keep the money. The investigators believe the banks have been profiting from the money ever since.
The government is also accused of not having done enough to trace survivors.
Land and belongings were sent
to Zionist organisations
It passed many of the assets of Holocaust survivors, including land and property, to Zionist organisations such as the Jewish National Fund.
To the surprise of the committee, Bank Leumi was widely reported in the Hebrew media last month as having agreed to pay less than $10 million to Holocaust families, even though it is still publicly denying that it has any such accounts. Separately, the government is also reported to be mulling the idea of paying some $15 million to the families.
The deal was struck last month by Lapid after the banks accused him of slandering them. Lapid did not consult with the Knesset committee.
Avital responded angrily: "The banks can now claim that they bought Lapid with a bit of money and, in exchange, they are exempt from returning the Holocaust survivors' money."
The reduction agreed with Lapid follows several objections the banks have made to the way the Holocaust assets have been calculated.
The Israeli banks have been resisting the efforts of the Knesset committee to work out the current value of the accounts using the same criteria applied to the Swiss assets. There, the banks had to adjust the money by inflation and add 4% interest.
The Israeli banks, on the other hand, want inflation not to be taken into account until after the creation of Israel, omitting the war years when inflation reached more than 300%, and will fund only 2% interest.
In Israel, there is little sympathy with the banks' position. For many years, Israeli banks have been running a cartel-like operation where they charge the same high commissions.
They are currently being investigated by the Anti-trust Authority. In the first nine months of this year they racked up a $1 billion profit - their highest ever.
Avital suggests public pressure must be used against the banks: "If the banks don't want to pay, we will have to launch a public campaign, perhaps legislation. It won't be easy. The Knesset and government have done nothing about this for more than 50 years. The heirs will have to go to court."