The man was arrested at Ben-Gurion Airport as he returned from a fundraising tour in the United States.
Simultaneously, dozens of police detectives raided the village of Kfar Chabad, confiscated documents and detained for questioning movement activists suspected of being involved in the fraud affair.
The arrest was conducted following a secret investigation held over the past eight months, after the airport intelligence unit received information that an association linked to young Chabad members was being used to cover up tax evasion.
According to the suspicions, the suspect used fictitious bank accounts for money laundering purposes. The police also suspect that the funds raised by the association in the past few years for education, aid and charity activities were transferred to "straw accounts" in Israel and abroad and were withdrawn for private purposes, including payments to the association members.
'Association supported by State'
Commander Avi Mansour, head of the police's central district investigation department, told Ynet, "This is a wide-scale affair which we have been conducting secretly over the past few months. This association's annual budget totals about NIS 30 million ($7.6 million) and it receives from the State some NIS 7 million ($1.7 million) a year."
"This investigation included dozens of Chabad officials," a police source said. "In the past, disputes between organization members led to lawsuits, and the material obtained on the organization points to severe tax offenses. The organization will find it very difficult to continue with its activities following these arrests."
The Chabad movement supported opposition leader Benjamin Netanyahu in his premiership campaign in 1996. It has links to some governmental institutions and its members recently accompanied Prime Minister Ehud Olmert during his visit to the US.