Barak said he hadn't known of any illegal practices, and asserted that the campaign-finance law was unclear.
After the state comptroller, Eliezer Goldberg, imposed the fine, the office of Attorney General Elyakim Rubinstein said "there are grounds to instruct the police to open an investigation" of the matter. The probe will include past campaign-finance practices by other parties as well, the Justice Ministry said.
Barak said at a news conference that he "honored" the comptroller's report, but said "in light of the large fine" the party was considering appealing to the Supreme Court.
In handing over his report to Parliament, the comptroller said the financing practices of Barak's One Israel party had "trampled on the law," and called the matter "grave."
Barak should have known about the alleged illegal activity, the comptroller said in his report. But the prime minister, who spoke before the criminal probe was announced, said he had not been aware of it.
"I didn't know about these groups," he told a news conference. "I wasn't involved in fundraising."
The report said One Israel had set up several nonprofit organizations that funneled large contributions from foreign donors. Such campaign contributions are illegal under Israeli laws, which sharply limit the amount one donor can give.
Barak's chief political opponents, the Likud party, said Barak should have known about the campaign financing activity.
"The state comptroller says a red light should have lit up before Barak," said Likud leader Ariel Sharon.
The affair is an unwelcome distraction at a time when Barak is under pressure to make progress on the peace front, with both Syria and the Palestinians.
The state comptroller's report also comes on the heels of several high-profile political scandals in Israel. Earlier this week President Ezer Weizman defiantly refused to leave office, despite the launch of a police investigation for possible tax evasion and failure to report cash gifts.
Weizman has admitted accepting hundreds of thousands of dollars from the French millionaire Edouard Sarousi between 1988 and 1993, the year he became president, but has denied that this was a bribe.
Meanwhile, former Prime Minister Benjamin Netanyahu and his wife, Sarah, have been grilled by police about suspicions that they illegally kept tens of thousands of dollars worth of gifts belonging to the state, including silverware, candlesticks, carpets, pictures, scarves and a gold letter opener from Vice President Al Gore.
The attorney general has not decided whether to prosecute the Netanyahus, who have maintained their innocence.
Th comptroller's report charged that Barak associates, including Cabinet Secretary Yitzhak Herzog and the prime minister's brother-in-law, Doron Cohen, used money from the organizations for surveys, campaign material and door-to-door recruiting.
The nonprofit groups were created as a conduit for funds from a Swiss millionaire and a Canadian charity group -- both run by Herzog -- to permit them to make contributions larger than allowed by law, according to the report.
The fundraising, which totaled $1.3 million, "constitutes a contribution to the party in violation" of campaign finance laws, the report said.
The Likud officials alleged that some of the money was channeled through companies set up in Panama, Bermuda and the United States to avoid detection. Goldberg said that his investigation extended beyond Israel's boundaries but he did not elaborate.
Written by Laurie Copans
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